A banking scandal highlights the problem of black money in India

India’s shadow economy

Evasive action

A banking scandal highlights the problem of black money in India

Mar 23rd 2013 | MUMBAI |From the print edition

THE videos were set to the James Bond theme tune and labelled as a “shocking mega-exposé”. They were released by an investigative website called Cobrapost on March 13th, and have hit the share prices of India’s biggest private-sector banks. The sting consisted of a journalist with a secret camera walking into bank branches, where he claimed to be linked to an unnamed politician whose house could no longer contain his cash. Staff in many branches were only too willing to help launder the money, usually by fiddling the rules for setting up accounts and insurance policies. “Yes, yes, don’t worry, sir, all people do this,” replied one bank official.

The lenders and their regulator are looking into the allegations. Even if they are bogus, they tap into a well of mistrust. A 2009 e-mail claimed that Indians held more money in Swiss banks than people from all other countries combined. It was a hoax, but still went viral.

Gauging the scale of the problem is hard. A 2010 World Bank study of 151 countries concluded that India’s shadow economy, defined as legal activity concealed from the authorities, was equivalent to a fifth of official GDP (confusing matters, it is unclear to what extent India’s official GDP already captures the black economy). That is roughly double the level of the best rich countries, but below the global average and most other emerging nations. The last vaguely official study was in 1985 and had a similar answer—19-21% of official GDP. Read more of this post

Eaton Vance Files to Start Active ETFs Using New Model that wouldn’t disclose their holdings daily

Eaton Vance Files to Start Active ETFs Using New Model

Eaton Vance Corp. (EV) asked U.S. regulators for permission to start a series of actively managed exchange-traded funds that wouldn’t disclose their holdings daily. Eaton Vance filed with the U.S. Securities and Exchange Commission to open what it calls exchange-traded managed funds, or ETMFs, the Boston-based company said today in a statement. The funds would mirror existing Eaton Vance mutual funds and the firm seeks to license the model to other fund providers, according to the statement. Active ETFs typically combine the security selection of a fund manager with the intra-day trading and cost-saving characteristics of ETFs. Companies interested in that hybrid have so far been largely discouraged from opening products, especially those focused on equities, by the SEC’s requirement for daily disclosure of ETFs holdings. Active ETFs in the U.S. hold $12.3 billion, less than 1 percent of assets in the $1.4 trillion ETF industry, according to data compiled by Bloomberg. “By removing the requirement for daily portfolio transparency, ETMFs can enable investors to access a broad range of active strategies through a vehicle that provides the investor benefits of an exchange-traded fund,” Eaton Vance said in the statement. Eaton Vance, the manager best known for selling products designed to minimize taxes, managed about $248 billion in assets as of Jan. 31. Read more of this post

The Limits of China’s Market Model; An interview with James McGregor, whose book “No Ancient Wisdom, No Followers” argues that the long-term prospects for China’s economy are being hurt by state dominance and protectionism.

MARCH 27, 2013, 10:00 AM

The Limits of China’s Market Model

In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.” In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.  Read more of this post

China: gold before swine; Should gold traders be paying attention to Chinese pork prices?

China: gold before swine

Mar 28, 2013 8:24am by Leslie Hook

Should gold traders be paying attention to Chinese pork prices? It may sound outlandish, but new research has uncovered an interesting link between global gold prices and Chinese inflation (which in turn is often driven by pork prices). China accounts for a quarter of the world’s physical bullion demand so it’s no surprise to find it has a big role in setting global prices. But just how its influence works is not always clear, especially when weighed against other factors like crude prices, quantitative easing, or the strength of demand from India, the world’s biggest gold buyer. Now there is evidence to suggest a strong correlation between bullion prices and Chinese inflation, according to Na Liu, head of CNC Asset Management. He wrote in a recent note to clients: We have reviewed many Chinese macro indicators to detect their correlation with the gold price, and we are basically brought down to the very basics: the gold price is highly correlated to China’s inflation and real interest rate… This makes intuitive sense. Over the past few years, China’s jewellery demand shows only steady growth. The key driver for demand volatility comes from investment demand, and investment demand was driven by the need for purchasing power preservation and therefore varies as inflation expectation surges and ebbs. Last year, as China’s inflation cooled, gold demand did not increase in China at all. His chart illustrates how peaks in the gold price match peaks in Chinese inflation, while rising inflation is correlated with rising gold prices:

Source: CNC Asset Management

So what does this mean for gold bugs? Officials have warned that China faces inflationary pressures this year, with central bank governor Zhou Xiaochuan saying this month that China should be on “high alert” against inflation. Inflation for the first two months of this year came in at 3.2 per cent, its highest level in 10 months. The fear is that inflation could be pushed even higher by rising prices for pork, which is heavily weighted in the consumer price index because it is so widely consumed. As Rahul Jacob noted on beyondbrics, pork prices are expected to rise sharply this year, by as much as 16 per cent according to some estimates. If that happens, it could be good news for gold bugs.

The end is nigh’ for global oil demand growth: Citi; global oil demand would plummet by 18%, to around 74 million barrels a day from the current 90 million

Citi: ‘The End Is Nigh’ For Oil

Rob Wile | Mar. 26, 2013, 11:21 AM | 5,312 | 10

Citi‘s Seth Kleinman has a pretty sweeping note today, titled “The End Is Nigh,” in which he argues crude oil demand — and with it, prices — are is set to fall dramatically in the coming decade thanks to the rise of natural gas and more advanced fuel economies.  And the trend is worldwide. Kleinman on gas: One of the many unforeseen ripple effects of the US shale revolution is a push to substitute natural gas for oil. This is set to accelerate with LNG already challenging diesel’s 13 mb/d heavy duty truck use globally but especially in China, bunker’s 3.7 mb/d seaborne market, and CNG and propane set for exponential growth not only in markets such as Brazil, Egypt, Iran and India, but in Russia and the US as well. Oil-based power generation is increasingly being replaced by gas-fired generation. As much as 2 mb/d of power generation demand in the Middle East in total could be switched to natural gas by the end of the decade, and the increasing availability of LNG towards end-decade could back out other oil for power generation needs in India and Latin America amongst others. And on fuel economy: Higher prices, the removal of many fuel subsidies and rising fuel economy mandates have dramatically improved the outlook for fuel efficiency in global automotive and truck fleets. Citi’s automobiles team estimates that new car fuel efficiency is now improving by 3-4% p.a., with trucks managing 1-2%. As cars make up ≈60% of the total global road fleet we conservatively estimate that new vehicles (cars and trucks combined) fuel economy increases by 2.5% p.a. Here’s the key chart showing global demand forecasts.

Kleinman concludes that the oil price spikes of the late ’00s were basically a fluke: The structural bull market of the previous decade was a result of surging global oil demand and consistently disappointing non-OPEC supply growth, compounded by a collapse in Iraqi and Venezuelan production. The outlook for each of these factors has now reversed, reinforcing Citi Research’s long term view that by the end of the decade Brent prices are likely to hover within a range of $80-90/bbl. The shale boom’s effects are still rippling across the globe.  Read more of this post

Driving the Asian Century Beyond Clans, Cliques, Clones in Indonesia

Driving the Asian Century Beyond Clans, Cliques, Clones in Indonesia
Michael L. Bak | March 27, 2013

Dynamic Asia. Amazing Asia. Rising Asia. Wherever you turn, wherever you read, wherever you tweet, facebook or youtube, nothing could be as clear; Asia is where it’s at.  Action. Growth. Change. If Asia is the future, then welcome to the mothership: Indonesia.

China is dominating the world’s headlines and cover pages; are we now witnessing the fall of the West and the rise of the rest, or as The Economist most recently put it: “is America ready to be Number 2”? We’d be forgiven for instantly gazing China-ward. Even the OECD says China will become the number one economy in 2016; but there’s a whole lot of Asia out there that’s not the Middle Kingdom. It’s the Asian Century after all, and Indonesia is leading the charge.

Indonesia’s democratic credentials bolster its confidence in regional security and economic matters, from Myanmar’s transition to a more engaged and engaging Association of Southeast Asian Nations. Growing economically by leaps and bounds — many predict the land of the mystic Garuda will outpace China and India in 2013, barreling along at 6.3 percent this year. But the story of the Asian Century goes well beyond markets, per capitas, and growing middle classes.

Crucial to our story, Indonesia brings a seriously democratic (if not messy) government, fiercely independent (and wildly free) press, one of the world’s most diverse countries (in so many aspects), and a super-active civil society (masters of multi-platform activism). Malaysia may have staked a claim to “Truly Asia,” but Indonesia definitely gets the Oscar for animating the Asian Century.

With Indonesia’s colorful democracy leading, the Asian Century will tell the story of Southeast Asia breaking the bonds of socio-economic imperialism, ditching patronage and growing through enlightened governance.  Read more of this post

As the Pace of China’s Junk Bond Sales Grows, So Do Worries. Chinese junk bonds also have a unique structure, which could leave investors vulnerable. Chinese bonds are issued through offshore holding companies and tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt

MARCH 28, 2013, 2:53 PM

As the Pace of China’s Junk Bond Sales Grows, So Do Worries

HONG KONG — It has an all-too-familiar ring. Investors in search of better interest rates rush to risky, high-yield bonds, raising worries that the market is overheated. But the concerns — which have already been voiced about the $120 billion of European and American junk bonds issued this year — are now being applied to the fledgling Chinese market. While American and European companies have been selling high-yield debt for decades, Chinese businesses only recently started to tap into the junk bond market in earnest. It’s a sign that Chinese companies are growing up. As the country’s economy continues to open up, private sector businesses have looked to foreign investment to finance their expansion efforts, rather than relying on hard-to-get loans from the state-controlled banks. The junk bond market in China took off this year. Although the deals still account for a small share of the global total, Chinese companies have sold $8 billion of high-yield bonds to overseas investors since January. That’s up from $2.3 billion during the same period a year earlier, according to figures from Dealogic. “Bond markets are booming because companies have had difficulty getting the level of debt they want out of banks onshore or offshore, and in tapping equity markets,” said Nick Gronow, a senior managing director atFTI Consulting in Hong Kong and an expert in Chinese bankruptcies. “So bonds have really taken up the slack.”

But the pace of growth is troubling to some analysts. As investors have plowed into junk bonds across the globe, yields have plummeted. In the United States, rates on junk bonds have dipped below 6 percent, compared with historical payouts of roughly 10 percent or more. The trend is similar in China. Country Garden, a builder based in the southern city of Guangzhou, raised $750 million in January by selling 10-year bonds that paid 7.5 percent a year. In 2011, the company sold $900 million of seven-year bonds at a much higher 11.125 percent. The borrowing costs for Kaisa Group Holdings, a commercial real estate company in the southern city of Shenzhen, have also dropped rapidly. In September, it sold $250 million of five-year bonds at 12.875 percent. By January, it was able to sell $500 million of bonds at 10.25 percent. This month, it issued new bonds at 8.875 percent. “Chinese real estate issuance is happening for structural reasons: 50 percent of the population needs to be urbanized and housed, traditional funding from banks may be more restricted now, and global appetite for yield is on the rise,” said Gregorio Saichin, the London-based head of emerging markets and high-yield, fixed-income portfolio management at Pioneer Investments. “When you combine all the above factors with a massive refinancing exercise by Chinese property developers, you get this type of outcome.” But it’s a slim difference in yields for such disparate markets. Chinese high-yield bonds have many of the same characteristics — and risks — as American debt. They tend to be sold by companies looking to finance ventures in new or untested areas or businesses that compete in industries where earnings are subject to volatile swings.

But the Chinese market has its own set of potential problems, and some analysts worry that investors aren’t being properly compensated for the added layer of risks. For one, the bulk of the high-yield bonds in Asia this year — roughly half — come from Chinese real estate companies. The fear is that the housing market, which has been booming, is a bubble that will eventually burst. The industry is especially uncertain, given the periodic government intervention. On March 1, Beijing announced new measures to curb excess in the market, including the strict enforcement of a 20 percent capital gains tax on the sale of preowned homes. “With the new leadership in China, people are still not sure which way things will go in terms of property policies,” said Suanjin Tan, an Asia fixed-income portfolio manager based in Singapore at BlackRock. “That also adds to the desire among these guys to remain cashed up, so they can take advantage of any wobbles in the market to pick up land on the cheap.”

Chinese junk bonds also have a unique structure, which could leave investors vulnerable. Mainland China’s domestic bond market remains largely off limits to foreign buyers. So most investors buy offshore Chinese bonds, which are issued through holding companies headquartered in places like the Cayman Islands. The bonds tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt, especially if local banks or other Chinese creditors make claims. Bondholders are now facing such difficulties with the bankruptcy of Suntech Power.

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Buchheit On Cyprus: “The Situation Is Spiralling Down”, And Why A Second Bailout May Be Needed

Buchheit On Cyprus: “The Situation Is Spiralling Down”, And Why A Second Bailout May Be Needed

Tyler Durden on 03/28/2013 17:05 -0400

When the world’s leading expert on Sovereign debt restructurings believes that the endgame for Cyprus might be another round of restructuring, adding that “I’m not sure this is over,” it is important to listen. With the calmness in Cyprus today more reflective of paralysis than confidence,  Lee Buchheit senses that the parameters of how much money will be needed to recapitalize the banks have changed. He tells Bloomberg TV’s Lee Pacchia in this brief clip, “the situation is spiraling down… they’ll need more money because the economy is worse, tax collections less, deposits will flow out when they can flow out.” As for which European nation will be next in need of assistance with its sovereign debt burdens? Buchheit agrees with us that while many are looking to Slovenia, he sees real economic and political problems in both Italy and Spain remaining especially since the EU “have certainly changed the rules of the game.”

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