A study group from the Chinese Academy of Social Sciences economics department recent visit to the US says that there should not be too much dependency on the housing industry for economic growth. The past reliance on the housing industry for economic growth, especially using the income from land sales as one of the local governance income may distort the purpose of the local governance role in economic growth. It will also distort the the economic growth factors, increasing the cost factor too early, lower the economy's overall competitiveness and even induce controversial social views.
The study group in June went to US to study the sub-prime crisis problems. The reports says that the US sub-prime crisis inspiration to China is that China's housing market's development model needs to be re-evaluated. At the same time, the government needs to make clear its stand point of its position and role in the housing market. Considering different people's credit level, the lower income group should be classified under the housing rental and low cost housing category.
The real estate financial system should also be re-designed to curb housing bubbles coupled with risks control in banks. To lower the negative effect of the fluctuations in the housing market, when changing the real estate financial system model and at the same time strengthening innovation, focus on strengthening internal controls of commercial banks, preventing the lowering of loan quality and the transfer of risks from the housing industry. As such, the housing industry should be encouraged to seek capital through stocks and bonds issue, reform the various local areas housing CPF and its control system, to form a government as soon as possible to support the residential mortgage bank and an urgent need to institute residential mortgage securitization.
The report thinks that in designing the financial market system, especially in development of financial derivative products, there is the need to be fully aware of the pros and cons of derivative products. Financial innovation will continue to be promoted but at the same time there should be stronger controls on the development and progress of the derivative products market to control risks. There should also be strict controls on the upper limits allowed for leveraging during the forming of the policies to prevent over leveraging, preventing the risk from a single market to spread to other markets. Also, to strengthen global co-ordination in monitoring.
Thursday, September 25, 2008
Tuesday, September 23, 2008
Is the US dollar crumbling?
With the deepening of the financial crisis on US Wall Street, global financial markets are going through a big shake never before in history. In a very short time period, global markets no matter stock markets, oil, gold or other commodities, prices are having big fluctuations. Such big concussions in the financial markets means that the international monetary and financial systems using US dollar as the dollar settlement unit is having its greatest test since the Bretton Woods Agreement.
About this current financial crisis cause and the future developments, there are many discussions and many think that the main cause is that US provided too much US dollar liquidity.
Bretton Woods Agreement was signed on July 1944. It established the US dollar's global reserve currency leadership status. From then on, global trades, commodities market and other global trading markets all used US dollar for settlement. Such US dollar based international trading and financial system in the United States provides support for the US as a strong global leader. But at the same time, the US dollar also poses a deadly irresistible temptation for America.
According to David Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations and thus achieve developments in the country. The hegemony of the US dollar as the trading dollar settlement unit in global trading gives US slight advantage over other countries. When other countries are busying producing various products and resources, US can easily print more US dollars and it can engage in global trade and buy other countries products for its own consumption. To anyone or any country, such convenience is an irresistible temptation. Hence, as the US dollar supports the hegemony of US, it is also causing laziness in US and in the past few decades, US manufacturing have largely moved out of US and US have become from a big manufacturing country into a big financial country deeply engrossed in consumption. US is loosing in a lot of areas of leadership after the 2nd world war. US is also becoming from a biggest creditor into a biggest debtor.
But the problem for US is that such dependency on the US currency for support cannot continue on. The basis for the US dollar as the global trading currency is based on US credits. When the US dollar is printed too much and exceeds US credibility limits, it will be the end of the happy days for US. As the manufacturing industry continues to be lost and the financial services industry sector continues to increase its foothold, US credibility will be shown more in the real estate, financial assets and so on. When the sub-prime crisis starts and the US housing prices and financial assets prices starts to decline greatly, US credibility will also start to follow and fall which will affect the US dollar global reserve currency status.
What is more worst is that the US government's actions to help with the current sub-prime crisis is continuing to print more US dollar and draw more overdraft on the US credibility. For many years, in order to maintain their decent lifestyles, the US government and the US citizens continues to borrow, causing the continuous increment of trade and fiscal deficits. The end result is the flooding of US dollars and asset bubbles, which is one of the root cause of the current sub-prime credit crisis. At the current sub-prime credit crisis, although by issuing more bonds by the US government can help alleviate the problem on hand, but it will not totally resolve the problem but instead plant a seed for more trouble in the future.
Recently Bush government announced a 700 billion USD plan to save the market. The purpose of the plan is to ease the market fear caused by the collapse of Lehman Brothers, Merrill Lynch being taken over and stop the domino effect caused by the sub-prime crisis. However, it has done a major impact to the US dollar's credibility.
In order to proceed with the plan, the US government has asked to increase the limit allowed for US treasury bonds from current value of 10.6 trillion USD to 11.3 trillion USD in order to leave some spare for the implementation of the plan. The limit put on the US treasury bonds was originally put in place to enforce within a workable range an unbreakable line of safety. Now that the US government easily changed it to resolve the current financial market crisis, it is equivalent to giving the market dangerous signals that the US dollar will further weaken.
On 22 September 2008, the New York Mercantile Exchange November crude oil price raised by 6.62 USD and closed at 109.37 USD, a 6.44% increment. At the same day, New York Mercantile Exchange gold futures price also raised by 44.3 USD closing at 909 USD per ounce, a 5.1% increment. Crude oil and gold's continuous big increment has obvious relations to the plan that the US government is going to implement.
Such continuous injection of the US dollar into the financial market is a continuous act of abuse of the US dollar credibility and will enhance the weakening of the US dollar. When the other countries cannot tolerate any more of US acts of excessive overdraft on the US dollar, they will not lend money to US, start to give up on the US dollar and US dollar's credibility will then crumble.
Of course, US credit crisis can be passed on to other countries through the international commodity prices and international monetary and financial systems causing world's major economies difficulty to protect themselves from it. The rest of the world will be forced into a dilemma.
About this current financial crisis cause and the future developments, there are many discussions and many think that the main cause is that US provided too much US dollar liquidity.
Bretton Woods Agreement was signed on July 1944. It established the US dollar's global reserve currency leadership status. From then on, global trades, commodities market and other global trading markets all used US dollar for settlement. Such US dollar based international trading and financial system in the United States provides support for the US as a strong global leader. But at the same time, the US dollar also poses a deadly irresistible temptation for America.
According to David Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations and thus achieve developments in the country. The hegemony of the US dollar as the trading dollar settlement unit in global trading gives US slight advantage over other countries. When other countries are busying producing various products and resources, US can easily print more US dollars and it can engage in global trade and buy other countries products for its own consumption. To anyone or any country, such convenience is an irresistible temptation. Hence, as the US dollar supports the hegemony of US, it is also causing laziness in US and in the past few decades, US manufacturing have largely moved out of US and US have become from a big manufacturing country into a big financial country deeply engrossed in consumption. US is loosing in a lot of areas of leadership after the 2nd world war. US is also becoming from a biggest creditor into a biggest debtor.
But the problem for US is that such dependency on the US currency for support cannot continue on. The basis for the US dollar as the global trading currency is based on US credits. When the US dollar is printed too much and exceeds US credibility limits, it will be the end of the happy days for US. As the manufacturing industry continues to be lost and the financial services industry sector continues to increase its foothold, US credibility will be shown more in the real estate, financial assets and so on. When the sub-prime crisis starts and the US housing prices and financial assets prices starts to decline greatly, US credibility will also start to follow and fall which will affect the US dollar global reserve currency status.
What is more worst is that the US government's actions to help with the current sub-prime crisis is continuing to print more US dollar and draw more overdraft on the US credibility. For many years, in order to maintain their decent lifestyles, the US government and the US citizens continues to borrow, causing the continuous increment of trade and fiscal deficits. The end result is the flooding of US dollars and asset bubbles, which is one of the root cause of the current sub-prime credit crisis. At the current sub-prime credit crisis, although by issuing more bonds by the US government can help alleviate the problem on hand, but it will not totally resolve the problem but instead plant a seed for more trouble in the future.
Recently Bush government announced a 700 billion USD plan to save the market. The purpose of the plan is to ease the market fear caused by the collapse of Lehman Brothers, Merrill Lynch being taken over and stop the domino effect caused by the sub-prime crisis. However, it has done a major impact to the US dollar's credibility.
In order to proceed with the plan, the US government has asked to increase the limit allowed for US treasury bonds from current value of 10.6 trillion USD to 11.3 trillion USD in order to leave some spare for the implementation of the plan. The limit put on the US treasury bonds was originally put in place to enforce within a workable range an unbreakable line of safety. Now that the US government easily changed it to resolve the current financial market crisis, it is equivalent to giving the market dangerous signals that the US dollar will further weaken.
On 22 September 2008, the New York Mercantile Exchange November crude oil price raised by 6.62 USD and closed at 109.37 USD, a 6.44% increment. At the same day, New York Mercantile Exchange gold futures price also raised by 44.3 USD closing at 909 USD per ounce, a 5.1% increment. Crude oil and gold's continuous big increment has obvious relations to the plan that the US government is going to implement.
Such continuous injection of the US dollar into the financial market is a continuous act of abuse of the US dollar credibility and will enhance the weakening of the US dollar. When the other countries cannot tolerate any more of US acts of excessive overdraft on the US dollar, they will not lend money to US, start to give up on the US dollar and US dollar's credibility will then crumble.
Of course, US credit crisis can be passed on to other countries through the international commodity prices and international monetary and financial systems causing world's major economies difficulty to protect themselves from it. The rest of the world will be forced into a dilemma.
England may prepare 200 bliion pound plan to save market
Analysts says that if there are no actions taken, England may end up like US with a financial and economic crisis. They think that the England government may use 200 billion pounds to save the market.
People from the England finance department says that currently there are no plans like the US to save the market but they are ready to take any necessary actions to stabilize the financial market.
From media reports on the 22 September 2008, after the US government's plan for a 700 billion USD plan to save the market, England's government may consider using 200 billion pounds to help the banking industry who are in a bad situation. The England government has not denied that they will not follow the footsteps of US but at the same time mentioned that currently they have no official similar plans.
Yesterday, JP Morgan says that out of capital concern, it has lowered the ratings for the England banking industry.
Situation Worsened Last Week in England
Currently England is facing the same continuous rising large amount of bad debts and huge decline of housing prices and in last week the situation has worsened. England's central bank monetary policy committee previous committee member and economic analysts from Citi and UBS says that the England government has a need for a similar plan like the US to save the market.
London's school of political economics professor Buiter says that England will soon have a similar plan like the US in the bailout of bad investment assets by tax payers in US.
UBS economic analyst says that if the liquidity assets, non-performing assets and similar problems are not resolved in time for banks, then other countries including England should consider a plan similar to that of US.
Citi's England economic analyst Michael Saunders says that from the looks of the movemets by the England's government lately, the actions taken are mostly to ease the market such as providing emergency liquid assets, stopping of short selling and others. Time can let the financial system recover stabality but the whole system does not have the self-stabalizing capabilities.
England's Finance Department Says It Is Prepared
England's central bank on April came out with a special liquidity plan to inject liquidity into the financial system. It can be foreseen that to come out with any such plans will cause the plan's amount to increase each time. The plan used over 100 billion pounds but analysts says that the figure will definately go over 200 billion pounds.
To such comments, the England's finance department says that England currently is not considering plans similar to that of US. But at the same time, the senior officials and the prime minister has clearly mentioned that they are prepared to take any actions to stabalize the financial system.
People from the England finance department says that currently there are no plans like the US to save the market but they are ready to take any necessary actions to stabilize the financial market.
From media reports on the 22 September 2008, after the US government's plan for a 700 billion USD plan to save the market, England's government may consider using 200 billion pounds to help the banking industry who are in a bad situation. The England government has not denied that they will not follow the footsteps of US but at the same time mentioned that currently they have no official similar plans.
Yesterday, JP Morgan says that out of capital concern, it has lowered the ratings for the England banking industry.
Situation Worsened Last Week in England
Currently England is facing the same continuous rising large amount of bad debts and huge decline of housing prices and in last week the situation has worsened. England's central bank monetary policy committee previous committee member and economic analysts from Citi and UBS says that the England government has a need for a similar plan like the US to save the market.
London's school of political economics professor Buiter says that England will soon have a similar plan like the US in the bailout of bad investment assets by tax payers in US.
UBS economic analyst says that if the liquidity assets, non-performing assets and similar problems are not resolved in time for banks, then other countries including England should consider a plan similar to that of US.
Citi's England economic analyst Michael Saunders says that from the looks of the movemets by the England's government lately, the actions taken are mostly to ease the market such as providing emergency liquid assets, stopping of short selling and others. Time can let the financial system recover stabality but the whole system does not have the self-stabalizing capabilities.
England's Finance Department Says It Is Prepared
England's central bank on April came out with a special liquidity plan to inject liquidity into the financial system. It can be foreseen that to come out with any such plans will cause the plan's amount to increase each time. The plan used over 100 billion pounds but analysts says that the figure will definately go over 200 billion pounds.
To such comments, the England's finance department says that England currently is not considering plans similar to that of US. But at the same time, the senior officials and the prime minister has clearly mentioned that they are prepared to take any actions to stabalize the financial system.
Monday, September 22, 2008
Analysts: World economy adjustment will affect China in 4 ways
At the China Macro Economic Forum (3rd season 2008), analysts says that the current world economy adjustment will affect China in 4 ways.
Analysis show that the current world economy shows 3 basis characteristics. 1) The world economy has entered an economy downturn region. 2) Global commodities surge in prices and fluctuations and also inflationary pressures. 3) Key countries financial crisis spreading and US economy's external unbalanced continuous correction.
Under the influence of the current economy downturn adjustment, the biggest and longest impact to economy bodies has 3 characteristics. 1) High reliance on external trade. 2) Export of manufacturing and processed products together with bulk import of commodities. 3) Large amount of foreign reserves.
For the Chinese economy, such impacts will show in 4 ways. Increase of commodities prices causing import of "price erosion" and with the depreciation of the US dollar and other factors causing China's foreign reserves "actual buying power" to reduce greatly.
1) The depreciation of the US dollar will cause large influx of funds into China causing fluctuations in exchange rates and cause inherent pressures.
2) Commodities price surge and huge fluctuations will have negative impact to the Chinese resource-intensive industrial enterprises especially the processing and manufacturing enterprises profit margins endangering China's current status of the world's manufacturing center.
3) Decrease in external demand and unfavorable development of trade conditions will have negative effects on the export industries balance sheets. All such impacts will endanger the banking systems credit quality and further endanger China's macro economic stability.
Analysts believes that the current global economy adjustment may have mid to long term risks. But in the short term, there will be also disorderly adjustments like currency crisis and trade policies against the normal cycles. This means that under the pre-condition of maintaining short term stability, there is a need to accelerate financial and economic reforms to counter the mid to long term effect of the current economic downturn adjustment.
Analysis show that the current world economy shows 3 basis characteristics. 1) The world economy has entered an economy downturn region. 2) Global commodities surge in prices and fluctuations and also inflationary pressures. 3) Key countries financial crisis spreading and US economy's external unbalanced continuous correction.
Under the influence of the current economy downturn adjustment, the biggest and longest impact to economy bodies has 3 characteristics. 1) High reliance on external trade. 2) Export of manufacturing and processed products together with bulk import of commodities. 3) Large amount of foreign reserves.
For the Chinese economy, such impacts will show in 4 ways. Increase of commodities prices causing import of "price erosion" and with the depreciation of the US dollar and other factors causing China's foreign reserves "actual buying power" to reduce greatly.
1) The depreciation of the US dollar will cause large influx of funds into China causing fluctuations in exchange rates and cause inherent pressures.
2) Commodities price surge and huge fluctuations will have negative impact to the Chinese resource-intensive industrial enterprises especially the processing and manufacturing enterprises profit margins endangering China's current status of the world's manufacturing center.
3) Decrease in external demand and unfavorable development of trade conditions will have negative effects on the export industries balance sheets. All such impacts will endanger the banking systems credit quality and further endanger China's macro economic stability.
Analysts believes that the current global economy adjustment may have mid to long term risks. But in the short term, there will be also disorderly adjustments like currency crisis and trade policies against the normal cycles. This means that under the pre-condition of maintaining short term stability, there is a need to accelerate financial and economic reforms to counter the mid to long term effect of the current economic downturn adjustment.
Friday, September 19, 2008
US credit crisis may be spreading to monetary markets
The US sub-prime crisis storm is now spreading to the monetary markets.
One of the US big funds Putnam announced suddenly on 18 September 2008 that due to high redemption pressure of its fund by its clients, it has decided to close one of its 12 billion worth of monetary fund.
The monetary market is mostly used for short term financing and is normally regarded as stable earnings and with low risks. Buying in funds investing in such market has been regarded as a good replacement for savings. But because of the current US financial market turmoil, investors confidence are shaken and starts to liquidate their assets for cash.
On 17 September 2008, one large scale retail monetary fund RPF faced big redemption of its funds and cause the value of its fund unit to decline heavily to below 1 USD per unit. This means that investors will make a loss. But Putnam says that the per unit value of the fund that it decided to close is still above 1 USD and does not have the problem of asset quality reduction. However, considering the tight shortage of funds in the market and the high redemption by its clients, the fund after voting of the fund trustees decided to close the fund and return the funds to investors as soon as possible. It is reported that the fund is mostly sold to retirement fund management companies and other institutional investors.
Insiders say that such situation for monetary funds of about 3.4 trillion USD scale is unprecedented.
According to data from monitoring agency iMoneyNet, on 17 September 2008, investors withdrew about 89 billion USD from the US monetary market. In the 5 trading days before that, the total pull out of funds reached about 80 billion USD. In the week of 10 September 2008, the monetary market shrunk by about 5%, the reduction was the largest from recorded data by iMoneyNet since 1975.
Latest Updates
19 September 2008
One of the US big funds Putnam announced suddenly on 18 September 2008 that due to high redemption pressure of its fund by its clients, it has decided to close one of its 12 billion worth of monetary fund.
The monetary market is mostly used for short term financing and is normally regarded as stable earnings and with low risks. Buying in funds investing in such market has been regarded as a good replacement for savings. But because of the current US financial market turmoil, investors confidence are shaken and starts to liquidate their assets for cash.
On 17 September 2008, one large scale retail monetary fund RPF faced big redemption of its funds and cause the value of its fund unit to decline heavily to below 1 USD per unit. This means that investors will make a loss. But Putnam says that the per unit value of the fund that it decided to close is still above 1 USD and does not have the problem of asset quality reduction. However, considering the tight shortage of funds in the market and the high redemption by its clients, the fund after voting of the fund trustees decided to close the fund and return the funds to investors as soon as possible. It is reported that the fund is mostly sold to retirement fund management companies and other institutional investors.
Insiders say that such situation for monetary funds of about 3.4 trillion USD scale is unprecedented.
According to data from monitoring agency iMoneyNet, on 17 September 2008, investors withdrew about 89 billion USD from the US monetary market. In the 5 trading days before that, the total pull out of funds reached about 80 billion USD. In the week of 10 September 2008, the monetary market shrunk by about 5%, the reduction was the largest from recorded data by iMoneyNet since 1975.
Latest Updates
19 September 2008
- Treasury, Fed move to bolster money market funds
19 Sept. WASHINGTON (AP) -- The Treasury Department and the Federal Reserve announced separate actions Friday designed to bolster the nation's $2 trillion of assets in money market fund assets, which had come under threat from one of the worst financial crises in decades.
The Treasury said it will tap into a Depression-era fund to provide guarantees for the money market mutual funds. The Fed said it will expand its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank's move should help the funds to meet demands for redemptions.
Financial crisis may impact US economic fundamentals
Professor 陈志武 from Yale University says on 18 September 2008 that the various measures undertaken by the US government may have helped with the current financial crisis, however, this financial crisis will still have bad influence to the US economic fundamentals.
US Treasury Secretary Henry Paulson expressed on the same day that the US government is putting together a rescue plan to clear away the mountains of bad debt that have weighed down banks and caused the worst financial crisis in decades.
Professor 陈志武 thinks that US is currently facing the worst financial crisis since 1929. The US government will have to pay a heavy price for the various measures undertaken to help alleviate the current financial crisis. In order to help out the various financial institutions, the US government has to issue about 500 billion USD worth of US government bonds. This will increase the US budget deficit and the US dollar will depreciate which will badly affect the US economy.
With the direct or indirect actions by the US government to help to resolve the financial crisis, JP Morgan Chase bought over US fifth largest investment bank Bear Stearns, BOA bought over US third largest investment bank Merrill Lynch. Such acquisitions will result in creating huge financial giant institutions who are able to 'hijack' the US government in future due to their sheer size and financial mights.
UN's global finance monitoring department's 洪平凡 has a description for the influence of the financial crisis to the US economy. He says that the US economy is like the human body, the financial industry is the heart, funds are the blood and the real economy is like the various organs in the human body. If the financial industry were to be hurt strongly, it would be like having a heart attack affecting the blood flow which will result in other organs failing.
洪平凡 thinks that this current financial crisis will cause big harm to the US economy. Because the financial industry suffer heavy losses in the current financial crisis, the future US credit scale and conditions will face tightening which will result in suppressing of consumption and production developments. The US economy is not very optimistic in the near future.
Latest Updates
19 September 2008
US Treasury Secretary Henry Paulson expressed on the same day that the US government is putting together a rescue plan to clear away the mountains of bad debt that have weighed down banks and caused the worst financial crisis in decades.
Professor 陈志武 thinks that US is currently facing the worst financial crisis since 1929. The US government will have to pay a heavy price for the various measures undertaken to help alleviate the current financial crisis. In order to help out the various financial institutions, the US government has to issue about 500 billion USD worth of US government bonds. This will increase the US budget deficit and the US dollar will depreciate which will badly affect the US economy.
With the direct or indirect actions by the US government to help to resolve the financial crisis, JP Morgan Chase bought over US fifth largest investment bank Bear Stearns, BOA bought over US third largest investment bank Merrill Lynch. Such acquisitions will result in creating huge financial giant institutions who are able to 'hijack' the US government in future due to their sheer size and financial mights.
UN's global finance monitoring department's 洪平凡 has a description for the influence of the financial crisis to the US economy. He says that the US economy is like the human body, the financial industry is the heart, funds are the blood and the real economy is like the various organs in the human body. If the financial industry were to be hurt strongly, it would be like having a heart attack affecting the blood flow which will result in other organs failing.
洪平凡 thinks that this current financial crisis will cause big harm to the US economy. Because the financial industry suffer heavy losses in the current financial crisis, the future US credit scale and conditions will face tightening which will result in suppressing of consumption and production developments. The US economy is not very optimistic in the near future.
Latest Updates
19 September 2008
- US financial rescue plan to cost "hundreds of billions" of dollars
19 Sept (AFP) -- WASHINGTON - Treasury Secretary Henry Paulson said Friday a rescue plan for the troubled US financial sector will cost "hundreds of billions" of dollars.
"We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem," Paulson told reporters ahead of talks with Congress on details of the massive rescue effort, unveiled initially late Thursday.
"We are going to be coming to them with a proposed legislative package and working with them to flesh out the details through the weekend and we're going to be asking them to take action on legislation next week," Paulson said.
Paulson announced "other immediate actions" including an acceleration of purchases of mortgage securities by the Treasury and by Fannie Mae and Freddie Mac, the two government-sponsored enterprises taken over by the government this month in the face of massive losses.
Republican Senator Richard Shelby said earlier the overall cost of government actions to steady the financial sector could be one trillion US dollars, including 500 billion US dollars for the new effort to clean up bad assets from bank balance sheets.
"I figure it will be at least half a trillion," Shelby said in an ABC television interview.
"But if you look at what the Fed has already done, and the extension of power to Treasury to deal with Fannie Mae and Freddie Mac, I believe we're talking about a trillion dollars," he said.
- Will the US dollar be next to fall?
19 Sept (Business Times) -- OVER the last two months, the US dollar has managed a decent recovery, buoyed by hopes that the US economy was going to be the first out of recession, and therefore require the US Federal Reserve Bank to raise interest rates. This, at a time when their counterparts in Europe and Japan are more likely to contemplate rate cuts. In Q2 2008, the US economy grew a sparkling 3.3 per cent, thanks to some US$110 billion in tax rebates as well as the stronger exports facilitated by the weaker US dollar earlier in the year. In sharp contrast, the UK economy flat-lined, Japan's fell sharply, and those in the eurozone tanked too.
Since then, however, US financial giants have fallen like tenpins, starting with Fannie Mae and Freddie Mac, then followed by the collapse of Lehman Brothers and the Fed bailout of insurance giant AIG this week. Worse, bluechip stocks tumbled the best part of 4 per cent on Wednesday night, rattled by fears that there'll be more to come. In response, the search for safe refuge alternatives saw gold recording its largest ever one-day rise, exploding almost 10 per cent higher overnight, the Japanese yen and Swiss franc topping overnight currency gains, and short-term US Treasury securities bought despite near-zero yields.
Based on a broader-based US dollar index, however, the greenback is still some 10 per cent above its all-time lows of March 2008, although key Wall Street indices have fallen more than 25 per cent off their all-time highs of 2007 - to lows not seen in three years or more. This is possibly due more to a short-term technicality than true US dollar resilience. It happened in July this year, and is happening again this month, as risk aversion and flight to safety considerations take centre stage. In short, US investors have sold - or are hurriedly selling - more of their overseas investments, and repatriating the proceeds. This requires them to sell foreign currencies in favour of the US dollars that they then send home - either into the safety of US Treasuries or to patch up losses sustained on the home front.
The same thing happened in July this year, the latest month for which such flow statistics are available. July's net flow of funds only just managed to register a small plus (in favour of inflows into the US) because of massive repatriations. We're told that Fannie Mae and Freddie Mac losses may have helped persuade - or force - US investors to bring home the proceeds from the sale of some US$14 billion worth of foreign bonds and US$18 billion worth of equities.
Given Wall Street's huge losses, and the massive deleveraging we are witnessing, it shouldn't be a surprise that US-based hedge funds have cut and run again - especially when they have to report Q3 results by end-September. Thereafter, they can put on new trades, and perhaps only then will the US dollar see its mettle truly tested.
China - Measures taken to stimulate ailing stock market
A slew of measures were taken by the China government to stabilize the China stock market. They were not very effective until the 3 big moves (points 4 to 6) done on the same day on 18 September 2008 which really helped restore confidence in the China stock market.
Now the hope is that the confidence level can sustain.
1) China to allow exchangeable bonds to ease stock oversupply (5 September 2008)
The China Securities Regulatory Commission (CSRC) will allow shareholders of listed companies to issue exchangeable bonds, a move to ease oversupply in the stock market that has helped to drive down share prices.
The CSRC published a draft regulation on the newly-introduced financing tool on its website on Friday night, soliciting public comment by Sept. 12.
Shareholders can issue bonds with an embedded option to exchange the bond for the stock of a company other than the issuer at least a year after the issuance, according to the regulation.
Such bonds could provide shareholders with a new funding channel other than simply dumping their holdings. This would ease the impact of heavy selling, said an unidentified CSRC official in a statement on the website.
Heavy selling has been cited as a factor that has aggravated liquidity strains in the country's flagging stock market.
2) China steps up pace of foreign fund approvals (13 September 2008)
China's securities regulator, seeking to support a slumping stock market, has given approval for six more foreign institutions to invest in Chinese securities.
The licensing of the six institutions in August marks the fastest monthly pace of approvals in nearly four years, the official Shanghai Securities News said on Saturday.
It brings to 65 the total number of investors in China's Qualified Foreign Institutional Investor (QFII) scheme, which was launched in 2003 as the main way for foreigners to buy Chinese equities.
The newly approved investors still need to obtain currency quotas from China's foreign exchange regulator. Individual quotas are commonly around US$100 million to US$200 million, and quotas issued so far total roughly US$11 billion.
China agreed in talks with the United States late last year to raise the ceiling for the combined quota to US$30 billion from US$10 billion. But it has been reluctant to grant new QFII licences rapidly, partly because large inflows of foreign funds could destabilise its markets.
In the past two months, however, a plunge of the main stock index to 21-month lows, down 66 per cent from last October's peak, has prompted the securities regulator to promise to bring in more foreign funds to help stabilise stock prices.
Meanwhile, slowing appreciation of the yuan against the dollar has threatened to trigger net capital outflows from China, potentially giving the foreign exchange regulator more room to permit inflows into the country.
Foreign investors cannot bring in enough money to make much of an impact on China's stock market; combined QFII quotas are equivalent to less than 1 per cent of market capitalisation.
But foreigners were among the first investors to start pulling out of the market as it peaked late last year, so signs of fresh buying by them could boost local investors' confidence.
The six QFII institutions approved in August include ACE INA International Holdings, an affiliate of New York-listed insurer ACE, Canada's Caisse de depot et placement du Quebec, and the corporation running Harvard University in the United States, according to the securities regulator's website.
The others are South Korea's Samsung Investment Trust Management Co, AllianceBernstein of the United States, and Singapore's Oversea-Chinese Banking Corp.
[Take note, OCBC one of them.]
3) China cuts rates, lowers reserve ratio (15 September 2008)
China's central bank Monday cut the cost of bank loans, the first time since 2002, and lowered the proportion of money lenders must have as reserves, the first such move in nine years, to keep the economy from sliding further.
The benchmark lending rate will be lowered by 0.27 percentage point to 7.20 percent from Tuesday, but the interest rate of deposits remains unchanged.
The 1 percentage point cut from the reserve requirement ratio of 17.5 percent does not apply to the five biggest banks and the Postal Savings Bank, the People's Bank of China (PBOC) said on its website. And banks in areas hit by the devastating May 12 earthquake will have their ratio cut by 2 percentage points. These changes will come into effect from Sept. 25.
"The adjustment is directly related to the macro-economic data for August," said Zhang Jun, director of Fudan University's China Center for Economic Studies.
The figures for the economy in August, released last week, showed a drop in consumer inflation but a rise in factory gate cost (or producers price index, PPI), a weakening industrial output and falling imports. All these indicate "downside economic risks", Zhang said.
The rising PPI and falling consumer price index (CPI) rate mean corporate earnings would suffer as costs rise, and that would ultimately hurt economic growth, Liu Dongliang, economist with the China Merchants Bank, said. "The country is facing the danger of an economic downturn."
The government adopted tightening measures in the second half of last year to prevent the economy from overheating and keep the CPI from rising out of control.
It has raised the interest rate six times and the reserve requirement ratio 15 times since last year, with the latest ratio increase being the fifth this year.
The tightening measures have yielded results, but the change seems to have come much sooner than expected, prompting the authorities to ease the policies, Zhang said.
The country's GDP for the second quarter grew 10.1 percent year-on-year, compared to 11.9 percent for the whole of 2007.
The situation is similar to what it was 10 years ago, when the macro-economic regulation before 1997 coupled with the 1997-98 Asian financial crisis, hit the economy hard and pushed it into deflation, he said.
Now the economy faces a slowdown at home and is already feeling the winds of the U.S. financial turmoil.
Policymakers later adopted a series of measures, such as bolstering small and medium-sized enterprises (SMEs), to maintain a stable economic growth.
The SMEs are the most dynamic components of the economy, accounting for three-fourths of the total jobs in the country and producing 60 percent of the goods and services. And it is they that have suffered the most since last year because of the tightening policies.
Banks usually do not like sanctioning loans to SMEs because of fears they may fail to pay back in time, and the tightening policies have worsened the situation for them, analysts said.
"The key issue now is how to better allocate the lending resources to ensure SMEs have more access to loans," Zhang said. The PBOC has cut the requirement for smaller banks because most of their loans go to SMEs.
But the liquidity problem has not been fundamentally solved, he said, and the authorities have stopped short of applying the cut in reserve requirement ratio to major banks.
4) China cancels stamp tax on stock purchase to support equities market (18 September 2008)
China decided on Thursday to scrap the stamp tax on stock purchase, effective on Friday, in a move to boost the equities market after domestic stocks fell for third consecutive day since Tuesday.
The Central Huijin Investment Co.,Ltd., an investment arm of the Chinese government, said Thursday it would buy the shares of three major Chinese lenders on the secondary market to shore up their share prices amid stock market slumps.
6) China supports strategic SOEs to buy more stocks of listed subsidiaries (18 September 2008)
China is to back up its 147 centrally-administered state-owned enterprises (SOEs) in buying more stocks of their listed subsidiaries, the top state assets regulator said here Thursday.
Now the hope is that the confidence level can sustain.
1) China to allow exchangeable bonds to ease stock oversupply (5 September 2008)
The China Securities Regulatory Commission (CSRC) will allow shareholders of listed companies to issue exchangeable bonds, a move to ease oversupply in the stock market that has helped to drive down share prices.
The CSRC published a draft regulation on the newly-introduced financing tool on its website on Friday night, soliciting public comment by Sept. 12.
Shareholders can issue bonds with an embedded option to exchange the bond for the stock of a company other than the issuer at least a year after the issuance, according to the regulation.
Such bonds could provide shareholders with a new funding channel other than simply dumping their holdings. This would ease the impact of heavy selling, said an unidentified CSRC official in a statement on the website.
Heavy selling has been cited as a factor that has aggravated liquidity strains in the country's flagging stock market.
2) China steps up pace of foreign fund approvals (13 September 2008)
China's securities regulator, seeking to support a slumping stock market, has given approval for six more foreign institutions to invest in Chinese securities.
The licensing of the six institutions in August marks the fastest monthly pace of approvals in nearly four years, the official Shanghai Securities News said on Saturday.
It brings to 65 the total number of investors in China's Qualified Foreign Institutional Investor (QFII) scheme, which was launched in 2003 as the main way for foreigners to buy Chinese equities.
The newly approved investors still need to obtain currency quotas from China's foreign exchange regulator. Individual quotas are commonly around US$100 million to US$200 million, and quotas issued so far total roughly US$11 billion.
China agreed in talks with the United States late last year to raise the ceiling for the combined quota to US$30 billion from US$10 billion. But it has been reluctant to grant new QFII licences rapidly, partly because large inflows of foreign funds could destabilise its markets.
In the past two months, however, a plunge of the main stock index to 21-month lows, down 66 per cent from last October's peak, has prompted the securities regulator to promise to bring in more foreign funds to help stabilise stock prices.
Meanwhile, slowing appreciation of the yuan against the dollar has threatened to trigger net capital outflows from China, potentially giving the foreign exchange regulator more room to permit inflows into the country.
Foreign investors cannot bring in enough money to make much of an impact on China's stock market; combined QFII quotas are equivalent to less than 1 per cent of market capitalisation.
But foreigners were among the first investors to start pulling out of the market as it peaked late last year, so signs of fresh buying by them could boost local investors' confidence.
The six QFII institutions approved in August include ACE INA International Holdings, an affiliate of New York-listed insurer ACE, Canada's Caisse de depot et placement du Quebec, and the corporation running Harvard University in the United States, according to the securities regulator's website.
The others are South Korea's Samsung Investment Trust Management Co, AllianceBernstein of the United States, and Singapore's Oversea-Chinese Banking Corp.
[Take note, OCBC one of them.]
3) China cuts rates, lowers reserve ratio (15 September 2008)
China's central bank Monday cut the cost of bank loans, the first time since 2002, and lowered the proportion of money lenders must have as reserves, the first such move in nine years, to keep the economy from sliding further.
The benchmark lending rate will be lowered by 0.27 percentage point to 7.20 percent from Tuesday, but the interest rate of deposits remains unchanged.
The 1 percentage point cut from the reserve requirement ratio of 17.5 percent does not apply to the five biggest banks and the Postal Savings Bank, the People's Bank of China (PBOC) said on its website. And banks in areas hit by the devastating May 12 earthquake will have their ratio cut by 2 percentage points. These changes will come into effect from Sept. 25.
"The adjustment is directly related to the macro-economic data for August," said Zhang Jun, director of Fudan University's China Center for Economic Studies.
The figures for the economy in August, released last week, showed a drop in consumer inflation but a rise in factory gate cost (or producers price index, PPI), a weakening industrial output and falling imports. All these indicate "downside economic risks", Zhang said.
The rising PPI and falling consumer price index (CPI) rate mean corporate earnings would suffer as costs rise, and that would ultimately hurt economic growth, Liu Dongliang, economist with the China Merchants Bank, said. "The country is facing the danger of an economic downturn."
The government adopted tightening measures in the second half of last year to prevent the economy from overheating and keep the CPI from rising out of control.
It has raised the interest rate six times and the reserve requirement ratio 15 times since last year, with the latest ratio increase being the fifth this year.
The tightening measures have yielded results, but the change seems to have come much sooner than expected, prompting the authorities to ease the policies, Zhang said.
The country's GDP for the second quarter grew 10.1 percent year-on-year, compared to 11.9 percent for the whole of 2007.
The situation is similar to what it was 10 years ago, when the macro-economic regulation before 1997 coupled with the 1997-98 Asian financial crisis, hit the economy hard and pushed it into deflation, he said.
Now the economy faces a slowdown at home and is already feeling the winds of the U.S. financial turmoil.
Policymakers later adopted a series of measures, such as bolstering small and medium-sized enterprises (SMEs), to maintain a stable economic growth.
The SMEs are the most dynamic components of the economy, accounting for three-fourths of the total jobs in the country and producing 60 percent of the goods and services. And it is they that have suffered the most since last year because of the tightening policies.
Banks usually do not like sanctioning loans to SMEs because of fears they may fail to pay back in time, and the tightening policies have worsened the situation for them, analysts said.
"The key issue now is how to better allocate the lending resources to ensure SMEs have more access to loans," Zhang said. The PBOC has cut the requirement for smaller banks because most of their loans go to SMEs.
But the liquidity problem has not been fundamentally solved, he said, and the authorities have stopped short of applying the cut in reserve requirement ratio to major banks.
4) China cancels stamp tax on stock purchase to support equities market (18 September 2008)
China decided on Thursday to scrap the stamp tax on stock purchase, effective on Friday, in a move to boost the equities market after domestic stocks fell for third consecutive day since Tuesday.
With the authorization of the State Council, China's Cabinet, the Ministry of Finance and the State Administration of Taxation said they decided to cancel the share trading stamp tax on stock purchase while the stamp tax on share selling remained unchanged at 0.1 percent.
The cancellation came hours after Chinese stocks tumbled 1.72 percent on Thursday, amid the current global financial turmoil.
It was the first time since 1991 authorities had levied an unilateral stamp tax on stocks trading and the second time this year they had adjusted the stock trading stamp tax.
On April 24, it cut the tax from 0.3 percent to 0.1 percent amid falling share prices.
5) State investment arm to shore up three Chinese lenders' shares with stock-buying plan (18 September 2008)The Central Huijin Investment Co.,Ltd., an investment arm of the Chinese government, said Thursday it would buy the shares of three major Chinese lenders on the secondary market to shore up their share prices amid stock market slumps.
The company said it would buy the shares of the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank and operations had started on Thursday.
Central Huijin was set up in 2002 with a mission to reform state-owned banks burdened with a high ratio of non-performing loans.
6) China supports strategic SOEs to buy more stocks of listed subsidiaries (18 September 2008)
China is to back up its 147 centrally-administered state-owned enterprises (SOEs) in buying more stocks of their listed subsidiaries, the top state assets regulator said here Thursday.
Li Rongrong, the State-owned Assets Supervision and Administration Commission (SASAC) director, said the regulatory body had long held SOEs, particularly the 147 which report to the central government, should be an active force in facilitating a stable development of the stock market.
Companies mainly owned by the 147 giants should play a exemplary role on the market, he added.
Li stressed the Chinese economy was basically sound, and the 147 conglomerates were performing well. The SASAC supported them to buy more stocks of their listed companies based on their own growth requirements.
Chinese stocks have continued to hit new lows amid worries about global financial turmoil and the slowdown of the domestic economy. On Thursday, Chinese stocks tumbled 1.72 percent, the third fall in three days.
Latest Updates
23 September 2008
- China Huijin increases stake in three top commercial lenders
BEIJING, Sept. 23 (Xinhua) -- Chinese three largest commercial banks announced Tuesday that Central Huijin Investment Co., Ltd., an investment arm of the government, had increased its shareholdings of the three banks.According to announcements released by the banks on Tuesday evening, Huijin has increased shareholdings of 2 million shares for each bank through shares purchase on the Shanghai Stock Exchange.
China Construction Bank (CCB) said that following the acquisition, Huijin holds 152,844,297,904 shares of the CCB (including 2,000,000 A-shares and 152,842,297,904 H-shares), representing approximately 65.405 percent, up from 65.4041 percent, of the total issued share capital of the bank.
The Industrial and Commercial Bank of China said Huijin now holds 118,008,174,032 shares in the bank after the acquisition, increasing its stake in the country's top lender from 35.3292 percent to 35.3298 percent.
The Bank of China said the government investment arm now holds 171,327,404,740 shares in the bank after the purchase, increasing its stake from 67.4937 percent to 67.4945 percent.
It is one of a package of moves by the government to stabilize the sliding stock market, including the recent cancellation of the stamp tax on stock purchases.
Huijin intends to continue to increase its shareholdings in the three banks on the secondary market within 12 months commencing from the date of this share acquisition, according to the banks' announcements.
19 September 2008
- Chinese shares soar 9.46% as Beijing gives market a boost
19 Sept (AFP) -- SHANGHAI - Chinese share prices closed 9.46 per cent higher on Friday in the fastest one-day rise in nearly seven years after the government abolished a tax on buying shares to boost the market, dealers said.
Every stock traded on Friday rose the maximum ten percent daily limit in the first session since the government announced it was abolishing a 0.1 per cent stamp duty tax on buying shares.
The benchmark Shanghai Composite Index, which covers A and B shares, was up 179.25 points at 2,075.09. It was the most the index has climbed since October 23, 2001, when it it rose 9.9 per cent.
However, analysts cautioned that the market, still down 60.6 per cent since the start of the year, remained fragile because investors were still nervous about the turmoil in the financial world.
"Beijing's moves are going to have a psychological rather than any long-term impact. Beijing cannot, for example, stop the financial crisis from happening in the US but this is what has been distressing the markets," Orient Securities analyst Mo Guangliang told Dow Jones Newswires.
The government also announced late Thursday that the domestic arm of China's sovereign wealth fund, Central Huijin Investment Co, was increasing its stake in three leading Chinese banks to help shore up their stock prices.
But analysts were skeptical that the move was anything more than symbolic because Huijin was already the principal shareholder in all three.
Nonetheless the banks all rose 10 per cent with the Industrial and Commercial Bank of China closing at 3.78 yuan, Bank of China at 3.36 yuan, while China Construction Bank rose to 4.19 yuan.
The rally was expected to continue on Monday.
Shares quickly hit the daily limit early Friday and trading tapered out in the afternoon as most investors opted to hold out for better prices before disposing of their shares, Guotai Junan analyst Xu Yinhui told Dow Jones.
Those who wanted to buy could not bid more than the 10 per cent limit's rise in share prices.
"Today, those who own shares refused to sell, clutching their shares as if their life depended on it," Xu said. But he warned: "Soon, shares will be regarded as junk again."
Zhang said there was also pressure from previously non-tradeable shares that have recently hit the market, boosting the share supply and further depressing stock prices.
The Shanghai A-share Index gained 188.21 points, or 9.45 per cent, to close at 2,179.11 and the Shenzhen A-share Index jumped 51.00 points, or 8.88 per cent, to 625.33.
The Shanghai B-share Index closed up 10.87 points, or 9.82 per cent, to 121.60, while the Shenzhen B-share Index rose 26.56 points, or 9.32 per cent, to 311.68.
The yuan closed the day at 6.8350 against the US dollar, down from Thursday's finish of 6.8340.
Thursday, September 18, 2008
6 Central Banks pledge joint pumping of 180 billion USD to stabalize market
To counter the more and more serious downward development if the financial crisis, the 6 central banks globally on 18 September 2008 jointly took action to help stabilize the market.
The FED in its open statement says that FOMC (Federal Open Market Committee) has approved a plan to authorize $180 billion USD expansion of temporary foreign currency swap arrangements. This will help increase the liquidity in the monetary market.
Europe central bank expressed that the Europe central bank and FEDs foreign exchange swap arrangements limits will increase from current 55 billion USD to 110 billion USD.
The Swiss central bank expressed that its foreign exchange swap arrangements limits will increase from current 15 billion USD to 27 billion USD.
The Canadian central bank says that it has reached an agreement with the FED for a foreign exchange swap arrangement worth 10 billion USD to increase the US currency liquidity in the Canadian market.
Japan central bank has reached an agreement with the FED for a foreign exchange swap arrangement worth 60 billion USD.
The England central bank says that it will inject 40 billion USD into the market. It says that this and the previous measures taken by the various central banks aims to improve the global financial liquidity situation.
Latest Updates
19 September 2008
The FED in its open statement says that FOMC (Federal Open Market Committee) has approved a plan to authorize $180 billion USD expansion of temporary foreign currency swap arrangements. This will help increase the liquidity in the monetary market.
Europe central bank expressed that the Europe central bank and FEDs foreign exchange swap arrangements limits will increase from current 55 billion USD to 110 billion USD.
The Swiss central bank expressed that its foreign exchange swap arrangements limits will increase from current 15 billion USD to 27 billion USD.
The Canadian central bank says that it has reached an agreement with the FED for a foreign exchange swap arrangement worth 10 billion USD to increase the US currency liquidity in the Canadian market.
Japan central bank has reached an agreement with the FED for a foreign exchange swap arrangement worth 60 billion USD.
The England central bank says that it will inject 40 billion USD into the market. It says that this and the previous measures taken by the various central banks aims to improve the global financial liquidity situation.
Latest Updates
19 September 2008
- Central banks redouble efforts to keep financial system alive
Sept. 19 (AFP) -- FRANKFURT - Central banks redoubled efforts Friday to get the global financial system through the worst financial crisis in decades, raising the volume of injections this week close to around 800 billion dollars.
With stock markets boosted by news that Washington is trying to cobble together a US debt clearance mechanism, the Bank of Japan led the way, making two fresh injections totalling three trillion yen (28.3 billion US dollars).
The BoJ has made emergency injections twice daily for the past four days, and the latest brings the total to 11 trillion yen since Tuesday.
The European Central Bank (ECB) meanwhile freed up 40 billion US dollars and the Bank of England offered 40 billion US dollars (28 billion euros) to financial institutions struggling to obtain funds amid a worldwide squeeze on credit.
The US Treasury said meanwhile it would guarantee US money market funds up to an amount of 50 billion US dollars in order to ensure their solvency in another move to shore up the financial sector.
"Money market funds play an important role as a savings and investment vehicle for many Americans," the Treasury said in statement.
"They are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system," the statement said.
It added that the guarantee "should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."
Since the credit crunch began 14 months ago, distrust about the quality of assets being offered as collateral has spread through the money markets where banks obtain short-term funds.
The resulting drying up of liquidity became a drought this week with the demise of Lehman Brothers and the last-minute rescue of fellow Wall Street titan Merrill Lynch and the de-facto nationalisation of insurance giant AIG.
As a result, central banks have had to step up to the plate and fulfill their traditional role as the lender of last resort, making billions available for banks to borrow.
On Thursday, the US Federal Reserve made 180 billion US dollars of liquidity available to the central banks of the eurozone, Japan, Britain, Canada and Switzerland to help ease the pressures.
The US Securities and Exchange Commission meanwhile said Friday it had followed authorities in Britain, Switzerland and Ireland to ban so-called short selling of shares, widely blamed for the crippling falls in stock prices of banks this week.
Short-selling occurs when investors sell stock they do not yet own in order to profit later from an anticipated fall in prices -- often contributing to the price fall.
The London stock market jumped 6.88 per cent, Paris 5.40 per cent, Frankfurt 3.87, Tokyo 3.76, Hong Kong 9.6 per cent and Shanghai nearly 9.5 per cent, and Russian shares roared up 15.5 per cent after several trading suspensions.
The dollar surged in London, where the euro fell to 1.4197 dollars from 1.4348 here late Thursday.
And the timeless barometer of confidence, gold, signalled a fall in the fear level, dropping to 855.5 US dollars an ounce in Hong Kong from 875.5 dollars Thursday.
- Central Banks Offer Extra Funds to Calm Money Markets
Sept. 18 (Bloomberg) -- The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.
The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.
George Soros hints England may be next to be hit
Investor George Soros on 16 September 20008 says that the financial market turmoil is far from over. England could be the next to be hit outside of US Wall Street in the coming period.
George Soros on and interview with BBC expresses his view on the Lehman Brothers bankruptcy and AIG's troubles.
He said that he is worried and that at a certain level, we are still in the process of entering the financial troubles storm and not going out.
When asked whether the US government should save Lehman Brothers, Soros said yes or no will leave it to the market to decide. But he says that the US government bailout faces moral risks and that in the end the US government has to do anything possible in order to save the financial system crisis.
Soros said that England's economy dependency on the financial industry makes it especially vulnerable the current financial crisis. He says that the financial industry constitutes a big part of England's economy so he thinks that the impact of the current financial crisis on England will be much greater that other countries.
George Soros on and interview with BBC expresses his view on the Lehman Brothers bankruptcy and AIG's troubles.
He said that he is worried and that at a certain level, we are still in the process of entering the financial troubles storm and not going out.
When asked whether the US government should save Lehman Brothers, Soros said yes or no will leave it to the market to decide. But he says that the US government bailout faces moral risks and that in the end the US government has to do anything possible in order to save the financial system crisis.
Soros said that England's economy dependency on the financial industry makes it especially vulnerable the current financial crisis. He says that the financial industry constitutes a big part of England's economy so he thinks that the impact of the current financial crisis on England will be much greater that other countries.
China may be impacted by the collapse of US investment banks
On 17 September 2008, some China banks disclosed their holdings of Lehman Brothers securities.
China Banks' Holdings of Lehman Brothers Securities
ICBC: 151.8 million USD
Of the 151.8 million USD, ICBC's overseas unit had about 139 million USD which are all of prime rating securities. Such securities when the issuer goes bankrupt, the holder has the priority over the rest of other types of securities and stock holders.
BOC: 75.62 million USD
Of the 75.62 million USD, BOC (Hong Kong) had about 69.21 million USD. BOC New York branch also provided loans to Lehman Brothers of about 50 million USD and to Lehman Brothers subsidiaries of about 3.2 million USD. The previous total adds up to be about BOC's total asset of about 0.01%, 0.19% of BOC net assets as of 30 June 2008.
China Industrial Bank: 33.6 million USD
The 33.6 million USD is with regards to investments and dealings with Lehman Brothers.
Bank of Communications: Limited impact
Bank of Communications says that the securities of Lehman Brothers held by Bank of Communications is relatively low in its investment portfolio and the risks are controllable and also the impact of Lehman Brothers bankruptcy has limited impact on Bank of Communications.
China Construction Bank: Still in verification
Currently no comment and says that they are still in the process of verification.
China Merchants Bank: 70 million USD
Of the 70 million USD, 60 million are of prime rated securities and the rest of the 10 million are of sub-prime rated securities.
Due to the news of the various China banks holdings of Lehman Brothers securities after Lehman Brothers went under, the share prices of the various Chinese banks plummets, with some even dropping to the lower allowed level for 2 consecutive days wiping out a big amount of their value.
China Export Industries Impacted
As the sub-prime crisis spreads in US, export industries in China with products exported to US are also affected. On a recent report, about 500 export industries in China FuJian (福建) were not paid in amount of up to about a billion USD by US companies.
Most of the Chinese export companies were mainly dealing in handicrafts, shoes, agricultural, electronics and other consumner products. Also, it is estimated that most of them are not insured against such defaults in payments and so there could be more cases not recorded.
Selling of China Properties by US Investment Banks
As the concern that the crisis in US may spread, various US investment banks are selling their assets in China. Morgan Stanley has plans to sell away part of its housing projects in ShangHai, including expensive rental properties in ShangHai XinTianDi (新天地) area and 100 plus service apartments. The property project in ShangHai XinTianDi (新天地) area was bought by Morgan Stanley in 2003 as one its important investment in ShangHai property market.
Other then Morgan Stanley, Citi and Goldman Sachs are also doing similar acts. Citi sold 上海永新广场 for about 105 million USD last year September. Citi bought it for about 50 million USD in November 2005. Note that the gains from rentals during the 2 years was about 50 million RMB. Goldman Sachs sold a office building (高腾大厦) for about 150 million USD last year end which they bought for about 107.6 million USD in 2005. This was also Goldman Sachs first big investment in China's property market.
Talking Down of China Property Market
On 12 September 2008, Morgan Stanley issued a report saying that the China propery market has declined significantly with a high possibility of collapsing and will impact banks' earnings. Almost at the same time, Goldman Sachs also issued a report saying that the risks of default in loan payments in China will show in 4Q 2008 and 1H 2009. The report by Goldman Sachs also says that the slowdown of the China property market has yet to impact the China banking industry and the worst is coming. With the decrease in home sales volume, confidence will drop for home buyers. Empty homes will increase and profit margins will decrease which will cause property developers to have liquidity problems and so China banking industry's risk for non-performing loans to the property developers will increase. Lehman Brothers followed soon after with another report saying that the China property market is under pressure. Supply is more than demand with surplus needing 3 to 4 years to digest. Situation will get worse in big cities and in the coming few months housing prices will continue to decline and may continue to 2H 2009.
Analysts says that the sales of China properties by the various big US investment banks may be to a move to sell still profitable assets in China to provide liquidity back in US.
However, the selling of properties by the big US investment banks will definitely have a big impact on the confidence level in the China property market.
Latest Updates
22 September 2008
China Banks' Holdings of Lehman Brothers Securities
ICBC: 151.8 million USD
Of the 151.8 million USD, ICBC's overseas unit had about 139 million USD which are all of prime rating securities. Such securities when the issuer goes bankrupt, the holder has the priority over the rest of other types of securities and stock holders.
BOC: 75.62 million USD
Of the 75.62 million USD, BOC (Hong Kong) had about 69.21 million USD. BOC New York branch also provided loans to Lehman Brothers of about 50 million USD and to Lehman Brothers subsidiaries of about 3.2 million USD. The previous total adds up to be about BOC's total asset of about 0.01%, 0.19% of BOC net assets as of 30 June 2008.
China Industrial Bank: 33.6 million USD
The 33.6 million USD is with regards to investments and dealings with Lehman Brothers.
Bank of Communications: Limited impact
Bank of Communications says that the securities of Lehman Brothers held by Bank of Communications is relatively low in its investment portfolio and the risks are controllable and also the impact of Lehman Brothers bankruptcy has limited impact on Bank of Communications.
China Construction Bank: Still in verification
Currently no comment and says that they are still in the process of verification.
China Merchants Bank: 70 million USD
Of the 70 million USD, 60 million are of prime rated securities and the rest of the 10 million are of sub-prime rated securities.
Due to the news of the various China banks holdings of Lehman Brothers securities after Lehman Brothers went under, the share prices of the various Chinese banks plummets, with some even dropping to the lower allowed level for 2 consecutive days wiping out a big amount of their value.
China Export Industries Impacted
As the sub-prime crisis spreads in US, export industries in China with products exported to US are also affected. On a recent report, about 500 export industries in China FuJian (福建) were not paid in amount of up to about a billion USD by US companies.
Most of the Chinese export companies were mainly dealing in handicrafts, shoes, agricultural, electronics and other consumner products. Also, it is estimated that most of them are not insured against such defaults in payments and so there could be more cases not recorded.
Selling of China Properties by US Investment Banks
As the concern that the crisis in US may spread, various US investment banks are selling their assets in China. Morgan Stanley has plans to sell away part of its housing projects in ShangHai, including expensive rental properties in ShangHai XinTianDi (新天地) area and 100 plus service apartments. The property project in ShangHai XinTianDi (新天地) area was bought by Morgan Stanley in 2003 as one its important investment in ShangHai property market.
Other then Morgan Stanley, Citi and Goldman Sachs are also doing similar acts. Citi sold 上海永新广场 for about 105 million USD last year September. Citi bought it for about 50 million USD in November 2005. Note that the gains from rentals during the 2 years was about 50 million RMB. Goldman Sachs sold a office building (高腾大厦) for about 150 million USD last year end which they bought for about 107.6 million USD in 2005. This was also Goldman Sachs first big investment in China's property market.
Talking Down of China Property Market
On 12 September 2008, Morgan Stanley issued a report saying that the China propery market has declined significantly with a high possibility of collapsing and will impact banks' earnings. Almost at the same time, Goldman Sachs also issued a report saying that the risks of default in loan payments in China will show in 4Q 2008 and 1H 2009. The report by Goldman Sachs also says that the slowdown of the China property market has yet to impact the China banking industry and the worst is coming. With the decrease in home sales volume, confidence will drop for home buyers. Empty homes will increase and profit margins will decrease which will cause property developers to have liquidity problems and so China banking industry's risk for non-performing loans to the property developers will increase. Lehman Brothers followed soon after with another report saying that the China property market is under pressure. Supply is more than demand with surplus needing 3 to 4 years to digest. Situation will get worse in big cities and in the coming few months housing prices will continue to decline and may continue to 2H 2009.
Analysts says that the sales of China properties by the various big US investment banks may be to a move to sell still profitable assets in China to provide liquidity back in US.
However, the selling of properties by the big US investment banks will definitely have a big impact on the confidence level in the China property market.
Latest Updates
22 September 2008
- Seven listed Chinese banks report $721 mln in Lehman exposure
BEIJING, Sept. 22 (Xinhua) -- Seven Chinese listed banks have announced bond holdings of 721 million U.S. dollars in the bankrupt U.S. investment bank Lehman Brothers as of Monday, according to Securities Daily.The individual exposures included 191.4 million U.S. dollars at China Construction Bank (CCB), 151.8 million U.S. dollars at the Industrial and Commercial Bank of China (ICBC), 128.8 million U.S. dollars at the Bank of China (BOC), 76 million U.S. dollars at the CITIC Bank, 70 million U.S. dollars at the China Merchants Bank, 70.02 million U.S. dollars at the Bank of Communication and 33.6 million U.S. dollars at the Industrial Bank.
CCB, with the largest exposure, said earlier it would closely monitor developments, prudently assess potential losses, make sufficient provision for impairment losses and protect the bank's legal rights.
The Lehman Brothers bankruptcy would not have a significant impact on CCB's financial situation, the bank said.
ICBC also said it was considering making provisions for its Lehnman exposure.
- China's Wen warns of further world economic turmoil
(AFP )BEIJING: Chinese Premier Wen Jiabao has warned the global economic slowdown and financial turmoil may get worse, pledging more flexible policies to maintain the country's growth, state media said Monday.
"The international financial turmoil and the slowdown in the world's economy could worsen, and we cannot underestimate the impact of these changes on the national economy," Wen said, according to the Shanghai Securities News.
"We should improve the effectiveness, focus and flexibility of macro-control measures... to maintain the stability of the economy, the financial market and the securities market."
It is particularly important to "find the balance between maintaining steady and fast economic growth and curbing inflation", he told a meeting on Saturday with provincial and ministerial leaders.
China's economy expanded by 11.9 per cent last year, and cooling efforts have already seen growth slow to 10.1 per cent in the second quarter of this year.
The consumer price index dropped to 4.9 per cent in August, the fourth consecutive month of slowing inflation and well below the peak of 8.7 per cent in February, giving policy makers more room to focus on growth creating.
Both the central bank and the banking regulator issued statements earlier this month calling for more loans to boost the national economy, after Beijing in August raised this year's quota of new local-currency loans by five percent.
The finance ministry also unveiled 10 days ago a package of subsidies worth US$510 million to help small and medium-sized firms.
- 3 Chinese commercial banks hold Lehman-related bonds
BEIJING, Sept. 18 (Source: China Daily) -- At least three large Chinese commercial banks have disclosed their exposure to the worsening U.S. financial crisis through bonds issued by investment bank Lehman Brothers, which has filed for Chapter 11 protection.
China Merchants Bank Wednesday said in a statement to the Shanghai Stock Exchange that it holds 70 million U.S. dollars of Lehman Brothers bonds, of which 60 million dollars is senior debt and the rest subordinated debt.
The bank also said it has not made special provisions for the book losses on those bonds and will evaluate their potential risks and disclose further details at a later date.
Industrial and Commercial Bank of China (ICBC), the country's largest State-controlled commercial bank by assets, holds 152 million dollars in bonds issued by, or linked to, Lehman Brothers.
At press time, ICBC had not issued a statement to the Shanghai bourse to specify its exposure to Lehman Brothers.
Bank of China (BOC) was also affected by the failure of Lehman Brothers. BOC holds 75.62 million dollars in bonds issued by the ailing U.S. investment bank. It also loaned 53.2 million dollar to Lehman Brothers and its subsidiaries. BOC was reportedly listed as an unsecured creditor in documents filed by Lehman Brothers at the United States Bankruptcy Court of the Southern District of New York.
Lehman Brothers, the fourth largest investment bank in the United States, filed for Chapter 11 protection after efforts to find a buyer collapsed last Sunday.
Rising concern about the ripple effect of the deepening U.S. financial crisis plus the gloomy outlook for China's banking sector has pushed down the prices of Chinese commercial banks' shares in the past two trading days.
Shares in China Merchants Bank Wednesday dropped 9.96 percent to 14.47 yuan apiece. With its 11 percent plummet on Tuesday, China Merchants Bank has fallen a total 18.9 percent over the past two trading days.
Bank of China has dropped a total of 14.8 percent from last Friday to close at 2.97 yuan. Its Hong Kong-listed H shares also fell 4.6 percent yesterday to 2.9 Hong Kong dollars.
China Construction Bank Wednesday plunged 10.09 percent to end at 3.83 yuan, while its H shares also tumbled 8.15 percent to 4.73 Hong Kong dollars.
The latest 27-basis-point cut to the benchmark lending rate plus the unchanged deposit rate is expected to squeeze bank earnings by narrowing the interest spread.
Jing Ulrich, chairwoman of China equities at JPMorgan Securities, yesterday told China Daily: "As China's financial market is not fully opened yet, the problem of Lehman Brothers is expected to have only an indirect impact on China's financial sector. An individual Chinese bank's exposure to the U.S. financial crisis should be seen in the context of its total assets."
Wednesday, September 17, 2008
6 big stock market crashes in history
Here is the list of the 6 big stock market crashes in history.
- Last century 70s Hong Kong stock market crash
Hang Seng Index
Biggest Drop: 91%
Highest: 1780
Lowest: 150 - 1929 US stock market crash (July 1929 - August 1932)
Dow Jones Industrial Average
Biggest Drop: 89.05%
Highest: 380.33
Lowest: 41.63 - 1989 Japan bubble burst (December 1989 - April 2003)
Nikkei
Biggest Drop: 80.2%
Highest: 38916.00
Lowest: 7699.50 - Last century 90s Taiwan stock market crash
Taiwan Weighted
Biggest Drop: 80%
Highest: 12495
Lowest: 2560 - 1993 China stock market crash (February 1993 - July 1994)
Shanghai Composite
Biggest Drop: 79.1%
Highest: 1558.95
Lowest: 325.89 - 2008 Vietnam stock market crash (March 2007 - June 2008)
Ho Chi Minh VN Stock Index
Biggest Drop: 68.6%
Highest: 1170.67
Lowest: 367.456
Tuesday, September 16, 2008
Will Morgan Stanley & Goldman Sachs merge?
After the collapse of Lehman Brothers, the 5 big US investment banks are now left with Goldman Sachs and Morgan Stanley. The financial crisis in US has the likelihood of spreading further. Out of concern for the financial crisis in US, people are guessing that whether the 5 big US investment banks will be left with only 1.
Analysts says that there is the possibility of Morgan Stanley being bought over. The buyer could be Barclays PLC or other non-US banks but not US commercial banks. Analysts believe that in US there are no other big banks that have the capability to buy over Morgan Stanley. Wells Fargo & Co. and US Bancorp may have the capability to buy 1 investment bank but the both so far has not shown any signs of going forward with such a big deal. NBA Research banking analyst Nancy Bush says that Morgan Stanley may have the possibility to merge with Goldman Sachs. If so Wall Street will only be left with 1 big investment bank.
In fact, the only US company that has the capability to buy over Morgan Stanley is Goldman Sachs. In 2007 Morgan Stanley has made some wrong judgments on mortgage loans. But the performance from then has been rather satisfying to its investors and it has lowered its risks exposure. Goldmans Sachs recently has successfully predicted that the sub-prime crisis will make a turn for the worse and thus able to avoid the crisis.
Goldman Sachs and Morgan Stanley will release their financial reports this week. Analysts estimate that the results will not be that bad as compared to last year same period. If they are able to show they are still profitable then there will be no immediate danger to both.
Latest Updates
22 September 2008
Analysts says that there is the possibility of Morgan Stanley being bought over. The buyer could be Barclays PLC or other non-US banks but not US commercial banks. Analysts believe that in US there are no other big banks that have the capability to buy over Morgan Stanley. Wells Fargo & Co. and US Bancorp may have the capability to buy 1 investment bank but the both so far has not shown any signs of going forward with such a big deal. NBA Research banking analyst Nancy Bush says that Morgan Stanley may have the possibility to merge with Goldman Sachs. If so Wall Street will only be left with 1 big investment bank.
In fact, the only US company that has the capability to buy over Morgan Stanley is Goldman Sachs. In 2007 Morgan Stanley has made some wrong judgments on mortgage loans. But the performance from then has been rather satisfying to its investors and it has lowered its risks exposure. Goldmans Sachs recently has successfully predicted that the sub-prime crisis will make a turn for the worse and thus able to avoid the crisis.
Goldman Sachs and Morgan Stanley will release their financial reports this week. Analysts estimate that the results will not be that bad as compared to last year same period. If they are able to show they are still profitable then there will be no immediate danger to both.
Latest Updates
22 September 2008
- Goldman Sachs, Morgan Stanley aim to restore market confidence
(Channel NewsAsia) SINGAPORE : The move by investment banking giants Goldman Sachs and Morgan Stanley to change their legal status to bank holding companies is unlikely to affect the organisational structure of the companies.
But market watchers said the move could restore confidence in the market.
By changing their status, the banks are subjecting themselves to tighter controls and scrutiny from national bank regulators, but it also gives them access to direct lending from the US Federal Reserve.
With this in place, confidence in the institutions may return along with money inflows.
Under US regulations, becoming a bank holding company means that both former investment banks will be directly regulated by the Federal Reserve.
They will be required to meet basic liquidity requirements.
Goldman and Morgan Stanley will also have access to a lifeline of federal funds with which to shore themselves up in difficult times.
Observers said the banks are aiming to restore investors' confidence .
Ho Yew Kee, Vice Dean and Associate Professor, Finance, National University of Singapore, said: "It basically says that 'we are going to open our books, and embrace the regulations'. They are saying that they are having the same type of scrutiny and governance as any other bank under the Federal Reserve"
There has been speculation that the banks undertook the status change in order to raise funds by opening commercial outlets, something their new status would allow them to do.
But experts said this is unlikely to happen, and that boosting faith in the market is the priority for now.
Associate Professor Ho said: "Whenever there is no trust or no confidence in the market, the money does not flow. And when money does not flow, the entire machinery of the economy breaks down, and this is something we must prevent from happening or getting worse in the current situation."
Looking ahead, market watchers expect to see Goldman Sachs and Morgan Stanley becoming better run and better supported investment banks, rather than opening branches to take deposits. - Goldman Sachs and Morgan Stanley to be holding companies
(AFP )WASHINGTON: US investment banks Goldman Sachs and Morgan Stanley will become bank holding companies and will receive new US government credit, the Federal Reserve announced late Sunday.
In a statement, the Federal Reserve said its board had approved "the applications of Goldman Sachs and Morgan Stanley to become bank holding companies" and authorised the Federal Reserve Bank of New York "to extend credit" to the two firms.
The Fed also made these collateral arrangements available to the broker-dealer subsidiary of investment firm Merrill Lynch.
Goldman Sachs and Morgan Stanley are the only independent investment banks remaining in the United States following a meltdown on Wall Street that saw the collapse of investment bank Lehman Brothers last Monday and the government bailout of insurance giant AIG.
- Goldman and Morgan Stanley rule out deal
(The Independent) -- Goldman Sachs and Morgan Stanley, the last two remaining independent investment banks, insisted they would remain independent, even as analysts and traders in the credit markets questioned the viability of their business model.
The cost of insuring the two companies' debt against a default has ballooned since rival Lehman Brothers collapsed at the weekend and Merrill Lynch sold itself to avoid a similar fate, and that cost hit a record yesterday.
Last night, Morgan Stanley brought forward the publication of its latest results to try to calm nerves in the debt markets, saying it had significantly outperformed Wall Street's expectations in the last quarter and had access to $179bn (£100bn) in cash and easily saleable assets.
"I felt it was appropriate given circumstances and turmoil in the market," the company's chief financial officer, Colm Kelleher, said, explaining the decision to bring the results forward. "The market's acting irrationally." He said he had been contacted by other Wall Street executives concerned that traders were playing "games" with financial sector stocks.
Morgan Stanley's profit for the three months to 31 August fell 3 per cent to $1.43bn.
The number of major investment banks has been cut from five to two in the past six months, and analysts have begun debating whether they can survive without bolting their volatile business in the capital markets on to a commercial bank that has a large depositor base for security.
Mr Kelleher said depository institutions "may bring with them their own set of complications" and that he was confident in the existing business model. His comment echoed one from Goldman Sachs' chief financial officer David Viniar earlier in the day, who said a merger was off the table. The difficulties Lehman and others have got into stem from poor business decisions, not a flawed business model, Mr Viniar said.
Friday, September 12, 2008
13.7 billion USD pullout from Asia stock markets
Foreign funds scale of buying Asia region stocks have been shrinking. At the same time, Asia markets bond issues are slowing down.
Recently, most institutions data shows that because of the global economic slow down and lesser risks investors willing to take, Asia's stock markets are facing a net outflow of funds, and the scale can even get greater. The withdrawal of funds from the stock market may also indicate that funds withdrawal may spread to other areas such as FDIs and loan capitals.
Asia Stock Markets Encounter Net Fund Outflow
One of the 3 leading global rating agencies, Fitch Ratings data shows that foreign funds are decreasing their investments in Asia stock markets. In the first 6 months of this year, the net selling of Asia stocks is worth up to 13.7 billion USD, the highest since June 2001. The outflow scale is even larger than the 2001 tech bubble burst and 2003 SARS outbreak. The worst hit is Taiwan as because in Taiwan, foreign funds has large holdings in its stock market and a high ratio of it is in the electronics industry related stocks.
HSBC recently did a survey with various big funds and the results show that in Asia Pacific region (not including Japan) for 2Q 2008, the recorded net fund outflow ratio of equity funds as compared to that of funds that managed stocks for its clients is 20%. But in 1Q there was a 6% inflow. In Japan, the ratio for the same period was 10% and 8% for 1Q.
The survery was done by HSBC with the 12 global leading fund companies. The survey results show that in the end of 2Q this year, the 12 fund companies have a total of 4.2 trillion USD put up by clients for management, equivalent to 17% of all the global fund companies total holdings. The survey results also shows that in 2Q this year, net fund outflow reached an estimated 28.5 billion USD. Comparing to 1Q, the total fund size went down by 0.67%.
A wealth management supervisor from HSBC Hong Kong's personal financial services department says that the net fund outflow from the stock market in 2Q shows that investors are concerned about the inflation problem in Asia and the slowing down of the Asian economies. Investors continues to take a more prudent investment strategy and pulled the funds out from the volatile stock markets and transfer them to bonds or cash.
Coming 2 Quarters - High Fund Outflow Dangerous Period
Looking forward, institutions are not optimistic about the Asia stock markets.
The survey results by HSBC shows that fund managers in general does not see the stock market performing in 3Q of 2008 in the Asia Pacific region (not including Japan). The survey results also shows that funds have started holding cash and bonds. When asked about the outlook of the 2008 3Q Asian stock market, 22% of the fund managers thinks that in 3Q they will reduce stock holdings of Asian stock markets not including Japan. This ratio was zero during 2008 2Q. In 2Q, 56% of the fund managers increased such holdings and in 3Q only 44% mentioned that they were preparing to increase their holdings.
Bank of China Hong Kong recently also announced their research report saying that the expectations for countries economic slowdown and global recession have increased. This makes funds more sensitive. After Europe and Japan, the effect of the economic slowdown from the developed countries to the developing countries will be more prominent. If that were to be the case, global funds may pull out in big scale from those regions. According to the general trend that developing countries economic cycles are generally lagging behind the developed countries, in the coming 1 to 2 quarters, it is in a high danger period were funds will most likely pull out from developing countries.
Stock Market Fund Movements Indicates Overall Slowdown in Capital Inflows
Fitch Ratings says that as global investors continues to strengthen their sense on risk aversion, the decline of the region's economic fundamentals and the worsening of the global financial situation, Asia Pacific region fund inflow starts to slow down.
Fitch Ratings report also says that altough in January 2008 Asia Pacific region has received strong FDI and is still able to get international cross-border loans from major banks, but scales of foreign funds buying into the Asia Pacific region stock market have been declining and at the same time global issue of funds have slowed down.
Franklin Poon, director at Fitch's sovereign group says that there will be sharp fluctuations of fund flows in the market and that they have started to question the thought about the decoupling of Asia. The changes in the movement of sensitive funds could be indications beforehand of the FDIs and loan capital movements.
Fitch Ratings has continous trackings on 4 types of faster movements fund inflow situations on FDIs inflows, foerign funds buying into local stock market scales, outside positions of foreign banks in Asian countries and bonds issued overseas.
Fitch Ratings mentioned that in 1Q 2008, there are no signs of weakening of FDI in Asia Pacific region. In capital inport economies, China, India, Thailand, Indonesia and Phillipines, FDIs net inflow are still stable. In capital export economies, Hong Kong, South Korea, Malaysia and Taiwan, FDIs net outflow also does not show major signs of decline.
As for international inter-bank lending, Asia is still a net creditor of international banks. Fitch Ratings thinks that under the circumstance that the official foreign exchange reserves continues to increase, Asia regions foreign assets will continue to rise and the region's credit risks will still be in a controllable region. At the same time, international banks continues to increase their loan issues in Asia. Fitch Ratings currently is especially concerned with India and South Korea. The two countries net international bank loans are increasing too fast, the deposits in the international banks cannot match it.
In 1Q 2008, Asia Pacific region's international bond issue scale has shrunk with net issue size dropping 47% to 5 billion USD. The biggest drop were in Hong Kong and Singapore. The 2 places are the region's financial centres and so is the most sensitive to global capital market's development. Malaysia, Thailand and India's country bonds issues are also dropping in scale.
Recently, most institutions data shows that because of the global economic slow down and lesser risks investors willing to take, Asia's stock markets are facing a net outflow of funds, and the scale can even get greater. The withdrawal of funds from the stock market may also indicate that funds withdrawal may spread to other areas such as FDIs and loan capitals.
Asia Stock Markets Encounter Net Fund Outflow
One of the 3 leading global rating agencies, Fitch Ratings data shows that foreign funds are decreasing their investments in Asia stock markets. In the first 6 months of this year, the net selling of Asia stocks is worth up to 13.7 billion USD, the highest since June 2001. The outflow scale is even larger than the 2001 tech bubble burst and 2003 SARS outbreak. The worst hit is Taiwan as because in Taiwan, foreign funds has large holdings in its stock market and a high ratio of it is in the electronics industry related stocks.
HSBC recently did a survey with various big funds and the results show that in Asia Pacific region (not including Japan) for 2Q 2008, the recorded net fund outflow ratio of equity funds as compared to that of funds that managed stocks for its clients is 20%. But in 1Q there was a 6% inflow. In Japan, the ratio for the same period was 10% and 8% for 1Q.
The survery was done by HSBC with the 12 global leading fund companies. The survey results show that in the end of 2Q this year, the 12 fund companies have a total of 4.2 trillion USD put up by clients for management, equivalent to 17% of all the global fund companies total holdings. The survey results also shows that in 2Q this year, net fund outflow reached an estimated 28.5 billion USD. Comparing to 1Q, the total fund size went down by 0.67%.
A wealth management supervisor from HSBC Hong Kong's personal financial services department says that the net fund outflow from the stock market in 2Q shows that investors are concerned about the inflation problem in Asia and the slowing down of the Asian economies. Investors continues to take a more prudent investment strategy and pulled the funds out from the volatile stock markets and transfer them to bonds or cash.
Coming 2 Quarters - High Fund Outflow Dangerous Period
Looking forward, institutions are not optimistic about the Asia stock markets.
The survey results by HSBC shows that fund managers in general does not see the stock market performing in 3Q of 2008 in the Asia Pacific region (not including Japan). The survey results also shows that funds have started holding cash and bonds. When asked about the outlook of the 2008 3Q Asian stock market, 22% of the fund managers thinks that in 3Q they will reduce stock holdings of Asian stock markets not including Japan. This ratio was zero during 2008 2Q. In 2Q, 56% of the fund managers increased such holdings and in 3Q only 44% mentioned that they were preparing to increase their holdings.
Bank of China Hong Kong recently also announced their research report saying that the expectations for countries economic slowdown and global recession have increased. This makes funds more sensitive. After Europe and Japan, the effect of the economic slowdown from the developed countries to the developing countries will be more prominent. If that were to be the case, global funds may pull out in big scale from those regions. According to the general trend that developing countries economic cycles are generally lagging behind the developed countries, in the coming 1 to 2 quarters, it is in a high danger period were funds will most likely pull out from developing countries.
Stock Market Fund Movements Indicates Overall Slowdown in Capital Inflows
Fitch Ratings says that as global investors continues to strengthen their sense on risk aversion, the decline of the region's economic fundamentals and the worsening of the global financial situation, Asia Pacific region fund inflow starts to slow down.
Fitch Ratings report also says that altough in January 2008 Asia Pacific region has received strong FDI and is still able to get international cross-border loans from major banks, but scales of foreign funds buying into the Asia Pacific region stock market have been declining and at the same time global issue of funds have slowed down.
Franklin Poon, director at Fitch's sovereign group says that there will be sharp fluctuations of fund flows in the market and that they have started to question the thought about the decoupling of Asia. The changes in the movement of sensitive funds could be indications beforehand of the FDIs and loan capital movements.
Fitch Ratings has continous trackings on 4 types of faster movements fund inflow situations on FDIs inflows, foerign funds buying into local stock market scales, outside positions of foreign banks in Asian countries and bonds issued overseas.
Fitch Ratings mentioned that in 1Q 2008, there are no signs of weakening of FDI in Asia Pacific region. In capital inport economies, China, India, Thailand, Indonesia and Phillipines, FDIs net inflow are still stable. In capital export economies, Hong Kong, South Korea, Malaysia and Taiwan, FDIs net outflow also does not show major signs of decline.
As for international inter-bank lending, Asia is still a net creditor of international banks. Fitch Ratings thinks that under the circumstance that the official foreign exchange reserves continues to increase, Asia regions foreign assets will continue to rise and the region's credit risks will still be in a controllable region. At the same time, international banks continues to increase their loan issues in Asia. Fitch Ratings currently is especially concerned with India and South Korea. The two countries net international bank loans are increasing too fast, the deposits in the international banks cannot match it.
In 1Q 2008, Asia Pacific region's international bond issue scale has shrunk with net issue size dropping 47% to 5 billion USD. The biggest drop were in Hong Kong and Singapore. The 2 places are the region's financial centres and so is the most sensitive to global capital market's development. Malaysia, Thailand and India's country bonds issues are also dropping in scale.
Buffett: To save Fredie and Fannie, US government may loose a few 100 billion USD
Investing guru Warren Buffett on an interview with The Wall Street Journal recently said that if the US housing market were to further worsen, the US government's intervention in the helping of Freddie and Fannie may loose a few hundred billion USD.
Buffett says that whether the results for the US government's intervention in bailing out Freddie and Fannie is good or bad will be based on the development of the US housing market. If housing prices continues to decline 15%-20%, the US government may loose a few hundred billion USD. However if the housing market is already near bottoming out, then the losses will be relatively smaller. When asked whether the US housing maket has reached a turning point, Buffett declined to comment on that.
The looser may not be only the US government. Citi's credit analyst says that the CDS for Freddie and Fannie and the banking industry has lost 25 billion USD. Because after the US government's bailout of Freddie and Fannie, they may be unable to repay in full the CDS. Citi's credit analyst also thinks that CDS by Freddie and Fannie circulating in the market is worth about up to 500 billion USD, investors may only be able to get back 95% of it.
After the US government's take over, notes issued by Freddie and Fannie are now in high demand by investors. Fannie Mae sold a record $7 billion of two-year notes to investors, signaling renewed confidence in the mortgage lender. The notes received more than $9 billion of orders, according to The Wall Street Journal. This is the largest single deal notes transaction in history. Fannie Mae placed 63 percent of the notes with US investors. A further 12 percent of the notes went to investors in Asia, 8 percent to buyers in Europe and 17 percent to others. Fund managers took the lead as the biggest buyers of the notes, taking 54 percent of the new securities, followed by 27 percent to central banks.
Buffett says that whether the results for the US government's intervention in bailing out Freddie and Fannie is good or bad will be based on the development of the US housing market. If housing prices continues to decline 15%-20%, the US government may loose a few hundred billion USD. However if the housing market is already near bottoming out, then the losses will be relatively smaller. When asked whether the US housing maket has reached a turning point, Buffett declined to comment on that.
The looser may not be only the US government. Citi's credit analyst says that the CDS for Freddie and Fannie and the banking industry has lost 25 billion USD. Because after the US government's bailout of Freddie and Fannie, they may be unable to repay in full the CDS. Citi's credit analyst also thinks that CDS by Freddie and Fannie circulating in the market is worth about up to 500 billion USD, investors may only be able to get back 95% of it.
After the US government's take over, notes issued by Freddie and Fannie are now in high demand by investors. Fannie Mae sold a record $7 billion of two-year notes to investors, signaling renewed confidence in the mortgage lender. The notes received more than $9 billion of orders, according to The Wall Street Journal. This is the largest single deal notes transaction in history. Fannie Mae placed 63 percent of the notes with US investors. A further 12 percent of the notes went to investors in Asia, 8 percent to buyers in Europe and 17 percent to others. Fund managers took the lead as the biggest buyers of the notes, taking 54 percent of the new securities, followed by 27 percent to central banks.
Thursday, September 11, 2008
Will Lehman Brothers become the next Bear Stearns?
Will Lehman Brothers become the next Bear Stearns? This is the hottest topic now on Wall Street.
When employees of Lehman Brothers walk out the office of the fourth largest investment bank on Wall Street, they are greeted by reporters and camera flash lights. An employee of Lehman Brothers said that its like the reporters are there waiting to see how Lehman Brothers collapse.
On 9 September 2008, Lehman Brothers shares closed at 7.79 USD down 44.95% from a day ago's closing price of 14.15 USD, the largest drop in a day for the company's share price history. News before this was that the talks between Lehman Brothers and South Korean Korea Development Bank (KDB) was not successful. This worries the market and the gains due to the bailout news of Freddie and Fannie were all returned back to the market.
After market close, Lehman Brothers announced that it will release its 3Q financial report a week earlier on 10 September 2008 morning US eastern time and also a series of "Strategic Initiatives".
From the Lehman Brothers 3Q financial report, it shows that Lehman Brothers made a loss of about 3.9 billion USD, or 5.92 USD per share, higher than expected. Asset write down amounted up to 7.8 billion USD, after hedging, it still pose a figure of about 5.6 billion USD.
Lehman Brothers also announced some self-help measures. It will largely reduce its Mortage Backed Securities (MBS), commercial properties and other low liquidity assets. In 2009, it will transfer its commercial properties into its subsidiary Real Estate Investments Global (REI Global). It will also sell most of the shares of one of the department and lastly reduce dividends payout to 5 US cents per share.
Sales Talk
Recently news about Lehman Brothers seeking to sell part of its shares and subsidiary businesses have been popping around in the market. The news that have the biggest impact on investors was the sale of part of its shares to KDB.
Last week KDB spokesman Sung Joo-young announced that KDB did have talks with Lehman Brothers to buy 25% of its shares and mentioned that the amount could be up to 5.2 billion USD. This news injected some level of confidence into the market and Lehman Brothers share price even stood above 17 USD at one time.
However, the KDB talks with Lehman Brothers was very not going on very well. Jun Kwang-woo, chairman of the Financial Services Commission said that due to the financial market's situation globally, the South Korean banking industry should cautiously consider the buying of stakes in Lehman Brothers.
In South Korea, the mood is that there are no consensus on the selling price prposed by Lehman Brothers CEO Richard Fuld. A South Korean newspaper report on Wednesday was quoting from an anonymous high South Korean authority that due to the global financial situation and the South Korean banking industry environment, and also the price quoted by Lehman Brothers, the talks between KDB and Lehman Brothers are most likely going to fail.
On 9 September 2008, Lehman Brothers share price dropped 44.95%, testing the lowest price reached in 10 years. Market analysts says that the mass dumping has got to do with the failure of the talks between KDB and Lehman Brothers.
On the news conference on 10 September 2008, Lehman Brothers CFO Ian Lowitt points out that the company will try its best to sell and reduce its MBS and commercial property related assets, and to strip away its commercial properties and put it into REI Global in order to clean up the company's balance sheets.
Hedge fund Highbridge energy asset management director says that from the current situation, is it quite impossible that Lehman Brothers is able to get out from the MBS market. He has worked in the middle management in Lehman Brothers before and is relatively familiar with Lehman Brothers business ongoings. He thinks that because the MBS problem is too big for Lehman Brothers. The only way to help with the situation is to have a good deal.
Rumours before this says that Lehman Brothers intends to sell its investment management department Neuberger Berman. On Tuesday CNBC quoted from sources that says Lehman Brothers top mangement has arranged talks with buyers. But the highest bidding price was only 2 billion USD, much lower than the estimated price Lehman Brothers has for Neuberger Berman.
Neuberger Berman was referred to as its 'pearl' by Lehman Brothers. Since bought over in 1995 by Lehman Brothers, its business has been growing. To sell it is considered a signal that Lehman Brothers encountered problems getting financing.
Hedge fund Highbridge energy asset management director says that Neuberger is a piece in Lehman Brothers that will affect its pricing. To sell away Neuberger is like amputating away an arm or leg to save its life, ie, selling the best asset in order to get financing to alleviate the bad financial situation that Lehman Brothers is in.
Before this, BlackRock, Carlyle Group, Hellman & Friedman and other various others were pointing out that they have interest in buying Neuberger. However, till date we are not seeing any deals appearing. The steep drop in price of Lehman Brothers share deals another blow to investors confidence which makes it more difficult for Lehman Brothers to sell its shares at a more better price.
Ian Lowitt on 10 Septembet 2008 news conference says that Lehman Brothers is seeking to sell part of the share holdings of Neuberger Berman and will announce the details once any deals are done.
Adding More Stress to the MBS Market
Hedge fund Highbridge energy asset management director says that the problem with Lehman Brothers lies in its MBS related assets. Lehman Brothers commodity futures business, stock related business and its traditional fixed income business are doing quite well. However, the company was too aggressive in its business in the recent few years which left it with a 65 billion USD MBS related asset bill and leveraged loans of about 10 billion USD. Lehman Brothers market value was only about 5.3 billion, which is only a small fraction of the MBS and leverage loans assets.
Now that the MBS market is very bad and with leverage in Lehman Brothers MBS related assets, if it were to write down, reducing 10% will cause it to loose nearly 10 billion USD, this will be worth more than the current overall market value of its shares. So if Lehman Brothers were to do further write downs, it may follow the foot steps of Bear Stearns.
On 9 September 2008, Lehman Brothers interest difference between its Credit Default Swaps (CDS) and its bonds has reached 120 basis points to reach 440 basis points, making a new high record. But the difference from Bear Stearns is that the 3 largest investment banks, Goldman Sachs, Morgan Stanley and Merrill Lynch says that they will not stop its trading with Lehman Brothers. Bear Stearns price plummeted after Goldman Sachs sends out a notice saying that it will stop trading with Bear Stearns.
Because of the large MBS related assets, if Lehman Brothers is to go bankrupt, it will need to clear off all of them. The large amount of the MBS related assets by Lehman Brothers will add more pressure to the already battered MBS market. Now that the US government has stepped in to help Freddie and Fannie in order to support the liquidity of the MBS market, with Lehman Brothers going bust, it will add on more costs for the US government to save the MBS market.
Watching Wall Streets few big investment banks, Bear Stearns has went down, now Lehman Brothers may be next, followed by maybe Merrill Lynch. This looks like a domino game. The US government has stepped in to help Freddie and Fannie to help stabalize and boost market confidence, but if Lehman Brothers were to go under, it will be another big blow to market confidence.
But hedge fund Highbridge energy asset management director says that Lehman Brothers may have a good way out and not go bankrupt. Ian Lowitt at the news conference says that after the the various measures are able to be implemented, Lehman Brothers balance sheets in 2009 will be clean and bright.
Latest Updates
15 September 2008
When employees of Lehman Brothers walk out the office of the fourth largest investment bank on Wall Street, they are greeted by reporters and camera flash lights. An employee of Lehman Brothers said that its like the reporters are there waiting to see how Lehman Brothers collapse.
On 9 September 2008, Lehman Brothers shares closed at 7.79 USD down 44.95% from a day ago's closing price of 14.15 USD, the largest drop in a day for the company's share price history. News before this was that the talks between Lehman Brothers and South Korean Korea Development Bank (KDB) was not successful. This worries the market and the gains due to the bailout news of Freddie and Fannie were all returned back to the market.
After market close, Lehman Brothers announced that it will release its 3Q financial report a week earlier on 10 September 2008 morning US eastern time and also a series of "Strategic Initiatives".
From the Lehman Brothers 3Q financial report, it shows that Lehman Brothers made a loss of about 3.9 billion USD, or 5.92 USD per share, higher than expected. Asset write down amounted up to 7.8 billion USD, after hedging, it still pose a figure of about 5.6 billion USD.
Lehman Brothers also announced some self-help measures. It will largely reduce its Mortage Backed Securities (MBS), commercial properties and other low liquidity assets. In 2009, it will transfer its commercial properties into its subsidiary Real Estate Investments Global (REI Global). It will also sell most of the shares of one of the department and lastly reduce dividends payout to 5 US cents per share.
Sales Talk
Recently news about Lehman Brothers seeking to sell part of its shares and subsidiary businesses have been popping around in the market. The news that have the biggest impact on investors was the sale of part of its shares to KDB.
Last week KDB spokesman Sung Joo-young announced that KDB did have talks with Lehman Brothers to buy 25% of its shares and mentioned that the amount could be up to 5.2 billion USD. This news injected some level of confidence into the market and Lehman Brothers share price even stood above 17 USD at one time.
However, the KDB talks with Lehman Brothers was very not going on very well. Jun Kwang-woo, chairman of the Financial Services Commission said that due to the financial market's situation globally, the South Korean banking industry should cautiously consider the buying of stakes in Lehman Brothers.
In South Korea, the mood is that there are no consensus on the selling price prposed by Lehman Brothers CEO Richard Fuld. A South Korean newspaper report on Wednesday was quoting from an anonymous high South Korean authority that due to the global financial situation and the South Korean banking industry environment, and also the price quoted by Lehman Brothers, the talks between KDB and Lehman Brothers are most likely going to fail.
On 9 September 2008, Lehman Brothers share price dropped 44.95%, testing the lowest price reached in 10 years. Market analysts says that the mass dumping has got to do with the failure of the talks between KDB and Lehman Brothers.
On the news conference on 10 September 2008, Lehman Brothers CFO Ian Lowitt points out that the company will try its best to sell and reduce its MBS and commercial property related assets, and to strip away its commercial properties and put it into REI Global in order to clean up the company's balance sheets.
Hedge fund Highbridge energy asset management director says that from the current situation, is it quite impossible that Lehman Brothers is able to get out from the MBS market. He has worked in the middle management in Lehman Brothers before and is relatively familiar with Lehman Brothers business ongoings. He thinks that because the MBS problem is too big for Lehman Brothers. The only way to help with the situation is to have a good deal.
Rumours before this says that Lehman Brothers intends to sell its investment management department Neuberger Berman. On Tuesday CNBC quoted from sources that says Lehman Brothers top mangement has arranged talks with buyers. But the highest bidding price was only 2 billion USD, much lower than the estimated price Lehman Brothers has for Neuberger Berman.
Neuberger Berman was referred to as its 'pearl' by Lehman Brothers. Since bought over in 1995 by Lehman Brothers, its business has been growing. To sell it is considered a signal that Lehman Brothers encountered problems getting financing.
Hedge fund Highbridge energy asset management director says that Neuberger is a piece in Lehman Brothers that will affect its pricing. To sell away Neuberger is like amputating away an arm or leg to save its life, ie, selling the best asset in order to get financing to alleviate the bad financial situation that Lehman Brothers is in.
Before this, BlackRock, Carlyle Group, Hellman & Friedman and other various others were pointing out that they have interest in buying Neuberger. However, till date we are not seeing any deals appearing. The steep drop in price of Lehman Brothers share deals another blow to investors confidence which makes it more difficult for Lehman Brothers to sell its shares at a more better price.
Ian Lowitt on 10 Septembet 2008 news conference says that Lehman Brothers is seeking to sell part of the share holdings of Neuberger Berman and will announce the details once any deals are done.
Adding More Stress to the MBS Market
Hedge fund Highbridge energy asset management director says that the problem with Lehman Brothers lies in its MBS related assets. Lehman Brothers commodity futures business, stock related business and its traditional fixed income business are doing quite well. However, the company was too aggressive in its business in the recent few years which left it with a 65 billion USD MBS related asset bill and leveraged loans of about 10 billion USD. Lehman Brothers market value was only about 5.3 billion, which is only a small fraction of the MBS and leverage loans assets.
Now that the MBS market is very bad and with leverage in Lehman Brothers MBS related assets, if it were to write down, reducing 10% will cause it to loose nearly 10 billion USD, this will be worth more than the current overall market value of its shares. So if Lehman Brothers were to do further write downs, it may follow the foot steps of Bear Stearns.
On 9 September 2008, Lehman Brothers interest difference between its Credit Default Swaps (CDS) and its bonds has reached 120 basis points to reach 440 basis points, making a new high record. But the difference from Bear Stearns is that the 3 largest investment banks, Goldman Sachs, Morgan Stanley and Merrill Lynch says that they will not stop its trading with Lehman Brothers. Bear Stearns price plummeted after Goldman Sachs sends out a notice saying that it will stop trading with Bear Stearns.
Because of the large MBS related assets, if Lehman Brothers is to go bankrupt, it will need to clear off all of them. The large amount of the MBS related assets by Lehman Brothers will add more pressure to the already battered MBS market. Now that the US government has stepped in to help Freddie and Fannie in order to support the liquidity of the MBS market, with Lehman Brothers going bust, it will add on more costs for the US government to save the MBS market.
Watching Wall Streets few big investment banks, Bear Stearns has went down, now Lehman Brothers may be next, followed by maybe Merrill Lynch. This looks like a domino game. The US government has stepped in to help Freddie and Fannie to help stabalize and boost market confidence, but if Lehman Brothers were to go under, it will be another big blow to market confidence.
But hedge fund Highbridge energy asset management director says that Lehman Brothers may have a good way out and not go bankrupt. Ian Lowitt at the news conference says that after the the various measures are able to be implemented, Lehman Brothers balance sheets in 2009 will be clean and bright.
Latest Updates
15 September 2008
- Lehman files for bankruptcy protection
Lehman on Monday filed for Chapter 11 bankruptcy protection, ending the 158-year-old Wall Street firm's run and rattling the foundation of the global financial system.
Lehman said that it will continue business while it explores the sale of its broker and investment-management units and other strategic alternatives.
Tuesday, September 9, 2008
The opportunities and threats on the bailout of Freddie and Fannie
Treasury Secretary Henry Paulson on 7 September 2008 afternoon US Eastern time, with the announcement of a plan to provide Freddie and Fannie funds of up to 200 billion USD, change of the top management, let FHFA perform its specific functions of management on Freddie and Fannie and pledge to ensure that the 2 companies flow of funds will not be limited, the US government formally takes over Freddie and Fannie.
Freddie and Fannie's stock price has went down from around 65 USD to around 5 USD in less than a year, reaching the lowest of 3 USD. The financial aid before this was a failure and Barclays, Citi, Merrill Lynch and other investment banks took a severe hit. There are also well renowned financial institutions with historical background and other ustable and smaller scale players who were hit and trapped.
Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal to provide liquidity to the mortgage market. In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation. The main reason for the privatisation was due to the financial pressure from the war in Vietnam. Before the recent takeover, the US government does not have any stake in Fannie and Fannie was not accepting any government subsidies. Fannie continues to fulfill its duty to try to help US citizens buy their own house and was relieved from any tax burden.
Created in 1970, Freddie Mac can be seen as a measure to prevent market monopoly by Fannie Mae. It can also be seen as a way Wall Street taking the chance to share and enjoy the benefits of Fannie's preferential policies of treatment by the US government. Before the crisis, Freddie and Fannie had over 90% market share in the secondary mortgage market (with some welfare in the residential mortgage). Ginnie Mae never had the chance to catch up with Freddie or Fannie.
The capital behind Freddie and Fannie was actually very small. The ability to make it so big was because of the invisible credit support by the US government which allows Freddie and Fannie to have virtually limitless financing. Take Freddie Mac for example, in 2006 for every 10 seconds they are able to issue a mortgage loan, one of the seeds of destruction planted for the current sub-prime financial crisis. Under the US Congress special law registration, Freddie and Fannie does its job of stabalizing the mortgage market with its business under the supervision of the US federal government, and enjoying benefits and excemptions that other financial institutions can never dreamed of. The debts issued by Freddie and Fannie were not guarenteed by the US government in any contractual form. Under the current crisis situation, congress has no choice but to allow Treasury Secretary Henry Paulson to take over Freddie and Fannie's financials. As for what will become of Freddie and Fannie, it will be up to the congress and the next US government to decide.
Other then the loose management and supervision of Freddie and Fannie, the decline of the US economy and increasing jobless data were also the cause of the crisis of Freddie and Fannie. Those who cannot pay up for their homes are pitiful, but those who hold the preferred shares, normal shares of Freddie or Fannie and the management suffer even greater losses. Financial takeover is an emergency crisis aid for Freddie and Fannie, it will pay first pay the mortgage backed securities and debt holders of up to a 100 billion USD. The difference between preferred shares and debt is, those who cannot pay up the interest for debt holders will be declared bankrupt but it is not breaking of the contractual terms if the dividends cannot be paid to the share holders. There is nothing much the preferred share holders can do. The normal share holders have fled wherever and whenever possible since the crisis first started. Now is to see how the management apologize. Other than blaming the management of Freddie and Fannie, the more critical issues now are the various implications of the crisis of Freddie and Fannie and the recent bailout move. The rescue of Freddie and Fannie by the US federal government was approved by congress, but the bill will be footed by the FED and US Treasury. How much more funds can be used by the US Treasury? If the US economy continues to weaken and more default in mortgage payments, Freddie and Fannie can become 2 bottomless pits. The Bush adminstration's budget surplus basically is hopeless and cannot be depended on, a last minute increase in tax is also not possible, the only way is to issue more bonds by the US government.
Under the current circumstances, issuing of more bonds by the US government will add on to the depreciation of the USD, increasing the export and currency appreciation pressure of other countries. But if the holders of the US bonds were to reduce their holdings, it will cause the bond price to go down which will cause the bond rates to go up, adding on to the financial pressure for the US government to raise funds to the extent that the US government may be unable to issue new bonds.
With the current move, it will act to calm the holders of the securities (various countries SWFs, mostly from Asia and China) and let them hold to maturity. With the buying of the securities, it will act to stabalize the price and maybe start a round of buying of the securities. Pacific Investment Management Company (PIMCO), running the world's largest bond fund, has said that if the US government were to inject more funds to support the financial market, they and other big financial institutions will follow. With the intervention of the US government, the securities issued by Freddie and Fannie are now very low in risks, almost equivalent to the US government bonds.
The China central bank on 8 September 2008 through its official website expressed that the measures taken to alleviate the Freddie and Fannie crisis situation are positve and should be able to stabalize the market and restore confidence.
Fitch Rating's Eileen A. Fahey during an interview with a newspaper reporter says that the move by the US government may be to stabalize the mortgage market and at the same time increase liquidity in the market to lower the current mortgage spreads which is way above the historical level. Eileen also said that Freddie and Fannie now have the same level of ratings as the US government. This means that the securities issued by Freddie and Fannie will be about the same price as the US government bonds. On 7 September 2008, Standard & Poor's Ratings Services said it affirmed its long-term AAA and short-term A-1+ senior unsecured debt ratings on Fannie Mae and Freddie Mac.
An analyst mentioned that maybe too much attention has been put on the China and Asia central banks' holdings of Freddie and Fannie's securities. This gives the central banks too much extra pressure and prompts the decision makers to reduce their holdings in a hurry which at the situation at that time will be sold at a loss. The debt market liquidity is high and the sub-prime weakness is also causing the downturn of the prime maket. Although Freddie and Fannie beforehand were investing in prime market housing areas, but prime mortgage securities are also depreciating in value.
The analyst also mentioned that although the securities are depreciating in values, their ratings are still quite high. With principal guarenteed and low default rate, the possibility of unable to get back the promised interest payments is quite low. The cost of the securities will not be affected, just that currently the market price is lower than the time of purchase.
So the risks of the China and Aisa central banks with their holdings of Freddie and Fannie's securities are quite low.
The recent move has also prompted strengthening of the US dollar. This should have positive effects on the US equity market and more fund will flow towards US assets creating demand.
Latest Updates
12 September 2008
Freddie and Fannie's stock price has went down from around 65 USD to around 5 USD in less than a year, reaching the lowest of 3 USD. The financial aid before this was a failure and Barclays, Citi, Merrill Lynch and other investment banks took a severe hit. There are also well renowned financial institutions with historical background and other ustable and smaller scale players who were hit and trapped.
Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal to provide liquidity to the mortgage market. In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation. The main reason for the privatisation was due to the financial pressure from the war in Vietnam. Before the recent takeover, the US government does not have any stake in Fannie and Fannie was not accepting any government subsidies. Fannie continues to fulfill its duty to try to help US citizens buy their own house and was relieved from any tax burden.
Created in 1970, Freddie Mac can be seen as a measure to prevent market monopoly by Fannie Mae. It can also be seen as a way Wall Street taking the chance to share and enjoy the benefits of Fannie's preferential policies of treatment by the US government. Before the crisis, Freddie and Fannie had over 90% market share in the secondary mortgage market (with some welfare in the residential mortgage). Ginnie Mae never had the chance to catch up with Freddie or Fannie.
The capital behind Freddie and Fannie was actually very small. The ability to make it so big was because of the invisible credit support by the US government which allows Freddie and Fannie to have virtually limitless financing. Take Freddie Mac for example, in 2006 for every 10 seconds they are able to issue a mortgage loan, one of the seeds of destruction planted for the current sub-prime financial crisis. Under the US Congress special law registration, Freddie and Fannie does its job of stabalizing the mortgage market with its business under the supervision of the US federal government, and enjoying benefits and excemptions that other financial institutions can never dreamed of. The debts issued by Freddie and Fannie were not guarenteed by the US government in any contractual form. Under the current crisis situation, congress has no choice but to allow Treasury Secretary Henry Paulson to take over Freddie and Fannie's financials. As for what will become of Freddie and Fannie, it will be up to the congress and the next US government to decide.
Other then the loose management and supervision of Freddie and Fannie, the decline of the US economy and increasing jobless data were also the cause of the crisis of Freddie and Fannie. Those who cannot pay up for their homes are pitiful, but those who hold the preferred shares, normal shares of Freddie or Fannie and the management suffer even greater losses. Financial takeover is an emergency crisis aid for Freddie and Fannie, it will pay first pay the mortgage backed securities and debt holders of up to a 100 billion USD. The difference between preferred shares and debt is, those who cannot pay up the interest for debt holders will be declared bankrupt but it is not breaking of the contractual terms if the dividends cannot be paid to the share holders. There is nothing much the preferred share holders can do. The normal share holders have fled wherever and whenever possible since the crisis first started. Now is to see how the management apologize. Other than blaming the management of Freddie and Fannie, the more critical issues now are the various implications of the crisis of Freddie and Fannie and the recent bailout move. The rescue of Freddie and Fannie by the US federal government was approved by congress, but the bill will be footed by the FED and US Treasury. How much more funds can be used by the US Treasury? If the US economy continues to weaken and more default in mortgage payments, Freddie and Fannie can become 2 bottomless pits. The Bush adminstration's budget surplus basically is hopeless and cannot be depended on, a last minute increase in tax is also not possible, the only way is to issue more bonds by the US government.
Under the current circumstances, issuing of more bonds by the US government will add on to the depreciation of the USD, increasing the export and currency appreciation pressure of other countries. But if the holders of the US bonds were to reduce their holdings, it will cause the bond price to go down which will cause the bond rates to go up, adding on to the financial pressure for the US government to raise funds to the extent that the US government may be unable to issue new bonds.
With the current move, it will act to calm the holders of the securities (various countries SWFs, mostly from Asia and China) and let them hold to maturity. With the buying of the securities, it will act to stabalize the price and maybe start a round of buying of the securities. Pacific Investment Management Company (PIMCO), running the world's largest bond fund, has said that if the US government were to inject more funds to support the financial market, they and other big financial institutions will follow. With the intervention of the US government, the securities issued by Freddie and Fannie are now very low in risks, almost equivalent to the US government bonds.
The China central bank on 8 September 2008 through its official website expressed that the measures taken to alleviate the Freddie and Fannie crisis situation are positve and should be able to stabalize the market and restore confidence.
Fitch Rating's Eileen A. Fahey during an interview with a newspaper reporter says that the move by the US government may be to stabalize the mortgage market and at the same time increase liquidity in the market to lower the current mortgage spreads which is way above the historical level. Eileen also said that Freddie and Fannie now have the same level of ratings as the US government. This means that the securities issued by Freddie and Fannie will be about the same price as the US government bonds. On 7 September 2008, Standard & Poor's Ratings Services said it affirmed its long-term AAA and short-term A-1+ senior unsecured debt ratings on Fannie Mae and Freddie Mac.
An analyst mentioned that maybe too much attention has been put on the China and Asia central banks' holdings of Freddie and Fannie's securities. This gives the central banks too much extra pressure and prompts the decision makers to reduce their holdings in a hurry which at the situation at that time will be sold at a loss. The debt market liquidity is high and the sub-prime weakness is also causing the downturn of the prime maket. Although Freddie and Fannie beforehand were investing in prime market housing areas, but prime mortgage securities are also depreciating in value.
The analyst also mentioned that although the securities are depreciating in values, their ratings are still quite high. With principal guarenteed and low default rate, the possibility of unable to get back the promised interest payments is quite low. The cost of the securities will not be affected, just that currently the market price is lower than the time of purchase.
So the risks of the China and Aisa central banks with their holdings of Freddie and Fannie's securities are quite low.
The recent move has also prompted strengthening of the US dollar. This should have positive effects on the US equity market and more fund will flow towards US assets creating demand.
Latest Updates
12 September 2008
- China may cut its dollar holdings - CICC
(China Daily) -- China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.
The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world's biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms' debt, CICC Chief Economist Ha Jiming said in a report Thursday."The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."
China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.
Countries in Asia have stockpiled foreign exchange reserves since the 1997-98 financial crisis to act as a cushion against a run on their exchange rates. That in turn has increased pressure on policymakers to ensure higher returns from more than $4 trillion in assets.
China will expand its investments in corporate bonds and equities, according to Ha. Treasury and agency bonds account for 50 percent and 40 percent of total dollar assets held by the central bank, he wrote.
- Fannie Mae sells 63% of record note deal in US
NEW YORK, Sept 10 - Fannie Mae said it placed 63 percent of its record US$7 billion two-year note sale on Wednesday with accounts in the United States.
The company, which was taken over along with Freddie Mac by the government on Sunday, also said it sold 12 percent of the notes to investors in Asia, 8 percent to buyers in Europe and 17 percent to others.
Fund managers were the biggest group of buyers, taking 54 percent of the new securities, followed by 27 percent to central banks.
When Fannie Mae last sold two-year notes, in a US$3 billion issue priced in July, investors in Asia were the largest buyer segment with 39 percent, followed by 33 percent to domestic investors. Central banks also led by buyer type, with 57 percent of the securities, followed by 20 percent to fund manager.
The new notes were sold at a yield premium 70 basis points higher than Treasuries. The spread narrowed to 66 basis points soon afterward, a market source said.
Monday, September 8, 2008
Worry about the passing of US sub-prime crisis burden to outside of US
The recent announcements of each country's economic figures were quite surprising.
Although US financial market is still in the sub-prime credit crisis mess with no signs of recovery, but the housing market, consumer market's economic figures are showing some pleasant surprises. US July existing home sales increased 3.1% from that in June, personal consumption in the second quarter increased by 1.7%, the largest increment since last year 3Q. 2Q GDP grew 3.3% comparatively, much higher than 1Q 0.9% growth.
At the same time, Europe, Japan and other economic bodies economic growth is taking a serious downturn. Japan's 2Q showed a 0.6% negative growth, the worst performance in 7 years. Euro regions showed a 0.2% decline comparatively.
US may be the source of the sub-prime credit crisis, but its economy is showing signs of recovery. Morgan Stanley says that the other regions in the world may get into recession earlier than US. US has once again shown its economy flexibility. This flexibility comes from not only the enterprises own vitality, but also from the swift reactions of the FED and Finance department. When oil price was shooting up, the FED took a big rate cut. The interest rate drop from 5.25% to 2% within 8 months. At the same time, the US currency also took a dive, making new lows. And to encourage consumer spending, the Bush administration in Jan this year announced a 145 billion USD tax rebate program.
At the same time, Euro central bank and other countries central banks are still focusing on controlling inflation with the Euro central bank raising its interest rates by 25 basis points recently. While the crisis in England is comparable to that in US, the England central bank still dare not lower the interest rates.
With the flexibility in the US economy, the sub-prime credit crisis is still unable to be resolved by the slow and self adjustments in the US economy. The other bigger possibility of releasing the crisis pressure is by transferring some of the burden to other areas. At the beginning of the century at the time of the IT tech bubble crisis, Allen Greenspan lowered interest rates to increase liquidity to boost the housing market growth. So the IT tech bubble crisis problem was resolved by the housing market boom quite quickly but at the same time the underlying crisis was transferred to the housing market which caused the current sub-prime credit crisis problems.
Now what we are seeing is that with the swift reactions of the US government and the slow counter actions by the other countries, the US sub-prime credit crisis is slowly transferring its burden to outside of US. US 2Q economic growth, although in it has the effect from the economic stimulus package, but the more important reason was the increase in exports. The U.S. Department of Commerce figures showed that in 2Q, US products and service export grew 13.2%, much higher then the expected 0.2% and 1Q's 5.1%. Import went down to 7.6%, higher than 1Q's 0.8% decline. This makes export becoming the main reason for the strong economic growth in 2Q in US.
Although US financial market is still in the sub-prime credit crisis mess with no signs of recovery, but the housing market, consumer market's economic figures are showing some pleasant surprises. US July existing home sales increased 3.1% from that in June, personal consumption in the second quarter increased by 1.7%, the largest increment since last year 3Q. 2Q GDP grew 3.3% comparatively, much higher than 1Q 0.9% growth.
At the same time, Europe, Japan and other economic bodies economic growth is taking a serious downturn. Japan's 2Q showed a 0.6% negative growth, the worst performance in 7 years. Euro regions showed a 0.2% decline comparatively.
US may be the source of the sub-prime credit crisis, but its economy is showing signs of recovery. Morgan Stanley says that the other regions in the world may get into recession earlier than US. US has once again shown its economy flexibility. This flexibility comes from not only the enterprises own vitality, but also from the swift reactions of the FED and Finance department. When oil price was shooting up, the FED took a big rate cut. The interest rate drop from 5.25% to 2% within 8 months. At the same time, the US currency also took a dive, making new lows. And to encourage consumer spending, the Bush administration in Jan this year announced a 145 billion USD tax rebate program.
At the same time, Euro central bank and other countries central banks are still focusing on controlling inflation with the Euro central bank raising its interest rates by 25 basis points recently. While the crisis in England is comparable to that in US, the England central bank still dare not lower the interest rates.
With the flexibility in the US economy, the sub-prime credit crisis is still unable to be resolved by the slow and self adjustments in the US economy. The other bigger possibility of releasing the crisis pressure is by transferring some of the burden to other areas. At the beginning of the century at the time of the IT tech bubble crisis, Allen Greenspan lowered interest rates to increase liquidity to boost the housing market growth. So the IT tech bubble crisis problem was resolved by the housing market boom quite quickly but at the same time the underlying crisis was transferred to the housing market which caused the current sub-prime credit crisis problems.
Now what we are seeing is that with the swift reactions of the US government and the slow counter actions by the other countries, the US sub-prime credit crisis is slowly transferring its burden to outside of US. US 2Q economic growth, although in it has the effect from the economic stimulus package, but the more important reason was the increase in exports. The U.S. Department of Commerce figures showed that in 2Q, US products and service export grew 13.2%, much higher then the expected 0.2% and 1Q's 5.1%. Import went down to 7.6%, higher than 1Q's 0.8% decline. This makes export becoming the main reason for the strong economic growth in 2Q in US.
10 billion 'hot money' inflow into China GuangZhou's insurance industry
During the first half of this year, GuangDong province (not including ShenZhen) insurance income amounts to 41.58 billion yuan and its high growth is drawing attention from the industry.
Recently, 中央财经大学保险学院执行院长 professor 郝演苏 went for some research and investigations in GuangDong and estimates that hot money of about 10 billion yuan has entered into the GuangDong insurance market. GuangDong's 保监局 quickly responded that there are no hot money inflow and says that the insurance products does not have the conditions to attract hot money.
In the first half this year, GuangDong's insurance income's 92.63% growth is well above the national average value of 63.94%, in it 75% and above comes from bank insurance sales. In the first half of this year, JiangShu, ShangHai, BeiJing and other frontline provinces and cities growth is lower then the national average. Professor 郝演苏 questions that with the implementation of the new labour law, the Pearl River delta region industries have not been doing well, so where does the large amount of money comes from? GuangDong's population are more financial savvy comparatively and who will invest in such prudent insurance products?
GuangDong's 保监局 says that other than the capital market downturn causing funds to flow towards the insurance market, insurance and banking industry's attention towards insurance products is the main cause for the high growth. In the past year there have been 8 new provincial-level insurance branches opening in GuangDong, about half that of the 17 currently in GuangDong. The business development is the driving force for the growth in insurance premiums in the first 8 months of this year.
Professor 郝演苏 thoughts is that in the first half of this year, GuangDong's insurance growth of 92.6% amounting to insurance premiums of 20 billion yuan, with fronline areas average growth of about 50% as an estimate, of the 20 billion yuan, 10 billion yuan comes from overseas.
Professor 郝演苏 says that from his research, because the Hong Kong dollar is pegged to the US dollar, to prevent depreciation of the Hong Kong dollar and to earn a higher interest, quite a lot of Hong Kong and Macau people are putting their funds in bank insurance products with prices quoted using the Chinese RenMinBi. The most welcomed product is 万能险 because it is capital guarenteed, has higher returns and relatively easy to buy and redeem.
However, GuangDong's 保监局 does not agree to that idea. It says that from an earnings/returns perspective, Hong Kong's investment based insurance products' quality are much better than those in China quoting a example that an insurance company in GuangDong and Hong Kong selling the same type of 万能险 insurance product, tracking over a period of time, the returns in Hong Kong is about 5% whereas in China it is only about 3%.
中山大学金融学博导 professor 申曙光 also questions that hot money's characteristic is to get high returns in a short priod of time. Investing in insurance products cannot match this characteristic. There are a lot of ways hot money can get into China, but with the various adminstrative fees to pay for insurance products in China, the possibility of high gains in a short period of time is relatively low.
People from the GuangDong's insurance industry have cold response to this news. Saying that in Hong Kong, the stock and housing market is not doing very well coupled with the depreciation of the US dollar, if Hong Kong and Macau people were to buy insurance products quoted in RenMinBi with higher constant returns than bank's fixed deposit coupled with the appreciation of the RenMinBi, it will be a better investment option.
An insurance company's banking insurance product manager said that the largest client they have has an insurance premium of 20 million yuan per person. They also have clients from Taiwan. They are very willing to sell as it does not violate any Chinese government's regulations. He said that other then the recent instructions from the Chinese government regulators to reform the banking insurance products due to the fear that it may grow too fast causing a negative growth next year, there are nothing much of other instructions.
Professor 郝演苏 says that 10 billion yuan in GuangDong or China is not a big sum. There is no need to fear once the term hot money is being heard and think negatively. He says his report is just serving a warning bell to the Chinese regulators. Firstly, are there more conrete regulations to govern foreigners buying insurance products in China? Next, for big insurance premiums, are there any checks in place to trace the source of the fund?
Recently, 中央财经大学保险学院执行院长 professor 郝演苏 went for some research and investigations in GuangDong and estimates that hot money of about 10 billion yuan has entered into the GuangDong insurance market. GuangDong's 保监局 quickly responded that there are no hot money inflow and says that the insurance products does not have the conditions to attract hot money.
In the first half this year, GuangDong's insurance income's 92.63% growth is well above the national average value of 63.94%, in it 75% and above comes from bank insurance sales. In the first half of this year, JiangShu, ShangHai, BeiJing and other frontline provinces and cities growth is lower then the national average. Professor 郝演苏 questions that with the implementation of the new labour law, the Pearl River delta region industries have not been doing well, so where does the large amount of money comes from? GuangDong's population are more financial savvy comparatively and who will invest in such prudent insurance products?
GuangDong's 保监局 says that other than the capital market downturn causing funds to flow towards the insurance market, insurance and banking industry's attention towards insurance products is the main cause for the high growth. In the past year there have been 8 new provincial-level insurance branches opening in GuangDong, about half that of the 17 currently in GuangDong. The business development is the driving force for the growth in insurance premiums in the first 8 months of this year.
Professor 郝演苏 thoughts is that in the first half of this year, GuangDong's insurance growth of 92.6% amounting to insurance premiums of 20 billion yuan, with fronline areas average growth of about 50% as an estimate, of the 20 billion yuan, 10 billion yuan comes from overseas.
Professor 郝演苏 says that from his research, because the Hong Kong dollar is pegged to the US dollar, to prevent depreciation of the Hong Kong dollar and to earn a higher interest, quite a lot of Hong Kong and Macau people are putting their funds in bank insurance products with prices quoted using the Chinese RenMinBi. The most welcomed product is 万能险 because it is capital guarenteed, has higher returns and relatively easy to buy and redeem.
However, GuangDong's 保监局 does not agree to that idea. It says that from an earnings/returns perspective, Hong Kong's investment based insurance products' quality are much better than those in China quoting a example that an insurance company in GuangDong and Hong Kong selling the same type of 万能险 insurance product, tracking over a period of time, the returns in Hong Kong is about 5% whereas in China it is only about 3%.
中山大学金融学博导 professor 申曙光 also questions that hot money's characteristic is to get high returns in a short priod of time. Investing in insurance products cannot match this characteristic. There are a lot of ways hot money can get into China, but with the various adminstrative fees to pay for insurance products in China, the possibility of high gains in a short period of time is relatively low.
People from the GuangDong's insurance industry have cold response to this news. Saying that in Hong Kong, the stock and housing market is not doing very well coupled with the depreciation of the US dollar, if Hong Kong and Macau people were to buy insurance products quoted in RenMinBi with higher constant returns than bank's fixed deposit coupled with the appreciation of the RenMinBi, it will be a better investment option.
An insurance company's banking insurance product manager said that the largest client they have has an insurance premium of 20 million yuan per person. They also have clients from Taiwan. They are very willing to sell as it does not violate any Chinese government's regulations. He said that other then the recent instructions from the Chinese government regulators to reform the banking insurance products due to the fear that it may grow too fast causing a negative growth next year, there are nothing much of other instructions.
Professor 郝演苏 says that 10 billion yuan in GuangDong or China is not a big sum. There is no need to fear once the term hot money is being heard and think negatively. He says his report is just serving a warning bell to the Chinese regulators. Firstly, are there more conrete regulations to govern foreigners buying insurance products in China? Next, for big insurance premiums, are there any checks in place to trace the source of the fund?
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