US Financial Crisis/Bailout, China's Role

This statement "The reason for the collapse of the US financial system is that politicians will never give up the power to print money for short term benefits aka winning elections by promising all kinds of unproductive spending and making housing and credit available for all" has been in quite in my mind for some time now. It seems to be a fundamental flaw in populist democracies.

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Absolutely. In the words of Milton Friedman, people are concerned with special interests but not general interests. They seek to benefit one aspect of the system without considering the negative ramifications on the rest of the system. Labor unions are a great example of this.

It means that money invested to the United States from abroad gets recycled and reinvested abroad again. Money from China goes to the US, US company gets the loan, then reinvests them building a plant in China. And so it goes, ad infinitum.

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I think that's right, only I think the cycle started with seed capital by the way of foreign direct investments, which by the way caused inflation in the 80s and led to social unrest. It's the same thing with the British investing in American industries in the late 1800s and early 1900s. If you let private capital flow, with certain controls and restrictions that makes the most business sense, the money tend to go the places offering the best long term growth.

Also, it's a function of relative risk. US financial assets, such as the Tbill, are not considered risky, so the foreigners purchase them at extremely low yields, compared to sovereign debt from Argentina or SK. US assets yield less because they are perceived safer whereas foreign assets yield more because of their elevated risk. So in the end, the returns are almost equal.

Crisis could benefit Chinese bargain hunters

* Article
* Comments (Comment7)
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PAUL HAVEN

Associated Press

November 23, 2008 at 9:00 AM EST

BARCELONA — Chinese companies are shopping for companies in Europe and around the world, undeterred by the global financial crisis. In fact, they are hunting for bargains.

Analysts and business leaders say the economic meltdown that has pummelled global stock markets may be bad news for the West, but it could be a boon to Chinese companies flush with cash and looking for places to put it – despite being burned on earlier investments.

“Business people from China have quite a high level of confidence that we will recover from the impact, and they see more opportunities through this crisis,” said Fu Chengyu, chairman of China's third-largest state-owned oil company, China National Offshore Oil Corp.

“We feel more confident than we did six months ago, but this all depends on how we manage this opportunity ... We are looking forward to the next six months.”
Xu Kuangdi, vice-chairman of the National Committee of the Chinese People's Political Consultative, left, shakes hands with Spanish Foreign Minister Miguel Angel Moratinos during a meeting in Barcelona Nov. 17

Xu Kuangdi, vice-chairman of the National Committee of the Chinese People's Political Consultative, left, shakes hands with Spanish Foreign Minister Miguel Angel Moratinos during a meeting in Barcelona Nov. 17 (Manu Fernandez/AP)
The Globe and Mail

The optimism comes despite fears that China's economy is slowing, and that the government will be less enthusiastic about big Chinese companies sending investment overseas.

Cheap prices, low interest rates and China's insatiable appetite for raw materials are all likely to keep Chinese pocketbooks open, good news for capital-hungry Western companies that have seen their profits dwindle and their access to credit tighten.

“Cash is king, and China has a lot of cash, and the whole world is for sale at a discount,” said Charles Tang, the chairman of the Brazil-China chamber of commerce. “China should wait a few more months and then go on a shopping spree, to secure what it needs at a super discount.”

Where trade restrictions once prevented some high-profile deals from getting done, some see progress.

“Things are changing,” said Frank-Juergen Richter, president of Horasis, a Geneva-based group that helped organize the Global Chinese Business Meeting, a conference in Barcelona bringing Chinese and global business leaders together. “The U.S. and Europe realize that they need Chinese investment” to help ward off a recession.

Chinese companies invested $34.16-billion (U.S.) overseas in the first half of 2008, including $25.66-billion in non-financial institutions. That last figure represents a 229-per-cent increase from the same period in 2007, according to Chinese government figures.

With their balance sheets loaded with cash, and with interest rates falling, many believe the upward investment trend will continue, despite the risks.

The Chinese financial system has avoided the turmoil that has paralyzed Western markets, thanks to far stricter regulations. And the Chinese economy, despite being slowed considerably by the global downturn, is still expected to grow at an enviable 8-per-cent rate in 2009, helped in part by a $586-billion government stimulus package announced earlier this month.

Most Chinese investment overseas has so far focused on the banking and oil sectors.

In August, China's largest offshore oil services provider, China Oilfield Services, announced it was buying Norway's Awilco Offshore in a deal valued at $2.5-billion. And in March, Industrial & Commercial Bank of China Ltd. finalized the $5-billion purchase of a 20 per cent stake in South Africa's Standard bank, the biggest overseas investment ever by a Chinese investment institution.

China has also invested heavily elsewhere in Africa and in Latin America, with Aluminum Corp. of China investing more than $2-billion in a copper mountain in Peru, and others snapping up stakes in mining, commercial farming and construction in Zimbabwe and Zambia, among other places.

There are risks as well, particularly for companies flush with cash but short on experience in investing.

Chinese companies have been burned on investment in Western banking and financial companies. China's Ping An Insurance Co. was the biggest foreign shareholder in Fortis, a Dutch-Belgian bank that got into trouble and had to be taken over by the French and Dutch governments in October. Ping An said recently that it would take a $2.3-billion loss.

But whatever losses Chinese companies have suffered are dwarfed by the amount of cash they still have on hand. Ping An, for instance, still has $100-billion in assets, and can absorb the Fortis losses with relative ease.

Todd Lee, an analyst and head of the Greater China Group at Global Insight, said the government was likely to put the brakes on companies moving too much wealth overseas.

“On the one hand, assets are cheaper overseas, so for Chinese companies that are doing well that does present an opportunity,” he said from his Boston office. “On the other hand, the Chinese government is very concerned about growth and the effect the global recession will have on the economy so they don't want to see capital leaving China on a massive scale.”

Indeed, Chinese government leaders have warned the country's business community not to leap too soon into a market still searching for the bottom. Li Rongrong, the chairman of the Chinese agency in charge of big state corporations, had blunt words for those licking their chops at the cut-rate prices of overseas companies.

“Hold your cash,” he said last week, according to the China Daily newspaper. “Don't rush. There will be plenty of opportunities in the future.”

The Chinese should refrain from rushing in to buy foreign Corps on price, without establishing the synergy of the deal in terms of end products and management, concerning the later, alot of domestic companies are still lacking in western management techniques.Lenovo is a company that has found it plain sailing.

It seems to me, that the recent rescue of citi by the way of insuring/guaranteeing the value of citi's assets are exactly what I had proposed from day one, on 9/23, two days after the initial intro of the paulson plan and a day prior to the house republican proposal on insurance. Here's what I stated:

Just spent some time thinking about my proposal at the top of the page during lunch, and I want to clarify some points.

One, instead of being a party that borderline resembles an investor/creditor for these distressed financial institutions, the government should instead act in the capacity of an investment banker on both the buyside and the sellside. The government should establish the value of these assets (Mr. Bernanke being the valuation analyst here), and sell these assets to private and institutional investors at a premium in exchange for a government insurance on the credit of these assets. So basically, be the investment banker for the transaction and be the insurer as well for the buyside, which will be responsible for taking some of the investment risks of owning these securities from the taxpayers.

I think this approach is good because again, it leaves the government on the sidelines and being a last option, and secondly, government guarantees plus bargain values should be able to generate a pretty sizeable but limited market. This approach retains all the positives of the current bailout plan, but also transfers the risk of ownership to a degree from taxpayers to private investors and institutions. Sounds fair?
Additional specifics to the plan: the insurance would be issued in the form of put options. An example of a transaction would be:

Bernanke determines that the ytm of a security would give it a value of 30 cents to the dollar. The government then markets the security to a wide variety of potential buyers by offering a 7 cents premium, which would result in a selling price of 37 cents with an attached put option that would allow the investor to sell the security back to the government at 30 cents under a specified timetable. So basically, the taxpayer's money would only suffer a writeoff if the value of the underlying security drops off to less than 30 cents to the dollar, as opposed to less than 37 cents under the current government bailout plan.

The key thing here to note is that between prices of 37 and 30, that loss is taken by those private investors, rather than by the taxpayer, which would be the case under the current plan. So this is an allocation of risk from the taxpayers to market participants.

In addition, the put options would have different expiration periods, which would suit a wider variety of potential investors, thus attracting more potential buyers.

The advantages of my plan over the current government plan:
1). encourage participation of market participants and diminishing the role of the government in these financial dealings.
2). Better protects taxpayer's money by spreading the credit risk of the underlying securities to private investors and institutions.
3). allows private investors to recapitalize the books of distressed institutions in the form of the insurance premium, rather than having the taxpayer money do that.
4). having the government as an ultimate guaranteer of the security and the derivative put option would provide the needed liquidity for the market of these instruments.

That's my take.

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My plan calls for the government insuring 80% of the value of toxic assets, whereas the government has agreed to insure 90% of citi's toxic assets. Only by having this floor for visible losses would the market create enough liquidity for these assets. I had believed that this was the way to go from day one, and now it seems that now it will be executed on a large scale.

A bit off the scale...



Russian Professor Says U.S. Will Break Up After Economic Crisis
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By Robin Stringer

Nov. 24 (Bloomberg) -- A professor at the diplomatic academy of Russia’s Ministry of Foreign Affairs said the U.S. will break into six parts because of the nation’s financial crisis.

“The dollar isn’t secured by anything,” Igor Panarin said in an interview transcribed by Russian newspaper Izvestia today. “The country’s foreign debt has grown like an avalanche; this is a pyramid, which has to collapse.”

Panarin said in the interview that the financial crisis will worsen, unemployment will rise and people will lose their savings -- factors that will cause the country’s breakup.

“Dissatisfaction is growing, and it is only being held back at the moment by the elections, and the hope” that President- elect Barack Obama “can work miracles,” he said. “But when spring comes, it will be clear that there are no miracles.”

The U.S. will fracture into six parts: the Pacific coast; the South; Texas; the Atlantic coast, central states and the northern states.

“Now we will see a change to the regulatory system on a global financial scale: America will cease to be the world’s regulator,” to be replaced by China and Russia, he said.

To contact the reporter on this story: Robin Stringer in New York at [email protected].

Walker's World: Don't count on China



disclaimer: image is for illustration purposes only
by Martin Walker
Washington (UPI) Nov 24, 2008
As panic gripped the world markets again last week after U.S. Treasury Secretary Henry "Hank" Paulson decided to sit on his remaining $350 billion war chest and not buy any toxic mortgage assets, the only sign of relief came from China.

The Beijing government's decision to pump $586 billion into new infrastructure investment appeared like manna from Keynesian heaven, a promise that China would continue to buy oil and steel and cement and keep world markets ticking along.

It will be a tall order. For all its headlong economic growth over the last three decades, China's GDP is just $3 trillion, about one-fifth the size of the U.S. or European economies. A country with only 5 percent of global GDP will have trouble hauling the rest of the planet out of recession. And there are three alarming reasons to question just how far and how long China will be able to bear this burden.

The first came from the official Xinhua news agency, which reported last week that the country's leading bio-environment security team had reported, after a three-year survey, that more than a third of China's land is suffering serious erosion that is putting its crops and water supply at risk. At the current rate of loss of arable land, harvests in China's northeastern breadbasket were expected to fall 40 percent in 50 years. Soil erosion since 2000 has cost China $29 billion.

"China has a more dire situation than India, Japan, the United States, Australia and many other countries suffering from soil erosion," Xinhua reported, adding that the country was losing close to 5 billion tons of topsoil each year.

That may not be an immediate problem, but the crisis in trade credit is urgent. The lifeblood of the global economy, the international trade system, is drying up. It is becoming increasingly expensive and difficult to obtain letters of credit or the other forms of credit that finance the world's annual $13.6 trillion in trade.

Banks in China are reluctant to lend Chinese firms the money to import Western goods and raw materials, for fear that the importer might go bust. So in the absence of a guaranteed letter of credit, the exporters cannot get Western banks to finance the shipment.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," Bill Gary, president of Commodity Information Systems in Oklahoma City, reported last month. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

This is hurting emerging markets like Brazil, China and India particularly hard, says Pascal Lamy, head of the World Trade Organization, who says, "Trade finance is being offered at 300 basis points above the London Interbank Offered Rate, and even at this high price, it has been difficult for developing countries to obtain." Lamy has organized crisis meetings of banks with the WTO and International Monetary Fund to find ways to keep trade finance moving.

"Banks' refusal to offer letters of credit has resulted in very few fresh cargoes reaching the market, which is adding to the (ship-)owners' woes," says a report from Denmark's Maersk shipping group.

One of the main trade financing banks, HSBC, reports that the cost of guaranteeing a letter of credit has doubled, which helps explain the crisis in the shipping industry that has seen the charter cost of a 170,000-ton Capesize bulk carrier collapse from $233,988 in June to less than $5,000 this month, a fall of 98 percent.

"It's like standing on a beach watching a tsunami, knowing that it's coming," said Scott Stevenson, manager of the International Finance Corp.'s Global Trade Finance Program. (IFC is the private finance arm of the World Bank.)

World trade until this year had been growing at 7 percent to 10 percent annually but is now slowing sharply and may even be negative next year as the global recession spreads. One result has been the closure this year of 65,000 factories in China, mostly owned by Hong Kong, Taiwan and Korea. More than half of China's toy factories have shut.

And China has further troubles. Last week the official Beijing media reported that some 2,000 people rioted in Longnan, in northwest China's Gansu province, over a government plan to redevelop the city center in a way that threatened to make many people homeless. They burned cars, attacked a local Communist Party office, injuring 60 officials, and fought police with rocks and bottles, axes and iron bars.

Minxin Pei of the Carnegie Endowment in Washington, a leading U.S.-based analyst of China's bumpy path to modernization, estimates that riots in China are running at an average of 10 per day. China's official press has reported on dozens of demonstrations in recent weeks, including a two-day strike by disgruntled taxi drivers in the southwestern Chinese city of Chongqing and the torching of a police car in the recession-hit boomtown of Shenzhen. In June, 30,000 people demonstrated in the southwestern province of Guizhou, setting fire to cars and the local Communist Party building following rumors that officials had tried to cover up the death of a teenage girl.

"I don't think we're even close to seeing the real impact of the global financial crisis on Chinese society. I'd be surprised if the government wasn't very concerned about the increasing level of social unrest all over China," comments Joshua Rosenzweig, a Hong Kong manager of research at the Dui Hua Foundation, a human rights group.

If the world is counting on China to haul it out of recession, it may be relying on a weak reed.

Instead of China buying into Morgan Stanley, its Morgan Stanley buying into China.



Morgan Stanley buys stake in Chinese trust bank
SHANGHAI, Nov 26 (AFP) Nov 26, 2008
US banking giant Morgan Stanley has completed a deal to buy a 19.9 percent stake in a medium-sized Chinese trust bank based in the eastern city of Hangzhou, the two companies said Wednesday.

The purchase of Hangzhou Industrial and Commercial Trust company is part of Morgan Stanley's efforts to tap into China's growing financial market, they said in a joint statement.

"The investment further demonstrates Morgan Stanley's willingness and determination to expand its business in the China market," Sun Wei, chief executive of Morgan Stanley China was quoted as saying in the statement.

The companies did not specify how much Morgan Stanley paid for the stake, but the official Shanghai Securities News reported the purchase cost at about 200 million yuan (29.3 million dollars), citing senior company officials.

A Hangzhou Trust official, who spoke to AFP on condition of anonymity, said the figure was accurate, but declined to give further details.

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China should shun U.S. treasuries -economist

HONG KONG, Nov 26 (Reuters) - China should no longer buy U.S. Treasury securities because the recent gains in the dollar may be short-lived, eroding the future value of such holdings, an economist with a government think-tank said on Wednesday.
The United States is expected to look to China, which has about $2 trillion in reserves, the world's largest stockpile, as well as Japan and oil exporters to help finance the mounting costs of its bailout of the financial sector.
"Some may argue that it is right to buy more U.S. Treasuries because the dollar is strengthening," Yu Yongding told Reuters in an interview. "But we must note that the dollar is strengthening purely because of the current crisis, and it is not really gaining value."
He added: "Owing to political reasons, China may not have the luxury to sell U.S. Treasuries, but China should definitely buy no more -- nobody knows how bad the U.S. situation could get and China should not take too many risks."
The suggestions by Yu, a researcher with the Chinese Academy of Social Sciences and a former central bank adviser, are at odds with the official government line.
Vice central bank governor Yi Gang said earlier this month that Beijing would not resort to "panic selling" but would maintain a "prudent and responsible" stance in managing its foreign exchange reserves.
Investment bank China International Capital Corp went so far recently as to suggest that China should buy more Treasuries now to help fund the bailout of U.S. banks and should do so before other countries to benefit from the rise in bond prices.
Still, Yu's comments give an indication of the intensity of debate in policy circles over whether taking on more U.S. debt is really in the country's best interests.
Yu did not address the massive reverberations any signal by China that it would stop buying U.S. government debt would have for the global economy -- and ultimately, China.
He also did not lay out a detailed proposal on what the central bank should do instead with its continuous influx of new foreign exchange reserves, which are set to increase by about $500 billion in 2008 and about two-thirds of which analysts say are invested in dollar-denominated assets.
However, the People's Bank of China should consider using some of the reserves to buy commodities and strategic resources now, since prices are low, Yu said.
"Commodity prices have fallen sharply, and for those products necessary for long-term development, China should consider buying some as part of the reserves," he said. (Writing by Zhou Xin; Editing by Jason Subler)

UK's Woolworths just went under. At least 30,000 jobs at stake.




Woolworths set for administration
Woolworths store
Woolworths has had a presence on the UK High Street for almost a century

High Street legend Woolworths has buckled under its debt and is set to go into administration, BBC business editor Robert Peston has learned.

The move will put tens of thousands of jobs at its 815 stores under threat.

The board of Woolies - one of the UK's oldest store groups - is meeting to take the formal decision.

Deloitte will be appointed as administrators to the store chain and also to Entertainment UK, which supplies DVDs to supermarket groups.

However, Woolworths joint venture with BBC Worldwide, publisher 2 Entertain, will not go into administration as it is owned by Woolworths' parent company. And all stores will remain open and keep trading, at least for now. Money has been ring-fenced so that salaries will be paid to staff as normal on Friday, a spokeswoman added.


What is the point of Woolworths?
Robert Peston's analysis

Our business editor says that Woolworths has been something of a lame duck retailer for years, losing market share against intense competition.

The company's weak position was also the reason why the government did not intervene to rescue it.

"Government policy is not to prop up lame ducks," our business editor said.

Peter Mandelson, the business secretary, had been in contact with the company on Wednesday, to ensure that if it went into administration, it would minimise the anxiety to its employees.

The company has been asked to do what it can to protect its pension fund, and keep its stores open if possible during the vital Christmas period.

The UK's Woolworths has no connection with several retail chains around the world that carry the same name.

See how Woolworths' shares plunged during the past year

High Street trouble

The news of Woolworths' demise comes on the same day that furniture chain MFI announced that it was to go into administration.

The company had asked its landlords for a rent-free period to help sort out its financial problems.

However, the troubled company with its more than 1,000 staff, failed to reach an agreement.

MFI had suffered several years of financial trouble. Only last September, as part of a management buyout led by chief executive Gary Favell, 81 loss-making outlets were placed into administration.

Now the remaining 110 stores could face closure.

Woolworths' £385m debt

The collapse of Woolworths is also likely to lead to thousands of redundancies with the store chain employing 25,000 people and Entertainment UK employing 5,000.

The shopworkers' union Usdaw said the news was "devastating" for staff.

"We were hopeful that a last minute deal would be done and will want to meet with the administrators as soon as possible," the union's national officer John Gorle said.

BBC business editor Robert Peston: "Woolworths was weak for years"

The company has struggled under the weight of £385m of debt. Its problems were compounded over the past couple of months when it was forced to pay cash when buying goods from suppliers, because trade credit insurers were no longer prepared to insure suppliers to Woolworths.

During the past few days the company had tried to sell itself for a nominal price of £1, where the new owner would have to take on the firm's debt.

US restructuring firm Hilco was rumoured to be a potential buyer, with the BBC's commercial arm set to take over Woolworths' share in music and film publisher 2 Entertain.

Earlier this week, Woolworths' largest shareholder - property tycoon Ardeshir Naghshineh - had called on Woolworths to delay plans to sell parts of the business.

Mr Naghshineh said the firm should instead look at making money by selling of some of its outlets.

In the end Woolworths' board ran out of time.

This financial crisis may well see China being offered some better weapon systems by the Russians, now that the Russians are in a financial squeeze with oil at an avg of $50.a barrel. I read somewhere that they factor in oil at a return of $70/barrel in their economy.