Economists: China Mirrors U.S. on Eve of Financial Crisis

March 18, 2013, 5:20 PM

Economists: China Mirrors U.S. on Eve of Financial Crisis

The same three warning lights that preceded America’s real estate crash and financial crisis are now flashing over China, two economists say, leaving the government limited time to get out of trouble.

In a research note published on Saturday, Nomura economists Zhiwei Zhang and Wendy Chen outline the way that elevated property prices, a rapid build-up of leverage and a slide in the country’s potential growth rate could lead to a systemic crisis.

House prices in the U.S. racked up an 84% rise between 2001 and 2006, Mr. Zhang and Ms. Chen say, citing the Case-Shiller housing price index. The Nomura economists have their doubts about China’s official index, which shows a “rather benign” 113% rise in the major cities from 2004 to 2012. They argue that it is too broad, including older, lower-quality property across the nation. By contrast, a recent academic paper taking into account these quality differentials found prices climbed 250% from 2004 to 2009, they say.

“The government obviously recognizes the risks in the property sector,” Mr. Zhang and Ms. Chen write. “It has introduced a series of progressively tighter policies to contain property prices over the past several years… The pattern has been for house prices to initially dip after tightening policies are introduced, then to rebound, which suggests that the risks have not been mitigated.” Read more of this post

Magazine-Cover Curse Takes on New Meaning in Asia

Magazine-Cover Curse Takes on New Meaning in Asia

Will Shinzo Abe’s plan to revive Japan suffer the magazine-cover curse? Might Benigno Aquino meet the same fate in the Philippines?

What both leaders have in common is everyone slapping the “-nomics” suffix onto their growth strategies. “Abenomics” has excited investors, not to mention the pundit class, with its aim of ending 15 years of deflation. The same is true of “Aquinomics” in a country long deemed the sick man of Asia, now an investment darling.

Such bouts of euphoria often end in tears: “Reaganomics,” “Rubinomics” and “Bushonomics” in the U.S.; “Thatchernomics” in the U.K.; “Berlusconomics” in Italy; and “Thaksinomics” in Thailand. Sometimes the reckoning comes in short order; other times it takes decades. The track records of all too many of these supposedly new formulas for prosperity are questionable.

The problem is hype versus real change. Having one of these splashy appendages added to your ideas tends to have the same reverse karma payoff as being on the cover of a large- circulation magazine. By the time a trend or ideology is popular enough to warrant such a tribute, the game is already up. So, is the buzz about the Japanese and Philippine economies overdone? It will be if leaders put too much stock in their own press. Read more of this post

Pimco’s Kiesel Says Corporate Bondholders ‘Wake Up’ to Risks

Pimco’s Kiesel Says Corporate Bondholders ‘Wake Up’ to Risks

Investors are “finally” acknowledging the risks of holding corporate bonds with yields hovering at about record lows as the Federal Reserve holds benchmark interest rates at close to zero for a fifth year, according to Pacific Investment Management Co.

“Bondholders are finally starting to wake up to the fact that easy monetary policy for an extended period can also have adverse consequences,” Mark Kiesel, global head of corporate bond portfolios at the manager of the world’s biggest bond fund, wrote today on the firm’s website. “This trend has helped reignite shareholder activism and corporate animal spirits.” Read more of this post

Ex-Calpers CEO Buenrostro Indicted Over Apollo Investment

Ex-Calpers CEO Buenrostro Indicted Over Apollo Investment

Ex-California Public Employees’ Retirement System Chief Executive Officer Federico Buenrostro was charged with conspiring to trick the pension fund into paying millions of dollars in fees for a $3 billion investment into funds managed by Apollo Global Management LLC. (APO) Read more of this post

Iceland’s Lost Billionaires Unmourned as Riches Draw Ire; “Greed can’t again lead the way,” said Prime Minister Johanna Sigurdardottir. “We’ve taken that route before with terrible consequences for this nation and its people.”

Iceland’s Lost Billionaires Unmourned as Riches Draw Ire

Iceland, a country with a $13 billion economy, had six dollar billionaires before the financial crisis struck in 2008. Now it has none.

Five of the men — including former West Ham soccer team owner Bjorgolfur Gudmundsson and Baugur Group hf founder Jon Asgeir Johannesson — have lost all, or most of, their fortunes after building empires on loans from banks that used the island’s investment bubble to stretch their assets to 10 times the size of gross domestic product.

At least three of Iceland’s ex-billionaires are, or have been, the subject of financial misconduct probes. Johannesson, who once flew around in a pin-striped private jet and owned luxury apartments in New York and London, received a suspended one-year jail sentence in February for violations including accounting fraud. He and Gudmundsson, who filed for bankruptcy in 2009, personified the boom-to-bust cycle that dragged Iceland away from fishing and tourism and turned it into a center for high finance.

“Greed can’t again lead the way,” said Prime Minister Johanna Sigurdardottir, 70, whose Social Democrat-led government took over from the coalition that led Iceland into the crisis just over four years ago. “We’ve taken that route before with terrible consequences for this nation and its people.” Read more of this post

Traders Short Junk-Bond ETFs as Gains Top 100%: Credit Markets

Traders Short Junk-Bond ETFs as Gains Top 100%: Credit Markets

Wall Street’s biggest credit brokers are for the first time using exchange-traded funds as a way to wager that junk bonds are overvalued.

Bank of America Corp. (BAC) traders who helped dealers move $1.5 trillion of credit-default swaps index contracts last year began offering clients the ability to trade blocks of bond ETF (HYG) shares in February, according to three people familiar with the trading and an e-mail sent to customers. Shares borrowed to make bearish bets on State Street Corp. (STT)’s $12 billion speculative-grade bond ETF soared to a record 11.5 percent of the total outstanding on March 1, up from 4 percent at year-end. Read more of this post

Sweden Laments ‘Crazy’ Devaluations Amid Krona Strength

Sweden Laments ‘Crazy’ Devaluations Amid Krona Strength

Sweden took another step to distance itself from policies targeting competitive devaluations as exporters were told a strong krona provides opportunities to make their businesses more efficient.

“It’s good for companies that they need to understand that they have to compete with real tools rather than the imaginary tool that the exchange rate is,” Financial Markets Minister Peter Norman said in a March 15 interview in the Swedish town of Karlstad, where his Moderate Party laid out the foundations for its 2014 election campaign.

While Swedish exporters have warned that continued krona appreciation will force them to cut jobs, the government and central bank have repeatedly rejected talk of boosting trade competitiveness through the exchange rate. And while policy makers from France to Japan argue in favor of weaker currencies, the Swedes have praised their krona’s strength. Central bank governor Stefan Ingves in an interview last month said he was “happy” with the currency’s gains.

Sweden didn’t always have such a hands-off approach. Between 1976 and 1981, when the krona was linked to the Deutschmark and later to a basket of currencies dominated by the U.S. dollar, it was devalued four times. In 1982, its value was again cut, by 16 percent. After the Riksbank was unable to defend the fixed exchange rate inside the European Exchange Rate Mechanism — even resorting to a 500 percent marginal interest rate in 1992 — the peg was scrapped and a free float was introduced. Read more of this post

China’s Largest Mass Merchant Auchan/RT-Mart Turns to Its Own Brands for Growth

China’s Largest Mass Merchant Turns to Its Own Brands for Growth

Sun Art Retail Group Ltd. (6808), China’s largest operator of big-box stores, will boost its own brand offerings and add higher-margin items to increase sales after opening new stores helped raise 2012 profit by half.

The company’s RT-Mart and Auchan chains will add at least 700 more own-label products including stationary and cutlery this year and reduce local brands in favor of higher-end lines, Peter Huang, executive director, said in an interview. The retailer plans to boost own-brand sales to 10 percent of revenue in two years from 8 percent now, he said.

Huang’s shift to higher-end products is intended to help the Shanghai-based venture between Taiwan’s RT-Mart and France’s Groupe Auchan SA maintain its lead over Wal Mart Stores Inc. (WMT) and Carrefour SA (CA), its biggest rivals. Retailers can earn gross profit margins of between 10 percent to 25 percent on own branded non-food items, said Nice Wang, an analyst with Yuanta Securities HK Co. Read more of this post

Big Mac Fights Subway Shrimp in Russia Fast-Food Fracas

Big Mac Fights Subway Shrimp in Russia Fast-Food Fracas

More than two decades after McDonald’s Corp. (MCD)’s outlet on Moscow’s Pushkin Square began offering a golden-arched alternative to grey communist eateries, the fast-food pioneer is on the defensive.

McDonald’s, which virtually created the market for burgers and fries in the country and convinced Russians it’s okay to eat with their hands, must fend off a growing challenge from rivals Burger King Worldwide Inc. (BKW), Subway Restaurants, Yum! Brands Inc. (YUM) and Wendy’s Co. (WEN)

“A huge number of Subways have appeared in Moscow in recent years, I pass about five of them on my way home,” said Dmitry Mikhailov, a 30-year-old consultant. McDonald’s “is crowded — it’s just for pigging out quickly and running away.” Read more of this post

Moody’s Investor Services said China’s local-government financing vehicles face greater risk of default, as regulators warn 20 percent of their loans are risky.

Moody’s Sees Defaults as PBOC Warns on Local Risks

Moody’s Investor Services said China’s local-government financing vehicles face greater risk of default, as regulators warn 20 percent of their loans are risky.

A rally in LGFV bonds may reverse, particularly should delinqencies emerge, Christine Kuo, a Moody’s analyst, wrote in an e-mailed response to questions on March 8. The average yield may rise to 7 percent by June from 6 percent now, according to Shenyin & Wanguo Securities Co., the first brokerage incorporated in China and ranked the nation’s most influential research provider by New Fortune magazine in 2010.

“I see increased risk of LGFV defaults because the financial profiles of many remain weak and heavy refinancing is needed,” Hong Kong-based Kuo said. “Regulators have asked banks to control their LGFV exposures. Some of the projects could default unless other sources of funds are found.”

People’s Bank of China Governor Zhou Xiaochuan said in a March 13 press briefing that about one-fifth of loans to the financing arms of local governments are risky. Net debt issuance by these entities surged 179 percent in 2012 to 1.132 trillion yuan ($182 billion), accounting for 50 percent of corporate bond sales, according to Bank of America Corp. data. Read more of this post

Where ‘Channel-Stuffed’ German Cars Go To Die

Where ‘Channel-Stuffed’ German Cars Go To Die

Tyler Durden on 03/17/2013 21:57 -0400

With the collapse of Europe’s auto market, and the channel-stuffing that is rife in every car manufacturer in the world, it is no surprise that at the end of their brief lease periods, European cars (Audi in this case) are being led to this ‘graveyard’ in Germany (70 miles north of Munich). This car park of chaos is full of nearly-new cars meant for destruction so as never to enter the car market as a cheap alternative and to maintain a high-priced spare parts market. It seems the Keynesian profligacy or digging a hole to fill it in has progressed in the 21st century to building a car and crushing that car as the engine of growth for our economies. The site can be found here…

Burmese startups have both foreign competitors and local cronies to contend with

Burmese startups have both foreign competitors and local cronies to contend with

By Sam Petulla — 7 hours ago

Doesn’t matter what it sells—just call it Facebook.Sam Petulla

YANGON— To hear him talk, Thiha Aye Kyaw sounds pretty much like an ambitious young entrepreneur anywhere on the planet. The 20-year-old computer science student has already built an app that makes him about as much money as a full-time software engineer. Businesses seek him out, and he no plans to join a large IT company after he graduates. He and his friends “don’t want to get the salary and work under other people.”

Except that Thiha lives in Myanmar, which makes realizing his entrepreneurial dreams a little more complicated.

With Google’s chairman, Eric Schmidt, visiting Myanmar this week, there’s a lot of attention on the country’s untapped potential for investment, especially in technology and communications. Myanmar is implementing a new foreign investment law and plans to dramatically increase internet and mobile connectivity from its current levels of less than 10%. In January it hosted Barcamp Yangon, the country’s largest tech conference, attended by an estimated 6,000 people, where Thiha rubbed shoulders with entrepreneurs and digital activists from all over the planet; there were also a few of Schmidt’s colleagues from Google.

But Burmese startups have to contend both with foreign companies that are much better financed and more experienced, and with powerful local businessmen with ties to the regime. Read more of this post

There are fresh allegations that some of the money that went missing from a Chinese company once listed on the Nasdaq may have been laundered through slot machines in Las Vegas casinos

More on the Chinese missing millions that may have been laundered through Las Vegas

By Naomi Rovnick — 2 hours ago

There are fresh allegations that some of the money that went missing from a Chinese company once listed on the Nasdaq may have been laundered through slot machines in Las Vegas casinos.

As we reported in December, medical equipment maker China Medical Technologies was listed on the Nasdaq from 2005 until February last year, and had the bluest of blue-chip advisers, underwriters, investors and creditors. It was wound up last July after missing interest payments. According to court filings since our last report, the company’s liquidators now claim that $670 million of cash the company raised in its 2005 IPO and subsequent equity and bond sales cannot be located, upping their estimate from a previous $400 million. Read more of this post

‘Wash Trades’ Scrutinized; U.S. regulators are investigating whether high-frequency traders are routinely distorting stock and futures markets by illegally acting as buyer and seller in the same transactions

Updated March 17, 2013, 9:42 p.m. ET

‘Wash Trades’ Scrutinized

Issue Is Whether High-Speed Firms Illegally Buy, Sell Futures in Same Deals

By SCOTT PATTERSON, JENNY STRASBURG and JAMILA TRINDLE

U.S. regulators are investigating whether high-frequency traders are routinely distorting stock and futures markets by illegally acting as buyer and seller in the same transactions, according to people familiar with the probes.

Such transactions, known as wash trades, are banned by U.S. law because they can feed false information into the market and be used to manipulate prices. Intentionally taking both sides of a trade can minimize financial risk for the trading firm while potentially creating a false impression of higher volume in the market.

The Commodity Futures Trading Commission is focused on suspected wash trades by high-speed firms in futures contracts tied to the value of crude oil, precious metals, agricultural commodities and the Standard & Poor’s 500-stock index, among other underlying instruments, the people said.

The agency is looking at potential wash trades by multiple high-speed firms, although it isn’t known which ones investigators are scrutinizing. Firms found guilty of intentionally distorting the market through wash trades could face hefty fines. Read more of this post

Philippines Bets Big on Casinos; Manila Wants to Be as Big as Vegas

Updated March 17, 2013, 6:27 p.m. ET

Philippines Bets Big on Casinos

New $1.2 Billion Solaire Resort Opens, Raising Asian Pressure on U.S. Gambling Industry

By KATE O’KEEFFE

MANILA—The Philippines this weekend launched its bid to become Asia’s third gambling hub with the opening of a $1.2 billion casino, as the region battles the U.S. for supremacy in the global gambling market.

In China, Macau’s $38 billion gambling industry already generates six times the revenue of the Las Vegas Strip. In Southeast Asia, Singapore’s gambling revenue matched that of the U.S. casino capital within a year of the island opening its first resorts in 2010. Now Manila is gunning for Vegas, too. Read more of this post