China Threatens South East Asian Nations -
Tensions are rising once again between China and its regional neighbors. With tensions already strained between Japan and China, one might have assumed that Beijing’s leaders would look to avoid stirring up any more tensions. Now, however, Chinese Premier Li Keqiang has warned several countries it is currently in dispute with not to provoke China as The Philippines apparently did with its legal challenge to China’s disputed claims over the South China Seas.
Chinese aggression could spur ASEAN unity
China has one major advantage over its rivals. With the exception of Japan, most of the other nations with territorial disputes with care are smaller ASEAN nations. ASEAN refers to the collective of South East Asian nations and provides a loose regional coordination structure for all member states. So far, China has been very effective in using the divide and conquer strategy to keep ASEAN nations from banding together and presenting a united front to Chinese aggression.
China has thus far looked to resolve issues one-on-one with ASEAN nations. Meanwhile, China has used members of ASEAN not involved in the dispute, such as Cambodia and Laos, to hold up any attempts at unified action within the framework of ASEAN. - (Valuewalk)
APR 10, 2014 - Eurozone outlook brighter on better German forecasts -
BERLIN (AFP) - The outlook for the crisis-battered eurozone brightened Thursday as Germany’s leading economic think tanks raised their growth forecast for Europe’s top economy this year and next year.
Throughout the long crisis, the German economy has managed to escape with only a few bruises.
And now with a tentative recovery in the single currency area as a whole gradually firming and gaining momentum, buoyant domestic demand in Germany should enable Europe’s biggest economy to expand by 1.9 percent in 2014 and then 2.0 percent in 2015, the country’s top four institutes predicted in their spring report.
That would mark a big increase from 0.4 percent in 2013.
The government is pencilling in growth of 1.8 percent for this year, while both the German central bank or Bundesbank and the International Monetary Fund are expecting growth of 1.7 percent.
- ‘Momentum will remain high’ -
"For more than a year now, output has been on the up, employment growth is accelerating and sentiment among consumers and businesses is improving sharply," the institutes wrote.
Nevertheless, the think tanks were critical of new economic policies drawn up by the new left-right coalition government under Chancellor Angela Merkel.
"Economic policy will provide headwind for growth," they complained, describing the decision to lower the retirement age to 63 in certain cases as a "step in the wrong direction."
The introduction of a fixed national minimum wage from 2015 would also “put the brakes on employment growth,” the institutes warned.
Merkel and her conservative CDU-CSU parties reluctantly agreed to a minimum wage of 8.50 euros per hour in order to coax the Social Democrat SPD party into a power-sharing coalition.
The institutes also estimated that the crisis in Ukraine could also have a negative impact on German growth.
Russia is being threatened with economic sanctions in Europe following its annexation of Crimea.
And a drop of around 4.0 percent in Russian gross domestic product (GDP) would shave between 0.1-0.3 percentage point off German growth, the institutes said. - (AFP)
Cheap funding costs a boon for French firms -
(Reuters) - As economic prospects in western Europe improve, French companies whose shares are still reeling from the euro zone debt crisis are enjoying rock-bottom financing costs, a boost to their bottom lines that has yet to be fully reflected in their stock prices.
However, the borrowing binge has left French firms with a hefty debt burden, hovering near record highs just below 70 percent of the country’s GDP, according to the Bank of France data.
Economists warned that this could pose a refinancing challenge several years down the line when interest rates start rising. For the short to medium term, however, the issue is not seen as a risk, as companies take advantage of lower rates to gradually refinance their debt and dramatically lower interest expenses.
Meanwhile cheaper funding costs are already having other effects.
Beyond their positive impact on balance sheets and indirectly on companies’ return on equity, the lower cost of capital has started to fuel corporate activity.
"The very low rates paid by companies is a serious boost for M&A and you already see it in France," said Xavier Lespinas, head of equities at Swiss Life Banque Privee. "This will prompt more and more companies to make bold moves." - (Reuters)
Triggering the Next Stock-Market Rally -
Laurence Fink, chief executive officer of Blackrock Inc., the world’s largest money manager with more than $4 trillion in assets, recently issued a warning to U.S. companies: Stop focusing on short-term returns at the expense of longer-term investments.
“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
Stock buybacks and cash dividends totaled $214.4 billion in the fourth quarter of 2013. That is the highest level since the record high of $233.2 billion in the final quarter of 2007, according to the Wall Street Journal. Compare that to the second quarter of 2009, when buybacks and dividends totaled a mere $71.8 billion.
Buybacks tend to boost per-share earnings as corporate net income is applied to a smaller base of stock outstanding. Higher earnings per share can justify an increased stock price. In an era of low bond yields, dividends are an income stream that also gives the investor potential capital appreciation.
Both of these forms of financial engineering have helped to drive U.S. equity prices higher. However, unless a company wants to go private, it can’t buy back its stock forever. Dividends are limited by a company’s earnings.
Companies only have a finite amount of cash to invest. Whatever gets spent on buybacks and dividends is that much less available to be spent on investments in employees, research and development, and capital expenditure. It’s basic arithmetic.
When will the next round of capital investment begin in earnest? As soon as you figure out the answer to that question, you will have gained significant insight into the direction of the economy as well as the next phase of this stock-market rally. - (Bloomberg)
Latam forecasted to grow 3% this year, but fiscal deterioration is serious -
Reported March 31
The institution however emphasized that the fiscal deterioration of many Latin American countries in recent years has left the region more vulnerable to shocks stemming from the reduction in US stimulus.
It said the rise in foreign currency debt sales by banks and non-financial companies has also left many countries more exposed to shocks this time around than during the 2008 global financial crisis, it referred to as the “Great Recession.”
Still, the regional bank says Latin America is for the most part able to withstand capital fluctuations resulting from the drawback of asset purchases by the US Federal Reserve and slowdown of the Chinese economy.
During the 2008 financial meltdown, the region poured tens of billions of dollars into their economies to bolster activity, shore up employment and help local banks. Since then, many of those countries left the fiscal tap open despite the recovery, raising debt levels and diminishing their fiscal arsenal to battle another round of market turbulence.
“Fiscal balances have continued to deteriorate, and tighter fiscal management and restoring policy buffers remain key policy priorities,” the IADB warned in its report.
Rebuilding fiscal buffers is specially key now that the region’s economy is expected to grow between three and 3.5% in the next two years, at near potential but well below the 5% seen before the 2008 crisis, the IADB said.
For the typical country in the region, overall fiscal balances remain three percentage points of GDP below pre-crisis levels, with only three out of 21 countries improving their fiscal position in 2013 from 2012, the report said.
A clear example of fiscal slippage is Brazil where the country’s primary budget surplus, or excess revenue prior to debt interest payments, has plummeted from 3.11% of GDP in 2011 to 1.9% last year.
That rapid fiscal deterioration and lackluster economic growth prompted Standard & Poor’s to cut Brazil’s debt rating closer to junk territory last Monday.
A recent rise in the issuance of dollar-denominated debt by Latin American banks and companies has also increased vulnerabilities if the region’s currencies depreciate too rapidly, the report warns. - (Mercopress)
Fracking regulation. Via Big Picture Blog.
U.S. warns China not to attempt Crimea-style action in Asia -
By David Brunnstrom WASHINGTON (Reuters) - China should not doubt the U.S. commitment to defend its Asian allies and the prospect of economic retaliation should also discourage Beijing from using force to pursue territorial claims in Asia in the way Russia has in Crimea, a senior U.S. official said on Thursday.
Daniel Russel, President Barack Obama’s diplomatic point man for East Asia, said it was difficult to determine what China’s intentions might be, but Russia’s annexation of Crimea had heightened concerns among U.S. allies in the region about the possibility of China using force to pursue its claims.
Yep saw something along these lines coming. See page 2.
China rules out short-term stimulus despite weak trade figures - FT.com -
China will not resort to short-term stimulus measures in the face of temporary fluctuations in growth, Premier Li Keqiang pledged on Thursday, as monthly trade figures showed fresh signs of stress in the world’s second-largest economy.
Chinese imports and exports in March both contracted compared with a year earlier, adding to concerns about the slowdown in an economy that has been the biggest contributor to global growth since the 2008 financial crisis.
In a speech to a forum on the tropical Chinese island of Hainan, Mr Li acknowledged some of the challenges facing the economy but insisted his government was capable of propping up growth while implementing difficult reforms to put it on a more sustainable base.
“The upturn of the Chinese economy is not yet on a solid footing. Downward pressure still exists and difficulties in some fields must not be underestimated,” Mr Li said. But “there are conditions in place for the Chinese economy to achieve sustained, sound growth”, he added. “We have the capabilities and confidence to keep the economy functioning within the proper range.”
On Thursday, Mr Li said the government’s target of “about” 7.5 per cent GDP growth this year was flexible, and Beijing would not act to pump up growth as long as “there is fairly sufficient employment and no major fluctuations”.
Since taking over the government last year, Mr Li’s administration has downplayed traditional GDP targets, with job creation and reform of China’s growth model at the top of the agenda.
In recent weeks, the government has announced a series of initiatives to boost infrastructure spending to prop up flagging growth but has refrained from the kind of massive stimulus it revealed in the wake of the global financial crisis.
“We will not resort to short-term stimulus policies just because of temporary economic fluctuations and we will pay more attention to sound development in the medium to long run,” Mr Li said on Thursday.
Trade figures released on Thursday showed that Chinese exports fell 6.6 per cent in March from a year earlier, missing forecasts for a 4.9 per cent rise.
Imports fell even further, contracting 11.3 per cent from a year earlier and sending jitters through global equity and commodity markets.
In his speech, Premier Li championed the quick implementation of the Regional Comprehensive Economic Partnership as a way to boost growth in China and the broader region.
The RCEP is intended to create a trade zone extending from New Zealand to India and taking in China, Japan, Korea, Australia and the 10 Association of South East Asian Nation member countries.
Many see it as a competing initiative to the Trans-Pacific Partnership, which is being championed by the US and has effectively excluded China. - (FT)
I certainly hope officials have things under control. You see smoke but they say there is no fire. Perhaps it’s just a barbecue.
China bond auction failure reinforces slowdown concerns - FT.com -
Reported Apr 11
The Chinese government was unable to sell all the bonds offered at an auction on Friday, its first such failure in nearly a year amid concerns about slowing growth in the world’s second-largest economy.
The failed bond auction raises the stakes for Beijing as it tries to rein in debt levels, illustrating that even the state will have to pay a higher cost for funding as banks focus more on investment risks and demand improved yields.
Traders said there was strong appetite for the government bond but only at rates above what the finance ministry was willing to pay to borrow money.
The bond failure followed inflation data that showed prices fell in China last month, reinforcing the picture of a sluggish economy weighed down in part by government efforts to squeeze leverage out of the financial system.
Weak trade figures and industrial data, junk bond defaults and big declines in property sales have also added to a disappointing first quarter for China.
Analysts have rushed to downgrade their forecasts for Chinese growth and predict that the economy will expand 7.4 per cent this year, its softest in more than two decades.
The downturn has fuelled expectations that the government will prop up growth, but Li Keqiang, the premier, on Thursday rebuffed calls for a stimulus. “We have the capabilities and the confidence to keep the economy functioning within a proper range,” he said.
But some analysts believe the government runs a risk of being too slow to counter the deterioration of China’s growth prospects.
“It’s high time for the government to ease fiscal and monetary policy. I wouldn’t think of it as a policy stimulus. Policy has been too tight since last year,” said Shen Jianguang, an analyst with Mizuho Securities.
Last year’s failure was a precursor to a cash crunch that roiled global markets when Chinese money market rates spiked to double-digits.
Bond traders said the situation was different this time, with liquidity conditions healthier and the central bank determined to avoid a repeat of the cash crunch. But with market rates climbing in recent weeks and traders expecting the tightening to continue, banks demanded a higher yield from the finance ministry.
“Rates have to stay relatively high to force deleveraging. Yields should be higher,” said a trader with a bank in Shanghai. “Everyone is suffering from the deleveraging process, even the finance ministry.”
Debt in China has risen to about 220 per cent of gross domestic product, compared with 130 per cent in 2008. The International Monetary Fund and global rating agencies have said such a rapid increase in debt can endanger a country’s financial stability.
Since the middle of last year, the government has taken increasingly aggressive steps to slow the build-up of debt, making it harder for banks to obtain cheap financing and clamping down on shadow banking activity. But these tightening measures have also taken a toll on growth, as highlighted by the subdued inflation.
Looking at price figures for the first quarter as a whole, the weakness is apparent. The consumer price index rose an average of just 2.3 per cent in the first quarter compared with the same period last year. That is down from 2.9 per cent in the final quarter of 2013 and it is also well below the government’s target of 3.5 per cent inflation this year.
For industrial companies, the trend is even grimmer. Prices of goods as they leave their factory gates fell an average of 2 per cent in the first quarter from a year earlier. Although producers have faced deflation for 25 months, the situation had previously looked to be improving with declines narrowing at the end of last year.
“These downward pressures are particularly pronounced in the sphere of heavy industry, which is both most exposed to lower raw commodity prices and also overexposed to overcapacity issues,” said Louis Kuijs, an economist with RBS.
The weak inflation data weighed heavily on Chinese markets on Friday. Shares in Chinese companies listed in Hong Kong fell 1.85 per cent, underperforming the wider market, which was down 0.8 per cent. - (FT)
Household balance sheets remain quite weak.
— (This statistic is horrifying — PragCap)
Russian Fighter Jet Flies Repeatedly Within 1000 Yards Of US Warship In The Black Sea | Zero Hedge -
As we reported last Friday, a second US warship, the destroyer Donald Cook, crossed the Bosphorus last week and entered the Black Sea at precisely the time when NATO was arguing that its encroaching presence around Russia should not spook anyone.
Apparently it spooked someone, namely Russia, which over the weekend decided to give the Americans a warm welcome.
As AP reports, “A U.S. military official says a Russian fighter jet made multiple, close-range passes near an American warship in the Black Sea for more than 90 minutes Saturday amid escalating tensions in the region.”
White House warns Russia of more 'costs' over Ukraine / (RCS): from article..."director of the U.S. Central Intelligence Agency, John Brennan, had been in Kiev over the weekend" -
(Reuters) - The White House warned Russia on Monday that it would face further costs over its actions in Ukraine and said U.S. President Barack Obama would speak with Russian President Vladimir Putin soon.
U.S. officials stopped short of announcing a new set of sanctions against Russia but said they were in consultations with European partners about the prospect.
The European Union agreed on Monday to step up sanctions against Moscow by expanding a list of people subjected to asset freezes and visa bans.
"Russia continues to engage in provocative actions in Eastern Ukraine. The mere presence of the troops, in addition to what else they’ve done inside Ukraine, creates a threat of destabilization within Ukraine," White House spokesman Jay Carney told reporters.
"I can assure you that Russia’s provocations - further transgressions and provocations will come with a cost. And I’m not here to specify what cost will come from which specific action, but there have already been costs imposed on Russia; there will be further costs imposed on Russia."
The next round of U.S. sanctions, which would be the fourth imposed since the Ukrainecrisis began, is likely to target Russians close to Putin as well as Russian entities, three sources familiar with the discussions said on Sunday.
U.S. State Department spokeswoman Jen Psaki noted that the United States was prepared to impose sanctions on individuals and entities in the financial services, energy, metals, mining, engineering and defense sectors.
The sanctions have been the most visible sign of U.S. anger at Russia’s annexation of the Crimea region in southern Ukraine last month, reflecting the deepest plunge in U.S.-Russian relations since the Cold War.
Obama spoke to French President Francois Hollande about the crisis on Monday and praised Ukraine’s government for showing “great restraint” and working to unify the country, the White House said.
Carney also confirmed that the director of the U.S. Central Intelligence Agency, John Brennan, had been in Kiev over the weekend and decried what he called “false claims” leveled at the CIA by Russian authorities.
Head of the CIA in Kiev this weekend. Fishy business abounds.
Finance Officials Push for Bold Action to Sustain Economic Growth -
WASHINGTON — At the World Bank and International Monetary Fund annual spring meetings, concerns about crisis have given way to concerns about complacency.
The euro zone has re-emerged from recession. Emerging-market jitters have quieted. The fiscal battles in the United States have abated.
But the recovery remains fragile and in many cases, growth remains sluggish, leaving a jobs gap of 62 million.
“The overriding topic for discussion will be the topic of growth, quest for higher growth, better quality growth, more inclusive growth and sustainable growth,” said Christine Lagarde, the managing director of the fund, speaking with reporters on the eve of the weekend conference. “We need to act now.”
“We are monitoring the economic situation in Ukraine, mindful of any risks to economic and financial stability, and welcome the I.M.F.’s recent engagement with Ukraine,” said a communiqué from the Group of 20, which consists of the world’s biggest economies.
The fund is preparing a financial rescue package for Kiev that would come with stringent conditions, including tax increases and cuts in government spending.
Finance ministers and central bankers also discussed the possibility of new penalties for Russia, said Jacob J. Lew, the Treasury secretary. “There is broad and strong unity within the G-7 on increasing the sanctions and costs in response to escalating action from Russia,” he said, referring to the Group of 7, meaning Britain, Canada, France, Germany, Italy, Japan and the United States. “There was no dissent in the room that it was essential that there be unity in taking action if necessary.”
(RCS): On the 2010 reforms:
At the meetings, the United States also took heated criticism for Congress’s failure to agree to a 2010 reform package that would give emerging-market countries more say within the fund. The Obama administration has repeatedly urged leaders on Capitol Hill to ratify the package, which requires no new money from the United States, to no avail. “The end of the year for me is the final limit,” said Guido Mantega, Brazil’s finance minister, according to Reuters. “Four years waiting for me is just too much.”
The Group of 20 gave a year-end deadline for Congress to act — saying that at that point, the monetary fund might move on without the United States’ assent. It gave no further details. “If the 2010 reforms are not ratified by year-end, we will call on the I.M.F. to build on its existing work and develop options for next steps,” a communiqué said.
At a meeting in Sydney at the end of February, members of the Group of 20 major economies — which include rich countries like Canada and developing economies like Brazil and China — agreed to commit to policies to increase growth. The specific target is to lift economic output 2 percent beyond its current trajectory over the coming five years. - (NYT)
Philippine, U.S. Envoys in Draft Defense Pact Amid China Strain -
Philippine and U.S. negotiators reached agreement on key points of a pact to boost the American troop presence as the Southeast Asian nation seeks to counter China’s push for control of disputed South China Sea territory.
Representatives of both nations finished the eighth round of “very productive” negotiations in Manila, the Philippine defense and foreign affairs departments said in a joint e-mailed statement today. A draft of the defense cooperation agreement will be submitted to President Benigno Aquino for approval, the departments said.
The pact is part of Aquino’s plan to shore up military ties with allies such as the U.S., which is treaty-bound to defend the country in case of conflict. It also aids the U.S. strategic rebalancing toward Asia pushed by President Barack Obama as China’s leaders seek a greater role for their country in the region. The agreement is likely to be signed before Obama’s visit to the country this month during his Asian tour, Philippine foreign affairs spokesman Charles Jose said by phone.
The draft deal respects Philippine sovereignty and prevents the permanent stationing of U.S. troops and the U.S. having military bases or weapons of mass destruction in the country, according to the statement. U.S. access to and use of Philippine military facilities will be at the invitation of the Philippines and with full adherence to its laws, the defense department said.
China will make “no compromise, no concessions” in disputes over territory and resources with Japan and the Philippines, and is ready to fight and win any battle, General Chang Wanquan said April 8 at a briefing in Beijing alongside his visiting U.S. counterpart, Defense Secretary Chuck Hagel.
Aquino is also seeking to boost military ties with Japan, which is locked in a separate dispute with China over islands in the East China Sea. Two Japanese destroyers and two helicopters visited Manila early this month, and Japan will encourage more joint training with the Philippine military, Captain Hideto Ikeda, commander of the Japan Maritime Self-Defense Force’s 13th Escort Division, said on April 2. - (Bloomberg)
Be glad for Greeks bearing gifts -
Investors flocked to buy $4.2 billion of government bonds. The sale marks some hope that Greece will implement new reform laws, especially those aimed at cutting the number of public workers. The government of Prime Minister Antonis Samaras has already improved the pension system and collection of property taxes. It now reports the first budget surplus in a decade. And in 2014, the economy is expected to grow after shrinking in previous years.
Greece’s progress has been enough for the chief architect of the eurozone’s recovery, German Chancellor Angela Merkel, to pay a visit to the country Friday. In a sort of a short victory lap, the leader of Europe’s strongest economy praised Greeks for making it through a difficult first phase. The country, she said, now “harbors boundless possibilities still to be exploited.” She announced $139 million in loans to finance small businesses in Greece.
Ms. Merkel noted the Greeks’ personal sacrifices – 27 percent unemployment – but suggested that every country in the eurozone had to go through belt-tightening. “This path could only have been taken because there was solidarity in Europe,” she said.
Paying off the biggest debts in Europe’s most troubled economies will take years. Much depends on whether voters continue to elect leaders who trim spending and help small businesses grow. - (Christian Science Monitor)