As RBS collects its award for Best Trading Platform 2010, Asia, we hear how the company is developing its platform to keep clients connected to their investments 24/7, offering scale, transparency and speed for the next generation of mobile investors.
Year: 2010
Alex Mbugua on communications | Kenya Airways
Kenya Airways is one of the largest airlines in Africa. With a billion dollar annual turnover and a complex mix of shareholders, including private individuals, the airline KLM and the Kenyan government, good communication is vital. Alex Mbugua explains their methods.
A decade later, lessons in the Nasdaq collapse
Analysts and venture capitalists say the tech crash taught investors a seemingly simple lesson that had been lost in the flurry of public stock offerings by Silicon Valley start-ups with not a scrap of revenue – sales and profits, or at least the prospect of profits, matter.
Today, the Nasdaq index rests at less than half its peak, and many of the biggest names from 2000 – IBM, Hewlett-Packard and Microsoft – are trading more like traditional stocks, based on their fundamentals.
Finding the growth stocks, the companies of the future, has become trickier, investors say.
“Tech stocks were once viewed as unique and different, an industry that would grow rapidly and support extraordinarily high valuations,” said Ken Allen, portfolio manager at T. Rowe Price. “We learned a lot about the flaws in that logic. Tech stocks by and large are pretty comparable to other stocks.”
Shares of select tech names have thrived over the past decade. These include companies such as Apple Inc, Amazon.com Inc and Research in Motion Ltd, which have products that defined their category.
Google Inc and Salesforce.com Inc, which went public in 2004, have seen their shares more than quadruple.
But many of technology’s leading lights have never come close to regaining their past glory. Shares of Cisco Systems Inc, Yahoo Inc and Intel Corp are down more than 50 percent from that time.
Price-to-earnings multiples have compressed over the past decade as tech investing has become more “rational,” said Jeffrey Lin, an analyst at investment manager TCW Group.
Microsoft’s trailing price-to-earnings ratio topped 70 times in early 2000, and today it is roughly 16 times. IBM’s P/E ratio was more than 30 times in 2000, but now sits at 13.
“I feel good about tech stocks this decade because we don’t have this big valuation headwind like we did 10 years ago,” Lin said. But he estimated the Nasdaq will take another seven to eight years before it can surpass the March 2000 peak.
VC slump
In the late 1990s, investors bought shares at sky-high valuations and paid for growth they assumed would materialise.
The early 2000 rise of the Nasdaq composite was meteoric and, in retrospect, absurd. The index surged from 3,000 to above 5,000 in four months.
The January 2000 Super Bowl football championship was probably the clearest sign of an impending crash, with the broadcast overrun by dot-com commercials. Firms from the now infamous pet supply retailer pets.com to the long-forgotten online marketing company LifeMinders.com forked over more than $2m each to buy 30-second TV ads.
Barry Eggers, a founder of venture capital firm Lightspeed Venture Partners – an investor in companies such as Brocade Communications Systems and Ciena Corp, and more recently social gaming firm Playdom, said he remembers getting nervous as he saw the “froth” in the market.
Companies and their VC backers had been under tremendous pressure to go public quickly, he said.
“Those were the days when it was a lot easier to go public, and if you didn’t get public or get acquired for a large number, it was a very unsuccessful outcome,” Eggers said.
Today it takes roughly seven to eight years for an initial investment in a company to make a return, he said, but in the tech boom, it took only three to four years.
“What was driving all that was the growth opportunity.” Now he said, “We’ve learned to be more patient.”
Venture capital firms were hit hard when the bubble burst, and more recently when the financial crisis and recession struck. In 2009, VC fundraising fell 47 percent to $15.2bn, the lowest level since 2003, according to data from Thomson Reuters and the National Venture Capital Association.
Patience
Tech investors as a whole have learned to be more patient as industry growth rates normalised. But divining the latest hot trend – whether it be social networks, social gaming or mobile internet – is more challenging than ever.
“Gone are the days of 30 to 40 percent projected CAGRs (compound annual growth rates),” said Broadpoint Amtech analyst Brian Marshall.
He recommends that investors find “idiosyncratic, secular growth stories,” such as Apple, VMware and NetApp, as new technologies like smartphones and virtualisation disrupt older ones like PCs and servers.
“You want to play the themes that have the most robust outlooks, and then you identify the leaders that have the best opportunity to grow,” he said.
Marshall said the Nasdaq in 2009 and 2010 will mirror that of 2003 to 2004 when the market emerged from the dot-com crash, and thinks money will soon head for growth stocks over value.
He said the Nasdaq could make it all the way back to the March 2000 heights in five to 10 years.
“I hope,” he added.
Bank plans to expand social benefits network
At the end of a three-day meeting on the outskirts of the Bangladesh capital, the Global Alliance for Banking on Values (GABV), an independent network of 11 banks, said that it would look to adopt genuinely values-driven models.
“The members of the GABV have committed to touch the lives of one billion people by 2020 … to transform lives on a truly global scale, and make a substantial difference in our efforts to combat climate change,” Fazle Hasan Abed, co-founder of the GABV, told reporters.
The Dhaka meeting focused on joint capital raising efforts, and building an infrastructure to support the development of a new generation of bankers to use it.
“We believe values-led banking can and should make a positive difference to the lives of one in six people within 10 years,” said Peter Blom, chair and co-founder of the group and chief executive officer of Triodos Bank in the Netherlands.
The alliance, which says it represents seven million customers in 20 countries with a combined balance sheet of more than $14bn, committed to raise $250m to support the expansion of $2bn in lending to communities not served by banks and green projects around the world.
“Within a couple of months we will (have) $140m and it will not be difficult to raise the rest money over three years,” said Abed, who is also chief of the BRAC, the world’s largest non-government micro-financing agency.
Lawsuits, poker and the death of a boutique bank
Pali Capital, a boutique firm specialising in derivatives and fixed-income trading, was one of the few financial outfits hiring traders and bankers – often from the likes of imploding Wall Street behemoths like Lehman and Merrill Lynch.
With its annual revenue on pace to top $200m that year, Pali appeared to be an oasis of prosperity. Rodin sculptures adorned its offices and a corporate jet ferried its executives around the world.
The key to Pali’s success was its charismatic co-founder and chief executive, Bradley Reifler, a master salesman who was as good at wooing clients as he was at spending money – his own as well as the firm’s. He sometimes commuted to work by helicopter from his sprawling horse farm in upstate New York.
But in February, Pali itself shattered. The firm said it was winding down after failing to sell itself to a group advised by former Bear Stearns Chief Financial Officer Sam Molinaro.
The bank’s swift demise surprised industry observers. As with many firms that suddenly fail, not everything at Pali was what it seemed.
For all his enthusiasm and charm, Reifler had a combative side. Most conspicuously, he had a tendency to sue, launching at least a dozen lawsuits against people and companies over the last 10 years.
Reifler’s spokesman said he declined to comment and Bert Cohen, Pali’s other co-founder, could not be reached and his lawyer did not return calls. But interviews with more than 10 former employees of Pali and Reifler and examination of 11 lawsuits paint a picture of a man who spent freely and had few qualms about going to court if he felt threats to his control.
According to former employees and people who reviewed the company’s financial statements, Reifler’s penchant for litigation helped destroy the bank he spent so many years building.
The Panamanian connection
Reifler and family friend Cohen co-founded Pali in 1995. For the first few years, Reifler maintained his job at Refco, the now defunct commodity trading business started by his grandfather, Ray Friedman.
In 2000, Reifler left Refco to become chief executive of Pali, and it began to flourish. He immediately set out to expand the bank into areas including merger advisory, asset management and hedge fund investments. At its peak, the firm employed more than 200 people.
“He was a phenomenal salesperson,” said one former employee, noting how Reifler managed to persuade Panamanian bank Grupo Mundial to invest $25m in the company. He also secured a $6.5m loan from a Bear Stearns Cos unit by offering a personal guarantee.
Reifler hired good people – and paid them well, often offering guaranteed bonuses. Richard Anthony, then a little known trader, joined Pali in 2002 and built an equity derivatives sales and trading effort catering to hedge funds. The business generated big profits for the bank, contributing as much as 20 percent to total revenue, according to people who worked for Pali and others who looked to buy the company.
Like his boss, Anthony was a flashy salesman. His ‘Pali Poker’ nights – charitable fundraisers held at top New York locales including Capitale, The Box and the Hammerstein Ballroom – were big draws. They featured dancers from the Rockettes or the New York Knicks; John Legend performed at one. Some Pali clients would do more business with the company in the run up to these events, just to ensure they got a ticket, two people familiar with the company said.
Fortunate son
Reifler was born to privilege.
He grew up in Southern California, where his mother owns a Malibu beach house designed by Getty Centre architect Richard Meier. He went to the elite Harvard School for Boys, and later bragged to colleagues that one of his schoolmates was Joseph Gamsky, also known as Joe Hunt, the man behind a Ponzi scheme and murder scandal known as the Billionaire Boys Club.
As Pali prospered, Reifler’s income soared. He received three percent of all gross brokerage revenue. And he knew what to do with it.
In 2000, after his wife and children took riding lessons at the exclusive Chelsea Equestrian Centre, he sold the family’s multimillion dollar Manhattan townhouse, bought a 150-acre estate in Millbrook, New York and hired a team of professionals to look after as many as 12 horses.
The estate, known as Sky Blue Farm, also has an ice hockey rink, tennis courts and indoor and outdoor swimming pools.
When Reifler was not commuting by helicopter, a driver took him into Manhattan in a custom-fitted SUV with a trading screen and seats that reclined for sleeping, allowing the boss to rest during the almost two-hour journey from Millbrook, according to one person who had seen the vehicle.
At work, Reifler wore finely tailored suits and hosted $1m holiday parties for Pali employees at venues such as the Guggenheim Museum. Clients and key staff were taken on trips in the Pali jet. Some got invitations to the shooting range at Sky Blue Farm.
“He was fancy,” said a former junior Pali employee, who recalls being impressed by Reifler when he went to interview at Pali. Reifler met the prospective hire in his corner office, filled with artwork, expensive-looking furniture, and a model of Pali’s Falcon 900 jet. During the interview, he touted Pali’s entrepreneurial culture while an assistant brought in freshly-brewed espresso in gold-rimmed china cups.
“The office reeked of excess,” said Ron Simoncini, president of Axiom Communications, a public relations firm that was hired by Studio U, an arts and craft store in Chester, New Jersey, set up by Reifler and his wife, Ashley. The shop sold specially-designed craft projects and held children’s parties, as well as classes and events for adults.
Reifler relished Pali’s success. The collapse of big Wall Street firms created an opening for nimble trading firms, and by 2008, Pali and Reifler had acquired a fair amount of cachet on Wall Street.
“Everyone was very excited about working there,” said Lauren Schachter, chief executive of LBS Staffing, which recruited employees to Pali in 2007. “They had a great reputation.”
The junior employee said the firm was regularly mentioned in newspapers and on cable channel CNBC as being among the few that were hiring while other banks were closing down. “We thought, ‘We’re not just a boutique any more,'” he said.
See you in court
Reifler’s extreme litigiousness was rattling the firm, but few inside the bank were willing to confront him about it.
By June 2008, Pali Capital’s holding company had seven directors and only one – Bert Cohen – was independent, according to one lawsuit, filed that month by three shareholders.
Other board members included Kevin Fisher, who later became co-Chief Executive after Reifler departed; derivatives boss Richard Anthony; London-based trading head Richard Abrahams; chief financial officer David Wasitowski; and chief legal officer John Fedders. All of them reported to Reifler.
“He could make your life miserable,” another former employee said. “He appointed himself head of everything, including compliance, and everyone reported to him,” he said, adding, “If you crossed him, you didn’t get a bonus.”
In January, Reifler filed a lawsuit accusing Derrelle Janey, Pali’s head of strategy, of failing to repay a one-year $50,000 personal loan Reifler made him in May 2008.
Lawyers for Janey said Reifler was trying to buy his loyalty. They also said the funds Reifler lent him were likely not his but Pali’s, according to the lawsuit filed on Janey’s behalf in response to Reifler’s claim.
Public relations firm Axiom Communications said in its lawsuit that Reifler used Pali to finance Studio U, his arts and crafts store. Axiom is suing Pali and Studio U for payment of more than $76,000 that the company says it is owed for Web site development and other contracted services. Axiom alleges Pali Capital guaranteed it would pay for work the agency did for Studio U.
By the summer of 2008, Cohen and other large shareholders had become concerned that Reifler had “secretly run Pali as his own private fiefdom,” according to the June 2008 lawsuit filed by shareholders Ronald Weinstein, Stuart Sloan and WGS Verwaltungs.
That lawsuit alleges that Reifler paid himself millions in additional compensation, without board approval, by claiming among other things “loan guarantee fees” and consulting services to other companies that he owned.
“His penchant for ignoring fundamental rules of corporate governance and lining his own pockets appears to have touched every aspect of Pali’s business,” the plaintiffs’ lawyers wrote.
Reifler and Cohen became mired in a toxic battle for control of Pali. According to the lawsuit filed by shareholders, Reifler sent Cohen emails calling Cohen “a bitter lonely ass” and saying “you should just kill yourself…do everyone a favor.”
Booting out Reifler
In the summer of 2008, Cohen and other Pali shareholders – including Seattle-based businessman Sloan and Sam Zell’s SZ Investments – began an effort to oust Reifler, according to a separate lawsuit filed in response by Pali Holdings, Pali Capital’s parent.
The shareholders had accused Reifler in a lawsuit of forging a proxy document to support Reifler’s legal claims against Cohen and the other shareholders. A document obtained by Reuters indicates the person whose proxy Reifler is accused of forging believes Reifler acted “in good faith” on a voting arrangement he discussed with Reifler. Both lawsuits have since been discontinued.
Reifler left Pali in October 2008. According to lawsuits filed by Reifler’s lawyers, he resigned voluntarily. Lawsuits filed by Pali lawyers say he was fired.
Soon after his departure, the multiple lawsuits began to take a toll on Pali’s financial health.
According to a letter that Reifler’s lawyers sent to a New York State Court judge, in 2009 the company reported $13.4m in expenses for “external services,” most of which the letter said were believed to be legal fees.
That sum was almost triple the $4.8m in unpaid legal expenses that the firm had by the end of 2008, according to a filing with the Securities and Exchange Commission. The legal obligations were onerous for Pali, which had just $1.1m of cash on its balance sheet at the time, according to court filings. Company statements for 2009 have not been filed with the SEC and could not be obtained.
Reifler is suing Pali for release from the loan he guaranteed and he also began an arbitration proceeding through brokerage regulator FINRA to settle a dispute over compensation he says he is owed from Pali. The arbitration is scheduled to start in May.
Buyer beware
The bank had plenty of prospective buyers, including mortgage trading boutique Braver Stern and middle-market investment bank Rodman & Renshaw. Some were even willing to swallow the high legal expenses; one made an offer in mid-2009.
But Pali’s board believed the company could do better, and held out for an offer from Braver Stern, according to people briefed in the matter.
Anthony, the firm’s star performer, became frustrated by the slow pace of the deal and left for BGC Partners in December, taking a team of traders with him. Losing Anthony’s revenue was a final straw for struggling Pali. Buyers lost interest after Pali’s most profitable division walked away.
Reifler was not in favor of selling Pali. Last January he founded a group called the Committee of Concerned Pali Shareholders and sent a letter arguing that that the proposal to sell Pali was not in shareholders’ best interests. “Pali should be pursuing alternative forms of recapitalisation that would result in less dilution for existing shareholders,” the letter said.
Used to getting his own way, and always more of a trader than a business man, Reifler may have seriously miscalculated Pali’s state of affairs and the cost to the company of his litigation, say people close to him. He is now on the hook for the $6.5m loan he personally guaranteed.
His company is gone – but not his combativeness. According to his Twitter page, he is launching a new firm with what he refers to as “non-criminal” partners.
Dubai creditors may get multiple options
Bankers in London and the Gulf are divided over how Dubai should restructure the $26bn debt pile dogging its flagship holding company, leading the emirate to consider parallel offers in an effort to please all, the sources said.
How this “framework of a proposal” shapes up depends largely on how much additional capital the UAE main oil exporter Abu Dhabi is willing to provide its neighbour Dubai, given that Dubai itself has little means of raising cash.
“Support from Abu Dhabi is the missing piece,” said one senior London banker active in the emerging markets. “There has to be a political angle to the possible solution as Dubai World doesn’t have enough to repay the debt out of its own resources.”
State-owned conglomerate Dubai World held informal talks with major creditors, which include HSBC and Standard Chartered.
There is widespread expectation among creditors that Abu Dhabi will ride to the rescue, as it did in December when it helped Dubai avert an embarrassing default on an Islamic bond linked to property developer Nakheel.
A proposal, which is expected in the coming weeks, may include more than two tranches in an effort to meet the needs of the 97 lenders to Dubai World.
Local banks with little lending power may want whatever they can get from Dubai World quickly, while international lenders with big balance sheets can afford to wait for full repayment.
Two of the restructuring options include repayment over three to five years with the principal discounted, and repayment over seven to nine years with no discount. How much of a “haircut” is included on the shorter-term deal depends on how much money Abu Dhabi stumps up.
No real decision on the exact shape of the deal has taken place yet, said one London source.
But once it does, it will only be the opening shot in a long war of words with the final settlement likely months away.
“If they put a proposal out in March, its very doubtful that it will clear 95 lenders’ credit committees by the end of the standstill in April,” said the emerging markets London banker.
“Different voices and different reactions need to be pulled into a common response by the steering committee.”
Creditors are likely to resist any initial proposal with demands for better terms, including some sort of board representation or management control over the borrowers.
“Creditors are in a twilight zone between being a creditor and an equity holder and are looking for enhanced creditor rights. Negotiations will zero in on that particular dynamic,” said the banker.
Dubai utility in bond plan
Abu Dhabi is the capital of the seven-member UAE federation – the world’s third-largest oil exporter – and by far the richest. But it has kept noticeably mum about its plans for Dubai, hard hit by the global financial crisis and burdened by an estimated $101bn in total debt.
Last year’s $10bn bailout is conditional on Dubai World reaching a deal with creditors. About $5bn of those funds have yet to be released.
Dubai exports little oil, but raised its profile internationally with eye-catching construction projects such as the world’s tallest building and palm-shaped islands in the sea.
The fallout from Dubai’s debt crisis is being felt in Abu Dhabi, with Moody’s downgrading seven government-related entities late last week as they did not have an explicit, formal guarantee of government backing.
In a sign of how much Dubai’s own financial power has been curtailed, its state-owned utility Dubai Electricity and Water Authority (DEWA) said on March 10 its planned $1.5bn bond would carry no government guarantee.
DEWA’s plan to issue bonds marks Dubai’s first dip into international capital markets since its debt crisis last year. DEWA had postponed the issue after Dubai World shocked global markets in November, when it requested a standstill on debt linked mainly to its property developers, Limitless World and Nakheel, builder of the palm-shaped islands.
OPEC may face Iraq soon
OPEC was unlikely to discuss Iraq at its meeting on March 17 but it may need to do so within a couple of years.
“There’s only one issue, but it’s a big one. It’s a tsunami. Iraq,” said Leo Drollas at the Centre for Global Energy Studies.
After years of sanctions and war, Iraq is exempt from the output targets OPEC uses to set supply levels.
But as Baghdad embarks on an unprecedented oil industry development, OPEC will at some point need to bring Iraq back into the fold to prevent millions of barrels of new oil supply undoing its work to balance markets.
OPEC officials and analysts have said the issue is not urgent, as it could be years before Iraq makes significant increases to current output of around 2.5 million barrels per day (bpd). Baghdad’s failure to reach past ambitious targets has fed the scepticism.
The consensus among analysts is that it would take around five years for Iraq to boost output by between 1 million bpd and 1.5 million bpd.
But output gains could surprise OPEC in their speed.
“You could be looking at 1.5 million barrels in two years,” said a senior executive at one of the oil firms involved in Iraq. “That could make a huge difference to the supply and demand balance. Is there going to be that kind of demand pick up in that timeframe?”
Iraq’s deals call for foreign firms to boost output potential to 12 million bpd in seven years, which would leave it snapping at the heels of Saudi Arabia’s capacity of 12.5 million bpd.
Assuming the deals survive intact and work can go ahead, Iraq’s huge oilfields present little technical challenge to oil majors that have had to push into regions such as deep water and the Arctic to access oil reserves. There is nowhere else on earth where international oil firms have access to such cheap to produce, abundant reserves.
Reaching 12 million bpd in seven years appears improbable, but oil firms believe early gains will be easy.
The terms of the contracts Iraq has signed encourage firms to boost output quickly to recover costs. Once firms boost output from producing fields by 10 percent, they start getting paid.
“The way the contract is structured is to incentivise swift progress,” said Bill Farren-Price of consultancy Petroleum Policy Intelligence. “I’m fairly optimistic that we’ll see Iraqi oil output rising over the next 12 months as Rumaila and other projects get underway.”
Iraq has said it expects another 200,000 bpd of oil from fields leased under the new contracts this year. Its biggest producing field, Rumaila, should rise 100,000 bpd by July. BP and CNPC won the contract to boost output at Rumaila, the workhorse of Iraq’s oil industry to 2.85 million bpd from 1.07 million bpd.
What can OPEC tolerate?
OPEC, which has weathered many difficulties in its 50-year history including a bitter war between members Iran and Iraq, will likely put off thorny negotiations on how to accommodate a resurgent Iraq as long as possible.
“It’s the last thing they want to do (tackle this issue), the want to sweep it under the carpet,” said Drollas of the CGES.
When the group calls on Iraq to rejoin the depends on how quickly oil demand rebounds after two years of contraction due to the global economic downturn.
“If the market is very tight, with demand rising and non-OPEC supply continuing to disappoint, then Iraq could be accommodated quite well … But if demand falls then it would be a very big challenge for OPEC,” said Bassam Fattouh at Oxford Energy.
Even if the market could absorb the extra production, other OPEC producers would have to maintain curbs on supply in place since late 2008, while Iraq pumped more.
This would create tensions within the group as other members effectively give up market share and billions of dollars of potential revenues to Iraq.
Baghdad has said that it believes OPEC should allow it to pump more without imposing a quota as it has lost market share and revenues to other members of the group as years of sanctions and war prevented Iraq from achieving its production potential.
OPEC officials have said they would need to think about quotas once Iraq showed it can consistently pump 3 million to 3.5 million bpd.
Some say the group would have to address the issue if Iraq’s output approached five million bpd – putting it ahead of Iran and making Baghdad the second largest OPEC producer after Riyadh.
That could challenge Saudi Arabia’s position as dominant producer with the flexibility to influence output significantly.
“As Iraq substantially exceeds Iran’s production level it will raise significant political problems for OPEC as a whole and for Saudi Arabia in particular,” said Edward Morse, head of global commodities research at Credit Suisse.
Iraq has strengthened its hand for future negotiations with the oil deals. Previous production targets have been based on reserves. Iraq’s reserves are a little smaller than Iran’s, so a renewed quota might be similar to that of its neighbour. Iran’s target is around 3.34 million bpd, although Tehran disputes that and is pumping around 3.75 million bpd.
But Iraq would likely refuse to be saddled with that comparison, as the deals it has signed would put it on a par with Saudi capacity, regardless of its reserves. It would likely use that as a starting point for negotiations, analysts say.
China fears grow, spurring tightening talk
Chinese consumer inflation spurted to a 16-month high in February and a raft of economic data displayed broad-based strength, providing fresh arguments for policy tightening sooner rather than later.
The pace of credit growth halved in February, as expected, but some economists said the central bank would probably not wait long before increasing banks’ required reserves for a third time this year and perhaps even raising interest rates.
“Given the pace of real activity growth, which is well above potential level, and an inflation rate which is already at around three percent, we believe it is vital for the government to take more decisive measures to tighten the economy to prevent overheating, Goldman Sachs economists Yu Song and Helen Qiao said in a report.
Consumer price inflation quickened to 2.7 percent in the year to February from 1.5 percent in the year to January, handily beating forecasts of 2.3 percent. The government wants to limit inflation for the whole year to three percent.
Tao Wang with UBS in Beijing was one of several economists who said the jump in February largely reflected a low base of comparison from a year ago, when the economy was slumping, as well as the impact of the Lunar New Year holiday.
“It will, though, give the market an expectation of a more imminent rate hike. Our forecast is that a rate hike should happen relatively soon, if not this month then probably early in the second quarter,” she said.
Asian stocks fell nearly 0.5 percent as investors priced in a tough policy response, while the main Shanghai stock index surrendered an early gain of 0.72 percent to end the morning with a loss of 0.64 percent.
But comments by Chinese officials suggested the markets might be getting ahead of themselves.
Sheng Laiyun, the spokesman for the National Bureau of Statistics, said inflation would remain “mild and controllable” and blamed February’s rise on holiday spending and bad weather, which pushed up the price of food.
Su Ning, a deputy central bank governor, also cited the Lunar New Year effect and said China was not yet experiencing inflationary pressure.
Strong economy
Inflation now exceeds the 2.25 percent interest rate on 12-month certificates of deposit, raising the risk for policymakers that savers withdraw their cash from banks and plunge into the already bubbly property market.
Pipeline price pressures are also building. Annual factory-gate inflation quickened to 5.4 percent in February from 4.3 percent in January. Economists had forecast 5.2 percent.
Factory output exceeded expectations, expanding 20.7 percent in January and February from year-earlier levels, while retail sales growth of 17.9 percent was just a touch lower than forecast. Both readings marked an acceleration from December.
Only urban investment in fixed assets such as roads and factories slowed from a year earlier, when the government was launching its 4 trillion yuan ($585bn) stimulus package.
Still, investment growth of 26.6 percent in January and February beat market forecasts of a 26 percent rise.
The statistics office produces a combined figure for the first two months to iron out distortions due to timing of the Lunar New Year holiday, which varies from year to year.
Rate rise timing
Economists tied the underlying strength of the economy above all to the ready availability of cheap credit.
Although loan growth halved in February to 700 billion yuan, the total was still high given that it was a holiday-shortened month. And the proceeds of a lot of last year’s lending are still on deposit with banks, ready for companies to spend.
Yet not all economists believe major monetary tightening is imminent. They argue that the government remains wary of the fragility of the global recovery, despite strong export data released in early March, and is already slowing its infrastructure spending. Banks have been ordered to scale back lending and rules tightened to deter speculative property buying.
“Beijing has continued to successfully use incremental tightening measures to slow the pace of economic growth back to a more sustainable level from last year’s hyper-stimulated rate,” said Andy Rothman with CLSA in Shanghai.
He said more “symbolic” increases in required reserves were likely – there have already been two this year – as well as a couple of small interest rate rises in the second half of 2010.
But more dramatic policy steps to ward off asset price bubbles would not be needed, Rothman said in a note to clients.
Xing Ziqiang, an economist at China International Capital Corp in Beijing, said the central bank would wait and see for another month or two before raising interest rates, while Ting Lu with Bank of America Merrill Lynch said he still did not think borrowing costs would rise until the second half the year.
US bailout watchdog criticises Treasury over GMAC
The US Treasury’s decision against a bankruptcy restructuring for GMAC may have increased taxpayer bailout costs for the auto finance company and made it less viable, an oversight group said on Thursday.
The Congressional Oversight Panel, in a new monthly report, said despite three separate bailouts totaling $17.2bn, GMAC Financial Services continues to struggle with its troubled mortgage liabilities.
“The panel remains unconvinced that bankruptcy was not a viable option in 2008,” it said in the report. “In connection with the Chrysler and General Motors bankruptcies, Treasury might have been able to orchestrate a strategic bankruptcy for GMAC.”
The watchdog group said such a bankruptcy restructuring could have preserved GMAC’s core automotive lending functions while hiving off Residential Capital, its mortgage lending business, which remains a “millstone” around the company’s neck. A bankruptcy, and perhaps merging GMAC back into GM, could have put the lender on a sounder footing, the panel said.
But the Treasury chose against letting GMAC fail in late 2008, constraining its options in 2009 when it restructured the auto industry, the panel said.
The Obama administration currently estimates that taxpayer losses on the GMAC bailout may be at least $6.3bn.
After the capital infusions made by both the Bush and Obama administrations, the government owns 56.3 percent of the lender, which serves as the primary source of dealer and car buyer financing for GM and Chrysler.
The panel also criticised Treasury for its inconsistent treatment of GMAC. Bailout funds for the lender were classified under the $700bn Troubled Asset Relief Programme’s automotive industry finance programme, but in practice, Treasury treated the firm more like large banks such as Citigroup, the report said.
The Treasury wiped out common stockholders in GM and Chrysler, but GMAC’s original shareholders including Cerberus Capital Management, although diluted, still stand to profit from the taxpayers’ help, it said.
The Treasury committed funds to GMAC under a bank stress test program last year, but provided a final $3.8bn under the auto programme.
Exit strategy?
The oversight panel, led by Harvard Law School professor and bankruptcy expert Elizabeth Warren, also said the Treasury needed to insist that GMAC produce a viable business plan to deal with mortgage troubles and a near-term exit strategy that takes into consideration government stakes in GM and Chrysler.
“In light of the scale of these potential (taxpayer) losses, the panel is deeply concerned that Treasury has not required GMAC to lay out a clear path to viability or a strategy for fully repaying taxpayers.
“More than a year has elapsed since the government first bailed out GMAC, and it is long past time for taxpayers to have a clear view of the road ahead,” the panel said in the report.
The Treasury has said a bankruptcy for GMAC would have been too costly, requiring $40bn to $50bn in taxpayer-supplied debtor financing because it would have been the sole source of critical dealer “floorplan” financing for vehicle inventories.
It also would have complicated the much larger bankruptcies for GM and Chrysler, Ron Bloom, the Obama administration’s top automotive and industrial official told the panel in February. A collapse of financing could have brought down the automakers by choking off vital sales, he argued.
“After considerable analysis and deliberation, Treasury viewed the course taken as the least costly and least disruptive of all the options available,” Treasury spokeswoman Meg Reilly said in a statement.
“Had Treasury allowed GMAC to fail, no single competitor or group of competitors could have stepped in to absorb GMAC’s entire loan portfolio,” she said, adding that GM estimated that a new provider would have taken up to six months to create the infrastructure necessary to fill the void created by a GMAC failure.
Treasury officials have said they hope to sell off GMAC through an initial public stock offering, but they have conceded that step is likely more than a year away.
Chinese bankers told to curb pay to rein in risks
China on Wednesday unveiled strict new rules governing bankers’ pay that are designed to limit risk taking.
Payment of 40 percent or more of an executive’s salary must be delayed for a minimum of three years and could be withheld if their bank performs poorly, the China Banking Regulatory Commission said in a statement on its website.
This would ostensibly put China at the forefront of a global movement to use regulation of bankers’ pay as a way to control their firms’ investment behaviour.
The implications in China, though, are less significant, because bankers are, in effect, employees of the government in the largely state-owned banking system and their salaries are already significantly lower than their international peers’.
“This guideline aims to instruct commercial banks to learn lessons from the financial crisis and to improve their salary incentive mechanisms to avoid having bank staff taking risks due to improper incentives,” the banking regulator said.
Banks must consider a range of indicators, such as capital adequacy ratio, non-performing loan ratio and provisions for bad loans, when assessing their executives’ performance, the statement added.
In contrast to the risky market plays that have tempted global bankers, more pertinent in the case of China is the close relationship of bankers with government officials.
Investors are worried that a large portion of China’s 9.6 trillion yuan ($1.4trn) credit surge last year went to local governments with questionable ability to repay loans.
BOJ mulling easing again
The Bank of Japan is examining a further easing of its ultra-loose monetary policy and may decide on such a move this month, the Nikkei newspaper reported, weakening the yen and lifting government bond futures to a two-month high.
The government, its fiscal options limited by a ballooning fiscal debt, has been pressuring the BOJ to do more to beat deflation even as most other major central banks mull rolling back stimulus steps put in place during the global crisis.
Finance Minister Naoto Kan said he would welcome any BOJ measures to help beat deflation but had not heard directly from the central bank about what it was considering.
Another policy easing could raise questions about the BOJ’s independence after it buckled under government pressure in December and expanded its supply of funds to financial markets.
“Probably without government pressure, maybe the BOJ would stand pat,” said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities Japan.
“The government wants the BOJ to do something more toward the end of the fiscal year (on March 31). In addition, there are uncertainties in financial markets, especially FX, because of the Greek fiscal problems etc,” she said.
The BOJ’s likely aim would be to prevent further yen gains and stock declines from hurting corporate sentiment, she said.
The BOJ board will debate whether to expand the fund-supply operation it put in place in December, in which it extends loans to commercial banks at the policy rate of 0.1 percent, the paper said.
It will either boost the amount of funds it supplies in the operation from the current 10 trillion yen ($112.1bn) or extend the duration of the loans to six months from the present three months, the Nikkei said without citing sources.
After March’s rate review the BOJ board will then meet twice in April. An expansion of the central bank’s fund-supply operation has been cited by markets as the most likely option.
“I haven’t heard directly from the BOJ about what it plans to do,” Kan, who is also deputy prime minister, told reporters after a cabinet meeting.
“The BOJ governor and deputy governor have appeared regularly in parliamentary committees, where I’ve repeatedly said the government will do more to end deflation and that I hope the BOJ also does more. The BOJ could be responding to that.”
But the Nikkei said some board members were cautious about loosening policy further with the economy now in relatively good shape, so a decision may be delayed until April, it said.
Noda: No need to ease more
BOJ board member Tadao Noda said he saw no need for further easing now, and he also ruled out increasing the amount of government bonds the bank purchases.
The reported move would likely be aimed at pushing down longer-term money market rates, such as six-month to one-year borrowing costs, to encourage spending by households and companies. Lower yen borrowing costs would also help prevent sharp rises in the yen from hurting exports, a driving force behind Japan’s fragile recovery, the Nikkei said.
“I don’t think the yen will weaken sharply just because of this, but it would be positive for the economy,” said Takuji Aida, a senior economist at UBS Securities in Tokyo.
Deflation can be debilitating because consumers and companies tend to delay spending as they expect prices to keep falling. It can also make monetary conditions tighter than they appear, because real interest rates are higher than nominal rates.
Economists have argued that the BOJ needs to do more, and that it has damaged its credibility by not being more aggressive. They also say increasing short-term funding would not have much impact as it would not allow the BOJ to expand its balance sheet as the Federal Reserve and other central banks have done after the global financial crisis.
“The most direct way to do quantitative easing is to go out and buy assets,” said Simon Wong, regional economist at Standard Chartered in Hong Kong.
“The BOJ hasn’t done much to ease deflation, which has already hurt its credibility a bit. If you have an expansionary fiscal policy without an expansionary monetary policy, you end up with higher long-term yields.”
The finance minister has been escalating pressure on the BOJ, expressing his desire to target inflation and urging the bank to help the government drag the economy out of grinding deflation.
Such remarks by cabinet ministers are likely driven by the need for the Democratic Party-led government to look proactive ahead of an upper house election expected in July, especially since Prime Minister Yukio Hatoyama’s ratings are dropping due to funding scandals and doubts about his leadership.
The BOJ has said it is committed to fighting deflation after the government increased pressure on the central bank last year but has offered few clues on what it could do in the future beyond keeping interest rates near zero for as long as necessary.
The BOJ is unlikely to increase its long-term government bond purchases, a move favoured by some within the government, for fear such a move could be interpreted by markets as monetising debt and trigger sharp bond yield gains, the paper said.
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EU trade chief sees progress in India FTA talks
A free trade agreement with the European Union could create new export opportunities worth $9bn for Indian industries, EU trade chief Karel de Gucht said.
De Ducht, on a visit to India, said he expected good progress in the coming months on trade negotiations between the second most populous country in the world and the 27-nation EU.
“With India we will conclude a deal that benefits us both, or there will be no deal,” De Gucht wrote in an editorial piece published in the Economic Times of India.
India began negotiations for a free trade agreement (FTA) with the EU, its largest trading partner, in 2007, but the talks have run into a wall of differences, especially over EU efforts to link trade with sensitive topics which India wants to keep off the table.
Disagreements over market access, intellectual property rights, a dispute over generic drugs and the EU’s desire to include issues such as climate change and child labour have stalled the talks.
De Gucht said he was aware of the difficulties in overcoming some of the hurdles but added an agreement could increase Indian exports to the EU by a third from the current level and Indian firms could also benefits from the opening of services and investment markets.
Trade between India and the EU has grown by 16 percent annually and currently stands at 78 billion euros ($106.4bn), but is still less than one-fifth of the EU’s trade with China, India’s Asian rival.
De Gucht said successful trade deal could make India a much more attractive destination for European investment.
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