Randomly Noted

The bailout package for Greece has not stemmed the bleeding in global markets, but for Asia the declines in currencies and stocks may soon lure investors back in.

What we are seeing is Asia and the U.S. catching a cold from Europe, as violence grows in Greece over the planned austerity measures and as ratings agencies sound warnings on the fiscal health of others in the region, including Spain and Portugal.

Just as an example, Hong Kong’s share market has fallen three days in a row, losing 3.7% over that period, while the Taiwan dollar Wednesday fell to its lowest level against the greenback since April 9. Thursday, the Nikkei is down more than 3.0% and South Korea’s Kospi has shed 2.3%, with the Korean won around six-week lows against the U.S. dollar.

The declines in Asia, which have included a widening in credit default swaps in an otherwise encouraging environment for the region’s companies and debt, come as investors react to the latest woes in the euro-zone.

The contagion though for now is peripheral; it’s just the end result of a fading global mood for risk. Strip that away, and what do you find?

Asian banks have minimal exposure to European debt–certainly that from Greece, Spain and Portugal. It seems prudence continues to win the day. Asian banks and their economies came through the recent U.S.-induced financial crisis in relatively good shape precisely because they had steered clear of subordinated debt products and repackaged debt generally.

Asian governments have also–some more so than others–worked to overcome the frailties in their banking and financial systems that were exposed so violently when the Asian financial crisis hit more than a decade ago. That’s left systems in much stronger shape, and central banks much better armed with foreign exchange reserves.

The region’s economies have also been faster and more convincing in their recovery over the past six to 12 months. Many challenges remain, none the least from how and when to exit the large spending measures put in place during the crisis, and how and when to tighten monetary policy (as inflation starts to rise), but if there’s one place that offers any sort of sanctuary right now, it would be Asia.

The region needs Europe and the U.S. to keep buying its products, but intra-regional trade has taken up some of the slack, particularly from China.

Sounder economic fundamentals and a stronger banking system mean Asian markets may soon appear more attractive to investors in currencies and stocks (and also the better Asian credits), even if the Greek wobbles continue. It would take a lot more than what we’re currently seeing to suggest we’re heading anew for some sort of global banking or debt crisis.
That may mean the declines start to slow over the coming week as value appears.

While the world expected the U.S. administration to answer on April 15 the freighted question of whether it believed China a foreign exchange “manipulator,” the U.S. Treasury secretary found a third path that avoided yes or no. It was, of course, delay.

While no doubt disappointing to those who desire a bit of drama and conflict in the economic and diplomatic relations between powerful nations, delay has too many compelling advantages to ignore.

Once China’s preisdent, Hu Jintao, said last week he’d be boarding a plane for Washington to attend a nuclear summit in mid-April, it was clear the “manipulator” label, no matter how warranted by facts on the ground, was off the table. To make such a declaration with the Chinese president in town or just departed would be diplomatic insanity. China and the U.S. need each other far too much for that.

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Deglobalization.

It’s an ugly, awkward word, both in its construction and, more important, its implication.

It was used today in the monthly macro view produced by bond investor Bill Gross, managing director at the investment firm PIMCO. Gross was talking about the “structural headwinds” facing the global economy that form part of the firm’s “new normal” view of low economic growth.

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Australia has everything going for it: abundant natural resources coveted by the world’s foremost industrial powers; banks that didn’t take stupid risks with customers’ money; a front-loaded stimulus-spending scheme that appears to have worked; a robust economy recovering so decisively that the central bank is well into a rate-hike cycle; and a decent pension and healthcare system. All this is demonstrably true (with the usual caveats) and it’s also the script to which Chris Bowen, the country’s financial services minister, is hewing to on a trip to New York City and London this week. What’s more, Australia has a refreshing, pragmatic and probably wise attitude toward foreign investment. One hears not a peep of protectionist rhetoric out of the lefty government  - which stands in contrast to their American counterparts. Chinese money has flowed into Australia in recent years as government regulators okayed the lion’s share of acquisitions of resources firms, notes Bowen, whose boss is the Mandarin-speaking Prime Minister Kevin Rudd.  Stern Hu (no relation), the Australian citizen and employee of Aussie-based mining giant Rio Tinto, languishes in a Chinese prison with three Chinese colleagues under the murkiest of circumstances. But Bowen is adamant the case won’t weaken Australia’s approach to China as a foremost trading partner. No doubt the Rio Tinto 4 is “a sensitive issue” in Australia, and Bowen says the Rudd administration “made our views very clear that the Chinese government needs to consider this is not good for their reputation in terms of doing business in China.” Chinese government officials continue visiting Australia, he adds, and “we make the point about Stern Hu on those visits. But you can’t let that downgrade the importance of the relationship.” Asked about foreign money flowing into Australia’s already frothy property market – and the sense one has that some of that money is coming from China – Bowen says, “That’s something we’re relaxed about.” Continue reading…

Various Chinese VIPs have been dealing the U.S. a prolonged public scolding in recent days, as if to say to visiting President Obama and his constituents back home: you may be running the Free World but we’re big and getting bigger – and besides, you are utterly dependent on us for economic growth. Among the rhetorical gems: The U.S. is engaging in unfair trade protectionism. The U.S.’s monetary policy is excessively loose. American corporate giant Microsoft is stealing intellectual property from a Chinese firm. The U.S. is a filthy polluter spewing toxic emissions. All of which Americans could and often do say about China. Continue reading…

Realism is demanded if you are to see anything positive resulting from the meeting in Pittsburgh later this week of the leaders of the G20 nations.

Don’t expect specific rules about how bankers from Paris to Peoria will in the future be paid, with detailed formulas and upper limits. Sure, some of the leaders gathering at this sensitive economic time would like nothing less, and probably wouldn’t mind personally vetoing more generous individual pay packages.

Don’t expect leaders to follow through on anything broadly perceived to be not in their countries’ best interests, even if it’s not in their worst interests. Maybe the spirit of cooperation will sway some to take action of what is effectively neutral to themselves and beneficial to others.

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The Obama administration’s decision to slap fat tariffs on Chinese tire imports by invoking what amounts to a trade-relations loophole (known as a “safeguard” provision) is a political mistake and poor policy that undermines our trade clout with China. The U.S. president has scored short-term points with labor interests, but the country can’t afford this in the long-term. It’s disappointing to see the U.S. Trade Representative’s office fumble in such a way, given its officials’ hitherto disciplined – and productive – stands on U.S.-China trade matters. In the past few years the USTR has taken tough, measured positions with regard to Beijing’s efforts to skirt World Trade Organization rules – and by and large the U.S. has prevailed via conventional WTO processes. I’m thinking principally of the conflicts over video pirating, and also foreign financial information. It’s telling that the American tire industry didn’t push for the new tariffs; companies that make tires in plants scattered across the globe are continually on the hunt for the lowest labor, material and shipping costs – precisely so they can sell a full range of cheap-to-upscale tires abroad – and, yes, at home to penny-pinching U.S. consumers. It’s just so obvious: globalization is here to stay; we’d better get used to it and stop pandering to labor unions and niche businesses (textiles, garlic growers, bee keepers facing Chinese competition) which, frankly, have to adapt or die. All this said, China is an utterly unreliable trade partner and the U.S., with Europe, mustn’t hesitate to use WTO and other forums to keep it in line. If only the U.S. government had done so in the tires case.

This summer we’ve learned quite a lot about the cost of doing business in China, thanks to the Rio Tinto case, and the Green Dam web-filtering software fracas. Today, we were reminded of something we already knew: that foreign firms which want to  do business in China usually, if not always, have to go through some sort of Chinese entity. What happened today is the World Trade Organization ruled against China for forcing U.S. media producers to route their business in China through Chinese state-owned firms. This echoes last year’s settlement in which China agreed that the state-run Xinhua news agency would no longer serve as sales agent and regulator of foreign providers of financial information even as it competed against them. (Full disclosure: this case affected Dow Jones and our competitors.) All this – Rio, Green Dam, WTO, Xinhua and more – adds up to a litany of business hazards to those venturing into China. As I’ve written before, however, none of this will stop the flow of foreign firms into China. It will just make Chinese commerce costlier. Surely, CFOs and corporate risk managers ’round the world are tapping fresh figures into their calculators as they assess what it takes to compete in China circa August 2009. Low labor costs, a fast-growing economy (at an 8% annual pace despite the economic crisis), a rising middle class, vast regions populated by increasingly modern factories – it still amounts to a compelling proposition despite China’s statist, anti-WTO and anti-competitive tendencies. We should prepare for many more years of WTO cases as China, which joined the organization in 2001, clings to its practices as Beijing’s leadership weans its business and political cadres off the goodies they’ve grown accustomed to while “partnering” with foreigners. It will take many years, and certainly an economic crisis isn’t the time for the central government to deprive too many influential colleagues of their livelihoods.

China’s efforts to create a monolithic domestic steel industry with the collective clout to effectively stifle price competition in the iron ore market could eventually wind up before the World Trade Organization. Consider this: The Beijing government is engaged in a broad push “to assert greater control over the pricing of iron ore, a crucial material” that goes into steel production, colleagues Gordon Fairclough and Chuin-wei Yap report. (See link below.) China’s already huge appetite for steel has been stoked by the country’s vast economic stimulus program. What China’s government wants is for its “smaller steel companies to work with bigger ones to negotiate iron-ore prices,” the reporters say. To ensure that smaller players don’t go off and make side deals with global iron ore miners- which some have apparently done – China “is considering reducing the number of companies allowed to import iron ore” in the first place. In essence, China appears to be trying to re-engineer its steel industry – and rejig its iron ore import regulations – so few remaining companies get better – that is, lower – prices from global miners than do steel industry competitors in other countries. Will Australia, the U.K. and Brazil – home of the world’s biggest miners – lodge a complaint with the WTO? That would be risky, given China’s clear willingness to play hardball and retaliate: the detention of four Shanghai-based Rio Tinto iron ore employees – is evidence enough. (Not to mention the detention of an official with midsize domestic steel company Shougang.) That said, the Western countries may find a way to work the WTO angle quietly and obtain a desirable resolution. Stay tuned.

Here’s the story: http://www.dowjonesnews.com/newdjn/mainframetop.aspx

The U.S. has launched a World Trade Organization complaint against China on the grounds that Beijing unfairly helps domestic makers of steel, aluminum and chemicals, among others, by effectively blocking overseas exports of raw materials (eg. the ingredients that go into steel, aluminum and chemicals.) In essence, the complaint alleges that Chinese steel, aluminum and chemical companies get first dibs on raw materials – at ultra-low prices – from domestic producers, and are therefore more potent when competing against overseas companies. For their part, non-Chinese steel/aluminum/chemical makers have to buy raw materials in the open market, and arguably at higher prices because a lack of Chinese output limits the available supply. Here’s what USTR boss Ron Kirk said today at a Washington, D.C., press conference: “And we are most troubled that this appears to be a conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China’s companies to get, and goods more economical for them to produce.” The EU has filed a similar complaint. As often happens with WTO matters, this spat might get resolved during a consultation period in which the parties discuss, debate and negotiate. But the dispute has been going on for a couple of years and it’ll take many more months to sort it out. In the meantime, China will keep doing what it’s doing – and, frankly, it can’t really afford to pull back from its preferential quotas and export duties at this point. That’s because Beijing’s huge economic stimulus plan has launched a wave of infrastructure projects across that vast country, all of which need the very products (especially steel) which are helped by the allegedly unfair practices. Continue reading…