Tag Archives: economy
Echoes Of Mao In China Cash Crunch
http://www.ft.com/cms/s/0/1c2f126c-d982-11e2-bab1-00144feab7de.html#ixzz2WqmbUIgr June 20, 2013 11:51 am Echoes of Mao in China cash crunch By Simon Rabinovitch in Shanghai As China’s credit crunch takes a turn for the worse, the question of why the central bank has permitted market conditions to deteriorate so suddenly and so sharply looms ever larger. Short-term money market rates surged to more than 10 per cent on Thursday, a record high and nearly triple their level just two weeks ago, after the central bank refused to inject extra funds into the strained financial system. Analysts have mostly viewed the squeeze in economic terms, as a warning to lenders that they must rein in dangerously fast credit growth. But in the midst of the extreme market stress, a statement issued late Wednesday by the central bank raised the possibility that politics are also playing an important role. Bankers had been calling for the central bank to ease the pressure and a few investors had even predicted that it might cut interest rates. Instead, the People’s Bank of China ordered a thorough implementation of the new “mass line education” campaign launched this week by President Xi Jinping – a campaign that in its propaganda-style and potential scope carries echoes of the Mao era. The Communist party cadres that run the central bank were told to attack the “four winds” of “formalism, bureaucracy, hedonism and extravagance”, as demanded by Mr Xi. “It is quite possible that the central bank’s policies have some connection to Xi’s campaign,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “It seems to be much more serious than the short anti-corruption campaigns launched by Hu Jintao and Jiang Zemin [Mr Xi’s predecessors over the past two decades].” In monetary policy terms, the central bank could certainly be said to be waging war on hedonism and extravagance. The seven-day bond repurchase rate, a key gauge of liquidity in China, surged 270 basis points to more than 10.8 per cent on Thursday – a punitively high rate that could force cash-hungry banks to call in the riskiest of their loans. “There are definitely political calculations,” said Ken Peng, an economist with BNP Paribas. “The senior leadership is much more worried about ‘correcting behaviour’ and political considerations than just protecting their 7.5 per cent growth target.” Unlike the cash crunch that occurred in developed markets when the global financial crisis erupted in 2008, the squeeze in China has been almost entirely self-inflicted, a deliberate move by the central bank. Market players had hoped the central bank might inject extra cash in the economy at a scheduled auction on Thursday. But it rebuffed the pleas for help, putting more pressure on overstretched lenders. Concerns about financial risks appear to be the immediate trigger for the central bank’s actions. A surge in credit growth at the start of this year, despite a slowdown in the economy, has alarmed regulators. The central bank wants to send a message to banks to be more cautious in their risk control and to improve their own liquidity management – Peng Wensheng, China International Capital Corp The overall credit-to-gross domestic product ratio in China has jumped from roughly 120 per cent five years ago to closer to 200 per cent today, an indication of rising leverage throughout the economy. Song Yu, an economist with Goldman Sachs, said the tightening was “aimed at preventing the leverage ratio from reaching an even higher level”. With money market rates soaring, interbank rates have also shot up over the past two weeks. This has punished lenders that have used their privileged access to the stable, central bank-controlled interbank market to fund purchases of risky, high-yielding bonds. “The central bank wants to send a message to banks to be more cautious in their risk control and to improve their own liquidity management,” said Peng Wensheng, an economist with China International Capital Corp. “It is saying that you cannot expand credit as you like, and then simply rely on the central bank to back you up.” But the risk of dangerously fast credit growth in China is not new. The biggest change over the past half year has been political, with the ascension of Mr Xi as the country’s new paramount leader. Zhou Xiaochuan, central bank governor, is believed to have a good personal relationship with Mr Xi. Both are “princeling” sons of Communist revolutionary leaders. Mr Zhou had been expected to retire this year, having reached the mandatory retirement age, but Mr Xi allowed him a special dispensation to remain in office. Mr Xi’s campaign against the “four winds” was officially announced on Tuesday. The order that central bank cadres across China should study and implement the campaign was transmitted less than 24 hours later, ahead of virtually all other government units. Continue reading
Greece Looks For Salvation In EM Status
http://www.ft.com/cms/s/0/9ba2b82e-d742-11e2-a26a-00144feab7de.html#ixzz2Wqkme400 June 17, 2013 3:52 pm Greece looks for salvation in EM status By Robin Wigglesworth and Kerin Hope Greece has managed several unwelcome firsts as the eurozone crisis has unfolded. Last week, it set another precedent when MSCI, the influential index provider, relegated the country from its developed country index to emerging markets. The move was the first time MSCI downgraded a country from developed market status. While many investors had predicted MSCI’s review would end in a relegation, the move still contributed to a 3.2 per cent decline in the Athens Stock Exchange on the day. Yet, the downgrade could prove to be a blessing in disguise. Although hundreds of billions of dollars track MSCI’s developed market indices, Greece only had a small weighting and its companies are too small to be of much interest. Moreover, the type of investors that are benchmarked to developed market gauges tend to be risk-averse and shun stricken countries such as Greece. By contrast, in the EM index, Greece will have a higher weighting, which could more than override the effects of the downgrade. HSBC estimates that less than $200m of passive developed market index-tracking money will seep from Greece as a result, but the EM inflows could go above $1bn. More importantly, perhaps, the emerging markets gauge will in the longer run prove a more natural home for Greece, given that the investor base is more used to economic and political uncertainty. “Let’s face it, Greece is an emerging market and now it is classified as one,” says Achilles Risvas, manager of a Greece-focused hedge fund at Dromeus Capital. “With Greece being in the eurozone but classified as emerging markets, a number of the Greek corporates will have a relative edge to similar comparables in emerging markets.” Indeed, last week’s stock marker decline was only partly caused by the index relegation. Investors were spooked by the failure to privatise the government-owned gas monopoly, Depa, and political strife triggered by an abrupt shutdown of ERT, the public broadcaster. But some fund managers took advantage of the selling pressures from the index downgrade, and the market has climbed 6 per cent in the two days after the MSCI downgrade. “When all the index boys are forced sellers, you can pick up some great assets at very attractive prices,” one equity fund manager says. “For Greece the significance will be in the difference between the pool of forced seller versus the willing buyers on the emerging markets side.” After falling into a technical bear market – more than a 20 per cent drop since its March peak – some analysts argue that the Athens stock market is rich with opportunities. Although Greek equities are still up 93 per cent from the market’s trough last year, when fears of a eurozone exit were at their peak, the market is still worth only roughly a fifth of its pre-crisis total. Valuations are extremely low, and after surviving a domestic depression, many Greek companies are now relatively lean. Hedge funds have already made a lot of money betting on Greek bonds. But, with yields now climbing, hedge funds have started to weigh the opportunities on offer, not least in the recapitalisation of the domestic banking sector. Buttressing the banking sector will be a boon to the economy. “The recapitalisation of banks should restart credit flows, which will bring important oxygen into the economy,” says Paolo Batori, strategist at Morgan Stanley. “We believe that Greek economic growth is close to a turning point.” Nonetheless, much hinges on a return to economic growth, political stability and more clarity on the government’s finances. None of these factors can be taken for granted. Predictions of a Greek economic rebound have tended to disappoint, the ERT imbroglio highlighted the country’s political fragility and its debts are still ballooning. Greece is expected to receive a debt reprieve of some sort from its official sector lenders, but the extent of that will be politically sensitive. In the meantime, its bailout programme could easily veer off course. Athens will only get a debt write-off if it sticks closely to the targets – and privatisation is already wildly off-target. Local analysts worry some listed companies that have survived this far could still implode next year as banks are not expected to increase lending soon. Hedge funds have required very favourable terms to recapitalise Alpha Bank and will be wary of many other weaker lenders. Moreover, doubts persist about when the economic recovery will start. The government is predicting growth will return midway through next year, but some local economists are already predicting a seventh year of recession in 2014. Emerging market investors may well be more comfortable with these kinds of risks, but few will yet be rushing to snap up Greek equities. Additional reporting by Ralph Atkins, Alexandra Stevenson and Christopher Thompson Continue reading
Emerging Markets Mid-Year Pulse Check
Some markets do appear to have a weak pulse right now, but any number of catalysts could act as a jump start. Global economic growth hasn’t been terribly inspiring so far in the first half of the year, but many investors have nevertheless been inspired to pour more assets into the equity markets, some of which have surged to record highs. As we hit the mid-year point, now seems like a good time to take a pulse check of emerging markets and assess our prognosis. About the Author At Franklin Templeton, we never lose sight of why we’re here: to provide investors with exceptional asset management. That’s why our independent, specialized management teams are at the heart of our business. These dedicated portfolio groups allow us to offer focused expertise across a broad range of strategies and asset classes. Several emerging and frontier markets—including the Philippines, Indonesia, Thailand and Vietnam in Southeast Asia—have seen strong returns in recent months. And there are several other notable emerging market performers where positive local macroeconomic developments have attracted strong investment flows. Given that yields on some assets seen as “safe” are close to record lows, the attraction to potentially higher-yielding, but riskier assets such as emerging-market equities has continued to grow. Of course, we’ve seen some disappointments too. Some larger emerging markets like South Africa, South Korea, Russia, China and Brazil have lost ground year-to-date through April. Reduced GDP growth forecasts certainly didn’t help and commodity-heavy markets took a double hit as reduced growth projections depressed commodity prices at the same time indications of rising production costs pressured individual mining and energy companies. In addition, sentiment in South Korea suffered amid threats from North Korea and fears Japan’s moves to depress the yen’s value would hurt South Korean exporters. In China, the authorities responded to rising property prices with measures to tighten monetary policy and restrict property purchases. In addition, some political and market developments in Brazil, India and Russia suggested that policy development was moving in a less shareholder-friendly direction. For example, in Brazil, the government has initiated major tax claims against some large companies. In my team’s opinion, many of these issues that held back the performance of major emerging markets in recent months are likely to have little long-term impact. Tensions on the Korean peninsula tend to fluctuate over time, and we believe an escalation of the current situation into actual conflict is highly unlikely. We also think yen weakness is unlikely to be a permanent drag on South Korean export performance. And, China’s moves to cool property markets should be seen in the context of strong ongoing growth and moves to rebalance the economy toward more sustainable growth models. Some policy moves that came with short-term costs could ultimately bring long-term benefits, such as anti-corruption measures that led to reduced demand for luxury items during the Chinese New Year. In Russia, shareholder rights issues are balanced by what we see as exceptionally cheap equity valuations. Meanwhile, the overall direction of policy in both India and Brazil remains market-oriented. Most importantly, we believe recent commodity weakness does not represent a long-term trend. The Case for Emerging Markets’ Growth Despite a recent moderation in short-term global GDP growth forecasts, we still anticipate a likely reacceleration of growth in 2013 and in subsequent years, with 2012 expected to mark a low point. Moreover, we expect growth generally in emerging markets in 2013 and beyond longer term to be much stronger than in developed markets and believe such strong growth could not only drive rising demand for commodities, but also feed into corporate profitability and valuations over time. Industrialization and urbanization in emerging markets are likely to further increase commodity demand, which could push prices ahead over the long term. In many emerging economies, commodities, exports and infrastructure development could continue to be leading growth drivers, but we believe going forward, overall growth is likely to arise increasingly from domestic sources. Expanding consumer wealth is creating an increasingly large and discriminating body of middle class consumers across emerging markets, and their demand is in turn creating increasingly significant domestic economic activity. Furthermore, emerging markets have far lower levels of consumer indebtedness than is common in developed markets, giving their consumers commensurately greater capacity to ramp up demand. In addition, demographic factors are more favorable in many emerging markets than in most developed markets. With a relatively high proportion of the population in emerging markets moving into the workforce and a relatively low proportion of dependents, demographics are acting to reinforce consumer demand. Even in markets like China, where demographics are less clearly favorable, productivity gains from moves out of agriculture and into manufacturing and service industries have still provided a positive influence on growth and domestic demand. Frontier Markets – Emerging Markets of the Future These so-called “emerging markets of the future” have enjoyed strong growth from low base effects, abundant natural and human resources, the availability of easy gains from market reforms and injections of technology into relatively low-wage economies. Compared with more mature emerging markets, frontier markets are relatively under-researched, and we believe that this lack of familiarity could lead to undervaluation and pricing anomalies that we could seek to exploit through our extensive research resources. We are finding many opportunities in frontier markets globally, but with an especially dense pack of opportunities, we think Africa in general represents an investment destination all its own and one we are eyeing with particular interest. We remain aware of risks to all markets, including emerging markets, arising from the fragility of global growth, indebtedness, and a number of geopolitical risks, notably in Korea, the South China Sea and the Middle East. However, while we take account of macroeconomic considerations as part of our investment process, our central aim is to build portfolios from those stocks our research leads us to believe are most underpriced relative to their long-term potential. My prognosis: Some markets do appear to have a weak pulse right now, but any number of catalysts could act as a jump start. Continue reading
