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  • Aug 22, 2014
  • Updated: 3:37pm
BusinessEconomy

World Bank warns Asia to be alert against risks from US rate rises

While conditions support short-term growth, agency warns against complacency with risk of reversed capital flows after US rates rise

PUBLISHED : Saturday, 28 June, 2014, 1:09am
UPDATED : Saturday, 28 June, 2014, 1:09am

East Asian economies have recovered from the global financial crisis and are growing close to potential but governments cannot be complacent as capital flows could reverse quickly once United States interest rates rise, World Bank economists said in a global outlook report.

Since March, long-term interest rates and market volatility declined to "unusually low levels", narrowing bond spreads and putting downward pressure on borrowing costs, the report said.

Central banks have been very easy and accommodating [in their policies]
STEVEN WIETING, CITIBANK

This triggered "a renewed search for yields", which supported the demand for developing country assets and currencies, it said.

Current market conditions were "supportive in the short term" to developing country prospects but could encourage investors to underprice risk and borrowers to increase leverage, the lender said.

This might set the ground for sudden spikes in volatility and sharp adjustments to adverse news, it warned.

The World Bank downgraded its global gross domestic product outlook for this year to 2.8 per cent from 3.2 per cent.

If long-term US bond yields rose 100 basis points, developing economies could experience a 50 per cent drop in capital inflows, the report said, and this "could lead to lower investment and growth" for some countries.

The markets expected volatility levels to keep declining and asset prices and currencies reflected this, said Steven Wieting, Citibank's global chief investment strategist. The low volatility environment was "fundamentally grounded by the fact that we are in a mid-cycle environment. We are not heading into a credit crisis or rebounding from a credit crisis and central banks have been very easy and accommodating", he said.

Wieting expects the US economy to continue an above-average expansion for two to four years and European economies would rebound from last year's 0.4 per cent contraction to 1.2 per cent growth this year.

Citibank predicts 3 per cent global growth this year, while Deutsche Asset and Wealth Management forecasts 3.4 per cent.

The World Bank expects growth in South Asia, North Africa and the Middle East to "pick up more brusquely".

The report was written before the recent conflagrations in Iraq.

The report also cited China's corporate debt levels as a concern, as a cooling real-estate boom increased risk of a market correction. Total debt for the world's second-largest economy is 240 per cent of GDP, according to the World Bank.

China was equipped to deal with the build-up, the report said, noting the authorities' recommitment in May to reforms to rein in shadow banking activity and help contain the concentration of credit risks.

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singleline
Talking about China's NDRC, you may not know that the commission is also responsible for the country's anti-trust business.
It seems that this anti-trust business is one of the few activities of NDRC that is highly approved by the Chinese residents.
But even in this area, according to the following Chinese article, the commission cannot be said to have done a very good job so far.
(Chinese readers: ****business.sohu.com/s2014/others917/index.shtml)
“Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly,
when the prices went down they said it was predatory pricing,
and when they stayed the same they said it was tacit collusion.”
– William Landes, “The Fire of Truth: A Remembrance of Law and Econ at Chicago”,
Journal of Law and Economics (1981) p. 193.
singleline
Focusing only on the infrastructure is not enough.
China can hardly benefit only from the infrastructure construction, which has a welfare connotation, may not be self-liquidating, and so may not be sustainable.
This is a bit like those money-losing infrastructure projects of some of China's local governments.
More areas can be covered, like manufacturing, agriculture, or industrial parks.
Those countries not only need more infrastructure, they also need more economic platforms to develop the industries in which they have a comparative advantage.
China should consider more those kinds of constructions which are mutually beneficial --- projects that enable both the Asian countries and China to benefit from.
Also, the AIIB is restricted only to the countries in Asia.
Another New Silk Road Development Bank or Development Fund can also be considered to enlarge the number of countries that can participate in it.
(Chinese readers: ****blog.sina.com.cn/s/blog_4c604c2f0102uw17.html?tj=1)
singleline
What’s in a share index ?
The Shanghai Stock Exchange Composite Index (SSE CI) has been stagnating in the past few years, up until now.
If the CI is a leading indicator, it shows that the Chinese economy has yet to recover.
But some recent Chinese economic data do show that China’s economy has picked up some steam.
Despite the drop in the GDP growth rates in recent years, China’s unemployment rate has not shot up. It has actually declined.
The market sales figure has not worsened either. The amount of cars owned by the city dwellers has kept on rising in recent years.
The fact seems to be that the Chinese economy has somewhat rebalanced to some extent --- the growing internal demand has increased the residents’ average income.
The Chinese economy has grown healthily in recent years, except for the manufacturing industries (rising wages, high interest cost, overvalued yuan, high taxes, rising protectionism).
The service industries (online retailing, logistics, culture and education) have grown rapidly, but very few of those companies (like TenCent and Alibaba) are listed in Shanghai and so their good performance is not fully reflected in the SSE CI.
China’s present stock index (representing mainly the old economy) has failed to truly reflect the improving performance of the country’s real (and new) economy.
(Chinese readers: ****blog.sina.com.cn/s/blog_677debcb0102uwh0.html)
singleline
Well, this time may be different.
By the time the US raises her interest rates, say a year from now, the Asian Infrastructure Investment Bank (AIIB) will already have well established itself to serve the needs of the Asian countries.
What’s in a name ?
We should always guard against being misled by it.
Take China’s well-known National Development and Reform Commission (NDRC).
As its name implies, many people may think that it’s an organization specializing in promoting the country’s further reforms and development.
You can visit en.ndrc.gov.cn to know the names of all its various departments to appreciate the great power grasped by this commission.
But it was suggested by at least 2 Chinese economists that the commission should be cancelled, because what it’s been doing is more anti-reform than otherwise.
Don’t forget that this commission is formerly known variously as State Planning Commission and State Development Planning Commission, 'which has broad administrative and planning control over the Chinese economy.'
(****en.wikipedia.org/wiki/National_Development_and_Reform_Commission)
Planning !
The Chinese economy can actually be regarded as a 'government economy'.
Similarly, the coming AIIB may not always be what its name implies, being simply an organization specializing only in providing infrastructure funds for the Asian members.
singleline
Mainly a product of China, the coming AIIB will serve politically and economically as an alternative to the pro-West World Bank, IMF, and Asian Development Bank.
It may act as a lender of last resort to prevent the last Asian Economic Crisis from repeating in the Continent in the future.
At least less harm will be done if the hot money quickly retreats from Asia en masse one day in the future.
In the long term, a formal Asian Bond Market should be set up to cater to the needs of the richer and richer Asian countries.
Why do we have to rely on and be disturbed by the come-and-go of those Western capital ?
It’s up to the other Asian countries to determine whether to cooperate with China, at least economically if not politically (say, owing partly to the South China Sea dispute).
Pro-West Japan can't really be trusted.
Of course, those countries can be pro-China economically and anti-China politically at the same time.
But does schizophrenia reign supreme nowadays ?
Without hanging together, at least economically, the Asian vassals will be hanged by their Western King separately.
singleline
It’s a pity indeed if Hong Kong, possibly losing the full trust of Beijing through her recent political turmoil, fails to become the city headquartered by the AIIB, since our city is arguably the most suitable place in Asia in which to host the Bank.
We have already lost Alibaba, will we further lose the Bank ?
Hong Kong is nothing so far as the world’s politics is concerned – it’s only a money city.
But if the Bank’s headquarters is here, our city will be in the world spotlight frequently in the future.
singleline
Talking about banks, we shouldn't forget Jack Ma, and his Alibaba.
Together with Wanxiang Holdings, Alibaba's affiliated Small and Microfinancial Services Group has successfully obtained one of the five newly-issued licences.
This enables the group to establish a privately-owned bank in China.
Everybody knows how profitable China's banking business is.
This licence most probably is Jack Ma's licence to print money, if not a licence to kill !
He has a high possibility of becoming a successful banker years later, because his banking licence is protected by an economic moat, in at least the following 3 ways:
(i) The famous Alibaba brand-name means he can earn quite a lot of 'brand rent.'
(ii) The number of private-bank licences is presently restricted and is subject to the approval of CBRC.
This enables Ma to earn also the 'licence rent.'
(iii) I think, what distinguishes Ma from the other 4 competitors is his company's business nature.
With the full information of his business clients' flow of fund, Alibaba can much more easily assess the credit-worthiness and hence the amount of mortgages and guarantees of his future loan applicants (right now the assessment process is helped by a certain mathematical model) than his future competitors.
Which means his future banking business model will be a more sustainable and profitable one than that of the other private banks.
(Chinese readers: ****business.sohu.com/s2014/others857/index.shtml)
singleline
According to Alibaba’s prospectus, Jack Ma only holds 8.9% of the company’s shares.
SoftBank is holding 34.4% while Yahoo another 22.6%, for a total of 57%.
US$20 million and US$60 million were injected by SoftBank into Alibaba in 2000 and 2004 respectively.
If we choose US$200 billion as the middle-estimate of the company’s market value, the shares held by SoftBank will be worth as much as US$ 68.8 billion, meaning a return of 86,000 percent !
Indeed, letting Jack Ma have full control, and letting his team of directors and managers have the incentive to manage the company in the best possible way, will actually give the company’s shareholders the best possible protection and benefits --- but his demand was rejected by our city !
(Chinese readers: ****finance.sina.com.cn/zl/management/20140523/081219203220.shtml)
singleline
I think, an online internet company in the US, like Google, is not allowed by the government to own any banking licence.
After Taiwan’s interest rate liberalization since the early 1980s, many new banks were also established.
Many of them declared bankruptcy after an economic turbulence.
Will the same story repeat in China in the future ?
singleline
Believe it or not, China's quickly rising house prices has indirectly caused the rise of Alibaba in recent years.
Suppose a house near downtown Beijing costs 1.6 million yuan.
The husband's parents make the down payment of 400,000 yuan. The loan amount of 1.2 million, to be repaid in 20 years, means about 9,000 a month.
With a slightly-above-middle income level of 12,000 per month, the couple has only 3,000 left !
China's relatively young couples therefore have to do the best homework before they spend each dollar left behind.
This provides a golden opportunity for the development of online retailing (high efficiency, low prices) in the country, because now, to all those couples, every cent counts.
Hence the present fortune of Alibaba.
(From the Chinese book 'In the coming 10 years, the US prospers and China suffers ?')
China's property bubble may hinder the country's rebalancing efforts.

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