Shanghai Daily: Opinion

Global banks pulling back from overseas business

Howard Davies — 25 May 2012 0:00:00 +0800

GLOBAL policymakers regularly congratulate themselves on having avoided the errors of the 1930s during the financial crisis that began in 2008.

Led by US Federal Reserve Board Chairman Ben Bernanke, an economic historian of the Great Depression, they remembered the ideas of John Maynard Keynes and loosened monetary and fiscal policy to avoid the worst. We are still coping with the budgetary consequences, especially in Europe, but it is true that the world did not end in 2008.

Monetary tightening was not the only major policy error of the 1930s; so was a retreat into protectionism, symbolized by the Smoot-Hawley tariff increases at the beginning of that decade. Historians continue to debate the centrality of the Smoot-Hawley law itself, but the subsequent tariff war certainly damaged trade and economic growth, making a bad situation worse.

Today's statesmen like to say that they have avoided the protectionist error as well, but is that true? Certainly I do not expect a tariff war to break out in the near term, but there are dangerous indicators of trade trouble ahead.

The Doha round of global free-trade talks has been abandoned, and the World Trade Organization is now languishing by the lake in Geneva, uncertain of its future. Perhaps Doha was unlikely to achieve much in the current circumstances, but the absence of any continuing dialogue on world trade - at worst, a useful safety valve - adds a new level of risk. While people are talking, they are less likely to act precipitately.

In the financial arena, there're many signs of a revival of nationalistic approaches to regulation and currency policy. The crisis challenged the Washington Consensus, which assumed that the world was moving towards free movement of capital and market-determined exchange rates. Several countries have now imposed capital controls of various kinds. Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that "capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances."

Deglobalization

These early signs of deglobalization of financial markets have their parallels in commercial banking, with some of the biggest global institutions retrenching rapidly. Citibank and HSBC had gone further than most in developing a global footprint; indeed, one can hardly get on a plane nowadays without being reminded that the latter is "the world's local bank." But both are closing down in many countries.

Likewise, many other European banks are cutting back their overseas business sharply. The impact is particularly vivid in trade finance, where European banks have been major participants in Asia. Now they are in rapid retreat from that market, creating a worrying gap that Asian banks are seeking to fill.

There is more to come. As they struggle to raise new capital, European banks and insurers are likely to be forced to sell overseas assets.

If this were simply a sign of a new, tighter focus on viable long-term strategies, it might be regarded as a benign development. But there are indications that the process is being driven by regulatory change, and in some cases by regulatory protectionism.

Banks are overseen by a "home" regulator in their country of incorporation, and by a series of "host" regulators where they operate. "Home" regulators and lenders of last resort are increasingly worried about their potential exposure to losses in banks' overseas operations. As Mervyn King, the Governor of the Bank of England, acutely observed, "banks are global in life, but national in death." In other words, home authorities are left to pick up the tab when things go wrong.

Host regulators are increasingly nervous about banks that operate in their jurisdictions through branches of their corporate parent, without local capital or a local board of directors. So they are insisting on subsidiarization. From the banks' perspective, that means that capital is trapped in subsidiaries, and cannot be optimally used across its network. So banks may prefer to pull out instead.

A particular version of this phenomenon is at work in the European Union. In the single financial market, banks are allowed to take deposits anywhere, without local approval, if they are authorized to do so in one European country. Yet when the Icelandic banks failed, the British and Dutch authorities had to bail out local depositors. Now regulators are discouraging such cross-border business, leading to a process with the ugly new name of "de-euroization." We can only hope that it does not catch on.

Regulators, recognizing the risks of allowing financial deglobalization to accelerate, have been seeking better means of handling the failure of huge global banks. If banks can be wound up easily when things go wrong, with losses equitably distributed, regulators can more easily allow them to continue to operate globally and efficiently.

Uphill work

So a major effort to construct a cross-border resolution framework is under way. But it is uphill work, and Daniel Tarullo, a governor of the Federal Reserve, has acknowledged that "a clean and comprehensive solution is not in sight."

Does all of this amount to a serious threat to the benefits of globalization? The cautious answer would be that it is too early to say. Perhaps we are just seeing the beginnings of a changing of the guard, and that HSBC and Citibank will be replaced as global players by China's ICBC, Brazil's Itau Unibanco, or Russia's Sberbank.

But it may be that we are seeing a revival of a less benign Keynesian doctrine: "ideas, knowledge, science....should of their nature be international. But let goods be homespun wherever it is reasonably and conveniently possible and, above all, let finance be national."

Howard Davies, a former chairman of Britain's Financial Services Authority, deputy governor of the Bank of England, and director of the London School of Economics, is a professor at Sciences Po in Paris. Copyright: Project Syndicate, 2012.www.project-syndicate.org

Please leave shoeshining to shoeshiners

Qianjiang Evening News — 25 May 2012 0:00:00 +0800

WHEN civil servants "volunteer" to be shoeshiners in the streets for one day, they may be doing less good than they imagine.

On May 15, civil servants from 25 government departments in Shenzhen, Guangdong Province, offered free services to citizens, including giving haircuts and polishing shoes.

But hey, were you really doing these for free?

May 15 was a Tuesday - a workday. You said you polished shoes for free but actually you were paid with taxpayers' money to work that day. And in offering a "free" shoe polishing service, you crowded out those poor people who eke a living as professional street shoeshiners.

My dear civil servants, let ordinary people polish their own shoes. You would do better to devote your workdays to making sure that our food is safe and migrant workers' children receive a proper education.

Civil servant 'street show' can be useful

China Youth Daily — 25 May 2012 0:00:00 +0800

IT'S easy for the public to regard civil servants offering free shoe polishing services as nothing but a publicity stunt.

Most opinions expressed on the Internet are against the "street show" in Shenzhen on May 15, when civil servants took to the streets and offered haircuts and shoeshining services.

According to those opinions, civil servants should stick to their own jobs and not compete with street shoeshiners.

In my view, however, "show" is a not a bad word in itself.

There are many other "shows," if you will, such as the World Car-free Day. So, a show is not ugly per se. The only problem with a show is if it isn't followed up afterwards. If our civil servants can regularly volunteer to be free street shoeshiners, that would be a good thing.

It is also worth remembering that those civil servants on the streets of Shenzhen are not necessarily incompetent in their work, any more than those who stayed at their desks are necessarily competent.

So don't treat all civil servants who took part in this street show as wasting taxpayers' money.

China moves faster in approving infrastructure projects

Tony Tsang — 25 May 2012 0:00:00 +0800

AS reported in JRJ.com, the central government has requested local governments to report their all infrastructure project investment for this year before end-June for faster appraisal and approval, and related central government subsidies for these projects will likely be appropriated earlier than expected.

This likely represents the central government's endeavor to boost the slowing economy, which highly depends on real estate fixed-asset investment. China's commodity property FAI growth fell from the peak of 63 percent in November 2010 to 9 percent in April 2012.

As reported by the China Securities Journal, since end-February, China has tremendously accelerated the appraisal and approval process for major infrastructure projects, such as highway networks, airport and railway lines. For example, the airport projects in Fuyuan of Heilongjiang, Shihezi of Xinjiang, Qingyang of Gansu and Jiangbei of Chongqing have recently received approval from the National Development and Reform Commission.

Observers said these are strong evidence of infrastructure FAI acceleration, adding that the central government's focus should be relaunching and completing the suspended major projects, most of which are in central/western China and some of them were suspended since last August.

Earlier, the central government also said to allocate more capital for the development of social housing, with the Ministry of Finance and Ministry of Housing and Urban-Rural Development jointly allocated 10.5 billion yuan (US$1.67 billion) subsidy for low-rental housing projects, of which Eastern China accounts for 5.1 percent (540 million yuan), Central China accounts for 40.2 percent (4.22 billion yuan), and Western China accounts for 40.2 percent (4.22 billion yuan). This amount can also be used for public rental housing if the needs for low-rental housing have be satisfied.

In our view, the implications of these are: 1) With signs of a slowing economy, there will be more government stimulus; 2) Government's economic stimulus would focus more on infrastructure investment and social housing; 3) Basic tone of government tightening on the property market would remain unchanged with housing purchase restrictions to continue; and 4) There, however, would be more support on mortgages to first-time homebuyers and genuine upgraders. We believe that companies focus on infrastructure and social housing would benefit directly.

Steel sector heads for slower growth

25 May 2012 0:00:00 +0800

EDITOR'S note: This week Matt Jamieson spoke with Su Aik Lim, Fitch's Asia Pacific steel sector analyst based in Hong Kong, about China's steel industry and specifically the recent anomaly of record production levels following record losses. Jamieson is Head of APAC Research in Fitch's Corporate Ratings Group. Lim explains that a combination of seasonal factors and slower economic growth negatively affected the steel makers' profitability in the first quarter of 2012, and he expects China's steel industry production growth to decelerate to below 5 percent in 2012 from 7 percent in 2011.

Jamieson: According to the latest release by China's National Bureau of Statistics, Chinese crude steel production again crossed the 60 million metric ton (mt) level to 60.6 million mt in April after March's monthly record high of 61.6 million mt. However, the China Iron and Steel Association noted that the steel industry reported record losses in the first quarter of 2012 due to low steel prices and weak steel demand. Do the high output levels reported in April have anything to do with central government control over the industry, particularly given that it owns nine of the top 10 largest steel groups which produce close to 50 percent of China's total crude steel production?

Lim: On the contrary, the central government of China is cognizant of the Chinese steel industry's overcapacity problem and has prohibited new capacity expansion. However, development of the steel sector is strongly supported by the local city or county governments since the sector is an important employer and tax revenue contributor.

While the central government sets the policy regulating and supporting the steel industry, it does not dictate the operation of the steel companies. For example, it is not uncommon to see state-owned steel companies producing the same products and competing intensely with each other for market share.

Jamieson: How then can we explain why the Chinese steel manufacturers were willing to continue with high production levels in April after reporting losses during the first quarter?

Lim: Firstly, it is important to understand that the winter period is the seasonal low for steel production in China, as construction activity in the northern provinces halts due to the cold weather. Secondly, demand can be further dampened by adverse economic factors as per the cases of 2008 and 2011. The combination of seasonality and slower economic growth led to weak capacity utilization in the first quarter and negatively affected their profitability.

Higher output levels in March (1.99 million mt crude steel production daily) and continued acceleration in April (2.02 million mt daily) can be explained by the increase in construction activity after the winter season as well as channel re-stocking by steel distributors and users in the lead-up to the busier summer season. Since 2007, Chinese steel sales have shown a consistent pattern of peaking in the summer months.

Jamieson: But despite the seasonality, wouldn't you expect the widespread losses suffered by the steel mills to restrain their production levels in April?

Lim: Not necessarily. While the steel mills reported losses at the net level in the first quarter, they are still making money on a cash flow basis and hence covering most of their overheads. Also remember that the losses in the first quarter largely focus on the larger steel mills, which have obligations towards their customers, whereas many of the small mills (with crude steel production capacity below 2 million mt per annum) produce generic products and have some flexibility to avoid losses. Examples include switching to steel products with better pricing, or reducing production costs by using cheaper lower-grade iron ore. In the worst case, these small mills are not averse to shutting down their plants for a few months and waiting for a better time to re-enter the market.

In the case of the large steel mills, so long as they are generating positive EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization ), it makes more sense for them to continue production through the quieter winter period rather than closing down. Economies of scale are critical in this highly competitive industry. To obtain a cost advantage, a producer needs to maintain a high capacity utilization rate to keep unit costs down. If they were to cut production, then they risk losing their cost advantage, as well as their market share.

As for small steel mills, since they have credit facilities in place, they are able to continue operations on a flexible basis despite low operating margins and low economies of scale. While small, these steel mills still represent an integral part of the local economy, and hence local banks are under pressure to continue extending credit to them. In addition to their ability to adjust to the seasonality pattern, their ability to take a position in iron ore when prices are cheaper in the winter helps them survive.

Jamieson: Given the deteriorating demand/supply dynamics, why is the pace of consolidation moving so slowly?

Lim: From our perspective, industry rationalization is necessary to improve overall profitability but we do not expect any significant consolidation activity in the near future. This is firstly because operational integration from previous consolidation activity, by some of the large players in 2009 and 2010 including the Hebei Steel Group and the Shandong Steel Group, is likely to take a couple more years to complete. Secondly, cross provincial consolidation continues to face resistance from local authorities although each province is already driving intra-provincial consolidation. Finally, consolidation among the smaller players remains an uphill task considering the tight liquidity environment and the lack of incentives for the smaller steel mills to exit the industry.

Jamieson: Finally, how do you expect this summer to play out, given that demand for steel from China's construction and shipbuilding industries may not be as strong as previous years?

Lim: We expect growth in steel demand to decelerate, but not turn negative. Specifically, we expect the steel industry growth to fall below 5 percent per annum in 2012 and 2013 compared with 7 percent and 11 percent in 2011 and 2010, respectively. Demand can be supported by construction of low-cost housing and ongoing infrastructure projects and, potentially, from a recovery of China's auto production as we have seen some nascent improvement in Chinese auto sales in March and April this year.