Asia | Green World Investor

China’s Hot Money Outflows , Reduction in Forex Reserves May Indicate Coming Slowdown

14 Jan, 2012

China has reported the first decrease in its forex reserves in a qtr since the 1998 crisis. The Chinese Foreign Exchange Reserves which are humongous at over $4 trillion has shown a $100 billion decrease in Nov and Dec 2012 .While the sharp decrease in the Euro may account for some change , there is also anecdotal evidence that the hot money is flowing out of China . Note earlier Hot Money was pouring into China given the potential of yuan appreciation but with the potential of a Chinese Hard Landing ,the opposite may be happening . China has a distorted economy heavily dependent on exports and investment for growth . However changed macro economic conditions make this model unsustainable . How China manages to transition out of this investment export fueled condition is an open question . That they must is in no doubt nor the fact that China’s 10% GDP growth days are definitely over.

Chinese Trade Partners USA and Europe can no longer manage the massive deficits and strains are rising with some goods already facing disputes .Most famous is the Solar Panels while other Goods like Wind Turbines, Cars etc. have also seen signs of a Trade War. China under huge pressure appreciated the yuan by around 8% in 2011 from the US. In the current scenario when the profit margins of the small industries in China evaporting and potential for unreset (already happening ) , the situation remains dangerous . A Hard Landing not out of the question and people betting on it have already made money in 2011 without any serious decline happening till now.

China also faces a major change in 2012 with the top leadership of the country going to new leaders and the old set will go away.This means new policies and directions amidst major challenges to the Chinse economy and society.

China faces multiple challenges in 2012

1) Slowdown in Europe and USA means that their exports are sputtering and manufacturing has already started contracting

2) Protests in cities and villages grows against rampant corruption and land grabbing by Communist officials.Lack of democracy means violent protests at times.

3) Debt is becoming a huge problem with local government vehicles facing trouble as they can no longer raise money from real estate sales which has fallen by 20-25%

4) Massive industrial overcapacity is being exported outside.This has made the other trading nations put duties and curbs.A big trade war with USA cannot be ruled out.Chinese solar and wind products faced countervailing duties and dumping charges.China has already imposed high duties on US car imports.

China will take measure to stabilize its exports and imports as slowing global growth creates a “grim situation” for trade, said Zhang Xiaoqiang, a vice chairman at the nation’s top economic planning agency.

“Downward risks for the global economy are increasing,” the National Development and Reform Commission’s Zhang said at a forum in Beijing today. “The difficult situation will make competition for product exports among countries fiercer.” China will take steps to stabilize and improve trade policy, including the lowering of import taxes for some consumer goods, helping smaller businesses get financing and keeping its currency “basically stable,” he said.

China FE reduction

China’s foreign-exchange holdings reached a record $3.27 trillion in October and then fell in the following two months, the central bank data showed, indicating a decrease of $92.6 billion in November and December.

Much of the decline may be due to a lower value of the reserves held in currencies other than the U.S. dollar, said Cui Li, a Hong Kong-based economist at Royal Bank of Scotland Plc who previously worked at the International Monetary Fund.

Financial Industry in a Depression of its Own RBS Firing 45% of pre crisis Global Banking and Markets Headcount

12 Jan, 2012

Green Investing

The Financial Industry will shed another 150,000 jobs according to Richard Bove, an analyst at Rochdale Securities LLC . Royal Bank of Scotland the bankrupt UK bank that was taken over the British government is going to kill a number of investment banking divisions and will fire 3500 people. RBS has already fired thousand before in wholesale and corporate banking . Now RBS will completely exit from a number of divisions like M&A, Cash Equities etc. which will mean thousands of firings . In an environment when financial jobs are scarce , this means that the fired thousands will have a tough time getting into the workforce again.RBS is going to fire 3500 people in addition to 2000 already announced. This would bring down the 24,000 pre crisis headcount by almost 45% .

The Financial Industry is in Depression with the sector shrinking continuously as its bloated structure deflates .Can’t say its a bad thing as excess financial sector growth was partly responsible for the 2008 crisis which continues till this day globally. he Financial Industry has become too huge as a percentage of the global economy with any value creation to say something like the IT industry. The share of the market cap of the stock market had become too high during the boom boom years of 2008 and it is continuing to go down.Despite the best (some would say the worst) effort of the governments to prop up the Too Big to Fail Banks,jobs are being let go as there is not enough work. European Banks are shrinking their balance sheets as they are too leveraged and insolvent. Without the ECB crutch,almost all of them would go under.

Taxpayer-backed Royal Bank of Scotland announced on Thursday it would cut 3,500 jobs in a reorganization and rebranding of its investment banking arm as the lender reins in its ambitions to be a global financial player.

The cuts, which are to be phased in over three years, will largely affect employees in Global Banking and Markets, which had offered advice on mergers and acquisitions. The division has 18,900 employees overall. “Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall,” Chief Executive Stephen Hester said in a statement.

Financial Jobs Killed in Tens of Thousands as Industry Shrinks, Global Oversupply of Labor Globalization Consequence

7 Jan, 2012

Green Investing

Financial Jobs are being let go in the tens of thousands by European and USA Financial Institutions. The Financial Industry has become too huge as a percentage of the global economy with any value creation to say something like the IT industry. The share of the market cap of the stock market had become too high during the boom boom years of 2008 and it is continuing to go down.Despite the best (some would say the worst) effort of the governments to prop up the Too Big to Fail Banks,jobs are being let go as there is not enough work. European Banks are shrinking their balance sheets as they are too leveraged and insolvent. Without the ECB crutch,almost all of them would go under.

London and French Banks are selling divisions and shedding jobs to become more leaner and survive till the government keeps them on life support. Major financial centers of London,New York are the worst hit in terms of financial job losses.

In a separate report, the daily said that Societe Generale was considering about 1,580 jobs cuts at its corporate and investment bank. “The job losses will include 880 voluntary departures in France, where most of the division’s employees are based, and 700 job cuts in other countries,” Financial Times said, quoting a spokesman of Societe Generale.

In a statement issued on Wednesday, Societe Generale had said it was looking at reducing the number of positions in its corporate and investment banking division by about 880 in France.

Global Oversupply of Labor

Labor in the current environment is currently totally screwed to put it mildly due to massive oversupply of labor. This is because the millions of graduates passing out each year in India and China do not have enough opportunities. The information revolution has meant that these graduates can be employed for super low wages by developed nation companies . Also while the globalization of capital and trade is almost free,the visa and immigrant restrictions means that labor cannot move freely leading to massive distortions. This favors the companies at the expense of labor.

One of my theories is the Global Labor Cost Arbitrage is that a lot of distortions and opportunities for arbitrage that we are seeing in the world today is because “Labor is not Globalized while Capital and Trade are “.However the Restrictions on the “Globalization” or in other words Free Movement of Labor is being reduced through the following trends

Improvement in Communication and Transportation, that has given rise to Outsourcing
Creation of regional blocs like the NAFTA,ASEAN ,EU etc. has allowed broken the labor barriers within the bloc between the members.This has resulted in “winners” in the form of the “poorer members labor” and “losers” in the form of “richer members labor” .
MNCs like IBM,Applied Materials with operations spread across multiple countries exploiting this situation by moving most of their labor requirements to low cost locations .

Asian White collar workers face Unemployment and Low Wages due to Increasing College Education

The spectacular growth in Asian economies like China,South Korea,HK,Taiwan over the last two decades has raised millions from poverty to a middle class life.This has led to increasing education levels among the new generation of Asians.Parents have poured a large part of their earnings into children education which was seen as a ticket to a better life.But many of these newly entered work force participants are not finding the pot of gold at end of the rainbow.This is because the population of college graduated workers has increased significantly putting the laws of supply-demand against these workers.In fact the wages of college educated workers have declined in some cases.

Perversely for the these educated Asians, the wages of Blue Collar workers has increased at a much faster pace compared to the White Collar workers.While the wages for highly in demand skill-sets and experience approach those of the western counterparts , the wages for those with little experience and “commoditized college degrees” continues to remain stagnant . This has been the experience in many countries across Asia like South Korea , India,China.Here are some examples of this wage pressures at work

Chinese Challenges in 2012 and What China Intends to do about it (Nothing Much)

2 Jan, 2012

China

China faces a major change in 2012 with the top leadership of the country going to new leaders and the old set will go away.This means new policies and directions amidst major challenges to the Chinse economy and society.

China faces multiple challenges

1) Slowdown in Europe and USA means that their exports are sputtering and manufacturing has already started contracting

2) Protests in cities and villages grows against rampant corruption and land grabbing by Communist officials.Lack of democracy means violent protests at times.

3) Debt is becoming a huge problem with local government vehicles facing trouble as they can no longer raise money from real estate sales which has fallen by 20-25%

4) Massive industrial overcapacity is being exported outside.This has made the other trading nations put duties and curbs.A big trade war with USA cannot be ruled out.Chinese solar and wind products faced countervailing duties and dumping charges.China has already imposed high duties on US car imports.

What China intends to do

a) China will balance “relatively quick” economic growth with inflation control in 2012 (don’t know what that means and how will they do it)

b) Country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

c) the 25-member Politburo affirmed an unchanged “proactive” fiscal stance for 2012 in December, a Nov. 30 cut in banks’ reserve requirements indicated a shift toward a bigger emphasis on supporting growth.

Here is what I wrote in 2010 on why Chinese economy might be slowing down

China has been called the “savior” of the world’s economy as its massive $586 billion Government Stimulus and Easy Money policies sustained over 10% GDP growth in 2009 even as the world GDP was contracting for the first time in recent history.However China’s huge stimulus has created problems of inflation and asset bubbles which threaten to slow down the world’s “Growth Engine” . This combined with the Greek Contagion has raised the fears that a “double dip” world recession could be just around the corner.China’s leadership is also wary of a second global downturn. However a bubble in the real estate has forced the hand of Chinese authorities which are trying to cool down the red hot “real estate” sector.The reasons that China’s economy which has averaged around 7-8% GDP growth in the last 30 years might be slowing down are listed here

Real Estate is a Bubble - The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels.Though the real estate is not driven by a debt fueled boom like the US and other developed countries , nonetheless avg real estate prices / average income levels would suggest that the real estate prices are poised to come down sharply.Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market
US and European Export markets are slowing down – China’s growth has been a export driven growth like those of other Asian Tigers.However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess.Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries .
Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls.Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar.With countries seeing their domestic markets shrink,everyone wants to export more and import less to repower their economies.An undervalued yuan is a trigger for trade wars.
Foreign MNCs feeling discriminated against – China’s protectionist policies has led to an alienation amongst the foreign companies doing business in the country.Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight.Foreign countries are reevaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies
Banks and Local Government have huge unaccounted liabilities - China’s corporate structure runs large based on patronage networks of government owned banks , state owned companies and provincial authorities.This frequently leads to misallocation in capital which shows up in the forms of NPAs.Local governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales.With real estate prices crashing and profits of export industries being pressurized , this is another bubble that may crack.
Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary.Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run
Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity.Recent suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend .Low wages which are China’s biggest competitive advantages may no longer remain one for much longer.

China to Balance ‘Quick’ Growth With Inflation in 2012, Hu Says

China will balance “relatively quick” economic growth with inflation control in 2012, amid rising uncertainty about the world economic recovery, President Hu Jintao said in a speech yesterday.The government will speed up economic structural adjustment and give priority to improving people’s well-being, Hu said in the five-minute New Year’s Eve speech carried on state television and radio.China’s manufacturing contracted for a second month in December as Europe’s debt crisis cut export demand, fueling speculation that the central bank may cut lenders’ reserve requirements within days.Earlier yesterday, the head of China’s central bank, Zhou Xiaochuan, said the country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

Summary

From the above it seems that the Chinese government still does not know exactly what to do.Controlling inflation with high growth seems a bit difficult.The problems are too big and the economy will slow down substantially.

Wage Inflation Shrinks Indian Outsourcing Companies Margins as Labor Cost Arbitrage Reduces

16 Apr, 2011

Asia,China,Technology Sector

Labor Cost Arbitrage is the biggest reason for the growth of the Indian outsourcing industry.The outsourcing revolution in India which started though technology outsourcing has spread to the legal,medical and other fields as well.Medical Billing,Coding and Transcription has become a big business besides Legal Outsourcing of work.Globalization of finance and trade has been much more rapid than the globalization of labor which faces many hurdles.The spread of Internet and improvement in Communications has made this hurdle moot as many high cost services in India are being performed virtually over the Internet.However this arbitrage which has bought billions in profits to global corporations and rise of new companies such as Infosys,TCS and others is disappearing.Rising Wage Inflation in India caused by a multitude of factors including the Bernanke Money Printing has led to shrinking of the margins.

Infosys which is India’s leading IT company is forecasting a massive reduction in its high margins as increasing attrition rates and higher wages cuts its profits.Higher competition has prevented the company from raising its prices as MNCs like IBM,Accenture shift most of their operations to lower cost locations in India.While the issue is not being faced by some companies like TCS who have lower margins anyway,smaller and medium sized IT companies like Mphasis,Mindtree have faced these issues for a longer time.The main reason is that the wage differences between Indian and US workers are reducing.Even China has facing massive wage inflation whic hhas shifted production to other lower wage countries like Bangladesh and Vietnam

Margins may shrink 300 bps: Balakrishnan

Infosys Technologies on Friday said it is expecting margins to shrink by close to 300 basis points (bps) next fiscal on account of low utilisation, rupee appreciation and wage inflation. The company, which saw its margins shrink by 100 bps in the last quarter of FY11, is projecting a 400 bps drop for the first quarter of FY12, the company’s chief financial officer said.

India not to impose Capital Controls like other Asian countries as Economy’s absorbing capacity increases

4 Aug, 2010

Uncategorized

India looks unlikely to impose capital or currency controls like Asian countries to stem the increasing capital inflows from developed nations.The Indian government and the Central Bank have decided that India’s large and growing economy can absorb the foreign capital inflows much in excess of the current $78 billion projected for this year.The capital inflow capacity has been increased by almost 40% to $150 billion per year.The reason for India’s move is that the country still has a large trade deficit and runs a big current account deficit as well.Thus a large capital account surplus is needed in order to balance the current account deficit.Unlike other Asian countries,India has not followed an export driven model which leads to large current account surpluses like China.India’s economy is more internal consumption driven with imports exceeded exports.The Indian economy has huge capital needs as it has to find almost $500 billion in the next 5 years to upgrade its inadequate infrastructure.

India can take inflows up to $150 bn without capital controls: RBI, govt – FE

Policymakers are now more optimistic of the economy’s capacity to absorb capital inflows without having to resort to artificial controls. The government, together with the Reserve Bank of India (RBI), have discussed the matter and have come to an understanding that given the import-intensity of the fast-growing economy, the tolerable level of net capital inflows could be informally set at $150 billion, up from the earlier figure of around $110 billion.

The Centre and RBI reckon that due to strong domestic growth and limited export growth, more external capital would be needed to finance the current account deficit, (CAD) which is estimated at close to 3% of GDP for 2010-11.

RBI rapidly raising rates to fight double digit inflation

India’s Central Bank has played an exemplary role during the GFC as the Indian economy escaped unscathed from the crisis.India’s financial sector was almost totally unaffected as strong prudent controls by the RBI prevented any liquidity or solvency problems.RBI has come under criticism for not raising interest rates fast enough to control inflation which is running into double digits.The Central Bank has responded by raising rates faster than expected to control inflationary expectations.The interest rate hike last month was the 4th this year as double digit inflation fuels protests and strikes in a country where the majority of the population lives under $2/day.

RBI raises interest rates, more tightening seen – Yahoo

The Reserve Bank of India (RBI) raised interest rates more forcefully than expected on Tuesday to fight inflation that is on track to hit double digits for a sixth straight month, setting the stage for more policy tightening.One-year overnight interest rate swap rates jumped after the RBI notched up its fourth rate rise this year and said it was “imperative” to normalise policy in line with the economy’s growth and inflation.

“The dominant concern that has shaped the monetary policy stance in this review is high inflation,” the central bank said, striking its most hawkish tone since the global downturn.

The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, matching forecasts. But it bumped up the reverse repo rate, used to absorb excess cash, by 50 basis points to 4.50 percent — more than the expected quarter point.