Month: March 2010

Beijing’s groans over US demands to let the yuan rise have been grand theatre, but domestic currents favouring a stronger currency are likely to prevail when Chinese leaders cool down to plot policy.

China’s denunciations of US pressure have, combined with other recent tension between the two powers, fostered the view that Beijing will put stubborn resistance to foreign hectoring ahead of arguments for yuan appreciation.

The core of this view is the assumption that the Communist Party and a nationalist public would find it intolerable to appear to cave in to external pressure.

But this image of a China boxed in by pride does not stand up to scrutiny. In a country where maintaining economic strength is sacrosanct policy, even prickliness over perceived US bullying could fade way.

Government advisers and analysts say Beijing still has plenty of political space to implement currency appreciation if it decides that a stronger yuan makes economic sense.

“If we didn’t adjust the exchange rate just because of US pressure, that really would be manipulation. China is still moving towards market-based reforms of its exchange rate, but is waiting for the economy to improve,” said Li Wei, head of the Americas division in the commerce ministry’s research unit.

“The main thing is that we will do it according to our own judgment.”

Regardless of US threats, Beijing is likely to resume appreciation in the second half of this year when the global economy strengthens and Chinese exporters indisputably find themselves on more solid ground, Li said.

China has in effect re-pegged the yuan at about 6.83 to the dollar since mid-2008 to shield its exporters from the financial crisis.

Currency manipulator?
President Obama’s government is under pressure to call Beijing a “currency manipulator” in a Treasury department report due on April 15.

The possible use of that designation, not invoked since 1994, has been greeted with thunderous rebuttals from Chinese officials.

Yet for all the denunciations, Beijing may be able to live with the ugly label.

“Calling China a manipulator and passing some kind of punitive legislation are different,” said Tao Xie, an expert on Sino-US relations at Beijing Foreign Studies University. “A label does not come with any punishment.”

If China is deemed a currency manipulator, the US Treasury must quickly launch talks with Beijing, though no sanctions are required.

A newly introduced Senate bill would be tougher, demanding tariffs on Chinese products if the yuan does not rise.

Beijing can be excused for feeling that it is has seen this movie before. Lindsey Graham and Charles Schumer, the US senators behind the bill, crafted similar legislation in 2005. Their attempt fizzled out when China launched gradual appreciation in July 2005.

The yuan climbed 21 percent over the next three years.

“The Chinese government may be thinking, ‘Let’s wait and see. The storm will pass’,” Tao said.

Commerce Minister Chen Deming hinted at the distinction between words and actions in a speech recently.

“If the US Treasury gave an untrue reply for its own needs, we will wait and see,” he said. “If such a reply is followed by trade sanctions, we will not do nothing.”

Preparing the ground
There are signs that China is preparing the ground for a resumption of yuan appreciation.

Since the re-pegging nearly 22 months ago, the rhetoric out of Beijing has grown predictable: a stable yuan has helped the economy and the global recovery.

In the last few weeks, this has started to change.

State newspapers have run a series of reports about officials visiting export hubs to ‘stress test’ how firms would cope with appreciation.

And in his most important news conference of the year, Zhou Xiaochuan, China’s central bank governor, described the “special yuan policy” as a temporary stimulus policy that would end “sooner or later”.

It will probably be for President Hu Jintao and Premier Wen Jiabao to decide whether to let the yuan rise again.

The official policy description – keeping the yuan “basically stable at a reasonable and balanced level” –  has been consistent since 2005, leaving them with considerable discretion to resume mild appreciation, said Victor Shih, a political scientist at Northwestern University in Illinois.

“Things change very fast. If inflation does increase, arguments can change. If exports do recover very quickly, arguments can change,” Shih said.

“They can say, ‘no, we are not doing it because some laowai (foreigner) is telling us to do it. We are doing it for these other reasons’.”

Hence the relatively mild market jitters thus far.

While the war of words with the US has made headlines, forecasts of a pick-up in both exports and inflation still dominate the outlook for the yuan.

A New Zealand banker defrauded clients of $13m to fund a lavish lifestyle of prostitutes, property and wine, according to local media.

Stephen Gerard Versalko, 52, was convicted of stealing NZ$17.8m from the clients of his employer, ASB Bank, and jailed for six years, the Dominion Post newspaper reported.

Court officials could not be reached for comment.

The biggest single employee fraud case in New Zealand came to an end after one of Versalko’s clients saw a documentary on fraudster Bernard Madoff and saw similarities in behaviour.

Between 2000 and 2009 Versalko spent at least NZ$3.3m on prostitutes, NZ$4m on luxury properties, as well as more than NZ$300,000 on wine, along with cars and a boat.

One prostitute received NZ$2.5m over that time, and the bank is taking legal action to get property she bought with the money, media reported.

Like the high-profile Madoff, Versalko ran a so-called ponzi scheme using NZ$4.6m of the defrauded money from new clients to pay off earlier investors.

Versalko’s victims were largely elderly women, living outside of New Zealand, who were led to believe their money was in high-return, government guaranteed investments.

The bank has repaid all the investors not only the amounts involved but also the interest they were promised.

Malaysia is considering proposals to end its subsidy regime and phase in a new goods and services tax as it begins dismantling a four-decade race-based economic system that has deterred foreign investment.

The economic regime adopted after race riots in 1969 has given a wide array of economic benefits to the 55 percent Malay population, but investors complain it has led to a patronage-ridden economy that has resulted in foreign investment increasingly moving to Indonesia and Thailand.

The cabinet has seen the reform proposals, which will be reviewed again before Prime Minister Najib Razak presents them at the “Invest Malaysia” conference, a government source who has seen the plans told reporters.

“The proposal cites political implications for some of the measures and calls for the government to make some tough decisions,” said the source, who could not be named because of the controversial nature of many of the policies.

An aide to Najib declined to comment, saying the plans, which will be open to public discussion before taking effect in June,  would be unveiled only at the end of this month.

The government recently abandoned politically sensitive plans to introduce a goods and services tax just weeks after scrapping petrol price increases aimed at cutting its subsidy bill, and an electricity price hike. It cited a need to “engage with the public” as reason for the delay.

The government will end budget crippling price controls and subsidies, mainly for fuel, food and power “with minimal exceptions”, according to the reform plans, drawn up by a government advisory body.

“The savings should then be allocated to widen the social safety net for the bottom 40 percent of households,” the source said.

The shift mirrors the opposition’s policy of targeting benefits at the poor regardless of race, although as the majority of poor are Malays, it may have little change on outcomes or on the wider system of preferences enjoyed by Malays.

The reform plans also call for reductions in personal and company tax rates, although the levels were not specified.

Najib has already rolled back elements of the Malay affirmative action policy, relaxing a rule that companies must offer stakes to indigenous ethnic Malays.

Policy flip-flops
A series of policy flip-flops in recent years have dogged Malaysia’s reform efforts and the country has seen net foreign direct investment outflows to the tune of 26.1 billion ringgit ($7.88bn) over the past two years.

Malaysia attracted 31 percent of the total FDI that went to Malaysia, Indonesia and Thailand in 2008 versus half of that total in the 1990-2000 period, according to UN data.

Foreign ownership Malaysian shares dropped to 20.4 percent of market capitalisation at the end of 2009 from 26.2 percent at the end of 2007, according to official data.

Malaysia will seek to position itself in high growth industries under the new reform proposals, aiming to achieve per capita gross national income of $17,000 by 2020, which would make it a developed nation by World Bank standards. Countries such as South Korea and Singapore have already made that leap.

Without a radical reshaping of its economy and a move away from low-value added electronics exports and labour intensive commodities industries, Malaysia risks losing ground to the likes of China and Vietnam and not making it to developed nation status, a recent World Bank report said.

It is unclear how far the proposals will go in reshaping Malaysia’s social system, blamed by some political analysts and economists for fostering graft and an uncompetitive economy.

“If the government wants to do it right, you will have to rope in everyone including the opposition,” said Shaharuddin Badaruddin, Associate Professor at Universiti Teknologi Mara in Kuala Lumpur.”This is the biggest difficulty now for the government in terms of implementing economic reform politics.”

Malaysia’s political system has been polarised by the trial on sodomy charges of opposition leader Anwar Ibrahim, who says they are part of a political conspiracy.

The current system gives majority Malays a range of benefits, from cheap loans and discounts on property to preferential access to education and preferential equity in companies.

The government has repeatedly sought to reassure Malays, its core voter base, their rights would not be eroded even as it tries to woo back ethnic Chinese and Indian voters who deserted the coalition in droves in the 2008 general election.

The report said a backlash against the proposed reforms could come from industries that have enjoyed protection from competition as well as from politicians whose constituents did badly out of the planned changes.

The blueprint offered no details on cutting the budget deficit other than through “prudent spending”, although a higher growth target of 6.5 percent annually would boost tax revenues.

The economy shrank by 1.7 percent last year.

Under its 2010 budget, the government had planned to reduce subsidies by 3.6 billion ringgit this year by altering its petrol subsidy regime from May, a measure that will now not likely happen until after elections, due by 2013, but which political analysts say could come in early 2011.

Tanzania has scope to raise spending on infrastructure projects in the fiscal year starting in July against a background of higher economic growth and slowing inflation, the IMF has said.

The east African nation’s economy is likely to expand by 6.2 percent in 2010 versus 5.5 percent last year, the fund said in a statement. It said inflation could fall to eight percent by June from 9.6 percent in February.

“Creating additional fiscal space to enable the desired scaling-up of infrastructure investment can be achieved through a combination of measures,” the IMF said, citing higher revenues, efficiency measures and new financing.

“Accessing new financing sources – there are a range of possibilities, including Public Private Partnerships, syndicated loans or Eurobonds – needs to be handled carefully and in the context of a strategy that comprehensively weighs the risks and returns,” the fund said.

Like neighbouring Kenya, Tanzania is taking another look at plans to issue a debut sovereign bond, which the global financial crisis forced it to shelve.

The IMF statement, which was issued at the end of an assessment mission to Tanzania, said the country had fared well in the face of the crisis, thanks to its policy responses and the pace of recovery of the world’s economy.

“A stronger-than-anticipated rebound in the global economy has helped offset the impact of disruptions from the regional drought, floods, and power outages, with the result that we have revised slightly upwards our growth forecasts for Tanzania to 5.5 percent in 2009 and to 6.2 percent in 2010,” the IMF said.

Like other economies in the region, Tanzania unveiled in June last year a fiscal stimulus programme aimed at cushioning growth from the second-round effects of the crisis, which included falls in foreign investment and tourist arrivals.

Although the growth was nascent and mainly in lightly-taxed areas, which caused government revenue collection to fall behind targets, a reversal in the revenues trend and the end of anti-slowdown measures could help in the next fiscal year, the IMF added.

It added that the country must balance fiscal and monetary policy to support growth of the economy that is mainly based on agriculture, mining, tourism and regional trade, while at the same time scaling back the fiscal stimulus.

Tanzanian banks had also weathered the global crisis well, helped by limited exposure to toxic assets and increased supervision by the central bank.

“However, the continued absence of a social security regulator is an important weakness in financial sector supervision,” the IMF said.

Andrew and Mark Madoff, sons of fraudster Bernard Madoff, have submitted a request with a US court to dismiss all the complaints against them, with prejudice, court documents showed.

In a filing with the US Bankruptcy Court, Southern District of New York, the sons said they ranked among the “numerous victims of their father’s terrible crimes”.

On December 10, 2008, Bernard Madoff confessed to his sons about a Ponzi scheme “of epic proportions”. Mark and Andrew contacted federal authorities within hours of learning of their father’s betrayal of their trust, the filing said.

The Plaintiff, Securities Investor Protection Corp (SIPC), sued the sons seeking damages, including their duly earned compensation for running the market making and trading businesses, Andrew and Mark said in the filing.

“Long on rhetoric, but short on legal or factual support, this is a case that as a matter of fairness never should have been brought, and as a matter of law should be dismissed,” the sons said in the filing.

In separate filings, niece Shana Madoff and brother Peter Madoff also sought dismissal of all complaints against them, with prejudice.

Peter Madoff will move before Judge Burton Lifland, for an order dismissing the Trustee’s complaint in its entirety, a filing said.

The lawsuit against Peter, sons Mark and Andrew and niece Shana, is a civil action and none of the family members has been criminally charged.

When pleading guilty in March 2009, Madoff said he acted alone. His long-time deputy Frank DiPascali admitted in August to working with others, whom he did not identify, in perpetrating the decades-long fraud.

Australia has welcomed a report saying that China did not blame Rio Tinto or the Australian government for the collapse of a $19.5bn tie-up between Chinalco and the Australian mining giant.

The Australian Age newspaper reported from Beijing that a detailed report to the State Council, or China’s cabinet, blamed economic forces and a powerful public relations campaign by BHP Billiton for the failure of what would have been China’s biggest offshore investment.

Australia’s Trade Minister said the report should help heal Sino-Australian relations, soured over the failed bid, and that Australia continued to welcome foreign investment to help expand its iron ore production.

“That’s an important concession, if it’s true, and we welcome that, and hope that not only was it a learning process, but it provides the basis for moving forward with our relationship with China on a more solid footing,” Crean told reporters.

Chinalco had agreed a $19.5bn equity and asset tie-up to help rescue Rio Tinto from its debt woes in February 2009, which the Anglo Australian miner abruptly called off in June, opting instead to raise money through a rights offer and form an iron ore joint venture with BHP.

The collapse of the deal damaged relations between Australia and China. A month later, at the height of fraught iron ore negotiations, China arrested four Shanghai-based Rio Tinto staff, including Australian citizen Stern Hu, on allegations of spying and bribery, deepening the rift.

“Objectively speaking, the failure of the merger between Chinalco and Rio Tinto lies in the rapid recovery of the world resources market, including the related stock market, which was beyond everyone’s expectations,” the Chinese report said, according to the Age newspaper.

Chinalco Vice President Lu Youqing told reporters he had not read the report, but added: “The case is over.”

“We have analysed it already. It is a normal business activity and not every activity has to be a successful one. Also, an unsuccessful one is not necessarily a bad thing.

“What we are thinking now is what to do next to develop the company, not struggle with the past,” Lu said.

The Chinese government’s report said the deal failed because Chinalco did not do enough to engage other Rio shareholders or to fight the public relations war in Australia, the Age said.

Rio kept Chinalco informed about its talks with BHP, and the State Council accepted that as global conditions improved it made more sense for Rio to link up with BHP in an iron ore joint venture than to tie up with Chinalco, a customer, according to the report the Age cited.

“One important reason for blocking the vertical merger is conflict of interest, that is, when the major customer of Rio Tinto enters the board of directors, it will have certain rights to speak on product pricing which may harm the interests of Rio Tinto’s other shareholders,” it said.

The report concluded that China underestimated the backlash to the deal and the effectiveness of a campaign led by Rio’s rival BHP against the Chinese state-owned company owning key resources in Australia.

It also outlined several mistakes China made that led to it losing the public relations war in Australia, including launching two other resources bids at the same time, Chinalco not lobbying enough, and not communicating with Rio Tinto’s key shareholders.

It also said Chinalco tried to grab too much in the one deal, seeking a bigger equity stake and joint ventures in assets.

Rio Tinto had no immediate comment on the report and BHP declined to comment on it.

German Finance Minister Wolfgang Schaeuble called for greater integration between euro zone members and stronger surveillance of member countries’ finances to protect the monetary union from further crisis.

In a column published in the Financial Times, Schaeuble said Europe’s monetary union was facing a critical moment and must take steps to protect itself from a new crisis.

“The fallout from the crisis is becoming ever more visible, labour markets in some countries are languishing and government debt almost everywhere is far in excess of permissible deficit limits,” Schaeuble wrote.

“There is only one course of action: all eurozone members must return to adherence to the stability and growth pact as rapidly as possible.”

“Co-ordination between euro members must be more far-reaching; they must take an active part in each other’s policymaking.”

Greece is battling a debt crisis and EU policymakers have been debating ways of providing financial support for it and other troubled euro zone members.

German politicians have pushed the idea of a rescue fund which euro zone countries could tap on tough conditions if they faced default. Questions over who would finance such a fund remain unanswered.

Yves Mersch, European Central Bank Governing Council member and Luxembourg central bank chief, made clear on Thursday that the ECB would not provide emergency funding for countries in a budget crisis.

Schaeuble said any aid offered would be subject to strict conditions, but could improve the EU’s ability to sort out its backyard problems without the help of the IMF.

“The prospect of emergency aid connected with hard corrective fiscal action would boost the confidence of financial markets, thus preventing a deepening of the crisis and obviating the eurozone members’ need to call upon the IMF in future.”

Schaeuble echoed the calls of Eurogroup Chairman Jean-Claude Juncker for euro zone finance ministers to step up their surveillance of countries’ finances.

“Economic and fiscal policy surveillance in the Eurozone was insufficient to prevent undesirable trends in a timely manner,” he said.

“From now on, a member state with an excessive deficit should not receive EU cohesion funds if it is not making sufficient savings.”

Referring to Greece, which provided the bloc with false economic statistics, Schaeuble said the EU statistics office, Eurostat, should be given increased powers to inspect public finances.

Schaeuble, finance minister of Europe’s largest economy, urged calm and said decisive handling of the crisis would help to strengthen the credibility of the ECB.

“If we are successful in putting fiscal policies in the member states back on the right course, the crisis will have brought about a change for the better.”