Signs of Slowing: Growth, trade surpluses and stocks fall in China
April 17, 2008

China has revised its growth for 2007 upward to 11.9%, but there are signs of it cooling in the face of the recession brewing in the United States.

The National Bureau of Statistics upped the growth rate from 11.4%, according to the China Daily newspaper. The new number reinforces the amazing growth that China experienced in the past year.

This year, however, most observers expect the economy to cool somewhat. The International Monetary Fund put the growth rate at a still impressive 9.3%. Such strong growth comes at right time, too, as the U.S. enters a slow period.

However, some signs point to China being dragged down slightly.

According to the Xinhua news agency, a People’s Bank of China economist said that the U.S. downturn could reduce China’s gross domestic product by 1%. The economist, Fan Gang, also said that the rapid flow of investment into China could cause a drastic appreciation of the yuan, hurting orders to Chinese producers.

At the same time, China’s trade surplus has shrunk for the first time in three years, the Wall Street Journal reported this week. Bank lending also slowed in the first quarter of this year.

The slowdown in exports is attributable in part to weakening demand in the U.S. and the appreciation of the yuan against the dollar. At the same time, China’s imports of raw materials have been growing, further narrowing the trade gap.

China’s markets also experienced some tremors this week when the CSI 300 Index and the Shanghai Composite Index fell 6.5% and 5.62%, respectively, following the announcement of continued monetary tightness.

Strength remains

Despite some signs of a cooling economy, China is still poised for growth that makes other countries seem listless by comparison. The World Bank also recently reported that the country had become the second largest economy by purchasing power, ahead of Japan.

Economist Geoffrey Bell, in an interview excerpted in this edition of Asia-Pacific Headlines, said that the economic downturn is likely to be felt most in places like the United States and Britain and less and less the further one gets from New York and London. Even if the credit crisis drags down China more than predicted, as Bell put it, “9% growth is not exactly a recession.”

Stable Asia: While U.S. heads toward recession, Asian growth continues
April 17, 2008

Geoffrey Bell, executive secretary of the Group of 30 economic council, spoke with the Association for Financial Professionals in April on the outlook for the world economy. While a recession looms for the U.S., he said Asia’s growth—and appetite for commodities—is likely to continue.

Obviously, China, Asia and Europe have different economic drivers, and we’re decoupling somewhat, but how much will rest of the world slow down with U.S.?

It’s a very good question, but nobody really knows the answer. For example, the IMF is coming out tomorrow saying that there would be a slowdown in the world economy and they saw a 25% chance of an actual recession, which is defined by the IMF as 3% growth in the world economy.

But, the way I see it, the U.S. is hit hardest, very low growth in 2008 and I think modest growth in 2009. The U.K. will probably also be hit very hard because we have a very similar economy to the United States. But the farther away you go, especially to the emerging markets of Southeast Asia and to a degree in Latin America, they’ll have some of that, but it’s not going to be enormous.

The IMF now forecasts that China, which grew at 11.9% last year, will now grow at 9.3% in 2008. Now that’s a slowdown, no question about that. It was needed because there was too much inflation, but also it’s worth pointing out that 9% growth is not exactly a recession. And of course maybe they got that wrong and it slows down to 8%.

I think the next stage is you can say, well all right, we’ll see some easing of commodity prices, but it’s very difficult for me to see a major drop in oil from $100 to $70 or $80. My own feeling is that the biggest impact is on the U.S., then you get to the U.K., then Continental Europe, but then the farther away you get from the epicenters of financial transactions in New York and London. I suspect the impact will be noticeable, but not severe.

That leads to one very important point. I see a situation whereby commodity prices ease, but not enormously.

People say there was a lot of speculation in oil markets or other commodity markets, and so the last $20, $30 or even $40 in oil was not sustained by fundamentals of supply and demand. Obviously other commodities like coal and cement will remain high. Do you think we’ve seen a near-term high in commodity prices?

I separate the two. Obviously their interlinked, but let’s take them each in term. Commodity prices, of course, when you have a slowdown in the world economy you’re going to have some impact. But the slowdown that I see is going to be particularly focused on the industrial world and less so on emerging markets. My conclusion is that commodity prices come down, but they don’t come down all that much.

If we had a major recession, no question oil would drop to $70 or $60 a barrel and all the other commodities would go with it. I think that might happen, but it’s certainly not an overwhelming possibility. It’s probably a 25% possibility, as the IMF suggests. If that is the case, then it means that China, India, Brazil as well, if they grow, their demand for oil will remain pretty high. In China, the January oil demand over the year before had risen by 6% or something on that order. It’s difficult for me to see an actual drop in demand.

Are there any big threats out there now that could make the situation toward a crisis?

If indeed markets around the world, including China, were to drop, not 20% like some of them have already, but more, then you could actually convert a slow period of growth or a modest recession into something much worse. That becomes frightening, because if that were to happen you’d get a big fall in commodity prices, which might do industrial countries a little good, but would do emerging countries great harm. That is a very big risk.

The other thing which goes along with that is, not only did we have an implosion of credit, but it’s going in the opposite direction. Already, about $250 billion has been written off by banks. That’s a lot of money. So the real risk is the financial crisis, which appears now to be contained, jumps out somewhere else and starts all over again. I don’t think that’s a high probability, but I think it’s certainly a possibility, and you can actually get a really nasty further spiral in house prices and all the things that go along with it with a credit contraction. People are still working under the assumption that we’ll have a slowdown, we’ll have a recession and then there will be a recovery. It may be a quick recovery or a slow recovery, but happens if there isn’t a recovery and if it continues to that way. I’m not saying it’s going to happen, but the probability is not zero.

Emerging Asian Economies Increasingly Attracting Foreign Capital
April 17, 2008

In recent years, Asia-Pacific countries such as China, Hong Kong, India, Taiwan, South Korea and Singapore have seen greater than ever inflow of foreign capital, especially from the US and European countries. Economic development together with favourable regulatory reforms and technological up-gradation are the main reasons for increasing foreign capital inflow. This change has transformed the Asia-Pacific region into a haven for foreign investors. The fallout from the sub-prime crisis may somewhat dampen foreign investment in Asia-Pacific temporarily but Celent believes that, over the long term, the trend towards an increasing share of Asian assets in global investment portfolios will be unchanged.

Emerging Asia saw 9% growth in GDP over the last year, fuelled by India and China. Short-term GDP growth forecasts of the market range from 4.5 to 9%, compared to 2% to 3% for the US and Europe. As a result of growth in economy, the Asia-Pacific region also saw an increase in market capitalisation. Hong Kong gathered highest market capitalisation in the region (US$1715bn), with as much as twice that of the next biggest stock exchange (China). The market capitalisation of China’s stock exchanges has more than doubled over one year. The growth in India, Hong Kong, Korea and Singapore exchanges has been around 48-63% over the past year.

Emerging markets have seen either stable or increasing stock market indices since 2003. Some of the markets, like Hong Kong, India, and Taiwan, have proved better performers than developed countries.

Regulatory reforms in these regions (except China) are favoring foreign institutional investors (FIIs) and thereby encouraging capital inflows. China is still rigid on foreign investors; therefore foreign investors in China either take the IPO or convertable bonds (CB) route to enter China’s capital market. On the other hand, Korea is very open to foreign investors, with around 20,635 FIIs.

Technology transformation in these regions has resulted in operational efficiency. Constant system upgrades have equipped these markets for more efficient and innovative products in future. Shanghai Stock Exchange (SSE) has adopted Next Generation Trading System (NGTS) to aim at improving efficiency, support trading of more products and minimise risk. NTGS is said to have increased trading capacity by nearly 100% and is capable of executing 63 million trades per day with a peak capacity of 20,000 transactions per second.

Each of these markets has adopted technology that is best suited to their customers, market size, and execution methods for smooth operations. Upgrading technology has minimised execution time and thereby enabled an increasing number of executions per second. Fully automatic buying and selling has also made trading more transparent and efficient.

Recent times have seen these target markets with sustained foreign portfolio investments, making it one of the key global trends. The US and Europe (primarily the UK) account for 50-75% of the net foreign inflows in each of these markets.

Primary Market

Primary equities markets are dominated by domestic players in terms of underwriting. Primary market issues in Asia have risen dramatically in recent years. IPOs and follow-on issues for the target markets rose from a total of US$55.8bn in 2005 to an estimated US$123.6bn in 2007. Although fallout from the sub-prime crisis may slow this trend, Celent believes IPO activity will continue to rise for the foreseeable future. Domestic investors accounted for an estimated 60.2% of the total capital raised in 2007. Foreign participation in primary market is extremely limited, especially in China where the foreign investors invest less than 1% due to rigid entry norms. In the other markets, foreign investors provided from 10.4% (Korea) to 42% (Singapore) of total capital.

European investors provided an estimated 9.9% and US sources provided 6.5% of the total capital raised in 2006. In other words, the US and Europe accounted for close to half of the foreign investment in primary issues in 2006. Celent predicts that the share of US and European investment in these Asian countries will expand, increasing to 23% in 2008. This represents an annual growth for combined US and European investment of 43% between 2005 and 2008.

Foreign brokerages are responding to this situation by either acquiring or partnering with local investment banks to gain greater access to the market. In India, for example, DSP acquired 90% share holding in Merrill Lynch and became DSPML to gain foothold in the Indian market.

Secondary Markets

In 2006, foreign institutional investors invested a net of US$49bn into the secondary markets. Excluding Korea, where there was a net outflow, the investments total around US$62bn into the other markets - the highest for any emerging economic region.

Activity in the secondary equities markets has also seen strong growth in the recent years. Trading in equities in the target markets surged from an estimated US$3.4 trillion in 2005 to US$8.9 trillion in 2007. US and European investors accounted for an estimated 15.9% of overall trading value in these markets in 2007. Celent expects the share of US and European investors to expand to 25.9% of total trading in 2008

Foreign investors trade actively in all markets except China, where regulatory restrictions and the existence of a proxy market in Hong Kong keep foreigners’ share of trading to less than 2%. In 2007, Celent estimated that foreign investment accounted for 19.1% (Taiwan) to 60.0% (Singapore) of trading in each market.

Foreign investors are playing a significant role in boosting this demand in a number of markets. European and US investor interest in Asia has been driven not only by the short-term strong performance of many Asian equi¬ties markets but also more fundamentally by the high growth of Asia’s emerging economies.

In general, compared to local firms, foreign firms have advantages in electronic trading, research, global investment portfolio and customised service. The competition from FIIs will help local firms improve overall service standards.

As a result of liberalised entry norms in the Asia-Pacific region, the target markets are expected to see increased foreign participation and thereby greater demand for Asia-based assets.

Relaxing regulatory norms will see some more foreign participation and thus result in greater demand for Asia-based assets. China, especially is set to see some major changes in this direction: CSRC claims it will restart approving new joint venture brokerage houses; the total quota for QFIIs will increase to US$30bn; and QFIIs will get quota for futures investment. All these changes will result in increased foreign inflows.

The market structure will see some change in the coming three to five years. The further opening of the mainland China market will change the market in Hong Kong, thus influencing some of the markets in the Asia region, like Singapore and Taiwan.

Why Investing in Treasury Will Help Everyone Sleep Better
April 17, 2008

More and more Asia-based companies are successfully making the transition to become true multinational companies (MNC), with international subsidiaries supporting a global product supply, sales and distribution base. This success has dramatically changed the role of treasury from being a provider of finance to being custodian of, in some cases, very significant cash surpluses. The companies that have focused on growing their business are now recognising the need to add the development of their treasury operations to their list of the key performance indicators (KPIs).

International Best Practices Take the Lead

Successful companies that have undergone quick expansion often find themselves still relying on manual, paper-based transaction processes, which depend on high levels of supervision and oversight by busy senior managers. As the cash mountain grows, senior managers become concerned by a lack of visibility, long and complex approval processes, management of risk, the way to build staff's skills and experience, and the general control environment surrounding the management of such a large amount of cash. That is why leading Asian companies are now looking to move forward and adopt international best practices throughout their treasury operations. In some cases this is being driven by the need to meet the Sarbanes-Oxley (SOX) requirements.

More often there is also a growing recognition that an efficient treasury is a major asset to the business. While each client has its own specific priorities, developing best treasury practices brings benefits across the board. Increasingly, CFOs have to meet the demands of international investors and are looking for significant progress in:

• Operational efficiency with improved system performance, faster processing times, and high straight through processing (STP) rates.
• Strong control environment that meets international standards.
• Understanding and actively managing risk to a clearly defined and agreed risk profile.
• Building the bottom line through improved yields and lower costs.

Many CFOs are currently concerned that their organisations do not have the background or experience to implement major changes to develop an effective treasury function.

Best Practice For Corporates

Policy statements
Leading companies in Asia are now implementing policy statements for the management of surplus cash. The policy statement defines the investments that can be made and how risk is to be managed. A policy-based approach effectively limits risk to an acceptable level.

Organisational structure
The MNCs should structure their treasury organisation around the front office, middle office and back office model. This gives a clear segregation of duties between people buying assets, settlement, managing risk and reporting results. Clear, logical and consistent approval and transaction processes facilitate automation and strengthen compliance to controls.

Employing a third party supplier
A good treasury system from a third party supplier is an important key to improve controls, as it can transform risk management, and also provide the detailed analysis needed to maximise yield.

Following these three key best practices, a CFO will ensure an efficient and secure treasury operation, which will support future business growth and will enable everybody to sleep better.

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April 17, 2008
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