Economic Battle Royale: George Soros vs PRC

♠ Posted by Emmanuel in , at 1/27/2016 01:30:00 AM
Mahathir and Soros eventually reconciled, but will Chinese authorities be so forgiving?
This could be a battle for the ages if it comes true: During the Asian financial crisis, then-Malaysian Prime Minister Mahathir Mohamed famously singled out George Soros as a villain in depressing any number of Asian economies to make a quick buck through currency speculation. Aside from calling Soros a "moron," Mahathir launched all sorts of tirades against the famous financial figure, prompting a heated exchange of words:
"I know I am taking a big risk to suggest it, but I am saying that currency trading is unnecessary, unproductive and immoral," Mr. Mahathir said Saturday night. "It should be stopped. It should be made illegal. We don't need currency trading. We need to buy money only when we want to finance real trade." 

On Sunday, Mr. Soros said: "Dr. Mahathir suggested banning currency trading. This is such an inappropriate idea that it doesn't deserve serious consideration. Interfering with the convertibility of capital at a moment like this is a recipe for disaster. Dr. Mahathir is a menace to his own country..."

When Thailand's currency crisis caused the Malaysian ringgit and other regional currencies to crash last month, the Malaysian prime minister blamed hedge-fund investors such as Mr. Soros, whom he called "a moron."  
The picture above dates from 2006, when the antagonists finally met face-to-face. Apparently, Mahathir had softened his views of Soros by then. Among other things, he mentioned that he no longer believed that Soros shorted Asian currencies like the Malaysian ringgit during the crisis:
Malaysia's former premier Mahathir Mohamad today met his old foe George Soros and said he accepted the billionaire financier was not responsible for the 1997-98 Asian financial crisis. Mr Mahathir has long blamed Mr Soros for undermining South East Asian economies by destabilising their currencies, and famously called him a "moron".

"Mr Soros said he was not involved in the devaluation of the Malaysian currency and that other people were involved. And I have accepted that," Mr Mahathir said at a joint press conference.
However, George Soros' reputation precedes him of being "the man who broke the Bank of England." By speculating against the pound's devaluation way back when, Soros made a tidy profit and gained global notoriety as a currency speculator. And so it is again with China's financial markets causing adverse spill-on effects on the rest of the world (particularly Asia). At the ongoing Davos meeting, Soros suggested that he was positioning against Asian currencies, raising the particular ire of the Chinese government. They have now warned him about speculating against the yuan and the Hong Kong dollar (which is pegged to the US dollar):
China’s state press is warning George Soros not to bet against its currency after the hedge fund star-turned philanthropist predicted a “hard landing” for its economy last week. “Soros’ challenge against the renminbi and Hong Kong dollar is unlikely to succeed, there is no doubt about that,” the overseas edition of People’s Daily, the Communist Party’s main mouthpiece, said Tuesday...

But China’s warning was strange for one reason: Soros never said he was betting against the renminbi or Hong Kong dollar. At the World Economic Forum in Davos, Soros was light on specifics, only saying he was betting against U.S. stocks and Asian currencies. 
If your reputation is like that of Soros, even the merest hint of speculation against Asian currencies brings a warning from PRC officialdom. (Consider yourself warned, Mr. Soros.)

New Venezuelan FinMin: Inflation Doesn't Exist

♠ Posted by Emmanuel in ,, at 1/26/2016 01:30:00 AM
Guerra economica and ever after.
The late Venezuelan President Hugo Chavez was once described as a "Narcissist-Leninist" by a number of economic commentators. As we've subsequently learned, self-ingratiating policies for the alleged benefit of the global workingman worked a lot better when oil was at $100/barrel instead of less than a third of that. In the latter situation which Chavez's successors find themselves, the scope for the Venezuelans spreading their largesse from oil revenues is greatly diminished since, well, the country is now faced with empty coffers selling the stuff at below cost for months on end.

Enter Venezuela's new finance minister, Luis Salas. It's not a good start that he's not an economist by training but a sociologist, but it only gets more interesting. Recently, he declared that inflation does not exist:
Venezuela's new economy czar Luis Salas is tasked with controlling what is believed to be the world's highest rate of inflation, but comes to the job with an unusual perspective: that inflation does not really exist.

President Nicolas Maduro on Wednesday tapped the 39-year-old sociologist as vice president for the economy amid soaring consumer prices and chronic product shortages, signaling a move toward orthodox socialism in the OPEC nation struggling under low oil prices.

Essays written by Salas describe scarcity and spiraling prices as the result of exploitation by businesses rather than government policy, offering an academic underpinning to the "economic war" explanation that Maduro uses to describe the current malaise of recession, runaway prices and widespread product shortages.

"Inflation does not exist in real life," he wrote in a 2015 pamphlet called "22 Keys to Understanding the Economic War." "When a person goes to a shop and finds that prices have gone up, they are not in the presence of 'inflation.'"

Salas has argued against the idea that excessive printing of money causes inflation - an almost universally accepted tenet of macroeconomics. He insists prices rise primarily because corporations seek excessive profit margins.
He also goes on a tired rather than proffer any explanation of how to deal with inflation (which you wouldn't have to deal with to begin with if it didn't exist):
Salas' numerous online essays are written in flowing academic prose featuring caustic turns-of-phrase such as "speculative-parasite-vulture capital" or "global war of the planetary plutocracy."

Few offer specific policy proposals. One list of ideas for economic policies for 2016 published on Salas' blog includes a recommendation that economic policy should be "coherent" and "should not be passive but rather active and on the offensive." 
Going back to the father of socialism, did Marx also deny the existence of inflation? Actually, no. From Das Kapital:
If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current, it will (apart from the danger of falling into general disrepute) represent only that quantity of gold, which, in accordance with the laws of circulation of commodities, is really required and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one-quarter of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price ’1 will now be expressed by the price £2. 
Why is it that today's socialists deny Marx's insights? If anything, this guy is even worse than Chavez--a "Fantasist-Leninist" [!] I'll stick with "inflation is always and everywhere a monetary phenomenon" which sounds rather more likely than "inflation doesn't exist."

Will the Paris-Dakar Rally Ever Return to Africa?

♠ Posted by Emmanuel in ,, at 1/24/2016 06:45:00 PM
What's the 'Paris-Dakar Rally' doing in Bolivia, of all places? Ask winner Toby Price (AUS).
It may strike you as false advertising, but the world-famous test of endurance known as the Paris-Dakar rally or just the Dakar rally has not been held on the African continent since 2009. This cross-continental motorsports event across inhospitable terrain used to be between Paris and Dakar, Senegal at various times since its 1979 inception. The Sahara desert was the proving ground for one of the ultimate tests of man and machine. However, since 2009, it has been held in South America due to security concerns on the African continent:
The Paris-Dakar Rally was moved from Africa to South America in 2009 but it is still called The Dakar Rally (or simply, Dakar). It is one of the toughest rallies in the world. The South American trail is also tough but does not reach the extremities in the Saharan desert. This year’s rally will start with a “prologue” in Buenos Aires in the Argentinian capital, on the 2nd of February, go through the length of the country and turn around in ,Uyuni, Bolivia on the 8th of January and take another route into Argentina where it will end in Vila Carlos Pas, Rosario, on January 16th. For cars, it will be a total of 9,583 gruelling kilometres.

This rally is unique. It is a race of extreme endurance of man and machine, a modern day Odyssey. It is the ultimate physical and mental test of man (and woman). Since the start of the rally, 69 people have lost their lives as a direct result of the race. This is made up of 28 competitors and 41 non-competitors. The non-competitors who lost their lives include the race founder, Thierry Sabine, 14 news journalists and support crew, 4 spectators, 4 children, and 18 other unnamed spectators and bystanders. The most common cause of death is collision. But casualties have been few in recent years. Even so, Motorbike rider, Michal Hernik, was found dead in mysterious circumstances in the 2015 race.
However, security challenges prompted leaving Africa altogether by 2009:
By 2000, the rally started to contend with terrorists in the African desert. That year the participants were airlifted across some of the more dangerous routes. That year’s race ended in Cairo. 2001 saw a woman finishing top for the first time. Jutta Kleinschmidt from Germany won in a Mitsubishi. In 2006, the race started in Portugal for the first time. This was repeated in 2007.

The 2008 race was cancelled after the murder of four French citizens and three Mauritanian soldiers in the days before the start of the race. The French Foreign Affairs Ministry advised its citizens not to travel to Mauritania since the country’s intelligence identified terrorist threats aimed at the rally. The following year, 2009, the race was moved to South America and Africa lost an important attention seeker to the continent. Africa’s loss became South America’s gain.
Critics will see the rally as a neo-imperialist relic since African participants have been next to none during the event's history. Ditto for African automakers. Still, the move to South America is a bit saddening insofar as it reflects the deteriorating security conditions in the Sahara. Mind you, this was before ISIS allegedly gained allies in the desert regions of Africa.

Hallelujah for Markets...from Vatican Finance Chief

♠ Posted by Emmanuel in at 1/21/2016 04:53:00 PM
The cardinal for capitalism, George Pell (de facto Vatican finance minister).
In the past I've covered "liberation theology"--the application of Marxist ideology to Christianity--and the controversies within the Catholic Church regarding it. During the time of Pope Benedict XVI, the arch-conservative who was in his previous guise Cardinal Ratzinger denounced the possibility of literally godless Marxist ideology co-existing with Christian doctrine. With the Jesuit Pope Francis though coming from Latin America--home of liberation theology--the preferential option for the poor is coming also back into focus. The main reason, of course, is because the current pontiff's stances often smack of "liberation theology." 

Touching upon these controversies is the role of the market in modern societies. Having condemned the solitary pursuit of riches as the "devil's dung" and other splendid allusions, Pope Francis and his seemingly liberation theology-friendly demeanor has struck others as a form of Catholic socialism. Previously disdained figures have been visiting the Vatican. Or, has capitalism-bashing really hit a fever pitch? 

George Pell, effectively the Vatican's equivalent of a finance minister--the Vatican is a state, after all--offers a more favorable view of markets:
George Pell, the head of the Holy See’s secretariat for the economy, told a conference hosted by The Global Foundation in Rome on Sunday that “no better model is available at the moment” than market economies, citing their capacity to “rejuvenate” after the Great Depression and recent global financial crisis, and their failure to produce the “massive alienation” predicted by Karl Marx.
His boss, though, may beg to differ. in his defense, Pell states that the Pope is actually not a socialist hardliner like some have styled him. Rather, Francis sees benefits from market mechanisms, although the focus on his more exaggerated statements against capitalism's admittedly negative excesses garners the bulk of media attention:
Cardinal Pell’s remarks contrast with the harsher tone towards unbridled capitalism often adopted by Pope Francis. In a speech last July in Bolivia he described the unfettered pursuit of money as the “dung of the devil”. Pope Francis also lashed out at multinational companies for plundering the planet in a high-profile encyclical letter on the environment published last June.

But Cardinal Pell insists that the Pope’s views may be more nuanced than is often believed — particularly by conservatives who have criticised the Argentine pope for being a socialist.

“We are all aware of Pope Francis’ commitment to social justice, his option for the poor and those on the peripheries, and his condemnations of exploitation, abuse and consumerism,” he said. “What is not so widely known is that Pope Francis himself ... has made specific and favourable reference to the role of business,” Cardinal Pell said. He cited how Pope Francis wrote in last June’s encyclical that business was a “noble vocation” and on his visit to the US he spoke of “the spirit of enterprise” as essential to a sustainable economy.
Catholicism is very hard to define from the conventional left-right duality Americans and their like view the world with. The Holy See sets its own course. Sometimes pleasing lefties with anti-war and anti-death penalty stances, it too pleases righties with its focus on the family and discouraging homosexuality. More than other things, markets can be viewed either way from Catholicism. The Acton Institute famously champions a market-friendly form of Catholicism, while Latin Americans including Pope Francis to some extent do bash its more extreme forms.

My personal belief remains the same--markets are essentially amoral. It can be used for good or ill. Those criticizing it for the excesses of capitalism certainly raise a valid point, but so do those who view it as a fairly mundane way to improve welfare in societies. Again, it's how market mechanisms are used rather than being inherently immoral or moral that raises confusion about the whole matter.

Prospects for Iran as the Next Investor's Darling

♠ Posted by Emmanuel in at 1/17/2016 05:10:00 PM
Capital goes to where profits are to be made. Is this place one of them for foreign investors?
Even in these rather blah economic times, there lie opportunities...for those brave enough to take them on, I suppose. With the rest of the world economy becoming rather stagnant, where is the smart money supposed to go? How about a country with a population of 77 million that has been locked out of the international community for years on end due to sanctions? With normalized economic relations set to resume this week (with the major exception of the United States), Iran looks like the destination country of choice for any number of multinational corporations.

Starved of modern capital and consumer goods, Iran certainly will have some appetite for them:
With global growth moribund, multinational firms have been waiting with bated breath for the lifting of international sanctions against Iran for access to a country in desperate need to modernise. After nearly a decade of limited access to the outside world, many sectors of the Iranian economy need new equipment including the oil and gas industry, railways, and airlines. Plus there are 80 million Iranian consumers, many of them keen to buy cars and other goods.

Access is expected to begin opening up, now that the International Atomic Energy Agency has issued a report concluding that Iran has fulfilled its obligations under a nuclear deal reached last year with world powers.
Yes, oil prices are at near-historic lows, but still, Iran's energy sector needs to modernize rather quickly to keep up with the others. So, oil services companies certainly have Iran in their sights:
Nevertheless, with the country holding the world's fourth-largest oil reserves and currently pumping a million barrels per day less than it did before sanctions, the Iranian energy sector is still attractive for foreign firms and Tehran is looking for US$25 billion in investment in the oil and gas sectors. "The infrastructure and energy sectors offer the best opportunities for our firms", Italy's economic development ministry said recently.

Russia, which has maintained close relations with Iran, has a leg up on the competition and is willing to put money on the table to achieve its goal of boosting its annual trade turnover with Tehran from US$1.6 billion currently to US$10 billion. Russian President Vladimir Putin offered to open up a US$5 billion credit line to Iran during a visit to Tehran in November.
Aside from FDI by MNCs, portfolio investors will also get their chance to place funds in Iran's stock market. Actually, it is the fifth largest in the Middle East with a total capitalization on $90 billion, so it's nothing to sneeze at. By coincidence, Saudi Arabia opening up its stock market to international investors places them both in competition for foreign funds:
With a market cap of about $90 billion, Iran’s stock market is fifth-largest in the Middle East. The lifting of sanctions will allow the country to compete for investor attention with Saudi Arabia, which opened the region’s biggest stock market to direct foreign ownership seven months ago.

While investing on Tehran’s bourse is already legal for many international investors, financial sanctions placed on the banking system have made it almost impossible to transfer money in and out of the country. The majority of those sanctions are being removed after an international deal over Iran’s nuclear ambitions, allowing the nation’s banks to reconnect to the Swift system for international financial transactions...

Even so, dozens of Europeans and Americans living in Europe have been on organized investor tours to Iran over the past year, assessing the landscape and visiting some of the large, listed manufacturers. Many have already obtained the necessary trading codes and licenses to prepare for the removal of sanctions.
Note though that directly owning shares in some companies linked to the Revolutionary Guards is still not possible. Still, that opportunities have opened up is undeniable, but you do have to be quite brave to be one of the first (back?) in lest Iran regress, especially on building nuclear weapons.

As China is Shunned, Starbucks, UBS Expand There

♠ Posted by Emmanuel in , at 1/12/2016 05:06:00 PM
Starbucks still bets its future on China--and so do many other MNCs, so what gives?
There is a tendency nowadays to sell everything China-related: companies in the PRC, companies that export a lot to the PRC, countries headquartered near the PRC (read: the Asia-Pacific) and so on and so forth. Call it financial guilt by association--if it has even a whiff of China, sell it. So, it must come as a surprise that, actually, there are Western multinational corporations that are not only bullish on China, but plan to expand their operations greatly there in the very near future. That they represent a range of industries is also suggestive of something.

First we have the Swiss banking giants UBS:
Sergio Ermotti, CEO UBS Group, said on Monday that the company will increase its workforce in China over the next five years. In an interview with Bloomberg, Mr. Ermotti said UBS will double its headcount by adding 600 employees to its offices in China. He revealed that these additions would be made across fixed income and asset management, equities, investment banking, and wealth management divisions. He further added that some workforce expansion will also take place in back-office operations as well.

The CEO believes it is the right time to expand in China, as volatility has given rise to growth opportunities. In his statement to Bloomberg TV, Mr. Ermotti said: “Those are also the good times to plan for the future, and that’s the reason why we are starting to implement our strategic plan.”
The coffee empire Starbucks' largest growth market remains...wait for it...China. In 2016, it's still full speed ahead for them in the PRC:
Starbucks Corp. plans to accelerate its expansion in China, shrugging off concerns about a slowdown in the coffee chain’s second-largest market behind the U.S. and a potential further depreciation of the yuan. The company plans to add about 500 new stores in the year ending Sept. 27, up from 450 new outlets in the previous year. China is Starbucks’ fastest-growing market, and the coffee chain is looking to have 3,400 locations there by 2019, compared with about 2,000 now.

“We have no intention of slowing down and we remain very optimistic and bullish on the opportunities that Starbucks has in China, both in the short term as well as in the long term,” John Culver, Starbucks president of the China and Asia-Pacific region, said in a phone interview Tuesday. Starbucks joins SAP SE, the world’s biggest maker of business-management software, in expressing optimism about China, betting on a sales boost as consumption and corporate spending grows even as a decline in the yuan would erode the value of profits they generate in the country.
Are they crazy? Isn't China about to collapse like a house of cards? My inclination is to believe this: China is no longer a "frontier" market where MNCs thought you could gain an tidy profit by getting there first. Rather, it has matured to such a point where MNCs competing with other MNCs and even local firms means that a shakeout of foreign investors is long overdue. Just like in any other endeavor, there will be those who succeed and others who fail. By adapting to local market conditions and building a good name in China, UBS and Starbucks among others aim to consolidate their gains there as others leave.

It's simple as that. As I mentioned at the top of the post, indiscriminately selling anything remotely China-related is not likely to pay off. Instead, pick those names that actually have done well in China and will likely continue to do so. Yes, be discriminating since it's hardly believable that everything there has turned sour all at once. There are still opportunities, but you have to be selective since China is maturing more quickly than you think, whether it be in coffee houses or financial services.

April Fool's or Biggest IPO Ever? Floating Saudi Aramco

♠ Posted by Emmanuel in , at 1/11/2016 12:30:00 AM

Of all the darndest things I've heard during the start of the year when there was no lack of them, the idea of Saudi Arabia's state oil company Aramco listing its shares takes the cake. Certainly the timing is bad given that oil prices have dropped precipitously. Hovering around $100-something in mid 2014, the price of a barrel has fallen to about a third of that. Still, desperate times may call for desperate measures. To help close a yawning fiscal deficit, Saudi Arabia may resort to an IPO despite naysayers thinking this is some kind of prank:
When one financial adviser heard about Saudi Arabia’s plans to list a company larger than the economies of most nations, he had to pull over his car because he was laughing so hard. Saudi Arabian Oil Co., or Aramco, the world’s largest oil producer, said Friday it’s considering an initial public offering. It confirmed an interview with Deputy Crown Prince Mohammad bin Salman published in the Economist Thursday. The news was greeted with incredulity in the financial industry, according to interviews with a half dozen bankers who do business in the Middle East. They asked not to be identified to protect their business interests.

For one thing, Aramco’s inner workings are opaque, making its true value a mystery. Then there’s the timing. The price of crude oil is near its lowest level in more than a decade. Discussions with Aramco about selling assets in the past had been about much smaller parts of the business, five of the people said. An initial public offering of the entire enterprise had only ever been discussed as a joke, one of the people said. 
Even if (a) oil prices have fallen by a huge amount and (b) any flotation will only see a few shares listed of subsidiaries and not the parent company, the sheer size of Aramco is something to reckon with. Given its massive proven oil reserves, some valuation models predict it will easily be the biggest initial public offering of all time. At the top of the range, astounding implied market capitalization figures of $7-10 trillion are being touted:
Saudi Arabia’s potential sale of shares in its state-owned oil giant could lead to a publicly listed company valued in the trillions of dollars, more than 10 times Apple Inc.’s peak of about $756 billion. Saudi Arabian Oil Co., better known as Saudi Aramco, on Friday held out the prospect of an IPO on the Saudi stock exchange. Aramco said it was considering “the listing in capital markets of an appropriate percentage of the company’s shares and/or the listing of a bundle of its downstream subsidiaries.”

That potential drew attention because the company produces more than 10% of the world’s oil supply every day and controls a large chain of refineries and petrochemical facilities to complement its exploration and production operations. Taken together the business could be valued at more than $10 trillion by some estimates. Exxon Mobil Corp., the largest non-state-controlled oil company, has a market value of $317 billion.
For all the hyperbole, you have to wonder though about the veracity of such figures when the "confidence interval" here ranges from "joketime" to "biggest IPO in world history." Can the secretive Saudis pull the latter off?

Saudi v Iran: When Mideast Unrest *Clobbers* Oil Prices

♠ Posted by Emmanuel in , at 1/08/2016 02:19:00 PM
"So what?" looks like this: oil price momentarily spiked after Saudi v Iran commenced, then resumed (downward) course.
We've gotten used to the idea that unrest in the Middle East results in a spike in oil prices worldwide. But, that may no longer be the case given current events. A few days ago, Saudi Arabia and Iran had a conflict culminating in the former severing diplomatic ties with the latter after the Saudis executed Shiite cleric Nimr al-Nimr and protests against the Saudi embassy in Tehran followed. Whether it's Saudi Arabia deliberately showing "who's boss" in the region after the US has become less bellicose towards Iran and its Shiite allies, we are more concerned here with the effect than the cause.

In terms of oil price, the result may be somewhat unexpected. After a brief spike in the aftermath of the aforesaid hostilities, the price of oil has actually fallen below the level it was before. To make a long story short:
  • To begin with, the market is so massively oversupplied with oil that the immediate consequences of this diplomatic tussle are next to none; 
  • Because these two large OPEC producers will likely not engage in military conflict (we hope), it is difficult to envision their production being materially affected;
  • Instead, their combined production will probably increase since they will not coordinate their production levels even as major players in a so-called "cartel."
Already, we have rumors that Saudi Arabia is cutting oil prices charged to European customers to preempt Iranian exports there after international sanctions are lifted:
The latest price drop was caused by the escalation of tensions between Saudi Arabia and Iran in the wake of the execution of senior Shia Muslim cleric Nimr al-Nimr. While this briefly drove prices higher, the prevailing view became that it would prevent the powerful Opec cartel, of which both countries are members, from agreeing on production cuts to support higher prices. In fact, most experts think it is likely to make the situation much worse.

Iran is about to emerge from years of international sanctions and stands ready to bring 500,000 additional barrels of oil per day to a market already oversupplied to the tune of up to two million barrels. The country already has "customers lined up", especially in Europe, Dr Fereidun Fesharaki, a former oil adviser to the Iranian Prime Minister and now chairman of consultancy FGE, told The Times.

This is triggering a price war that is adding further weight to prices. Reports have emerged that Saudi Arabia is slashing prices for its crude in Europe to try and prevent its customers buying from Iran as the market becomes another forum for what has been dubbed an "economic war" between the two countries.
There was a time when OPEC mattered and, more to the point, conflicts among OPEC members mattered. Iran v Iraq, Iraq v Kuwait, etc. are the stuff of legend. Those days are behind us now in a "free-for-all" environment where the mother of all cartels seems to have run its course and outlived its original purpose. Cartel or not, it's every producer out for itself. 

Note: In China, Green Means a Falling Stock

♠ Posted by Emmanuel in , at 1/07/2016 11:13:00 AM
Those stocks are green in the PRC...because they're falling. The third column shows changes on the day.
These past few days have been rough for global stock markets, but especially so in mainland China. Twice in four trading days, the Shanghai stock exchange has closed automatically after breaching the 7% daily trading limit on the down side. You keep seeing pictures like the one above of investors stupefied by boards showing stocks nearly all in green, and you may think "But aren't stocks going up across the board?" Actually, if you look at the figures, the stocks in green are down in China. Red is an auspicious color in China, and so it's used to indicate when stocks rise. Conversely, green is not necessarily the opposite as an "inauspicious" color, but it's what they use to indicate losses.

I think it would be clearer to the rest of the world if they used a different color-coding system for "down" to be some other color other than green. Then again, these boards may be programmed to show only three real variations of green, red, and a "neutral" color to show no change.

At any rate, PRC officialdom has much to answer for regarding these market movements roiling the world economy. Having goaded retail investors into stocks just as China's economy was slowing down, they now have to intervene heavily to avoid losing face. But even so, their efforts do not seem to be inspiring much confidence. That their central bank is guiding the yuan lower and lower again is a source of discomfort since it's precisely that sort of action by the PBoC which brought on last August's movements.

Surprise!? Egyptian Telecom Expropriated in North Korea

♠ Posted by Emmanuel in , at 1/05/2016 03:41:00 PM
The way we were: Orascom's Naguib Sawiris [c] with the late Kim Jong-il [r].
A corollary to "fortune favors the brave" is "misfortune favors the foolhardy."

Yes, there are cell phones in North Korea--it's just that you cannot call abroad or access the Internet through them. I had been peripherally aware of Orascom, the Egyptian telecommunications provider, through its advertisements on CNN. I was reminded of it in a powerful way when I read a recent Wall Street Journal article discussing how Orascom got expropriated (excommunicated?) by North Korea. Of course, my initial reaction was "Why of course! What were you thinking would happen to you went to North Korea, of all places?"

A closer reading reveals greater subtlety to it than that. Aside from investing in its home region of the Middle East, Orascom has found a profitable niche operating cellular phone networks where others won't dare go. Read: countries high in "political risk," which often isn't actually as forbidding as most of us would presume if you ask Orascom:
Egyptian tycoon Naguib Sawiris made billions of dollars from a global telecommunications empire that operated in authoritarian states from Zimbabwe to Pakistan. Now he is being dealt a potentially painful setback by one of the global economy’s biggest pariahs: North Korea...But in the last few years, a state-run competitor emerged in North Korea, and Cairo-based Orascom hit problems trying to repatriate profits. Orascom said in a November filing in Egypt it had lost control of its 75%-owned North Korean venture, Koryolink, and struck the venture from its balance sheet, removing hundreds of millions of dollars in assets.
Since 1997, Orascom has built and run mobile networks in more than 20 countries across Africa, the Middle East and the Indian subcontinent. Its strategy: Load up on debt to build networks quickly in risky markets with little or no infrastructure, betting on rapid growth and strong returns, then sell when the market matures and more players materialize...

Orascom operated in many politically unstable nations such as Yemen and Bangladesh. In most cases, the gamble paid off. In 2003, Orascom paid $5 million for one of Iraq’s first mobile network licenses. Its local partner faced kidnappings of staff and attacks on property from insurgents, but in 2007 Orascom sold its Iraq operations for $1.2 billion to a Kuwaiti company.

There have been some setbacks. Orascom’s joint venture in Syria with a company run by a cousin of President Bashar al-Assad fell apart in 2002 when a Syrian court handed the Egyptian company’s share of the venture to the local partner.
Zimbabwe, Pakistan, Syria, North Korea...if nothing else, Naguib Sawiris does not lack for courage. His approach is that while there may be a few write-offs here and there like North Korea (and Russia as mentioned elsewhere in the article), that other countries aren't so much in a hurry to chase Orascom away probably holds true insofar as few others would take his place. In Orascom's case, its inability to repatriate profits has led it to write off its North Korean operations:
Orascom’s operations in North Korea began when the country awarded Koryolink the rights to operate its only mobile network from late 2008 through the end of 2012. North Korea had scrapped an earlier project in the country with a Thai firm in 2004, because of fears the network was vulnerable to spies...

Orascom’s problems in North Korea appear to have built during the final year of its exclusivity clause in 2012. Koryolink’s annual report for the year noted “restrictions on cash transfers from local currency” in explaining a $272 million cash balance held inside the country, that more than doubled to June 30.

The company’s board meeting to ratify first quarter results in 2015 was postponed by over a month “due to the delay of the negotiations with the North Korean side to solve the problems arising out of the transfer of dividends, the currency exchange rates and the operational problems that has recently emerged,” minutes from the meeting reviewed by the Journal said.
So now we know that North Korea is really less safe the Pakistan or even Zimbabwe. Whereas countries like those are still peripherally attached to the international community--and even publicly welcome foreign direct investment--North Korea has next to no regard for FDI. As for Orascom, it's probably not crying too much about lost business. When you are in the business of investing in highest-risk markets, well, things like these are bound to occur once in a while.

Besides, I am sure it's made more than a reasonable amount elsewhere.

PS: Also see al Jazeera on "foreign indirect investment" in North Korea.

Argentina, Brazil, S Africa: Who Gets IMF Help in 2016?

♠ Posted by Emmanuel in ,, at 1/04/2016 10:09:00 AM
Can new Argentine President Mauricio Macri turn things around? His is not the only financially troubled G20 country.
Four days in, I am not seeing major improvements in 2016 for commodity exporters, although I could (and hope to) be wrong for the rest of the year. Whatever the rest of us think hasn't stopped longtime FT commentator Martin Wolf from placing odds on those three countries as potential borrowers from the world's lender of last resort, the IMF, this year. The prospect is certainly not one any of these countries looks forward to, but don't be surprised if one does go the poorhouse in 2016:
The G20 also contains 10 emerging economies. Some are being buffeted by sharp falls in commodity prices (Argentina, Russia and Saudi Arabia are prime examples). Some run significant current account deficits (Saudi Arabia again springs to mind, along with Brazil and South Africa). Both India and South Africa have fairly large fiscal deficits. Others, such as Brazil, have a smaller deficit but a sizeable burden of public debt. The countries that tick all the boxes for instability are Argentina, South Africa and Brazil. Under stress, those countries have recently changed finance ministers. Argentina has a new government that promises a new approach. The IMF stands ready. Will at least one of these countries call upon it? It seems likely.
It's odd that Martin Wolf doesn't mention how much foreign exchange reserves each of these countries holds. But, by that measure, the skimpiest belong to Argentina (surprise!) and South Africa. By this measure, Argentina is most at risk, followed by South Africa.

Great Escape: How To Smuggle Cash Outta China

♠ Posted by Emmanuel in at 1/01/2016 12:17:00 PM
Would Papa Smurf approve of PRC cash smurfing?

Here's wishing one and all a Happy New Year! Just as 2015 ended, 2016 begins with questions for the world economy that hinge on the fate of China. By now everyone knows that commodity exporters--coal, oil, steel, you name it--have suffered as the so-called commodity supercycle led by Chinese demand has dissipated. Another side effect of China's economic slowdown has been a steady and massive exodus of cash that wants to exit the PRC. Any way out, it goes, baby! Whereas  expectations during years of high growth were that the yuan would appreciate because of higher interest rates in the future to cool the economy down, you have the opposite phenomenon today. Not only is China cutting interest rates, making the yuan less attractive, but further depreciation is expected to help boost the PRC's export competitiveness.

In theory, China has among the world's strictest capital controls. In practice, there are all sorts of ways to bypass these controls. Two that I wish to highlight here are (i) parallel systems in PRC and Hong Kong where no money is actually transferred and (ii) good ol' "smurfing":

(i) Those familiar with remittance methods--I wrote an entire paper on them once--will be familiar with the "hawala" system. It works roughly like this: a customer first deposits yuan in to a mainland China account. To work around capital controls, there is no actual transfer of money made to Hong Kong. Rather, the equivalent amount in HKD is credited to a newly-opened account in Hong Kong:

In Hong Kong, more than 1,200 currency-exchange shops have seemingly little daily activity. These brightly lit storefronts specialize in helping wealthy Chinese transfer their money overseas. The premium isn’t high — only about 1,000 yuan ($160) per HK$1 million ($130,000) more than bank exchange rates would be if they could do the transaction.

It works like this: Chinese come to Hong Kong and open a bank account. Then they go to a money-change shop, which provides a mainland bank account number for the customer to make a domestic transfer from his or her account inside China. As soon as that transaction is confirmed, typically in just two hours, the Hong Kong money changer then transfers the equivalent in Hong Kong or U.S. dollars or any other foreign currency into the client’s Hong Kong account. Technically, no money crosses the border -- both transactions are completed by domestic transfers.

(ii) There is also "smurfing" in which friends, relatives and all manner of intermediaries move cash across borders in small amounts so as not to hit the upper limits of transferring large amounts:

The practice is called “smurfing” - named after the little blue cartoon characters who collectively make up the whole. Also known in Chinese as “ants moving their house,” for small grains of dirt being moved individually, the government has started restricting the amounts of cash that can be moved in this way, as well as how often banks can send money to a single account abroad from multiple sources.

There are more methods mentioned in the excellent Bloomberg article, but the overall message is clear: PRC residents are finding all sorts of clever ways to elude capital controls, driven by the expectation that keeping money onshore will only resort in further losses.