As China’s inflation soars, world fears knock-on effects
SHANGHAI (AFP) — As China’s factory floors feel the pressure from spiralling costs, there is growing nervousness in the rest of the world that the Asian giant’s next big export could be inflation.
From air-conditioned US shopping malls to bustling African street markets and remote Asian villages, shoppers have become accustomed over recent years to the vast array of ultra-cheap Chinese goods on offer.
China’s trade surplus last year reached 262.2 billion dollars, a more than 10-fold rise from 2003.
But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 percent in January, is ramping up the costs of doing business in China, with potential knock-on effects for the rest of the world.
As China’s currency has strengthened sharply against the dollar, the government has scrapped export tax rebates, while more stringent labour laws and even the ice and snow storms in southern and central China have further driven up costs.
“China’s inflation is having a domino effect on worldwide inflation, especially in the United States,” Li Huiyong, an analyst from Shanghai-based SYWG Research and Consulting, told AFP.
“In the past, (outside) inflation pressures in the US mainly came from oil prices because the US economy is highly dependent on crude oil. Cheap products from China and other developing countries helped to alleviate that pressure.
“Now Chinese goods are no longer as cheap it adds to the inflation pressure in the United States.”
Nevertheless, while it is clear that doing business in China is getting more expensive, there is no consensus among economists about how much that will translate into higher price tags for Chinese-made products overseas.
Wang Qing, chief China economist at Morgan Stanley, stressed that Chinese competitiveness was not about to disappear and goods from Asia’s most populous nation would remain cheap for years.
This would be the case as products moved up the value chain from toys and clothes to cars and high-tech machinery, according to Wang.
“I don’t think the days of cheap Chinese goods are over. The inflation that China is experiencing now has a cyclical component. By that I mean the high inflation won’t be sustainable,” he said.
“What’s more important is that you should not just focus on nominal wage growth, you also need to pay attention to labour productivity growth. That’s why I think we shouldn’t be too alarmed about this.”
And given the long and complex business chain between suppliers in China and overseas consumers, a rise in manufacturing costs does not mean that shoppers will immediately have to pay more for Chinese products.
Aside from cutting their own margins, factories and traders can first look to their clients, many of whom charge huge mark-ups on the wholesale price, to take on more of the financial burden.
For instance, the price of making a branded T-shirt in China may be just a few dollars, but they are typically sold in US malls for 10 or more times that price.
Companies intent on paying bottom dollar for their products could move operations to nations with cheaper overhead costs, such as Vietnam, Sri Lanka or Cambodia.
Alarm bells are definitely ringing in boardrooms across China.
Eating into exporters’ profit margins, producer prices jumped 6.1 percent last month to a three-year high.
Meanwhile, labour wages last year rose 20 percent and the yuan has appreciated more than nine percent against the US dollar in the past 14 months.
This has meant that more exporters face bankruptcy unless they lift prices to salvage their disappearing margins, which is just what most plan to do.
According to a survey by brokerage and research firm CLSA, 80 percent of Chinese exporters intend to raise prices this year in response to higher raw material costs.
“The appreciation of the renminbi (yuan) against the US dollar is a secondary factor driving these price hikes,” Shanghai-based CLSA economist Andy Rothman said in the survey.
Yatta Mao, a trade manager at Shanghai-based chemical trading firm Hanren, told AFP the tighter business conditions that have emerged over the past year were making it difficult to survive.
“The yuan appreciation has a huge impact on our business. It costs us much more in the production and delivery costs. What’s worse, the export tax rebates of 13 percent were cancelled so our total costs are up 20 percent,” she said.
And in China’s southern province of Guangdong, which borders Hong Kong and is one of the nation’s main export hubs, there are deep feelings of pessimism.
Thousands of Hong Kong- and Taiwan-owned factories based in Guangdong are likely to close soon as they seek cheaper overheads elsewhere, said Alexandra Poon, director of policy research at the Federation of Hong Kong Industries.
Everyone thinks of changing the world, Leo Tolstoy once wrote, but no one thinks of changing himself.
Hong Kong finds itself in that very situation. As an increasingly cozy part of the Chinese juggernaut, the city of 7 million people has a front-row seat for the changing of the guard in the global economy.
It’s debatable whether China will overtake the US economy in any of our lifetimes -- or ever. What’s not is that with more than 1.3 billion Chinese -- and more than 1 billion Indians -- entering the financial system, nothing will ever be the same.
Why, then, is Hong Kong so reluctant to take an obvious step to restore sobriety to its bubble-plagued economy? The change in question is scrapping its peg to the US dollar.
Tolstoy died in 1910, yet were the Russian famed for realist fiction to walk the streets of Hong Kong these days, what a tale he could tell. He might write of growing hardships as inflation increases at the fastest pace in about nine years. He might depict how housing costs are skyrocketing beyond the means of average residents. He might dramatize how rising food and energy costs are taking their toll.
And Tolstoy would find plenty of fodder to buttress his belief that those changing the world rarely think to alter their own actions. He would find it in a government that stubbornly leaves its currency linked to a sliding US dollar -- and to a central bank in Washington that continues to cut interest rates.
“Super easy monetary conditions are likely to spawn a property price and stock market bubble, which eventually should make the Hong Kong dollar peg impossible to stomach any further,” says Diana Choyleva, a London-based economist at Lombard Street Research.
Even though pressure for change is building, traders in Hong Kong aren’t exactly bracing for it. For one thing, the decision to de-peg the currency, or raise its value, will probably be made in Beijing, not Hong Kong. For another, it won’t be based on economic forces, but in spite of them.
When Hong Kong Chief Executive Officer Donald Tsang or Financial Secretary John Tsang are asked about the peg, the response is normally something like: The policy has served us well since 1983 -- why mess with success?
“Just as Hong Kong tolerated and absorbed years of deflation following the Asian crisis, it will tolerate and look through a period of inflation,” says Stephen Jen, Morgan Stanley’s London-based chief currency strategist.
Hong Kong’s stance has its defenders. The International Monetary Fund on Feb. 5 reiterated its support for the linked exchange rate. On its Web site, the IMF said “the current real value of the Hong Kong dollar is in line with fundamentals.”
Hardly. Rate cuts by the Federal Reserve are forcing the Hong Kong Monetary Authority to follow suit, adding liquidity to an economy that doesn’t needs it. Were Hong Kong to free its currency, there’s little doubt it would shoot higher from its current $HK7.8 per US dollar. ($HK7.2 per Australian dollar.)
Inflation pressures are building and asset bubbles are growing. In 2007 alone, residential rents climbed 13 percent from a year earlier, while luxury apartment rents jumped 27 percent. That was when the Fed’s overnight lending rate was above 4 percent. It’s now 3 percent and likely to go even lower. That may lead to increased buying of real estate and stocks given the negligible interest on bank accounts.
Inflation is but one concern here. Recruitment will become even harder as a falling exchange rate reduces salaries on a relative basis. For a city that views itself as the gateway to mainland China, not being able to attract the best and brightest from London, New York, Sydney, Tokyo and elsewhere is a bigger problem than government officials may realize.
The city’s worsening air quality is enough of a disincentive for many expatriates. The last thing Hong Kong wants is to lose its competitiveness.
The peg has its supporters in the business community because it’s a transparent, simple and predictable policy. For all the talk about stability, though, the peg also has been at the center of many of Hong Kong’s biggest challenges.
A decade ago, during the Asian crisis, speculators attacked the peg. While it was in vain, the episode was a distraction for policy makers. Earlier in this decade, an overvalued dollar helped worsen deflation. Now, with inflation rising, Hong Kong is facing new risks.
You have to wonder if the George Soros’s of the world are eyeing a return to speculation in the region. One possible step is to sever the link to the US dollar and peg the Hong Kong dollar to the yuan. Others say pegging to a Singapore-like basket of currencies makes more sense.
The dollar peg has served Hong Kong well at times. That doesn’t mean it can’t outlive its usefulness. Hong Kong has reached that point, and its economy is paying the price. It’s time for Hong Kong to change itself before China changes the world.
January inflation may be as high as in 70s oil crisis
Price pressures expected to ease later in the year though, say experts
By Bryan Lee - 25 February 2008
INFLATION could hit levels not seen since the oil crisis of the late 1970s, with consumer prices possibly jumping by as much as 7 per cent last month from a year ago. A lethal combination of surging food and oil prices worldwide, coupled with higher housing and transport costs at home, will produce an eye-popping figure when the actual number is published today, say economists.
While much of the price acceleration was due to external factors, experts said some of the increase was ‘self-inflicted’, citing hikes in road usage tariffs and taxi fares.
The good news is that last month’s inflation rate is likely to be as high as it gets this year, with experts adding that a big part of the rise could be attributed to technical reasons rather than real increases in living costs.
‘Think inflation went to the moon in December? Fastern your seatbelts. It’s going to shock even more in January,’ wrote DBS Bank economist Irvin Seah in a report.
Mr Seah reckons prices jumped by 6.6 per cent last month, accelerating from an already high 4.4 per cent in December.
Goldman Sachs economist Mark Tan thinks the figure could be nearer 7 per cent.
If they are right, January’s consumer price index (CPI) would be the highest seen since 1982, when aftershocks from the 1979 oil crisis were still being felt.
Goldman predicts full-year inflation will come in at the upper end of the official forecast range, which was raised two weeks ago to between 4.5 per cent and 5.5 per cent.
Mr Seah has pencilled in a 5 per cent full-year average.
Singapore is not alone in facing the spectre of escalating living costs.
Despite worries over a slowing world economy, inflation fears are high on the agenda in Asia and even the United States, the epicentre of the global slowdown.
But economists said government actions have added to price pressures in Singapore.
The upgrade in the annual values of Housing Board flats will be one of the biggest contributors to the CPI, even if this factor is a largely technical one. A property’s annual value is taken as the theoretical rental income it can fetch in a year.
Given the red-hot property market, the one-off revision has been a long time coming and will add about 1.5 to 2 percentage points to the CPI, economists say.
Another technical factor driving up the CPI was last July’s hike in the Goods and Services Tax, the effects of which should last until June this year.
But less theoretical were the higher transport costs, which came after the Government approved sharp increases in taxi fares and raised electronic road pricing rates while adding more gantries.
‘The spike might be largely technical but, for the man in the street, he has obviously seen how much more he has to fork out for food. For him, it’s quite real,’ said CIMB-GK economist Song Seng Wun.
Most experts expect inflation to stay high for the next few months. Snowstorms in China could worsen food inflation, while oil prices have shot past US$100 per barrel.
These observers expect slowing global growth to ease price pressures later in the year.
Economists were divided over whether the the Monetary Authority of Singapore (MAS) would tweak its monetary policy in April to fend off imported inflation.
Fortis Bank currency strategist Joseph Tan believes the MAS will steepen the permitted appreciation rate of the Singapore dollar.
‘The MAS is behind the curve in inflation. Since October, we’ve had a lot of surprises on the inflation front, which shows that we’ve underestimated inflation,’ said Mr Tan.
Others, such as Standard Chartered Bank economist Alvin Liew, said growth concerns would take precedence, noting that a stronger Singdollar would make local exports less competitive.
‘The Budget has been generous with handouts to help the lower-income group to cope,’ said Mr Liew.
‘The Finance Minister has also said that there’s a limit to how much a stronger Singdollar can fight inflation. That’s a tell-tale sign that the authorities don’t want the Singdollar to strengthen that much more.’
THE credit crisis is likely to have a significant impact on the United States economy, in addition to the turmoil it is causing in the global financial system, a top Lehman Brothers analyst said recently.
The ‘credit recession’ has not been as volatile as some earlier downturns, such as the period after the terrorist attacks in September 2001, said Mr Jack Malvey, Lehman’s chief global fixed-income strategist, last Friday. This crisis, however, stands out because of the ‘broadness of its effects’, he said.
It has created ‘an enormous amount of balance sheet adjustment’, as US and European banks make hefty write-downs to cover their exposure to risky sub-prime assets, said Mr Malvey.
He said the effects of the credit recession had widened. It has now also hit financial institutions like bond insurers and is likely to spill over into various sectors of the real economy, he added.
‘Watch carefully in the second quarter of this year - as companies become more conservative and less keen to expand employment.’
However, he expects that the US economy, which he believes to be already in a recession, will have a ‘technical recovery’ by the end of the year.
This will be due partly to Washington’s stimulus package, which will put cash in the hands of consumers, and to the effects of the Federal Reserve’s rate cuts.
Still, the US will have to endure a ‘slow healing process’ next year before ‘clear blue skies’ emerge in 2010.
‘We are definitely not looking at a V-shaped recovery, with gigantic upside in 2009,’ said Mr Malvey.
He also noted that the equity markets were likely to make a recovery at the end of the year.
The average global returns on bonds, however, may fall to 4 per cent from 5 per cent last year - the best rate of return since 2004 - and slide further to between zero and 2 per cent next year.
In the aftermath of the credit recession, widespread changes in the global financial architecture are also likely, he said.
The Allco recovery plan is to beg for some breathing space from the banks, relist the shares, sprout a bit of motherhood stuff about a new strategic business plan and tap the market for more capital.
It's a miserable failure if the stock price - down $1.83 to $1.22 at the time of this publication - is any indication. Allco had always relied on bamboozling the market with fancy structures. People, finally, don't believe it any more. Nor should they.
Every listed Allco structure has been a failure. Why would investors decide to tip in money now, especially as the goodwill is zero?
Not quite zero yet according to the belated Allco accounts. Goodwill is still booked at $1.3 billion though directors have augered for a writedown.
Elsewhere - and things will become clear later today - there is no mention of David Coe and his future, nor is there anything much in today's statement on simplifying the ridiculously byzantine Allco structure.
Operating cashflow for the period was negative, there is $6.5 billion in debt in the parent entity, another $7.8 billion in the assorted spin-offs and heaven knows how much in the assets underneath.
As usual, any useful information is interred in the notes to the accounts, although to give the board its due, the language is not quite as obtuse as usual. They have been chastened to be sure - not to mention put on notice by their lawyers.
In the notes on liabilities is the $250 million which needs to be refinanced by May, but there's another $900 million facility from the banks which also needs to be rolled, paid down or renegotiated.
These guys have played the market for fools for far too long and now the market will be reading the notes, not the marketing materials.
There is also a load of bottom-covering from directors - fearing lawuits - and from the auditor KPMG. Today's statement was not even an audit though KPMG saw fit to prepare for the worst by saying its bit about ``material uncertainty'.
The material uncertainty is whether the banks will get their money back from this mess. For shareholders the future is even more materially uncertain.
The banks have clearly told Allco to try to salvage the group by restoring market confidence and raising more equity. They have nothing to lose by this, but shareholders do.
A man has celebrated his 60th birthday by becoming a millionaire after placing a 50p bet.
Freddie Craggs, from Bedale, North Yorkshire, discovered by chance he had won £1 million on an accumulator bet, on odds of 2,798,000 to one.
He placed the bet on Friday, but only decided to have his ticket checked the next day when he went to make another bet at his local branch of William Hill.
All of his selections, which included Isn't That Lucky and A Dream Come True, had come up.
Hilary Craggs, his sister-in-law, said: "He leads a quiet life and lives frugally. It will take a long time for him to come to terms with having money."
Mr Craggs has yet to collect his winnings. A spokesman for William Hill said: "While we are quite happy to earn a day or two interest on the wager we are baffled as to why the winner has not contacted us."
His brother Charles said: "I have had a word with him and he's going to ring William Hill in a day or two."
Taiwan Yuanta says no plans to sell down Kim Eng stake
SINGAPORE, Feb 25 - Yuanta Securities, Taiwan's largest stockbroker, will not sell any of its 29 percent stake in Singapore's Kim Eng to Japan's Mitsubishi UFJ Securities. , its president Alex Lee said on Monday.
Yuanta Securities, the stockbroking arm of Taiwan's Yuanta Financial Holdings , also said it planned to grow its China business by increasing staff at its Hong Kong office from 50 to around 200 by the end of the year.
"Yuanta's holdings in Kim Eng will remain unchanged," Lee said at a media briefing in Singapore to launch several warrant products on the Singapore Exchange .
Mitsubishi UFJ on Friday offered to buy 11 percent of Kim Eng, a Singapore-listed regional stockbroker, from existing shareholders in a bid that could cost Japan's largest bank S$166 million .
The bid by Mitsubishi UFJ comes one day after the Japanese and Singapore companies agreed to set up an asset management joint venture.
Mitsubishi UFJ will distribute no less than S$1 billion worth of funds managed by the joint venture to Japanese investors within the next two years.
The Taiwanese firm marked its foray into the Singapore market on Monday by launching call warrants on three Taiwanese electronics firms: Hon Hai Precision Industry , Asustek Computer and High Tech Computer Corp .
Yuanta Securities plans to launch about 100 warrants in Singapore this year, senior vice president Timothy Lin said. - Reuters
NEW YORK (AP) -- Wall Street will face a slew of data this week: on Americans' spending, inflation at the producer level, home sales and manufacturing.
So far this year, economic data has been mixed, but worrisome overall, and that has made for a turbulent stock market. And investors are bracing for more of the same - for some time to come.
Last week, the Dow inched up 0.27 percent, the Standard & Poor's 500 index rose a modest 0.23 percent and the Nasdaq composite index dipped 0.79 percent. The three indexes are all down sharply for the year, and there's no sign yet of a true rebound in the stock market.
"Could it fall further? Sure," said Hans Olsen, chief investment officer in JPMorgan's private client services. He noted that particularly troubling news could easily push the S&P back under the 1,300 mark, a level it briefly sunk below in January.
It's possible for the stock market to end the year with decent returns, Olsen said, but "to say we're getting a bottom here might be premature."
Stock markets generally fall 30 percent, peak to trough, during a recession, said Christian Menegatti, lead analyst at the economic and financial Web site RGE Monitor. So it's quite possible, he said, depending on how weak the economy gets this year, for stocks to fall another 15 percent.
The biggest drag on the economy has so far been, of course, the housing market.
The National Association of Realtors reports Monday on sales of existing homes last month. According to the median estimate of economists surveyed Friday by Thomson Financial/IFR, existing home sales expected to have slipped by about 1 percent in January from December. Then on Wednesday, the Commerce Department reports on sales of new homes, which are anticipated to have slipped modestly in January.
Wall Street is concerned with not only sales, but inventories, which are at very high levels because demand is so weak. The housing market can only start bouncing back once inventories start edging lower - something that many analysts don't expect to happen for a while.
But a cash-strapped consumer is also a problem.
The government releases its readings on consumer spending and income on Friday, with both expected to rise by 0.2 percent. Anything below those levels could raise red flags for investors.
And inflation worries remain - the consumer spending report's inflation measure is forecast to come in at 2.2 percent, year-over-year, which is above the Federal Reserve's unofficial comfort zone. And last week, the Labor Department's consumer price index showed higher-than-expected upticks.
On Tuesday, the Labor Department issues its reading on prices at the wholesale level. The Producer Price Index is expected to have risen 0.3 percent in January after falling 0.1 percent in December, and the core index, which excludes food and energy, is expected to have risen 0.2 percent, the same as the prior month.
While the consumer is struggling, businesses are having a hard time offsetting that weakness.
Wednesday, the Commerce Department reports on orders of durable goods, which are expected to drop about 3.5 percent after rising 5.2 percent in December. And the Chicago Purchasing Manager's Index - considered a precursor to the Institute for Supply Management's U.S. manufacturing report next week - is expected to show that activity was flat, perhaps even contracting, in February.
What Fed Chairman Ben Bernanke implies the central bank's monetary policy during his testimony to Congress on Wednesday and Thursday could provide some short-term direction.
But doubts about the effectiveness of interest rate cuts in the tight credit markets - not to mention the gloomy tone Bernanke adopted during his last congressional appearance - could keep investors on edge for a while. Although rates have come down fairly sharply, banks have become less willing to lend and housing demand is low.
"You can make money cheap. You can't necessarily make people take out mortgages, or have institutions want to lend that money," Olsen said.
Nikkei index rises 3 percent on eased concerns about US financial sector
February 25, 2008
TOKYO (AP) -- Japan's benchmark Nikkei index jumped 3 percent Monday, rising to a month-and-a-half high as players snapped up banks and insurers amid eased concerns about the U.S. financial sector.
The Nikkei 225 index jumped 414.11 points, or 3.07 percent, to 13,914.57 on the Tokyo Stock Exchange. It was the Nikkei's highest close since Jan. 15. The index fell 1.37 percent Friday.
"The chance for the Nikkei to rise looks bigger than the risk to drop," said Masayoshi Okamoto, general manager at Jujiya Securities.
Traders took their cue from Wall Street's dramatic turnaround Friday shortly before closing on reports that a bailout plan for troubled bond insurer Ambac Financial could be announced this week. The Dow rose 0.8 percent to 12,381.
Gainers in Tokyo on Monday included Aioi Insurance, which surged 14 percent to 513 yen, and Mitsui Sumitomo Insurance, which added 10 percent to 1,107.
Among banks, Sumitomo Mitsui Financial rose 4.8 percent to 802,000 yen and Mitsubishi UFJ gained 4.1 percent to 975.
Sharp rose 5.2 percent to 2,100 yen after a weekend report said Sony plans to procure LCD panels for flat-screen TVs from the electronics maker.
The Topix index of all the exchange's first section issues rose 34.17 points, or 2.59 percent, to 1,355.54. It fell 1 percent Friday.
In currencies, the dollar was trading at 107.42 yen Monday, up from 106.93 yen late Friday in New York. The euro fell to US$1.4812 from US$1.4825.
China Weatherman Zhu Loses Grip as Citic Weakens CICC's Perch
By Cathy Chan
Feb. 25 (Bloomberg) -- Levin Zhu, the Chinese premier's son who went from government weather analyst to investment-banking rainmaker, may be losing his grip.
China International Capital Corp., the firm he wrestled from Morgan Stanley in 2000 when his father Zhu Rongji was in office, earned 90 percent less than Beijing-based rival Citic Securities Co. last year. CICC lost market share in stock underwriting, its biggest source of fees, and fell behind in trading as the local equity market tripled in size to $4 trillion, matching Japan's.
CICC is seeking new investors as Morgan Stanley attempts to sell its 34.3 percent stake in the company and start a competing venture with a Chinese partner it can control. Levin Zhu, whose father retired in 2003, also now faces competition from Goldman Sachs Group Inc. and UBS AG, the first Wall Street firms awarded licenses to manage share sales in China.
``It's time to initiate Plan B,'' said Payson Cha, chairman of Mingly Corp., a closely held Hong Kong investment company that was one of five founding shareholders when CICC was established in 1995. ``The directors, Levin and management need to sit down and discuss where we want to be five years from now.''
Zhu, 49, has been slow to veer from the company's strength as China's No. 1 stock underwriter and commit capital to trading and investments. CICC collected $788 million of fees from initial public offerings and secondary share sales from 2003 to 2007, according to data compiled by Bloomberg. That's double the amount for Citic, and exceeds the $738 million captured by Zurich-based UBS, the most successful international firm.
Zhu doesn't give media interviews regarding CICC, said Jiang Luyang, a Beijing-based spokeswoman for the firm.
Competitors Gain
CICC's share of domestic IPOs fell to 19 percent last year from 48 percent in 2002, Bloomberg data show. Citic's portion quadrupled to 16 percent, while UBS grabbed the biggest share, 22 percent, in its first year. CICC missed out on almost $80 billion of IPOs and secondary sales managed by rivals in 2007, including Bank of Communications Co.'s $3.3 billion stock offering and the $5.8 billion IPO of China Railway Group Ltd.
``The monopoly is gone,'' said Fang Fenglei, a CICC co- founder who left the firm in 2000 and established a joint venture with New York-based Goldman in 2004. ``The market is changing fast and they need to adapt quickly because there wasn't competition before.''
Earnings at Citic surged fivefold last year to 12 billion yuan ($1.68 billion) as stock trading ballooned, the Beijing- based company reported Jan. 7. CICC's profit rose 49 percent to 1.3 billion yuan, the company said Jan. 22. In 2006, CICC ranked as China's 10th-most profitable brokerage, according to the Securities Association of China, reflecting its dependence on underwriting and advisory services.
Weather Analyst
Zhu took a circuitous route to investment banking. After studying at Nanjing Institute of Meteorology in eastern China from 1977 to 1981, he spent two years in Beijing, analyzing global weather patterns at the China Meteorological Administration.
He then moved to the U.S. and received a doctorate from the University of Wisconsin-Madison in 1993. His Ph.D. thesis was a study of the Indian Ocean sea surface temperature on the large- scale Asian summer monsoon and the hydrological cycle, David Houghton, who was his Ph.D. adviser, told Bloomberg News in 2004.
In 1996, Zhu received a master's degree in accounting from Chicago's DePaul University and later that year joined Credit Suisse First Boston as an associate in New York.
After switching to CICC in 1998, the year his father became China's premier, Zhu forged personal ties with executives to win underwriting assignments from state-owned companies, including China Life Insurance Co. and China Petroleum & Chemical Corp., Asia's largest oil refiner.
Taking Control
He began to exert control in 2000 by forming a six-member management committee when Elaine La Roche, the last of three CEOs chosen by Morgan Stanley, resigned.
Zhu, who didn't want to be seen as profiting from his father's patronage, ran the show from behind the scenes until October 2002 when he became CEO, two people familiar with the situation said. Peter Clarke, formerly of Merrill Lynch & Co., had been appointed to that position in 2001, only to resign after less than a year because he had no decision-making powers, said a former management committee member who asked not to be identified. Clarke declined to be interviewed for this article.
Four committee members left CICC as Zhu resisted calls to boost brokerage income and delegate more authority. He also blocked attempts by New York-based Morgan Stanley to reclaim a larger management role in 2004 and 2005, a person with direct knowledge of the matter said.
`Created Difficulty'
Morgan Stanley, which paid $35 million for its CICC stake in 1995, has applied to open an investment-banking venture with Shanghai-based China Fortune Securities Co. Mack, who helped negotiate the original CICC investment, declined to comment.
``Like all good CEOs, Levin is very strong in his own mind and that may have created difficulty for Morgan Stanley,'' Mingly's Cha said. ``Levin really didn't think Morgan Stanley was able to contribute much and believed CICC should have its own character.''
Mingly, which owns 7.35 percent of CICC, hasn't decided whether to sell its holding, Cha said. The company was promised a stake after Cha proposed the idea of a joint venture investment bank to Edwin Lim, the World Bank's China chief who co-founded CICC and became its first CEO, Cha said.
``Our equity percentage is very small and we'd very much like to look at a cooperation in which Mingly can take a larger stake,'' Cha said. The company may build its own securities business in China and is keeping its options open, he said.
Management Exodus
CICC's other shareholders include the Government of Singapore Investment Corp., which also owns 7.35 percent. Domestic investors are China Jianyin Investment Ltd., with a 43.35 percent stake, and China National Investment & Guaranty Co., which owns 7.65 percent.
Zhu's leadership style, specifically the reluctance to accept outside ideas, was a reason cited by two CICC committee members for their decisions to resign, two people with knowledge of the decisions said.
The four members to depart included former managing directors Xu Xiaonian and Wu Shangzhi, who joined Goldman Sachs Gao Hua Securities Co., the China unit of the New York-based firm, and CDH Investments respectively. Bi Mingjian quit his role as head of investment banking and became an adviser to the firm in late 2005. Carl Walter, also a managing director, moved to JPMorgan Chase & Co.
Hands-On Oversight
Other executives who left were Yang Changpo, a managing director, who joined Goldman Gao Hua, and Li Gang, head of sales and trading in China, who started his own investment fund. Li Jian, a vice president of equity capital markets, departed for Goldman Gao Hua and Xiao Feng, vice president of investment banking, went to Washington-based buyout firm Carlyle Group. All declined to comment.
Zhu is hands-on when dealing with clients, accompanying chief executives of companies CICC takes public to their meetings with global investors. He spent two years preparing to win China Life's $3.5 billion share sale in 2003, poring over accounting books for several months to decide which assets should be included in the publicly traded company. He traveled with then China Life Chairman Wang Xianzhang to the U.S. to meet with fund managers, remaining at his side until the IPO was priced.
Zhu makes all key decisions himself, and demands extensive research documents and meetings before considering new business opportunities, according to four people who have worked with him and declined to be identified. When senior managers suggested the firm start trading Chinese shares in 2000, he initially dismissed the idea and CICC didn't get a brokerage license until December 2001, they said.
Three Branches
Since then, CICC opened just three branches, compared with Citic's 165, according to a research report published in November by Goldman Gao Hua. As of Feb. 15, there were 114.7 million individual brokerage accounts in China, more than Mexico's population. CICC has 86 fund manager clients, less than a third of Citic's 260, Goldman's report said.
``It is a relatively lethargic outfit,'' said Victor Shih, a political economist at Northwestern University in Evanston, Illinois, whose book Factions and Finance in China: Elite Conflict and Inflation, was published by Cambridge University Press. ``Levin Zhu is conservative because his father was behind the formation of CICC.''
Zhu Rongji, who stepped down in 2003 at the age of 74, shaped the nation's economic policies for almost two decades. A former mayor of Shanghai and central bank governor, he oversaw China's entry into the World Trade Organization in 2001 and approved international share sales by state-owned companies.
Telephone Hotline
The premier maintained a telephone hotline with PetroChina Co. executives during the oil company's $2.9 billion IPO in 2000, bankers said at the time. CICC managed that sale with Goldman.
Zhu's political ties were unrivaled in 1998, helping the firm win banking assignments. Five years after Zhu Rongji stepped down, those relationships carry less weight and China's market- oriented economic policies have created more of a meritocracy in deciding investment-banking mandates, said Donald Straszheim, vice chairman of Los Angeles-based Roth Capital Partners, LLC, who was hired in 2006 to find Chinese investment opportunities.
``The best connections are those that are contemporary,'' Straszheim said. ``China has gone on to the next round of leadership so it is only natural that over time the value of past connections will gradually decline.''
Zhu passed up opportunities to alter CICC's revenue mix and take advantage of a stock-market boom that tripled the value of the benchmark index since November 2006.
Spurned Opportunity
China's securities regulator offered him the chance four years ago to take over unprofitable brokerages, including China Southern Securities Co. and China Galaxy Securities Co., said a person with knowledge of the matter. The proposal was declined.
China Galaxy returned to profit in 2006 after receiving a bailout from the Chinese government. It now has the largest brokerage network in the country.
Zhu also opposed developing proprietary trading as Shanghai's benchmark index started to recover from a four-year slump, two people familiar with the decision said. He only resumed discussions on the matter after the market rallied in 2006, when the index more than doubled.
Much of Citic's growth was fueled by its IPO in 2003 and additional equity funding last year, which together raised $3.7 billion. Zhu has resisted calls for CICC to go public, citing the fact that managers would have to disclose compensation levels and be subject to greater outside scrutiny, said two people with knowledge of the situation.
`Clear Strategy'
Citic used the IPO proceeds to acquire three Chinese securities firms, increasing its branch network at a time the brokerage industry was posting losses. Citic announced a $1 billion cross-investment in October with New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm.
``We had a clear strategy,'' said Ted Tokuchi, Citic's head of investment banking, in an interview in Beijing. ``When we had cash from selling shares and few people thought brokerages were a good buy, we were able to pay prices that look very cheap now.''
Investment banking made up 61 percent of CICC's operating revenue in 2006, according to Goldman Gao Hua estimates. Asset management contributed 1.4 percent, brokerage fees 15 percent and proprietary trading 5.2 percent. Citic Securities derived 52 percent of revenue from brokerage commissions, 21 percent from trading for its own account, and 18 percent from investment banking, the report said.
CICC's past success helps explain why the firm hasn't needed to invest in new businesses to sustain profit growth, Cha said.
``Once the low-hanging fruit has been picked, maybe it's time to build a ladder,'' he said.
FOREX-Dollar, high yielders up as risk aversion dips
By Simon Falush Feb 25, 2008
LONDON, Feb 25 (Reuters) - The dollar strengthened versus the yen and euro on Monday and high yielding currencies were well-bid as stronger equity markets, on positive news about the U.S. financial sector, boosted investor confidence.
Reports that a rescue for troubled bond insurer Ambac Financial Group may be announced early this week helped soothe concerns about the health of the U.S. financial sector.
"Risk appetite is back on the table," said Jeremy Stretch, strategist at Rabobank.
"The Ambac rescue story has got risky assets performing strongly and with relatively little data today, market sentiment will once again be driven by perception of risk."
Concern that financial firms may suffer greater losses if the bond insurers lose their top-notch ratings, leading to ratings downgrades on the fixed-income securities they back, has kept investors on edge since the start of the year.
By 0848 GMT the dollar was 0.15 percent stronger versus the euro at $1.4807, retreating from three-week lows set last week. It was also 0.2 percent higher at 107.46 yen.
RISING EQUITIES
Japan's Nikkei average rose more than 3 percent to a six-week closing high .N225, and European stocks added 1.3 percent in early trade .
Gains in share prices are considered as showing increased investor appetite for risk-taking, and can boost demand for carry trades, which involves selling low-yielding currencies such as the yen to buy higher-yielding currencies and assets.
The high yielding New Zealand dollar, which typically benefits when risk appetite is strong, approached levels not seen since it was floated 23 years ago.
Sterling lost 0.2 percent versus the dollar to $1.9635 after a fall in British annual house price inflation to a 22-month low backed the case for more growth-boosting interest rate cuts.
With relatively little on the European data front, investors will look to comments from European Central Bank President Jean-Claude Trichet who is speaking at 1900 GMT.
Investors have pared back expectations of interest rate cuts from the ECB in recent weeks due to concerns about inflation.
"Expect inflation concerns to be mentioned as a continued source for concern, especially ahead of this week's CPI data (which is) likely at a 14 year high," said CIBC World Markets in a client note.
In the U.S., the focus will be on January existing home sales data at 1500 GMT.
Singapore's consumer price index(CPI) jumped 6.6 percent in January from a year earlier, after gaining a record high of 4.4 percent last December, the Singapore Department of Statistics (SDS) said Monday.
Increases in the cost of food, housing, transport and communication pushed the CPI in January at the fastest pace since 1982.
Compared to a month ago, the CPI in January went up by 1.3 percent, or 1.5 percent on a seasonally adjusted basis, said the SDS.
Housing cost rose by 11.1 percent from a year earlier as a result of higher costs for both owner-occupied and rented accommodation, while the 6.9 percent rise in transport and communication costs was attributed mainly to dearer petrol, as well as higher taxi fares and car prices, said the SDS.
Food prices increased by 5.8 percent, reflecting expensive cooked food, milk products, fresh poultry and pork, bread and fruits.
The Ministry of Trade and Industry (MTI) said the 6.6 percent year-on-year increase in CPI was consistent with the official inflation forecast of 4.5 to 5.5 percent for 2008.
It added that it also largely reflects a low base 12 months ago.
As the effects of the low base and one-off factors wear off in the second half of 2008, year-on-year inflation is expected to moderate significantly, said the ministry.
CPI is one of the major indicators of inflation. It measures the change in the prices of a fixed basket of goods and services commonly purchased by the majority of households.
Hillary Clinton and Barack Obama both propose to "turn the economy around" in a novel way - by raising tax rates on small businesses, working couples and stockholders in general, including retirees.
Of course, their plans are also meant to raise revenue for their various hundreds of billions in new spending - but the move would fall flat on that front, too.
Start with the deficit. The Bush administration predicts a $409 billion budget shortfall for fiscal 2009. But that rests on absurd assumptions - a sudden $104 billion drop in the price of war in Iraq and Afghanistan, a freeze in non-security discretionary spending - and a speeding up of economic growth.
In fact, this election year's "stimulus" bills are likelier to slow things down in 2009. Seven of the 10 postwar recessions began in the year after a presidential race, including 2001 and 1981.
So, with luck, the next president may start out with an economy that is only fragile or feeble and a deficit not much above $500 billion.
Now, on to tax hikes.
The federal government now takes 33 percent of taxable income above $200,000 on a joint return and 35 percent of income above $357,700. Both Democrats would raise those tax rates to 36 percent and 39.6 percent, respectively.
Even the Tax Policy Center (a think tank famously friendly to tax hikes and Democrats) estimates that raising the top two tax rates might bring in a mere $32 billion in 2010. That's 6 percent of the likely deficit - not a license to start a dozen new programs.
To squeeze a few more pennies from top taxpayers, Clinton and Obama would also phase out all personal exemptions at $250,000. That means large families would pay higher taxes than childless couples with the same income. They'd also phase out itemized deductions - which would force two-earner families in New York and California to pay more federal tax than those living in Texas and Florida.
And this politically suicidal tax discrimination against New Yorkers, Californians and big families would bring in only an extra $15 billion a year.
All in all, these tax hikes add up to, at most, $47 billion a year - only 1.5 percent of federal spending and 0.3 percent of GDP.
And even that assumes nobody makes the slightest effort to avoid the increased taxes. In reality, many two-earner families would become one-earner families; doctors would play more golf; some folks would quit working long hours and others would retire early. Top-bracket taxpayers would maximize deductions (take out a bigger mortgage, put more in the 401k) and minimize taxable income (buy municipal bonds or just spend rather than invest).
Such tax avoidance alone would cut the estimated revenue in half. The tax hikes' adverse effects on the stock market and the economy would more than eliminate the other half.
Meanwhile, both candidates are eager to spend more tens of billions a year on health-insurance subsidies, billions more for biofuels and (in Obama's case, at least) tens of billions more for several more refundable tax credits - checks to people who don't pay income tax. All these shameless vote-buying schemes would only worsen the real budget problem - which is runaway spending, not taxes.
Marginal tax rates are now much lower than they were in 1993 to 1996 on all incomes, large or small. And tax rates are much lower on dividends and capital gains. Yet the individual income tax brought in 8.5 percent of GDP last year - the same as in 1996 and much more than under the higher tax rates of '93-95.
Why do lower rates bring in as much money? In part because people do less to avoid taxes once rates are cut, in part because lower rates promote economic growth.
But the Democrats have an ideological bias against recognizing these clear facts - a naive faith in higher tax rates and an aversion to confronting excess spending. So they plan on two more tax hikes that won't work.
Obama wants to bring back the 28 percent tax on capital gains. In fact, our experience in the first Clinton administration proves that this would lose a lot of revenue: Investors would sit on stocks rather than sell and pay the tax.
The cap-gains tax dropped from 28 percent to 20 percent in 1997 - and revenues from that tax alone accounted for 12 percent of all individual income-tax payments from 1997 to 2000 - up from just 7.9 percent from 1993 to 1996.
Obama and Clinton also want to raise the tax on dividends from 15 percent to 39.6 percent. But that would just compel investors to liquidate blue-chip stocks at distress-sale prices and get back into tax-exempt bonds, cutting revenues further.
Higher tax rates on dividends and capital gains would crash the stock market yet do absolutely nothing to cut the deficit.
Other presidents have tried and failed to tax their way out of a budget squeeze. During the 1990 recession, the first President George Bush raised tax rates on "the rich," mostly by ending their deductions and exemptions. It didn't work: Individual income taxes brought in 8.3 percent of GDP in 1989 and just 7.6 percent of GDP by 1992.
President Bill Clinton then piled on another layer of high tax rates, 36 percent and 39.6 percent, while also greatly hiking taxes on Social Security benefits of working seniors. That failed, too: Individual income taxes brought in only 7.8 percent of GDP in 1993 and '94, 8.1 percent in 1995.
Federal revenues did not get much above the 1989 level until 1997 - when they rose because the capital-gains tax was cut.
In short, Obama is a "tax-and-spend" liberal, while Hillary is a "spend-and-tax" liberal. If either actually launched their gargantuan spending plans on the basis of imaginary revenues expected from taxing the rich, he or she would quickly end up having to tax the stuffing out of the middle class.
Ambac Rises on $3 Billion Rescue to Avert Downgrade
By Cecile Gutscher and Erik Holm
Feb. 25 (Bloomberg) -- Ambac Financial Group Inc. rose to the highest in two weeks on investor expectations the bond insurer may be rescued from crippling credit-rating downgrades by getting $3 billion in new capital.
Ambac, the second-biggest bond insurer after MBIA Inc., may announce an agreement this week, according to a person with knowledge of the discussions who declined to be named because the details aren't complete. The New York-based company plans to raise $2.5 billion by selling stock at a discount to existing shareholders and $500 million from issuing debt, the Wall Street Journal reported today, citing people familiar with the matter.
``Maybe we'll see light at the end of the tunnel soon,'' said Geraud Charpin, head of European credit strategy at UBS in London. ``That would be good news for banks.''
Citigroup Inc. and seven other banks are working with Ambac to prevent rating cuts that would throw doubt on the credit quality of the $553 billion of municipal and asset-backed securities it guarantees. Banks stand to lose as much as $70 billion from any downgrades to Ambac, MBIA Inc. and FGIC Corp., Oppenheimer & Co. analysts estimated. Ambac rose as much as 6 percent before the official start of trading in New York.
The stock was 69 cents higher at $11.40 at 7:35 a.m., the highest since Feb. 11. Ambac jumped 16 percent in New York Stock Exchange trading on Feb. 22 after CNBC Television said banks and Ambac were preparing a deal.
Ambac spokeswoman Vandana Sharma didn't return a voicemail and e-mail seeking comment before office hours today.
Bank Talks
Rating companies are demanding bond insurers add more capital or face downgrades because of losses on subprime- mortgage securities they guaranteed. Moody's Investors Service indicated it will decide whether to cut Ambac and Armonk, New York-based MBIA by the end of the month. A downgrade of all the firms would cast doubt on $2.4 trillion of securities they back.
New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing this month that the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.
``Ambac was among the neediest cases, so if they can pull it off, there's hope for the others,'' said Jim Reid, credit strategist at Deutsche Bank AG in London.
CDO Losses
Banks face losses from any rating cuts because they bought bond insurance to hedge the risks of collateralized debt obligations and other asset-backed securities that are now tumbling in value. CDOs package pools of securities then split them into pieces with different ratings.
UBS AG, Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG were also involved in the group discussing a rescue, said the person.
Dresdner, the German banking arm of Allianz SE, will contribute a ``small'' investment of ``two-digit million euros,'' Stefan Jentzsch, head of the Dresdner Kleinwort investment-banking unit, said at a press conference in Frankfurt today.
``We have long been waiting for banks to pay up,'' Philip Gisdakis, a Munich-based credit analyst at UniCredit SpA, Italy's biggest bank, wrote in a note to investors today. A ``solution without their participation would lead to large losses for them.''
Spokespeople for Citigroup, UBS, Wachovia and BNP declined to comment on the rescue plans. Spokespeople for RBS, Barclays and Societe Generale didn't immediately return e-mails or calls seeking comment.
FGIC Split
FGIC, which lost its top rating at Moody's last week, asked to be split into two separate businesses, one that insures municipal bonds and another for asset-backed securities. That would help protect municipal bonds from losses on the asset- backed debt.
Channel Reinsurance Ltd., a reinsurer for MBIA, had its top Aaa credit rating cut by Moody's on Feb. 22 because of a slump in the value of residential mortgage securities.
The rating was cut three levels to Aa3 with a negative outlook, Moody's said in a statement. Channel Re provides more than half the reinsurance bought by MBIA, according to MBIA filings. MBIA said last week all bond insurers must eventually divide their businesses.
Ambac Bond Risk
Ambac, which was downgraded by Fitch last month, lends its credit rating to $376.6 billion of municipal and international bonds and $176.6 billion of structured finance debt, including CDOs, according to its Web site. The stock declined 88 percent in the past year.
Credit-default swaps tied to Ambac's bond-insurance unit fell 5 basis points to 406 basis points on Feb. 22, according to CMA Datavision in London.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
SHANGHAI, Feb 25 (Reuters) - China's securities regulator, in a fresh effort to prevent a stock market crash, warned companies on Monday against making big issues of new shares that could push down the market.
"Refinancing by listed companies is a function of the capital market, and it is an important way for the market to allocate capital in the best way," a spokesman for the China Securities Regulatory Commission said.
"But companies should on no account maliciously seize money from the market," said the spokesman, quoted by the official Xinhua news agency on its Web site.
In a commentary, Xinhua itself warned that excessive share issues could cause the market to collapse.
"Listed companies should not regard the stock market as an automatic teller machine from which you can withdraw as much cash as you like. If the market crashes, everybody in the market will be a loser," Xinhua said.
The warnings appeared to show alarm among Chinese authorities over the sagging stock market, where the benchmark Shanghai index .SSEC is now 32 percent below a record high hit in October.
The index has plunged in the past month because of concern about the market's ability to absorb big supplies of new shares, including huge offers planned by Ping An Insurance (601318.SS: Quote, Profile, Research) (2318.HK: Quote, Profile, Research) and Shanghai Pudong Development Bank (600000.SS: Quote, Profile, Research).
The statement by the commission may now ensure a drastic scaling back or even the cancellation of those plans, although the commission did not explicitly say it would block them.
The commission urged shareholders to use their legal rights to prevent excessive share offers from proceeding.
In addition, the commission will look at the feasibility of fund-raising plans and whether they conform to regulations when it "strictly" examines applications by listed companies to offer shares, the spokesman added.
Ping An intends to raise as much as 120 billion yuan ($16.8 billion) by issuing new shares and convertible bonds, in what could be one of the world's largest equity refinancings.
China's second biggest life insurer has said it needs the money to boost its capital and make unspecified investments at home and abroad.
The company has scheduled a shareholders' meeting on March 5 to vote on the plan, and many fund managers had already expected the plan to be rejected.
Ping An officials could not be contacted for comment late on Monday. Asked by Reuters earlier in the day if the shareholder meeting would go ahead and whether the plan might be revised, Ping An spokesman Sheng Ruisheng said, "You should rely on our company's statements," declining to comment further.
Pudong Bank plans to raise some 40 billion yuan through an offer of new shares to boost its capital, which has been strained by rapid lending growth. But a senior executive at the bank told Reuters last week that the offer might be cut to 30 billion or 35 billion yuan because of the market's negative reaction.
REBOUND
Fund managers said the commission's warning might help the stock market rebound in coming days by suggesting authorities were determined to prevent a collapse of share prices.
"This is a clear signal to other firms which may want to raise money. Now they may not dare announce those plans, at least for now," said a fund manager at a Sino-European joint venture, who declined to be identified because he had not yet made a decision on how he would vote at Ping An's shareholder meeting.
But he and other fund managers said it was not clear whether even a halt to new fund-raisings would be enough to trigger a sustained rally by the market.
Investors are also worried by huge amounts of new shares that will become freely tradable this year as lock-up periods related to initial public offers and reform of companies' state shareholding structures expire.
The official China Securities Journal estimated last week that 401 billion yuan of such shares would become tradable in March. The market is also worried by rising Chinese inflation, at an 11-year high, and by the threat of a U.S. economic recession.
Over the past month, the commission has tried to support the market by approving the creation of three batches of new investment funds, lifting an informal suspension of such approvals that had been in effect since September.
But this intervention has had little impact, and the index sank 4.07 percent on Monday to a seven-month closing low.
The commission's warning apparently did not apply to IPOs by big Chinese companies. On Tuesday China Railway Construction Corp is due to accept retail subscriptions for the Shanghai portion of a dual IPO in Shanghai and Hong Kong that could raise a total of $5.4 billion, making it the world's largest IPO so far this year.
But the Shanghai portion of the IPO was delayed for several weeks because the regulator was concerned about its impact on the market, according to people with knowledge of the plan, and the size of the Shanghai tranche was cut by more than 10 percent.
Citigroup is facing further financial write-downs after revealing it has an exposure of $4bn (£2.03bn) to the troubled bond insurance sector and has been forced to move a $10bn hedge fund on to its balance sheet after significant losses.
The banking conglomerate also warned that further deterioration in the US housing market could lead to further write-downs in its sub-prime and leveraged loan books.
The warnings come after the bank suffered its worst quarter in its 196-year history, recording a loss of $9.83bn after accounting for $22.2bn in write-downs and other provisions.
Citigroup, which has already bolstered its balance sheet by $22bn in the last three months, may now have to raise further funds from external investors.
The bank's quarterly 10-K report, which was filed after the market closed in New York, reveals that on February 20, Citigroup entered into a $500m credit facility with its Falcon Multi-Strategy fixed income funds.
As a result of becoming its primary beneficiary, Citigroup was required to place the hedge funds assets on to its books, adding $10bn of assets and liabilities.
The news is likely to trigger a further sell-off in Citigroup's shares, which have slumped by 50pc in nine months, in spite of closing up seven cents at $25.12 last night.
Bare-clays Bank...High Street giant bids for Russian bank with a very saucy staff calendar
By WILL STEWART 23rd February 2008
Visiting the bank manager used to be a somewhat sobering experience.
How times have changed.
If Barclays is successful in its £200million bid for Russia's Expobank, it may find that the assets are more tangible than it had imagined.
These scantily-clad employees – ranging from secretaries to senior executives – have spiced up the Moscow-based bank's image with a 2008 calendar that is certain to raise eyebrows with the UK giant.
The women, aged between 20 and 33, peeled off to reveal an unexpected side to the world of commerce, with their pictures accompanied by provocative slogans doubling as advertising messages.
The models include the bank's chief economist for super-rich VIP clients, Anna Pogodina (Miss March), and her boss, Julia Kovyneva (Miss April), who is sprawled across a bed.
Senior manager Maria Guterman begins the year with her modesty protected by only a tray of cakes.
She is followed by Miss February Yevgenia Trusilova, a network sales manager, who is seen bending over a kitchen counter and accompanied by the slogan: "We work under your personal request."
However, there are no arguments about the nature of the calendar from the bank's upper echelons, as the project was the idea of chairman Kirill Yakubovskiy – and his professional photographer wife, Elena Boksa, took the pictures.
An Expobank spokeswoman said: "We wanted to make a pleasant surprise for our clients.
"We wanted them to know that it's not only professionals working with them but also beautiful women.
"Expobank tries to find unusual and creative ways in everything.
"The top managers were highly involved in this. The idea of a calendar was primarily developed by the chairman of our board.
"The slogans reflect the Expobank concept of interaction with our clients. Our employees were perfectly happy to take part in the photoshoot.
"They took it as a bonus on top of their normal work, though they were not paid for it. We are very proud of them all."
Ms Pogodina said: "I keep getting compliments about the calendar from my VIP clients, especially from the men – but the women say nice things too.
"I didn't expect, when I was having my picture taken, that I would see my name and full job title on the calendar. I was really surprised – and rather pleased."
Another employee-turned-model, Yulia Babenko, added: "It was one of our directors who offered us the chance to take part in the photoshoot.
"It was an interesting new experience for us and we all like the calendar. The photographer let us help create the images of ourselves."
The bank's move is one of the latest to be inspired by the women of Rylstone WI in North Yorkshire, who stripped off for a calendar launched in 2000 to raise money for Leukaemia Research.
They were photographed behind strategically placed objects – and the calendar caused a sensation.
The story was made into the movie Calendar Girls – starring Dame Helen Mirren and Julie Walters – which grossed £46million.
Expobank is a relatively small retail and commercial banking group whose major shareholders include British financier Lord Hambro, who has extensive interests in Russian gold-mining.
Barclays, Britain's third largest lender, with 2007 annual profits of more than £7 billion, is in the advanced stages of talks to buy a controlling stake in the bank.
The German government has had to bail out state-owned banks with taxpayers' money after their managements recklessly gambled away billions on subprime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy.
Ingrid Matthäus-Maier, a member of the center-left Social Democratic Party (SPD) and the CEO of the state-owned KfW banking group, is undoubtedly in one of Germany's highest earnings brackets. Although her annual salary of €418,000 ($614,000) is substantially lower than that of her counterpart at Deutsche Bank, Josef Ackermann, who earns a tidy €13 million a year, she does earn more than twice the salary of German Chancellor Angela Merkel, who has to make do with a mere €200,000.
That's nice for Matthäus-Maier. A lawyer by profession who was a financial expert for the SPD for many years, she would not have been able to get on the board of a private bank in 1999, the year she joined the board of KfW -- she lacked the banking experience required by law. But KfW is not subject to the same regulations as other banks, which explains why Matthäus-Maier doesn't owe government auditors an explanation -- not even now, in the wake of recent public accusations that she botched the IKB crisis.
As the head of KfW, Matthäus-Maier is a major shareholder in IKB, the Düsseldorf-based bank that is on the brink of bankruptcy and is only being kept afloat by a series of government bailouts running into the billions (more...). Last week was marked by one crisis meeting after the next, but the headstrong government banker had more than the future of IKB on her mind. Indeed, she seemed more concerned about her employment contract and whether it would be extended. Her demands triggered an irritated reaction from the head of the KfW supervisory board, Economics Minister Michael Glos, as well as from others present at the meetings.
Two days later, it was announced that former IKB CEO Stefan Ortseifen could look forward to a princely retirement pension of €31,500 a month -- effectively a token of appreciation for his failures. Ortseifen, after investing billions in the high-risk US subprime mortgage sector, insisted that the "uncertainties in the American mortgage market" would have "practically no effect" on IKB's investments. A few days later, IKB was on the verge of bankruptcy, with its supposed wonderful US investments worth little more than the paper it was printed on.
And German banks are not the only ones being hard hit by the subprime crisis. In the UK, the government earlier this week announced plans to temporarily nationalize the troubled bank Northern Rock until market conditions improved. The bank ran into difficulties last year as a result of the global credit crunch and was forced to ask the Bank of England for a bail-out. The House of Commons passed emergency legislation to nationalize the bank in the early hours of Wednesday morning, and the bill is expected to be approved by the House of Lords by the end of the week.
Amateurism and Greed
Ortseifen and Matthäus-Maier are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic for many of Germany's state-owned, partially state-owned and public sector banks. It is an environment that can only thrive in the shadow of the state -- and that has drained more than €20 billion from the public treasury within the last decade.
Until now, the government has always been there to pick up the tab in the end. Fully aware of this safety net, the executives at state-owned banks gambled with their employers' assets as if there was no tomorrow. Munich-based BayernLB did it with stocks in Singapore, Bankgesellschaft Berlin with real estate investments, and WestLB with holdings in British companies.
Anyone who is not responsible for bearing the consequences of the risks he or she takes can easily turn into a gambler. And the bets kept increasing in recent years, getting more and more public-sector banks into financial hot water. Now the banks find themselves lacking the assets they need to weather the turmoil of an international financial crisis.
Matthäus-Maier's bank KfW has already had to provide IKB with close to €5 billion in a series of three bailouts. With KfW itself gradually running out of cash, the federal government has now contributed another €1.9 billion.
The state of North Rhine-Westphalia has injected €1 billion into WestLB, another state-owned bank, as well as providing the ailing bank with another €3 billion in loan guarantees. The situation is even worse in Saxony, where the state has issued €2.73 billion in loan guarantees to Sachsen LB, that state's Landesbank, as Germany's state-backed regional banks are known. The other state-owned banks are providing another €14 billion in guarantees. Hamburg-based HSH Nordbank urgently needs €1 billion in fresh capital, while BayernLB last week reported a €1.9 billion write-down as a result of subprime exposure. BayernLB announced Tuesday that the bank's chief executive, Werner Schmidt, will be stepping down as of March 1 as a result of the crisis.
The situation for Germany's public banks has become so dramatic that it threatens to topple what has been one of the key pillars of the country's banking system. The state-owned banks are supposed to bail each other out when necessary, but the problem is that many are in trouble themselves and hardly in a position to help their peers. And things could get even worse.
If an industry giant like WestLB were forced to its knees -- which almost happened two weeks ago -- at least two other state-owned banks and a dozen savings and loan associations would crumple along with it. The member banks of the German Savings Banks Finance Group (Sparkassen-Finanzgruppe) are closely interlinked, and they are required to vouch for each other -- as long as they are in a position to do so, that is. The failure of a major state-owned bank like WestLB would also inevitably affect corporate customers, even forcing some into bankruptcy.
It is a nightmare scenario that the government financial supervisory authority now believes is increasingly likely. Germany's public-sector banks speculated far more heavily than private banks in American subprime mortgage securities. Now these banks' beleaguered executives are calling on the government to bail them out from a disaster of their own making.
It is a paradoxical situation, because the government, responding to pressure from Brussels, was required to withdraw its guarantee of protection for state-owned banks as of July 2005. Since then, it has only been liable for risks incurred before that date.
The consequences of the change were devastating for the public-sector banks, which suddenly found their business model pulled out from under their feet. In the days of government backing, they were able to borrow money at lower rates, which in turn allowed them to offer loans at lower rates than their private competitors. But that advantage ended in 2005.
Hard up for funds, many of the public-sector banks began speculating with high-risk securities. According to a former bank executive, many "literally stocked up on these investments" shortly before the cut-off date. Others even continued to do so after the cut-off date. Lacking a functioning business model, they turned to what was essentially gambling -- and lost.
Saving Their Skins
The hard-hit German banks are now trying desperately to save their skins. The situation is most dramatic at Düsseldorf-based IKB, the first German bank that was almost driven into bankruptcy by the US real estate crisis. Last week, once again, IKB's equity capital vanished into thin air. Jochen Sanio, president of Germany's banking supervisory agency BaFin, threatened to close the bank on Friday unless it could raise €1.5 billion ($2.2 billion). But KfW, IKB's biggest shareholder, was no longer able to bail out the Düsseldorf bank without jeopardizing its official mission, namely supporting small and mid-sized businesses.
In the end, the federal government and private banks came up with the funds for the bailout. For Finance Minister Peer Steinbrück, it was critical that IKB not be allowed to go under. The bankruptcy of a bank with such a high credit rating would trigger an unprecedented loss of confidence in the German financial market. In addition, a number of other banks had deposits at IKB worth a total of €18 billion.
"The issue here is ultimately about choosing the lesser evil, and about what is less damaging to the economy," Steinbrück explained at last Wednesday's meeting of the KfW supervisory board, shortly before the board decided to bail out the bank once again. Last Friday, the finance ministry justified the financial injection in a letter to the budget committee of the German parliament, the Bundestag: "Otherwise, we could have seen massive effects on the banking sector, with corresponding effects on the real economy."
A short time earlier, it had been WestLB that was almost ruined by the US subprime mortgage crisis. In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks.
But the state refused, arguing that the savings banks had declined to pledge their shares in WestLB to the state in return for its assumption of the risk, just as they had refused to bring in a private investor. The two sides became embroiled in heated negotiations, until Axel Weber, the head of the German central bank, the Bundesbank, intervened.
Weber proved to be persuasive. Köln-Bonner Sparkasse, a savings bank, had €340 million in deposits with WestLB, which it would be forced to write off if the bank went under. In other words, Weber argued, a WestLB failure would deeply jeopardize Köln-Bonner Sparkasse, as well as at least three other savings banks in North Rhine-Westphalia.
If that happened, the corporate customers of the affected banks could end up without access to their money for weeks, possibly even months. Despite the fact that the customers' deposits are in fact guaranteed, any bank insolvency is preceded by a moratorium on all bank transactions. This, Weber argued, would only lead to further bankruptcies, especially since the remaining savings banks in North Rhine-Westphalia, as their association presidents conceded, would have trouble satisfying the regional economy's liquidity requirements, because they already have a total of €43 billion in WestLB loans on their books. Furthermore, many of these banks also invested in American subprime mortgage securities, which they too would have to write off. The Westphalia-Lippe savings bank association, for instance, invested €100 million in the securities that triggered the worldwide financial crisis.
The officials involved painted grim scenarios. What would happen if customers were to withdraw their deposits from the savings banks en masse? And what if the insolvency of WestLB led to difficulties at two other state-owned banks, HSH Nordbank and BayernLB? How would that affect Bavaria and Hamburg, where the banks are headquartered? Would the public-sector banking system even be capable of surviving the failure of three state-owned banks? Could this in fact lead to the collapse of the entire economy, which would affect growth rates, unemployment and, ultimately, the well-being of society for many years to come? In the end, the participants were so drained that they agreed to a compromise.
Six months ago, BaFin president Jochen Sanio was heavily criticized when he warned of the "worst financial crisis since 1931." But now many politicians are convinced that the situation is far more serious than they had assumed until now.
In an effort to confront the crisis head-on, Jürgen Rüttgers, the governor of North Rhine-Westphalia, has urged Finance Minister Steinbrück to set up a round table of all the parties involved so they can discuss the issue and reach some kind of solution.
The federal states could still restructure the state-owned banking sector -- by allowing private minority shareholders, for example, or by merging their banks. If a crash does occur, third parties will be dictating the conditions. There will be fire sales, as was the case in Saxony, at significantly less-favorable prices.
But Steinbrück is hesitant. He recently told advisors that if he gives in to Rüttgers' demands, he could end up being "stuck" with the problems. There are also growing calls for the federal government to bail out the states and help them solve their problems. But this is something Steinbrück is apparently unwilling to consider.
The minister also has other things on his agenda -- his fellow SPD member Matthäus-Maier's contract, for example, which will not be extended, but also isn't set to expire until mid-2009. That's when someone else will take over at the helm of KfW -- and that person will be nominated by Angela Merkel's Christian Democrats.
(Translated from the German by Christopher Sultan)
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As China’s inflation soars, world fears knock-on effects
SHANGHAI (AFP) — As China’s factory floors feel the pressure from spiralling costs, there is growing nervousness in the rest of the world that the Asian giant’s next big export could be inflation.
From air-conditioned US shopping malls to bustling African street markets and remote Asian villages, shoppers have become accustomed over recent years to the vast array of ultra-cheap Chinese goods on offer.
China’s trade surplus last year reached 262.2 billion dollars, a more than 10-fold rise from 2003.
But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 percent in January, is ramping up the costs of doing business in China, with potential knock-on effects for the rest of the world.
As China’s currency has strengthened sharply against the dollar, the government has scrapped export tax rebates, while more stringent labour laws and even the ice and snow storms in southern and central China have further driven up costs.
“China’s inflation is having a domino effect on worldwide inflation, especially in the United States,” Li Huiyong, an analyst from Shanghai-based SYWG Research and Consulting, told AFP.
“In the past, (outside) inflation pressures in the US mainly came from oil prices because the US economy is highly dependent on crude oil. Cheap products from China and other developing countries helped to alleviate that pressure.
“Now Chinese goods are no longer as cheap it adds to the inflation pressure in the United States.”
Nevertheless, while it is clear that doing business in China is getting more expensive, there is no consensus among economists about how much that will translate into higher price tags for Chinese-made products overseas.
Wang Qing, chief China economist at Morgan Stanley, stressed that Chinese competitiveness was not about to disappear and goods from Asia’s most populous nation would remain cheap for years.
This would be the case as products moved up the value chain from toys and clothes to cars and high-tech machinery, according to Wang.
“I don’t think the days of cheap Chinese goods are over. The inflation that China is experiencing now has a cyclical component. By that I mean the high inflation won’t be sustainable,” he said.
“What’s more important is that you should not just focus on nominal wage growth, you also need to pay attention to labour productivity growth. That’s why I think we shouldn’t be too alarmed about this.”
And given the long and complex business chain between suppliers in China and overseas consumers, a rise in manufacturing costs does not mean that shoppers will immediately have to pay more for Chinese products.
Aside from cutting their own margins, factories and traders can first look to their clients, many of whom charge huge mark-ups on the wholesale price, to take on more of the financial burden.
For instance, the price of making a branded T-shirt in China may be just a few dollars, but they are typically sold in US malls for 10 or more times that price.
Companies intent on paying bottom dollar for their products could move operations to nations with cheaper overhead costs, such as Vietnam, Sri Lanka or Cambodia.
Alarm bells are definitely ringing in boardrooms across China.
Eating into exporters’ profit margins, producer prices jumped 6.1 percent last month to a three-year high.
Meanwhile, labour wages last year rose 20 percent and the yuan has appreciated more than nine percent against the US dollar in the past 14 months.
This has meant that more exporters face bankruptcy unless they lift prices to salvage their disappearing margins, which is just what most plan to do.
According to a survey by brokerage and research firm CLSA, 80 percent of Chinese exporters intend to raise prices this year in response to higher raw material costs.
“The appreciation of the renminbi (yuan) against the US dollar is a secondary factor driving these price hikes,” Shanghai-based CLSA economist Andy Rothman said in the survey.
Yatta Mao, a trade manager at Shanghai-based chemical trading firm Hanren, told AFP the tighter business conditions that have emerged over the past year were making it difficult to survive.
“The yuan appreciation has a huge impact on our business. It costs us much more in the production and delivery costs. What’s worse, the export tax rebates of 13 percent were cancelled so our total costs are up 20 percent,” she said.
And in China’s southern province of Guangdong, which borders Hong Kong and is one of the nation’s main export hubs, there are deep feelings of pessimism.
Thousands of Hong Kong- and Taiwan-owned factories based in Guangdong are likely to close soon as they seek cheaper overheads elsewhere, said Alexandra Poon, director of policy research at the Federation of Hong Kong Industries.
Time to yank Hong Kong dollar’s peg
February 25, 2008
Everyone thinks of changing the world, Leo Tolstoy once wrote, but no one thinks of changing himself.
Hong Kong finds itself in that very situation. As an increasingly cozy part of the Chinese juggernaut, the city of 7 million people has a front-row seat for the changing of the guard in the global economy.
It’s debatable whether China will overtake the US economy in any of our lifetimes -- or ever. What’s not is that with more than 1.3 billion Chinese -- and more than 1 billion Indians -- entering the financial system, nothing will ever be the same.
Why, then, is Hong Kong so reluctant to take an obvious step to restore sobriety to its bubble-plagued economy? The change in question is scrapping its peg to the US dollar.
Tolstoy died in 1910, yet were the Russian famed for realist fiction to walk the streets of Hong Kong these days, what a tale he could tell. He might write of growing hardships as inflation increases at the fastest pace in about nine years. He might depict how housing costs are skyrocketing beyond the means of average residents. He might dramatize how rising food and energy costs are taking their toll.
And Tolstoy would find plenty of fodder to buttress his belief that those changing the world rarely think to alter their own actions. He would find it in a government that stubbornly leaves its currency linked to a sliding US dollar -- and to a central bank in Washington that continues to cut interest rates.
“Super easy monetary conditions are likely to spawn a property price and stock market bubble, which eventually should make the Hong Kong dollar peg impossible to stomach any further,” says Diana Choyleva, a London-based economist at Lombard Street Research.
Even though pressure for change is building, traders in Hong Kong aren’t exactly bracing for it. For one thing, the decision to de-peg the currency, or raise its value, will probably be made in Beijing, not Hong Kong. For another, it won’t be based on economic forces, but in spite of them.
When Hong Kong Chief Executive Officer Donald Tsang or Financial Secretary John Tsang are asked about the peg, the response is normally something like: The policy has served us well since 1983 -- why mess with success?
“Just as Hong Kong tolerated and absorbed years of deflation following the Asian crisis, it will tolerate and look through a period of inflation,” says Stephen Jen, Morgan Stanley’s London-based chief currency strategist.
Hong Kong’s stance has its defenders. The International Monetary Fund on Feb. 5 reiterated its support for the linked exchange rate. On its Web site, the IMF said “the current real value of the Hong Kong dollar is in line with fundamentals.”
Hardly. Rate cuts by the Federal Reserve are forcing the Hong Kong Monetary Authority to follow suit, adding liquidity to an economy that doesn’t needs it. Were Hong Kong to free its currency, there’s little doubt it would shoot higher from its current $HK7.8 per US dollar. ($HK7.2 per Australian dollar.)
Inflation pressures are building and asset bubbles are growing. In 2007 alone, residential rents climbed 13 percent from a year earlier, while luxury apartment rents jumped 27 percent. That was when the Fed’s overnight lending rate was above 4 percent. It’s now 3 percent and likely to go even lower. That may lead to increased buying of real estate and stocks given the negligible interest on bank accounts.
Inflation is but one concern here. Recruitment will become even harder as a falling exchange rate reduces salaries on a relative basis. For a city that views itself as the gateway to mainland China, not being able to attract the best and brightest from London, New York, Sydney, Tokyo and elsewhere is a bigger problem than government officials may realize.
The city’s worsening air quality is enough of a disincentive for many expatriates. The last thing Hong Kong wants is to lose its competitiveness.
The peg has its supporters in the business community because it’s a transparent, simple and predictable policy. For all the talk about stability, though, the peg also has been at the center of many of Hong Kong’s biggest challenges.
A decade ago, during the Asian crisis, speculators attacked the peg. While it was in vain, the episode was a distraction for policy makers. Earlier in this decade, an overvalued dollar helped worsen deflation. Now, with inflation rising, Hong Kong is facing new risks.
You have to wonder if the George Soros’s of the world are eyeing a return to speculation in the region. One possible step is to sever the link to the US dollar and peg the Hong Kong dollar to the yuan. Others say pegging to a Singapore-like basket of currencies makes more sense.
The dollar peg has served Hong Kong well at times. That doesn’t mean it can’t outlive its usefulness. Hong Kong has reached that point, and its economy is paying the price. It’s time for Hong Kong to change itself before China changes the world.
January inflation may be as high as in 70s oil crisis
Price pressures expected to ease later in the year though, say experts
By Bryan Lee - 25 February 2008
INFLATION could hit levels not seen since the oil crisis of the late 1970s, with consumer prices possibly jumping by as much as 7 per cent last month from a year ago.
A lethal combination of surging food and oil prices worldwide, coupled with higher housing and transport costs at home, will produce an eye-popping figure when the actual number is published today, say economists.
While much of the price acceleration was due to external factors, experts said some of the increase was ‘self-inflicted’, citing hikes in road usage tariffs and taxi fares.
The good news is that last month’s inflation rate is likely to be as high as it gets this year, with experts adding that a big part of the rise could be attributed to technical reasons rather than real increases in living costs.
‘Think inflation went to the moon in December? Fastern your seatbelts. It’s going to shock even more in January,’ wrote DBS Bank economist Irvin Seah in a report.
Mr Seah reckons prices jumped by 6.6 per cent last month, accelerating from an already high 4.4 per cent in December.
Goldman Sachs economist Mark Tan thinks the figure could be nearer 7 per cent.
If they are right, January’s consumer price index (CPI) would be the highest seen since 1982, when aftershocks from the 1979 oil crisis were still being felt.
Goldman predicts full-year inflation will come in at the upper end of the official forecast range, which was raised two weeks ago to between 4.5 per cent and 5.5 per cent.
Mr Seah has pencilled in a 5 per cent full-year average.
Singapore is not alone in facing the spectre of escalating living costs.
Despite worries over a slowing world economy, inflation fears are high on the agenda in Asia and even the United States, the epicentre of the global slowdown.
But economists said government actions have added to price pressures in Singapore.
The upgrade in the annual values of Housing Board flats will be one of the biggest contributors to the CPI, even if this factor is a largely technical one. A property’s annual value is taken as the theoretical rental income it can fetch in a year.
Given the red-hot property market, the one-off revision has been a long time coming and will add about 1.5 to 2 percentage points to the CPI, economists say.
Another technical factor driving up the CPI was last July’s hike in the Goods and Services Tax, the effects of which should last until June this year.
But less theoretical were the higher transport costs, which came after the Government approved sharp increases in taxi fares and raised electronic road pricing rates while adding more gantries.
‘The spike might be largely technical but, for the man in the street, he has obviously seen how much more he has to fork out for food. For him, it’s quite real,’ said CIMB-GK economist Song Seng Wun.
Most experts expect inflation to stay high for the next few months. Snowstorms in China could worsen food inflation, while oil prices have shot past US$100 per barrel.
These observers expect slowing global growth to ease price pressures later in the year.
Economists were divided over whether the the Monetary Authority of Singapore (MAS) would tweak its monetary policy in April to fend off imported inflation.
Fortis Bank currency strategist Joseph Tan believes the MAS will steepen the permitted appreciation rate of the Singapore dollar.
‘The MAS is behind the curve in inflation. Since October, we’ve had a lot of surprises on the inflation front, which shows that we’ve underestimated inflation,’ said Mr Tan.
Others, such as Standard Chartered Bank economist Alvin Liew, said growth concerns would take precedence, noting that a stronger Singdollar would make local exports less competitive.
‘The Budget has been generous with handouts to help the lower-income group to cope,’ said Mr Liew.
‘The Finance Minister has also said that there’s a limit to how much a stronger Singdollar can fight inflation. That’s a tell-tale sign that the authorities don’t want the Singdollar to strengthen that much more.’
Credit crisis could hit US economy hard: Lehman
THE credit crisis is likely to have a significant impact on the United States economy, in addition to the turmoil it is causing in the global financial system, a top Lehman Brothers analyst said recently.
The ‘credit recession’ has not been as volatile as some earlier downturns, such as the period after the terrorist attacks in September 2001, said Mr Jack Malvey, Lehman’s chief global fixed-income strategist, last Friday. This crisis, however, stands out because of the ‘broadness of its effects’, he said.
It has created ‘an enormous amount of balance sheet adjustment’, as US and European banks make hefty write-downs to cover their exposure to risky sub-prime assets, said Mr Malvey.
He said the effects of the credit recession had widened. It has now also hit financial institutions like bond insurers and is likely to spill over into various sectors of the real economy, he added.
‘Watch carefully in the second quarter of this year - as companies become more conservative and less keen to expand employment.’
However, he expects that the US economy, which he believes to be already in a recession, will have a ‘technical recovery’ by the end of the year.
This will be due partly to Washington’s stimulus package, which will put cash in the hands of consumers, and to the effects of the Federal Reserve’s rate cuts.
Still, the US will have to endure a ‘slow healing process’ next year before ‘clear blue skies’ emerge in 2010.
‘We are definitely not looking at a V-shaped recovery, with gigantic upside in 2009,’ said Mr Malvey.
He also noted that the equity markets were likely to make a recovery at the end of the year.
The average global returns on bonds, however, may fall to 4 per cent from 5 per cent last year - the best rate of return since 2004 - and slide further to between zero and 2 per cent next year.
In the aftermath of the credit recession, widespread changes in the global financial architecture are also likely, he said.
银行系QDII可代客投资日本市场
《财经》记者 林靖 历志钢
[ 2008-02-23 ]
本金融担当大臣渡边喜美在京表示，目前日本股市股价较低，投资正当其时
【《财经》网专稿/记者 林靖 历志钢】“目前日本股价较低，现在投资，正当其时。” 2月22日，在京访问的日本金融担当大臣渡边喜美对《财经》记者表示。
当日，中国银监会与日本金融厅交换了，商业银行代客境外理财业务监管合作信函，达成监管合作协议。这意味着，中国的银行系QDII，今后可代客投资日本的股票市场和公募基金。
渡边喜美对《财经》记者表示，日本希望把中国在亚洲市场的能量，吸收到日本市场上来，将从官方和民间各个层面，加强与中方的合作和交流，“希望取得相乘效应。”
中国证监会主席助理姚刚，在出席东京证券交易所北京代表处成立庆典时表示，对外开放是推动证券市场发展的重要动力。日本是成熟市场，中国还是新兴市场。商业银行QDII政策再度放开后，中国投资者可以投资日本资本市场，既有利于加深两国证券领域合作，也有助于广大投资者分散投资风险。
QDII （Qualified Domestic Institutional Investors），即合格境内机构投资者，是与QFII （Qualified Foreign Institutional Investors），即合格境外机构投资者相对应的一种投资制度。
QDII是在目前人民币资本项下不可自由兑换条件下，允许经认可的境内合格机构，参与境外资本市场投资的一项制度安排。QDII的发展可在一定程度上，缓解人民币升值压力，对境内市场资金面的影响有限。
银监会对境内合格机构参与境外投资监管较为严格，在监管双方签署双边监管合作谅解备忘录之后，若要开展代客境外理财，还需重新签订代客境外理财业务监管合作谅解备忘录。
统计显示，截至2007年10月末，共有23家中外资银行取得了银行代客境外理财业务的开办资格。其中，21家中外资银行取得了161亿美元境外投资购汇额度；16家中外资银行推出了154款银行代客境外理财产品，人民币销售额达到352亿元（约合47亿美元），外币销售额达到10亿美元。
银监会纪委书记王华庆此前在接受《财经》专访时表示，银监会将逐步扩大商业银行QDII业务的境外投资范围和投资市场，稳步推进该项业务发展。
日本金融厅国际担当参事官知原信良对《财经》记者表示，日本是继香港、英国、新加坡之后，中国开放商业银行QDII业务的第四个地区，“这一步日本抢先于美国。”
知原信良表示，目前中国商业银行的QDII额度达到170亿美元，但去往日本的投资规模尚不知晓”，金融厅会努力使日本金融市场成为更具吸引力的市场。”
曾淵滄：由新地聯想到楊協成
2008-02-20
2月18日，美股休市，缺乏參考目標，港股於昨日回升，收復前日的跌幅，因此到目前為止，港股正在醞釀一個較像樣的大反彈之可能性仍然存在。港股已連跌4個月，膽小的人早已賣光股票離開市場，因此，現在的沽壓已經減輕，成交下降，大戶要托價炒上的難度也下降了。這兩天，一些低價的蚊型股又開始炒得火熱，股市莊家又出來活動了。一般上，股市莊家的出現，就表示市場的緊張、恐懼心態已相對緩和。新地（016）突然發出通告，稱主席兼行政總裁郭炳湘即日起休假，其職權由兩位弟弟分擔，通告於前晚發出。昨日新地股價跟隨大市上升，表現還比九倉（004）、長實（001）及恒地（012）另三隻藍籌地產股佳。暫時來說，郭炳湘的休假並不影響股價。根據傳媒的猜測，郭炳湘的休假是因為三兄弟不和。過去幾年，郭氏三兄弟曾經被投資界公認為最成功的接班人，他們的父親郭得勝老先生逝世後，三兄弟合作無間，不因為創業者的逝世而導致領導層分裂。過去幾年，局外人都認為，新地的最高決策是三兄弟一致同意之下而推行的。三軍不可一日無主帥，郭炳湘休假，新地是需要馬上委任一位代主席、代行政總裁，代主席與代行政總裁可以是一個人也可以是兩個人，如果香港特首休假，一定有署理特首。
百年老店難保控制權
新地三兄弟不和的傳言，使我想起新加坡的楊協成集團。楊協成是百年老店，第一代的楊景連老先生在中國福建開醬油店起家；第二代五兄弟移民新加坡，合作愉快，發揚光大。當年我在楊協成工作期間，第二代已從前線退下主席、總經理等職位，由第三代楊氏家族擔任。我於1982年年初至1987年年中，前來香港發展之前就在該集團當經理，很可惜，我離開楊協成後的第三年，楊氏家族也內部不和，最後主席被解除職位，支持主席的一派也全部離職。主席離職後，可能覺得再繼續持有楊協成股票並沒有意義，於是賣掉了。主席及其支持者賣股的結果是另一個家族的入侵，那就是信和集團的黃廷方家族。今日，楊協成集團已不再是楊氏家族所控制，很可惜。家族生意要延續數代可真不容易，最大的致命傷是股權分散於眾多的家族成員，家族權力鬥爭的失敗者，賣股套現的誘因很大。
It's all over at Allco
Michael West
February 25, 2008
This thing is gone.
The Allco recovery plan is to beg for some breathing space from the banks, relist the shares, sprout a bit of motherhood stuff about a new strategic business plan and tap the market for more capital.
It's a miserable failure if the stock price - down $1.83 to $1.22 at the time of this publication - is any indication. Allco had always relied on bamboozling the market with fancy structures. People, finally, don't believe it any more. Nor should they.
Every listed Allco structure has been a failure. Why would investors decide to tip in money now, especially as the goodwill is zero?
Not quite zero yet according to the belated Allco accounts. Goodwill is still booked at $1.3 billion though directors have augered for a writedown.
Elsewhere - and things will become clear later today - there is no mention of David Coe and his future, nor is there anything much in today's statement on simplifying the ridiculously byzantine Allco structure.
Operating cashflow for the period was negative, there is $6.5 billion in debt in the parent entity, another $7.8 billion in the assorted spin-offs and heaven knows how much in the assets underneath.
As usual, any useful information is interred in the notes to the accounts, although to give the board its due, the language is not quite as obtuse as usual. They have been chastened to be sure - not to mention put on notice by their lawyers.
In the notes on liabilities is the $250 million which needs to be refinanced by May, but there's another $900 million facility from the banks which also needs to be rolled, paid down or renegotiated.
These guys have played the market for fools for far too long and now the market will be reading the notes, not the marketing materials.
There is also a load of bottom-covering from directors - fearing lawuits - and from the auditor KPMG. Today's statement was not even an audit though KPMG saw fit to prepare for the worst by saying its bit about ``material uncertainty'.
The material uncertainty is whether the banks will get their money back from this mess. For shareholders the future is even more materially uncertain.
The banks have clearly told Allco to try to salvage the group by restoring market confidence and raising more equity. They have nothing to lose by this, but shareholders do.
Man wins £1 million from 50p lottery bet
By Paul Stokes
25/02/2008
A man has celebrated his 60th birthday by becoming a millionaire after placing a 50p bet.
Freddie Craggs, from Bedale, North Yorkshire, discovered by chance he had won £1 million on an accumulator bet, on odds of 2,798,000 to one.
He placed the bet on Friday, but only decided to have his ticket checked the next day when he went to make another bet at his local branch of William Hill.
All of his selections, which included Isn't That Lucky and A Dream Come True, had come up.
Hilary Craggs, his sister-in-law, said: "He leads a quiet life and lives frugally. It will take a long time for him to come to terms with having money."
Mr Craggs has yet to collect his winnings. A spokesman for William Hill said: "While we are quite happy to earn a day or two interest on the wager we are baffled as to why the winner has not contacted us."
His brother Charles said: "I have had a word with him and he's going to ring William Hill in a day or two."
Mr Craggs was not available for comment.
Taiwan Yuanta says no plans to sell down Kim Eng stake
SINGAPORE, Feb 25 - Yuanta Securities, Taiwan's largest stockbroker, will not sell any of its 29 percent stake in Singapore's Kim Eng to Japan's Mitsubishi UFJ Securities. , its president Alex Lee said on Monday.
Yuanta Securities, the stockbroking arm of Taiwan's Yuanta Financial Holdings , also said it planned to grow its China business by increasing staff at its Hong Kong office from 50 to around 200 by the end of the year.
"Yuanta's holdings in Kim Eng will remain unchanged," Lee said at a media briefing in Singapore to launch several warrant products on the Singapore Exchange .
Mitsubishi UFJ on Friday offered to buy 11 percent of Kim Eng, a Singapore-listed regional stockbroker, from existing shareholders in a bid that could cost Japan's largest bank S$166 million .
The bid by Mitsubishi UFJ comes one day after the Japanese and Singapore companies agreed to set up an asset management joint venture.
Mitsubishi UFJ will distribute no less than S$1 billion worth of funds managed by the joint venture to Japanese investors within the next two years.
The Taiwanese firm marked its foray into the Singapore market on Monday by launching call warrants on three Taiwanese electronics firms: Hon Hai Precision Industry , Asustek Computer and High Tech Computer Corp .
Yuanta Securities plans to launch about 100 warrants in Singapore this year, senior vice president Timothy Lin said. - Reuters
Spending, Inflation Data to Hit Wall St.
By MADLEN READ
Feb 24, 2008
NEW YORK (AP) -- Wall Street will face a slew of data this week: on Americans' spending, inflation at the producer level, home sales and manufacturing.
So far this year, economic data has been mixed, but worrisome overall, and that has made for a turbulent stock market. And investors are bracing for more of the same - for some time to come.
Last week, the Dow inched up 0.27 percent, the Standard & Poor's 500 index rose a modest 0.23 percent and the Nasdaq composite index dipped 0.79 percent. The three indexes are all down sharply for the year, and there's no sign yet of a true rebound in the stock market.
"Could it fall further? Sure," said Hans Olsen, chief investment officer in JPMorgan's private client services. He noted that particularly troubling news could easily push the S&P back under the 1,300 mark, a level it briefly sunk below in January.
It's possible for the stock market to end the year with decent returns, Olsen said, but "to say we're getting a bottom here might be premature."
Stock markets generally fall 30 percent, peak to trough, during a recession, said Christian Menegatti, lead analyst at the economic and financial Web site RGE Monitor. So it's quite possible, he said, depending on how weak the economy gets this year, for stocks to fall another 15 percent.
The biggest drag on the economy has so far been, of course, the housing market.
The National Association of Realtors reports Monday on sales of existing homes last month. According to the median estimate of economists surveyed Friday by Thomson Financial/IFR, existing home sales expected to have slipped by about 1 percent in January from December. Then on Wednesday, the Commerce Department reports on sales of new homes, which are anticipated to have slipped modestly in January.
Wall Street is concerned with not only sales, but inventories, which are at very high levels because demand is so weak. The housing market can only start bouncing back once inventories start edging lower - something that many analysts don't expect to happen for a while.
But a cash-strapped consumer is also a problem.
The government releases its readings on consumer spending and income on Friday, with both expected to rise by 0.2 percent. Anything below those levels could raise red flags for investors.
And inflation worries remain - the consumer spending report's inflation measure is forecast to come in at 2.2 percent, year-over-year, which is above the Federal Reserve's unofficial comfort zone. And last week, the Labor Department's consumer price index showed higher-than-expected upticks.
On Tuesday, the Labor Department issues its reading on prices at the wholesale level. The Producer Price Index is expected to have risen 0.3 percent in January after falling 0.1 percent in December, and the core index, which excludes food and energy, is expected to have risen 0.2 percent, the same as the prior month.
While the consumer is struggling, businesses are having a hard time offsetting that weakness.
Wednesday, the Commerce Department reports on orders of durable goods, which are expected to drop about 3.5 percent after rising 5.2 percent in December. And the Chicago Purchasing Manager's Index - considered a precursor to the Institute for Supply Management's U.S. manufacturing report next week - is expected to show that activity was flat, perhaps even contracting, in February.
What Fed Chairman Ben Bernanke implies the central bank's monetary policy during his testimony to Congress on Wednesday and Thursday could provide some short-term direction.
But doubts about the effectiveness of interest rate cuts in the tight credit markets - not to mention the gloomy tone Bernanke adopted during his last congressional appearance - could keep investors on edge for a while. Although rates have come down fairly sharply, banks have become less willing to lend and housing demand is low.
"You can make money cheap. You can't necessarily make people take out mortgages, or have institutions want to lend that money," Olsen said.
Nikkei index rises 3 percent on eased concerns about US financial sector
February 25, 2008
TOKYO (AP) -- Japan's benchmark Nikkei index jumped 3 percent Monday, rising to a month-and-a-half high as players snapped up banks and insurers amid eased concerns about the U.S. financial sector.
The Nikkei 225 index jumped 414.11 points, or 3.07 percent, to 13,914.57 on the Tokyo Stock Exchange. It was the Nikkei's highest close since Jan. 15. The index fell 1.37 percent Friday.
"The chance for the Nikkei to rise looks bigger than the risk to drop," said Masayoshi Okamoto, general manager at Jujiya Securities.
Traders took their cue from Wall Street's dramatic turnaround Friday shortly before closing on reports that a bailout plan for troubled bond insurer Ambac Financial could be announced this week. The Dow rose 0.8 percent to 12,381.
Gainers in Tokyo on Monday included Aioi Insurance, which surged 14 percent to 513 yen, and Mitsui Sumitomo Insurance, which added 10 percent to 1,107.
Among banks, Sumitomo Mitsui Financial rose 4.8 percent to 802,000 yen and Mitsubishi UFJ gained 4.1 percent to 975.
Sharp rose 5.2 percent to 2,100 yen after a weekend report said Sony plans to procure LCD panels for flat-screen TVs from the electronics maker.
The Topix index of all the exchange's first section issues rose 34.17 points, or 2.59 percent, to 1,355.54. It fell 1 percent Friday.
In currencies, the dollar was trading at 107.42 yen Monday, up from 106.93 yen late Friday in New York. The euro fell to US$1.4812 from US$1.4825.
China Weatherman Zhu Loses Grip as Citic Weakens CICC's Perch
By Cathy Chan
Feb. 25 (Bloomberg) -- Levin Zhu, the Chinese premier's son who went from government weather analyst to investment-banking rainmaker, may be losing his grip.
China International Capital Corp., the firm he wrestled from Morgan Stanley in 2000 when his father Zhu Rongji was in office, earned 90 percent less than Beijing-based rival Citic Securities Co. last year. CICC lost market share in stock underwriting, its biggest source of fees, and fell behind in trading as the local equity market tripled in size to $4 trillion, matching Japan's.
CICC is seeking new investors as Morgan Stanley attempts to sell its 34.3 percent stake in the company and start a competing venture with a Chinese partner it can control. Levin Zhu, whose father retired in 2003, also now faces competition from Goldman Sachs Group Inc. and UBS AG, the first Wall Street firms awarded licenses to manage share sales in China.
``It's time to initiate Plan B,'' said Payson Cha, chairman of Mingly Corp., a closely held Hong Kong investment company that was one of five founding shareholders when CICC was established in 1995. ``The directors, Levin and management need to sit down and discuss where we want to be five years from now.''
Zhu, 49, has been slow to veer from the company's strength as China's No. 1 stock underwriter and commit capital to trading and investments. CICC collected $788 million of fees from initial public offerings and secondary share sales from 2003 to 2007, according to data compiled by Bloomberg. That's double the amount for Citic, and exceeds the $738 million captured by Zurich-based UBS, the most successful international firm.
Zhu doesn't give media interviews regarding CICC, said Jiang Luyang, a Beijing-based spokeswoman for the firm.
Competitors Gain
CICC's share of domestic IPOs fell to 19 percent last year from 48 percent in 2002, Bloomberg data show. Citic's portion quadrupled to 16 percent, while UBS grabbed the biggest share, 22 percent, in its first year. CICC missed out on almost $80 billion of IPOs and secondary sales managed by rivals in 2007, including Bank of Communications Co.'s $3.3 billion stock offering and the $5.8 billion IPO of China Railway Group Ltd.
``The monopoly is gone,'' said Fang Fenglei, a CICC co- founder who left the firm in 2000 and established a joint venture with New York-based Goldman in 2004. ``The market is changing fast and they need to adapt quickly because there wasn't competition before.''
Earnings at Citic surged fivefold last year to 12 billion yuan ($1.68 billion) as stock trading ballooned, the Beijing- based company reported Jan. 7. CICC's profit rose 49 percent to 1.3 billion yuan, the company said Jan. 22. In 2006, CICC ranked as China's 10th-most profitable brokerage, according to the Securities Association of China, reflecting its dependence on underwriting and advisory services.
Weather Analyst
Zhu took a circuitous route to investment banking. After studying at Nanjing Institute of Meteorology in eastern China from 1977 to 1981, he spent two years in Beijing, analyzing global weather patterns at the China Meteorological Administration.
He then moved to the U.S. and received a doctorate from the University of Wisconsin-Madison in 1993. His Ph.D. thesis was a study of the Indian Ocean sea surface temperature on the large- scale Asian summer monsoon and the hydrological cycle, David Houghton, who was his Ph.D. adviser, told Bloomberg News in 2004.
In 1996, Zhu received a master's degree in accounting from Chicago's DePaul University and later that year joined Credit Suisse First Boston as an associate in New York.
After switching to CICC in 1998, the year his father became China's premier, Zhu forged personal ties with executives to win underwriting assignments from state-owned companies, including China Life Insurance Co. and China Petroleum & Chemical Corp., Asia's largest oil refiner.
Taking Control
He began to exert control in 2000 by forming a six-member management committee when Elaine La Roche, the last of three CEOs chosen by Morgan Stanley, resigned.
Zhu, who didn't want to be seen as profiting from his father's patronage, ran the show from behind the scenes until October 2002 when he became CEO, two people familiar with the situation said. Peter Clarke, formerly of Merrill Lynch & Co., had been appointed to that position in 2001, only to resign after less than a year because he had no decision-making powers, said a former management committee member who asked not to be identified. Clarke declined to be interviewed for this article.
Four committee members left CICC as Zhu resisted calls to boost brokerage income and delegate more authority. He also blocked attempts by New York-based Morgan Stanley to reclaim a larger management role in 2004 and 2005, a person with direct knowledge of the matter said.
`Created Difficulty'
Morgan Stanley, which paid $35 million for its CICC stake in 1995, has applied to open an investment-banking venture with Shanghai-based China Fortune Securities Co. Mack, who helped negotiate the original CICC investment, declined to comment.
``Like all good CEOs, Levin is very strong in his own mind and that may have created difficulty for Morgan Stanley,'' Mingly's Cha said. ``Levin really didn't think Morgan Stanley was able to contribute much and believed CICC should have its own character.''
Mingly, which owns 7.35 percent of CICC, hasn't decided whether to sell its holding, Cha said. The company was promised a stake after Cha proposed the idea of a joint venture investment bank to Edwin Lim, the World Bank's China chief who co-founded CICC and became its first CEO, Cha said.
``Our equity percentage is very small and we'd very much like to look at a cooperation in which Mingly can take a larger stake,'' Cha said. The company may build its own securities business in China and is keeping its options open, he said.
Management Exodus
CICC's other shareholders include the Government of Singapore Investment Corp., which also owns 7.35 percent. Domestic investors are China Jianyin Investment Ltd., with a 43.35 percent stake, and China National Investment & Guaranty Co., which owns 7.65 percent.
Zhu's leadership style, specifically the reluctance to accept outside ideas, was a reason cited by two CICC committee members for their decisions to resign, two people with knowledge of the decisions said.
The four members to depart included former managing directors Xu Xiaonian and Wu Shangzhi, who joined Goldman Sachs Gao Hua Securities Co., the China unit of the New York-based firm, and CDH Investments respectively. Bi Mingjian quit his role as head of investment banking and became an adviser to the firm in late 2005. Carl Walter, also a managing director, moved to JPMorgan Chase & Co.
Hands-On Oversight
Other executives who left were Yang Changpo, a managing director, who joined Goldman Gao Hua, and Li Gang, head of sales and trading in China, who started his own investment fund. Li Jian, a vice president of equity capital markets, departed for Goldman Gao Hua and Xiao Feng, vice president of investment banking, went to Washington-based buyout firm Carlyle Group. All declined to comment.
Zhu is hands-on when dealing with clients, accompanying chief executives of companies CICC takes public to their meetings with global investors. He spent two years preparing to win China Life's $3.5 billion share sale in 2003, poring over accounting books for several months to decide which assets should be included in the publicly traded company. He traveled with then China Life Chairman Wang Xianzhang to the U.S. to meet with fund managers, remaining at his side until the IPO was priced.
Zhu makes all key decisions himself, and demands extensive research documents and meetings before considering new business opportunities, according to four people who have worked with him and declined to be identified. When senior managers suggested the firm start trading Chinese shares in 2000, he initially dismissed the idea and CICC didn't get a brokerage license until December 2001, they said.
Three Branches
Since then, CICC opened just three branches, compared with Citic's 165, according to a research report published in November by Goldman Gao Hua. As of Feb. 15, there were 114.7 million individual brokerage accounts in China, more than Mexico's population. CICC has 86 fund manager clients, less than a third of Citic's 260, Goldman's report said.
``It is a relatively lethargic outfit,'' said Victor Shih, a political economist at Northwestern University in Evanston, Illinois, whose book Factions and Finance in China: Elite Conflict and Inflation, was published by Cambridge University Press. ``Levin Zhu is conservative because his father was behind the formation of CICC.''
Zhu Rongji, who stepped down in 2003 at the age of 74, shaped the nation's economic policies for almost two decades. A former mayor of Shanghai and central bank governor, he oversaw China's entry into the World Trade Organization in 2001 and approved international share sales by state-owned companies.
Telephone Hotline
The premier maintained a telephone hotline with PetroChina Co. executives during the oil company's $2.9 billion IPO in 2000, bankers said at the time. CICC managed that sale with Goldman.
Zhu's political ties were unrivaled in 1998, helping the firm win banking assignments. Five years after Zhu Rongji stepped down, those relationships carry less weight and China's market- oriented economic policies have created more of a meritocracy in deciding investment-banking mandates, said Donald Straszheim, vice chairman of Los Angeles-based Roth Capital Partners, LLC, who was hired in 2006 to find Chinese investment opportunities.
``The best connections are those that are contemporary,'' Straszheim said. ``China has gone on to the next round of leadership so it is only natural that over time the value of past connections will gradually decline.''
Zhu passed up opportunities to alter CICC's revenue mix and take advantage of a stock-market boom that tripled the value of the benchmark index since November 2006.
Spurned Opportunity
China's securities regulator offered him the chance four years ago to take over unprofitable brokerages, including China Southern Securities Co. and China Galaxy Securities Co., said a person with knowledge of the matter. The proposal was declined.
China Galaxy returned to profit in 2006 after receiving a bailout from the Chinese government. It now has the largest brokerage network in the country.
Zhu also opposed developing proprietary trading as Shanghai's benchmark index started to recover from a four-year slump, two people familiar with the decision said. He only resumed discussions on the matter after the market rallied in 2006, when the index more than doubled.
Much of Citic's growth was fueled by its IPO in 2003 and additional equity funding last year, which together raised $3.7 billion. Zhu has resisted calls for CICC to go public, citing the fact that managers would have to disclose compensation levels and be subject to greater outside scrutiny, said two people with knowledge of the situation.
`Clear Strategy'
Citic used the IPO proceeds to acquire three Chinese securities firms, increasing its branch network at a time the brokerage industry was posting losses. Citic announced a $1 billion cross-investment in October with New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm.
``We had a clear strategy,'' said Ted Tokuchi, Citic's head of investment banking, in an interview in Beijing. ``When we had cash from selling shares and few people thought brokerages were a good buy, we were able to pay prices that look very cheap now.''
Investment banking made up 61 percent of CICC's operating revenue in 2006, according to Goldman Gao Hua estimates. Asset management contributed 1.4 percent, brokerage fees 15 percent and proprietary trading 5.2 percent. Citic Securities derived 52 percent of revenue from brokerage commissions, 21 percent from trading for its own account, and 18 percent from investment banking, the report said.
CICC's past success helps explain why the firm hasn't needed to invest in new businesses to sustain profit growth, Cha said.
``Once the low-hanging fruit has been picked, maybe it's time to build a ladder,'' he said.
FOREX-Dollar, high yielders up as risk aversion dips
By Simon Falush
Feb 25, 2008
LONDON, Feb 25 (Reuters) - The dollar strengthened versus the yen and euro on Monday and high yielding currencies were well-bid as stronger equity markets, on positive news about the U.S. financial sector, boosted investor confidence.
Reports that a rescue for troubled bond insurer Ambac Financial Group may be announced early this week helped soothe concerns about the health of the U.S. financial sector.
"Risk appetite is back on the table," said Jeremy Stretch, strategist at Rabobank.
"The Ambac rescue story has got risky assets performing strongly and with relatively little data today, market sentiment will once again be driven by perception of risk."
Concern that financial firms may suffer greater losses if the bond insurers lose their top-notch ratings, leading to ratings downgrades on the fixed-income securities they back, has kept investors on edge since the start of the year.
By 0848 GMT the dollar was 0.15 percent stronger versus the euro at $1.4807, retreating from three-week lows set last week. It was also 0.2 percent higher at 107.46 yen.
RISING EQUITIES
Japan's Nikkei average rose more than 3 percent to a six-week closing high .N225, and European stocks added 1.3 percent in early trade .
Gains in share prices are considered as showing increased investor appetite for risk-taking, and can boost demand for carry trades, which involves selling low-yielding currencies such as the yen to buy higher-yielding currencies and assets.
The high yielding New Zealand dollar, which typically benefits when risk appetite is strong, approached levels not seen since it was floated 23 years ago.
Sterling lost 0.2 percent versus the dollar to $1.9635 after a fall in British annual house price inflation to a 22-month low backed the case for more growth-boosting interest rate cuts.
With relatively little on the European data front, investors will look to comments from European Central Bank President Jean-Claude Trichet who is speaking at 1900 GMT.
Investors have pared back expectations of interest rate cuts from the ECB in recent weeks due to concerns about inflation.
"Expect inflation concerns to be mentioned as a continued source for concern, especially ahead of this week's CPI data (which is) likely at a 14 year high," said CIBC World Markets in a client note.
In the U.S., the focus will be on January existing home sales data at 1500 GMT.
Singapore's CPI up 6.6% year-on-year in January
February 25, 2008
Singapore's consumer price index(CPI) jumped 6.6 percent in January from a year earlier, after gaining a record high of 4.4 percent last December, the Singapore Department of Statistics (SDS) said Monday.
Increases in the cost of food, housing, transport and communication pushed the CPI in January at the fastest pace since 1982.
Compared to a month ago, the CPI in January went up by 1.3 percent, or 1.5 percent on a seasonally adjusted basis, said the SDS.
Housing cost rose by 11.1 percent from a year earlier as a result of higher costs for both owner-occupied and rented accommodation, while the 6.9 percent rise in transport and communication costs was attributed mainly to dearer petrol, as well as higher taxi fares and car prices, said the SDS.
Food prices increased by 5.8 percent, reflecting expensive cooked food, milk products, fresh poultry and pork, bread and fruits.
The Ministry of Trade and Industry (MTI) said the 6.6 percent year-on-year increase in CPI was consistent with the official inflation forecast of 4.5 to 5.5 percent for 2008.
It added that it also largely reflects a low base 12 months ago.
As the effects of the low base and one-off factors wear off in the second half of 2008, year-on-year inflation is expected to moderate significantly, said the ministry.
CPI is one of the major indicators of inflation. It measures the change in the prices of a fixed basket of goods and services commonly purchased by the majority of households.
Tax Delusions
Obama, Clinton count on phantom cash
By Alan Reynolds
February 15, 2008
Hillary Clinton and Barack Obama both propose to "turn the economy around" in a novel way - by raising tax rates on small businesses, working couples and stockholders in general, including retirees.
Of course, their plans are also meant to raise revenue for their various hundreds of billions in new spending - but the move would fall flat on that front, too.
Start with the deficit. The Bush administration predicts a $409 billion budget shortfall for fiscal 2009. But that rests on absurd assumptions - a sudden $104 billion drop in the price of war in Iraq and Afghanistan, a freeze in non-security discretionary spending - and a speeding up of economic growth.
In fact, this election year's "stimulus" bills are likelier to slow things down in 2009. Seven of the 10 postwar recessions began in the year after a presidential race, including 2001 and 1981.
So, with luck, the next president may start out with an economy that is only fragile or feeble and a deficit not much above $500 billion.
Now, on to tax hikes.
The federal government now takes 33 percent of taxable income above $200,000 on a joint return and 35 percent of income above $357,700. Both Democrats would raise those tax rates to 36 percent and 39.6 percent, respectively.
Even the Tax Policy Center (a think tank famously friendly to tax hikes and Democrats) estimates that raising the top two tax rates might bring in a mere $32 billion in 2010. That's 6 percent of the likely deficit - not a license to start a dozen new programs.
To squeeze a few more pennies from top taxpayers, Clinton and Obama would also phase out all personal exemptions at $250,000. That means large families would pay higher taxes than childless couples with the same income. They'd also phase out itemized deductions - which would force two-earner families in New York and California to pay more federal tax than those living in Texas and Florida.
And this politically suicidal tax discrimination against New Yorkers, Californians and big families would bring in only an extra $15 billion a year.
All in all, these tax hikes add up to, at most, $47 billion a year - only 1.5 percent of federal spending and 0.3 percent of GDP.
And even that assumes nobody makes the slightest effort to avoid the increased taxes. In reality, many two-earner families would become one-earner families; doctors would play more golf; some folks would quit working long hours and others would retire early. Top-bracket taxpayers would maximize deductions (take out a bigger mortgage, put more in the 401k) and minimize taxable income (buy municipal bonds or just spend rather than invest).
Such tax avoidance alone would cut the estimated revenue in half. The tax hikes' adverse effects on the stock market and the economy would more than eliminate the other half.
Meanwhile, both candidates are eager to spend more tens of billions a year on health-insurance subsidies, billions more for biofuels and (in Obama's case, at least) tens of billions more for several more refundable tax credits - checks to people who don't pay income tax. All these shameless vote-buying schemes would only worsen the real budget problem - which is runaway spending, not taxes.
Marginal tax rates are now much lower than they were in 1993 to 1996 on all incomes, large or small. And tax rates are much lower on dividends and capital gains. Yet the individual income tax brought in 8.5 percent of GDP last year - the same as in 1996 and much more than under the higher tax rates of '93-95.
Why do lower rates bring in as much money? In part because people do less to avoid taxes once rates are cut, in part because lower rates promote economic growth.
But the Democrats have an ideological bias against recognizing these clear facts - a naive faith in higher tax rates and an aversion to confronting excess spending. So they plan on two more tax hikes that won't work.
Obama wants to bring back the 28 percent tax on capital gains. In fact, our experience in the first Clinton administration proves that this would lose a lot of revenue: Investors would sit on stocks rather than sell and pay the tax.
The cap-gains tax dropped from 28 percent to 20 percent in 1997 - and revenues from that tax alone accounted for 12 percent of all individual income-tax payments from 1997 to 2000 - up from just 7.9 percent from 1993 to 1996.
Obama and Clinton also want to raise the tax on dividends from 15 percent to 39.6 percent. But that would just compel investors to liquidate blue-chip stocks at distress-sale prices and get back into tax-exempt bonds, cutting revenues further.
Higher tax rates on dividends and capital gains would crash the stock market yet do absolutely nothing to cut the deficit.
Other presidents have tried and failed to tax their way out of a budget squeeze. During the 1990 recession, the first President George Bush raised tax rates on "the rich," mostly by ending their deductions and exemptions. It didn't work: Individual income taxes brought in 8.3 percent of GDP in 1989 and just 7.6 percent of GDP by 1992.
President Bill Clinton then piled on another layer of high tax rates, 36 percent and 39.6 percent, while also greatly hiking taxes on Social Security benefits of working seniors. That failed, too: Individual income taxes brought in only 7.8 percent of GDP in 1993 and '94, 8.1 percent in 1995.
Federal revenues did not get much above the 1989 level until 1997 - when they rose because the capital-gains tax was cut.
In short, Obama is a "tax-and-spend" liberal, while Hillary is a "spend-and-tax" liberal. If either actually launched their gargantuan spending plans on the basis of imaginary revenues expected from taxing the rich, he or she would quickly end up having to tax the stuffing out of the middle class.
Ambac Rises on $3 Billion Rescue to Avert Downgrade
By Cecile Gutscher and Erik Holm
Feb. 25 (Bloomberg) -- Ambac Financial Group Inc. rose to the highest in two weeks on investor expectations the bond insurer may be rescued from crippling credit-rating downgrades by getting $3 billion in new capital.
Ambac, the second-biggest bond insurer after MBIA Inc., may announce an agreement this week, according to a person with knowledge of the discussions who declined to be named because the details aren't complete. The New York-based company plans to raise $2.5 billion by selling stock at a discount to existing shareholders and $500 million from issuing debt, the Wall Street Journal reported today, citing people familiar with the matter.
``Maybe we'll see light at the end of the tunnel soon,'' said Geraud Charpin, head of European credit strategy at UBS in London. ``That would be good news for banks.''
Citigroup Inc. and seven other banks are working with Ambac to prevent rating cuts that would throw doubt on the credit quality of the $553 billion of municipal and asset-backed securities it guarantees. Banks stand to lose as much as $70 billion from any downgrades to Ambac, MBIA Inc. and FGIC Corp., Oppenheimer & Co. analysts estimated. Ambac rose as much as 6 percent before the official start of trading in New York.
The stock was 69 cents higher at $11.40 at 7:35 a.m., the highest since Feb. 11. Ambac jumped 16 percent in New York Stock Exchange trading on Feb. 22 after CNBC Television said banks and Ambac were preparing a deal.
Ambac spokeswoman Vandana Sharma didn't return a voicemail and e-mail seeking comment before office hours today.
Bank Talks
Rating companies are demanding bond insurers add more capital or face downgrades because of losses on subprime- mortgage securities they guaranteed. Moody's Investors Service indicated it will decide whether to cut Ambac and Armonk, New York-based MBIA by the end of the month. A downgrade of all the firms would cast doubt on $2.4 trillion of securities they back.
New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing this month that the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.
``Ambac was among the neediest cases, so if they can pull it off, there's hope for the others,'' said Jim Reid, credit strategist at Deutsche Bank AG in London.
CDO Losses
Banks face losses from any rating cuts because they bought bond insurance to hedge the risks of collateralized debt obligations and other asset-backed securities that are now tumbling in value. CDOs package pools of securities then split them into pieces with different ratings.
UBS AG, Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG were also involved in the group discussing a rescue, said the person.
Dresdner, the German banking arm of Allianz SE, will contribute a ``small'' investment of ``two-digit million euros,'' Stefan Jentzsch, head of the Dresdner Kleinwort investment-banking unit, said at a press conference in Frankfurt today.
``We have long been waiting for banks to pay up,'' Philip Gisdakis, a Munich-based credit analyst at UniCredit SpA, Italy's biggest bank, wrote in a note to investors today. A ``solution without their participation would lead to large losses for them.''
Spokespeople for Citigroup, UBS, Wachovia and BNP declined to comment on the rescue plans. Spokespeople for RBS, Barclays and Societe Generale didn't immediately return e-mails or calls seeking comment.
FGIC Split
FGIC, which lost its top rating at Moody's last week, asked to be split into two separate businesses, one that insures municipal bonds and another for asset-backed securities. That would help protect municipal bonds from losses on the asset- backed debt.
Channel Reinsurance Ltd., a reinsurer for MBIA, had its top Aaa credit rating cut by Moody's on Feb. 22 because of a slump in the value of residential mortgage securities.
The rating was cut three levels to Aa3 with a negative outlook, Moody's said in a statement. Channel Re provides more than half the reinsurance bought by MBIA, according to MBIA filings. MBIA said last week all bond insurers must eventually divide their businesses.
Ambac Bond Risk
Ambac, which was downgraded by Fitch last month, lends its credit rating to $376.6 billion of municipal and international bonds and $176.6 billion of structured finance debt, including CDOs, according to its Web site. The stock declined 88 percent in the past year.
Credit-default swaps tied to Ambac's bond-insurance unit fell 5 basis points to 406 basis points on Feb. 22, according to CMA Datavision in London.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
China warns companies against big share issues
By Andrew Torchia
SHANGHAI, Feb 25 (Reuters) - China's securities regulator, in a fresh effort to prevent a stock market crash, warned companies on Monday against making big issues of new shares that could push down the market.
"Refinancing by listed companies is a function of the capital market, and it is an important way for the market to allocate capital in the best way," a spokesman for the China Securities Regulatory Commission said.
"But companies should on no account maliciously seize money from the market," said the spokesman, quoted by the official Xinhua news agency on its Web site.
In a commentary, Xinhua itself warned that excessive share issues could cause the market to collapse.
"Listed companies should not regard the stock market as an automatic teller machine from which you can withdraw as much cash as you like. If the market crashes, everybody in the market will be a loser," Xinhua said.
The warnings appeared to show alarm among Chinese authorities over the sagging stock market, where the benchmark Shanghai index .SSEC is now 32 percent below a record high hit in October.
The index has plunged in the past month because of concern about the market's ability to absorb big supplies of new shares, including huge offers planned by Ping An Insurance (601318.SS: Quote, Profile, Research) (2318.HK: Quote, Profile, Research) and Shanghai Pudong Development Bank (600000.SS: Quote, Profile, Research).
The statement by the commission may now ensure a drastic scaling back or even the cancellation of those plans, although the commission did not explicitly say it would block them.
The commission urged shareholders to use their legal rights to prevent excessive share offers from proceeding.
In addition, the commission will look at the feasibility of fund-raising plans and whether they conform to regulations when it "strictly" examines applications by listed companies to offer shares, the spokesman added.
Ping An intends to raise as much as 120 billion yuan ($16.8 billion) by issuing new shares and convertible bonds, in what could be one of the world's largest equity refinancings.
China's second biggest life insurer has said it needs the money to boost its capital and make unspecified investments at home and abroad.
The company has scheduled a shareholders' meeting on March 5 to vote on the plan, and many fund managers had already expected the plan to be rejected.
Ping An officials could not be contacted for comment late on Monday. Asked by Reuters earlier in the day if the shareholder meeting would go ahead and whether the plan might be revised, Ping An spokesman Sheng Ruisheng said, "You should rely on our company's statements," declining to comment further.
Pudong Bank plans to raise some 40 billion yuan through an offer of new shares to boost its capital, which has been strained by rapid lending growth. But a senior executive at the bank told Reuters last week that the offer might be cut to 30 billion or 35 billion yuan because of the market's negative reaction.
REBOUND
Fund managers said the commission's warning might help the stock market rebound in coming days by suggesting authorities were determined to prevent a collapse of share prices.
"This is a clear signal to other firms which may want to raise money. Now they may not dare announce those plans, at least for now," said a fund manager at a Sino-European joint venture, who declined to be identified because he had not yet made a decision on how he would vote at Ping An's shareholder meeting.
But he and other fund managers said it was not clear whether even a halt to new fund-raisings would be enough to trigger a sustained rally by the market.
Investors are also worried by huge amounts of new shares that will become freely tradable this year as lock-up periods related to initial public offers and reform of companies' state shareholding structures expire.
The official China Securities Journal estimated last week that 401 billion yuan of such shares would become tradable in March. The market is also worried by rising Chinese inflation, at an 11-year high, and by the threat of a U.S. economic recession.
Over the past month, the commission has tried to support the market by approving the creation of three batches of new investment funds, lifting an informal suspension of such approvals that had been in effect since September.
But this intervention has had little impact, and the index sank 4.07 percent on Monday to a seven-month closing low.
The commission's warning apparently did not apply to IPOs by big Chinese companies. On Tuesday China Railway Construction Corp is due to accept retail subscriptions for the Shanghai portion of a dual IPO in Shanghai and Hong Kong that could raise a total of $5.4 billion, making it the world's largest IPO so far this year.
But the Shanghai portion of the IPO was delayed for several weeks because the regulator was concerned about its impact on the market, according to people with knowledge of the plan, and the size of the Shanghai tranche was cut by more than 10 percent.
Citigroup facing further big write-downs
By James Quinn
23/02/2008
Citigroup is facing further financial write-downs after revealing it has an exposure of $4bn (£2.03bn) to the troubled bond insurance sector and has been forced to move a $10bn hedge fund on to its balance sheet after significant losses.
The banking conglomerate also warned that further deterioration in the US housing market could lead to further write-downs in its sub-prime and leveraged loan books.
The warnings come after the bank suffered its worst quarter in its 196-year history, recording a loss of $9.83bn after accounting for $22.2bn in write-downs and other provisions.
Citigroup, which has already bolstered its balance sheet by $22bn in the last three months, may now have to raise further funds from external investors.
The bank's quarterly 10-K report, which was filed after the market closed in New York, reveals that on February 20, Citigroup entered into a $500m credit facility with its Falcon Multi-Strategy fixed income funds.
As a result of becoming its primary beneficiary, Citigroup was required to place the hedge funds assets on to its books, adding $10bn of assets and liabilities.
The news is likely to trigger a further sell-off in Citigroup's shares, which have slumped by 50pc in nine months, in spite of closing up seven cents at $25.12 last night.
Bare-clays Bank...High Street giant bids for Russian bank with a very saucy staff calendar
By WILL STEWART
23rd February 2008
Visiting the bank manager used to be a somewhat sobering experience.
How times have changed.
If Barclays is successful in its £200million bid for Russia's Expobank, it may find that the assets are more tangible than it had imagined.
These scantily-clad employees – ranging from secretaries to senior executives – have spiced up the Moscow-based bank's image with a 2008 calendar that is certain to raise eyebrows with the UK giant.
The women, aged between 20 and 33, peeled off to reveal an unexpected side to the world of commerce, with their pictures accompanied by provocative slogans doubling as advertising messages.
The models include the bank's chief economist for super-rich VIP clients, Anna Pogodina (Miss March), and her boss, Julia Kovyneva (Miss April), who is sprawled across a bed.
Senior manager Maria Guterman begins the year with her modesty protected by only a tray of cakes.
She is followed by Miss February Yevgenia Trusilova, a network sales manager, who is seen bending over a kitchen counter and accompanied by the slogan: "We work under your personal request."
However, there are no arguments about the nature of the calendar from the bank's upper echelons, as the project was the idea of chairman Kirill Yakubovskiy – and his professional photographer wife, Elena Boksa, took the pictures.
An Expobank spokeswoman said: "We wanted to make a pleasant surprise for our clients.
"We wanted them to know that it's not only professionals working with them but also beautiful women.
"Expobank tries to find unusual and creative ways in everything.
"The top managers were highly involved in this. The idea of a calendar was primarily developed by the chairman of our board.
"The slogans reflect the Expobank concept of interaction with our clients. Our employees were perfectly happy to take part in the photoshoot.
"They took it as a bonus on top of their normal work, though they were not paid for it. We are very proud of them all."
Ms Pogodina said: "I keep getting compliments about the calendar from my VIP clients, especially from the men – but the women say nice things too.
"I didn't expect, when I was having my picture taken, that I would see my name and full job title on the calendar. I was really surprised – and rather pleased."
Another employee-turned-model, Yulia Babenko, added: "It was one of our directors who offered us the chance to take part in the photoshoot.
"It was an interesting new experience for us and we all like the calendar. The photographer let us help create the images of ourselves."
The bank's move is one of the latest to be inspired by the women of Rylstone WI in North Yorkshire, who stripped off for a calendar launched in 2000 to raise money for Leukaemia Research.
They were photographed behind strategically placed objects – and the calendar caused a sensation.
The story was made into the movie Calendar Girls – starring Dame Helen Mirren and Julie Walters – which grossed £46million.
Expobank is a relatively small retail and commercial banking group whose major shareholders include British financier Lord Hambro, who has extensive interests in Russian gold-mining.
Barclays, Britain's third largest lender, with 2007 annual profits of more than £7 billion, is in the advanced stages of talks to buy a controlling stake in the bank.
WORST FINANCIAL CRISIS SINCE 1931?
German State-Owned Banks on Verge of Collapse
By Wolfgang Reuter
February 20, 2008
The German government has had to bail out state-owned banks with taxpayers' money after their managements recklessly gambled away billions on subprime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy.
Ingrid Matthäus-Maier, a member of the center-left Social Democratic Party (SPD) and the CEO of the state-owned KfW banking group, is undoubtedly in one of Germany's highest earnings brackets. Although her annual salary of €418,000 ($614,000) is substantially lower than that of her counterpart at Deutsche Bank, Josef Ackermann, who earns a tidy €13 million a year, she does earn more than twice the salary of German Chancellor Angela Merkel, who has to make do with a mere €200,000.
That's nice for Matthäus-Maier. A lawyer by profession who was a financial expert for the SPD for many years, she would not have been able to get on the board of a private bank in 1999, the year she joined the board of KfW -- she lacked the banking experience required by law. But KfW is not subject to the same regulations as other banks, which explains why Matthäus-Maier doesn't owe government auditors an explanation -- not even now, in the wake of recent public accusations that she botched the IKB crisis.
As the head of KfW, Matthäus-Maier is a major shareholder in IKB, the Düsseldorf-based bank that is on the brink of bankruptcy and is only being kept afloat by a series of government bailouts running into the billions (more...). Last week was marked by one crisis meeting after the next, but the headstrong government banker had more than the future of IKB on her mind. Indeed, she seemed more concerned about her employment contract and whether it would be extended. Her demands triggered an irritated reaction from the head of the KfW supervisory board, Economics Minister Michael Glos, as well as from others present at the meetings.
Two days later, it was announced that former IKB CEO Stefan Ortseifen could look forward to a princely retirement pension of €31,500 a month -- effectively a token of appreciation for his failures. Ortseifen, after investing billions in the high-risk US subprime mortgage sector, insisted that the "uncertainties in the American mortgage market" would have "practically no effect" on IKB's investments. A few days later, IKB was on the verge of bankruptcy, with its supposed wonderful US investments worth little more than the paper it was printed on.
And German banks are not the only ones being hard hit by the subprime crisis. In the UK, the government earlier this week announced plans to temporarily nationalize the troubled bank Northern Rock until market conditions improved. The bank ran into difficulties last year as a result of the global credit crunch and was forced to ask the Bank of England for a bail-out. The House of Commons passed emergency legislation to nationalize the bank in the early hours of Wednesday morning, and the bill is expected to be approved by the House of Lords by the end of the week.
Amateurism and Greed
Ortseifen and Matthäus-Maier are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic for many of Germany's state-owned, partially state-owned and public sector banks. It is an environment that can only thrive in the shadow of the state -- and that has drained more than €20 billion from the public treasury within the last decade.
Until now, the government has always been there to pick up the tab in the end. Fully aware of this safety net, the executives at state-owned banks gambled with their employers' assets as if there was no tomorrow. Munich-based BayernLB did it with stocks in Singapore, Bankgesellschaft Berlin with real estate investments, and WestLB with holdings in British companies.
Anyone who is not responsible for bearing the consequences of the risks he or she takes can easily turn into a gambler. And the bets kept increasing in recent years, getting more and more public-sector banks into financial hot water. Now the banks find themselves lacking the assets they need to weather the turmoil of an international financial crisis.
Matthäus-Maier's bank KfW has already had to provide IKB with close to €5 billion in a series of three bailouts. With KfW itself gradually running out of cash, the federal government has now contributed another €1.9 billion.
The state of North Rhine-Westphalia has injected €1 billion into WestLB, another state-owned bank, as well as providing the ailing bank with another €3 billion in loan guarantees. The situation is even worse in Saxony, where the state has issued €2.73 billion in loan guarantees to Sachsen LB, that state's Landesbank, as Germany's state-backed regional banks are known. The other state-owned banks are providing another €14 billion in guarantees. Hamburg-based HSH Nordbank urgently needs €1 billion in fresh capital, while BayernLB last week reported a €1.9 billion write-down as a result of subprime exposure. BayernLB announced Tuesday that the bank's chief executive, Werner Schmidt, will be stepping down as of March 1 as a result of the crisis.
The situation for Germany's public banks has become so dramatic that it threatens to topple what has been one of the key pillars of the country's banking system. The state-owned banks are supposed to bail each other out when necessary, but the problem is that many are in trouble themselves and hardly in a position to help their peers. And things could get even worse.
If an industry giant like WestLB were forced to its knees -- which almost happened two weeks ago -- at least two other state-owned banks and a dozen savings and loan associations would crumple along with it. The member banks of the German Savings Banks Finance Group (Sparkassen-Finanzgruppe) are closely interlinked, and they are required to vouch for each other -- as long as they are in a position to do so, that is. The failure of a major state-owned bank like WestLB would also inevitably affect corporate customers, even forcing some into bankruptcy.
It is a nightmare scenario that the government financial supervisory authority now believes is increasingly likely. Germany's public-sector banks speculated far more heavily than private banks in American subprime mortgage securities. Now these banks' beleaguered executives are calling on the government to bail them out from a disaster of their own making.
It is a paradoxical situation, because the government, responding to pressure from Brussels, was required to withdraw its guarantee of protection for state-owned banks as of July 2005. Since then, it has only been liable for risks incurred before that date.
The consequences of the change were devastating for the public-sector banks, which suddenly found their business model pulled out from under their feet. In the days of government backing, they were able to borrow money at lower rates, which in turn allowed them to offer loans at lower rates than their private competitors. But that advantage ended in 2005.
Hard up for funds, many of the public-sector banks began speculating with high-risk securities. According to a former bank executive, many "literally stocked up on these investments" shortly before the cut-off date. Others even continued to do so after the cut-off date. Lacking a functioning business model, they turned to what was essentially gambling -- and lost.
Saving Their Skins
The hard-hit German banks are now trying desperately to save their skins. The situation is most dramatic at Düsseldorf-based IKB, the first German bank that was almost driven into bankruptcy by the US real estate crisis. Last week, once again, IKB's equity capital vanished into thin air. Jochen Sanio, president of Germany's banking supervisory agency BaFin, threatened to close the bank on Friday unless it could raise €1.5 billion ($2.2 billion). But KfW, IKB's biggest shareholder, was no longer able to bail out the Düsseldorf bank without jeopardizing its official mission, namely supporting small and mid-sized businesses.
In the end, the federal government and private banks came up with the funds for the bailout. For Finance Minister Peer Steinbrück, it was critical that IKB not be allowed to go under. The bankruptcy of a bank with such a high credit rating would trigger an unprecedented loss of confidence in the German financial market. In addition, a number of other banks had deposits at IKB worth a total of €18 billion.
"The issue here is ultimately about choosing the lesser evil, and about what is less damaging to the economy," Steinbrück explained at last Wednesday's meeting of the KfW supervisory board, shortly before the board decided to bail out the bank once again. Last Friday, the finance ministry justified the financial injection in a letter to the budget committee of the German parliament, the Bundestag: "Otherwise, we could have seen massive effects on the banking sector, with corresponding effects on the real economy."
A short time earlier, it had been WestLB that was almost ruined by the US subprime mortgage crisis. In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks.
But the state refused, arguing that the savings banks had declined to pledge their shares in WestLB to the state in return for its assumption of the risk, just as they had refused to bring in a private investor. The two sides became embroiled in heated negotiations, until Axel Weber, the head of the German central bank, the Bundesbank, intervened.
Weber proved to be persuasive. Köln-Bonner Sparkasse, a savings bank, had €340 million in deposits with WestLB, which it would be forced to write off if the bank went under. In other words, Weber argued, a WestLB failure would deeply jeopardize Köln-Bonner Sparkasse, as well as at least three other savings banks in North Rhine-Westphalia.
If that happened, the corporate customers of the affected banks could end up without access to their money for weeks, possibly even months. Despite the fact that the customers' deposits are in fact guaranteed, any bank insolvency is preceded by a moratorium on all bank transactions. This, Weber argued, would only lead to further bankruptcies, especially since the remaining savings banks in North Rhine-Westphalia, as their association presidents conceded, would have trouble satisfying the regional economy's liquidity requirements, because they already have a total of €43 billion in WestLB loans on their books. Furthermore, many of these banks also invested in American subprime mortgage securities, which they too would have to write off. The Westphalia-Lippe savings bank association, for instance, invested €100 million in the securities that triggered the worldwide financial crisis.
The officials involved painted grim scenarios. What would happen if customers were to withdraw their deposits from the savings banks en masse? And what if the insolvency of WestLB led to difficulties at two other state-owned banks, HSH Nordbank and BayernLB? How would that affect Bavaria and Hamburg, where the banks are headquartered? Would the public-sector banking system even be capable of surviving the failure of three state-owned banks? Could this in fact lead to the collapse of the entire economy, which would affect growth rates, unemployment and, ultimately, the well-being of society for many years to come? In the end, the participants were so drained that they agreed to a compromise.
Six months ago, BaFin president Jochen Sanio was heavily criticized when he warned of the "worst financial crisis since 1931." But now many politicians are convinced that the situation is far more serious than they had assumed until now.
In an effort to confront the crisis head-on, Jürgen Rüttgers, the governor of North Rhine-Westphalia, has urged Finance Minister Steinbrück to set up a round table of all the parties involved so they can discuss the issue and reach some kind of solution.
The federal states could still restructure the state-owned banking sector -- by allowing private minority shareholders, for example, or by merging their banks. If a crash does occur, third parties will be dictating the conditions. There will be fire sales, as was the case in Saxony, at significantly less-favorable prices.
But Steinbrück is hesitant. He recently told advisors that if he gives in to Rüttgers' demands, he could end up being "stuck" with the problems. There are also growing calls for the federal government to bail out the states and help them solve their problems. But this is something Steinbrück is apparently unwilling to consider.
The minister also has other things on his agenda -- his fellow SPD member Matthäus-Maier's contract, for example, which will not be extended, but also isn't set to expire until mid-2009. That's when someone else will take over at the helm of KfW -- and that person will be nominated by Angela Merkel's Christian Democrats.
(Translated from the German by Christopher Sultan)
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