Why It Matters : Business and Economics

Can the World Spend Itself Out of a Depression?

Newsweek — Fri, 12 Dec 2008 01:41:03 GMT

By Stefan Theil

As governments throw around hundreds of billions of dollars, pounds and yuans to rescue the global economy—dwarfed by China’s $586 billion spending plan and Obama’s expected $700 billion plan—the critics of deficit spending have kept mostly to the shadows recently. Today, however, they took center stage—call it the Great Pushback. It wasn’t just deficit hawks in the U.S. Senate, who voted down the $15 billion bailout for Detroit automakers. In Europe, a battle is raging over whether spending in an appropriate response to the economic crisis.

The dispute centers on comments made by Germany’s finance minister, who ridiculed British plans to spend $30 billion to stimulate its economy as “crass Keynesianism.” The barb could just as well have been directed at similar plans in the United States, China and at the whole notion of government spending to stimulate the economy. Germany, which is known for fiscal rectitude and a savings rate that puts Americans to shame, leads a small group of European countries, including Poland, that are balking at coughing up the vast sums Europe’s leaders believe is needed.

The Germans insist they don't underestimate the depth of the crisis, but disagree about the risks of massively hiking government debt for what they see as ineffective and wasteful programs. German Finance Minister Peer Steinbrück, in an interview with Newsweek, said it was "breathtaking" to watch the speed at which supply-siders and fiscal conservatives were willing to "toss around billions." The centerpiece of the British plan, a 13-month temporary cut in the national sales tax from 17.5 to 15 percent, would have no effect other than saddle future generations of Brits with enormous deficits, Steinbrück warned.

Steinbrück's comments raised the hackles of British Prime Minister Gordon Brown. He lashed back at the Germans, calling them out of step with the rest of the world for their pestering reminders about the dangers of easy money and deficits. (For the record: Despite the rhetoric, the Germans have their own $41 billion spending plan in addition to a $670 billion bank bailout fund, but oppose having to put up money for a bigger, coordinated European effort for now. Their budget is balanced, Germans have had no housing or credit bubble, no wealth effect as few Germans invest in equities, and jobs are only now starting to get hit because of falling exports.)

Steinbrück may have been criticizing Britain, but his complaints are aimed at all the big spenders for feeding illusions about what he derides as "The Great Rescue Plan." His boss, German Chancellor Angela Merkel, last week also insisted Germany would refuse "to participate in this senseless race for billions" and that she was "deeply concerned" that the policy of cheap money and massive deficit spending in the U.S. and elsewhere risked repeating the very mistakes that precipitated the crisis. (See Newsweek's story about Germany's Mrs. No.) It’s strange that America's remaining fiscal conservatives now find themselves joined by a German Social Democrat like Steinbrück, who said a few months ago that Karl Marx wasn't so far off when he described the failings of financial capitalism. Is Steinbrück a voice of reason, or are he and other fiscal conservatives just fiddling as the world burns? With the crisis like a fog before us, the jury is still out.

How (Not) to Deal with the Somali Pirates

Barrett Sheridan — Wed, 26 Nov 2008 15:30:28 GMT

By Barrett Sheridan

Last week, the world cheered a little when an Indian warship said it had encountered a Somali pirate “mother ship” in the Gulf of Aden and, after being fired upon, blew it to smithereens. International shippers needed a reason to celebrate. Earlier that week, Somali pirates had captured their biggest prize yet, a Saudi supertanker carrying $100 million of crude and, with nearly a hundred attempted hijackings so far this year, were making waters around the Horn of Africa about as welcoming as a bed of nails.

Well, now they can put away the champagne glasses. CNN is reporting that the sunken “mother ship” was actually a Thai fishing trawler and that, while pirates were in the process of commandeering it, the vessel still had 14 innocent fishermen onboard when the Indian Navy struck. One of them, a Cambodian, spent six days adrift before being rescued by a passing ship. (One other is confirmed dead; the rest are missing.) The sailor is now recovering in a Yemeni hospital, where he had the chance to inform the Indian Navy of its mistake.

The event underscores the difficulty of tracking pirates in waters where they easily blend in with fishing trawlers or other private watercraft. “The bulk of Somali coastal dwellers are still fishermen,” says Peter Lehr, a lecturer in terrorism studies at Scotland’s University of St. Andrews. “They are now caught in the fray and being attacked by western warships. How can you divide a real fisherman and a pirate from one another? They use the same vessels.”

That means recent military operations in the region—the European Union and NATO now have forces there—might not be a very adequate defense against the pirates. So what line of defense is left? The ships themselves. Armed guards aren’t an option, because they’re too expensive for ship owners, and firefights are risky onboard ships carrying two million barrels of flammable crude oil. But there are alternatives. Hanging barbed wire around a ship’s perimeter is a simple way to dissuade would-be boarders. Electrified fences also work, but they’re out of the question on ships carrying volatile cargoes. The Long-Range Acoustic Device, or LRAD, has become popular after it effectively repelled an attack on a cruise ship in 2005; it blasts a deafening wall of sound at targets up to 300 meters away. Fire hoses also do the trick at shorter ranges. Even simply gunning the engines and picking up speed can deter pirates, who look for easy prey.

It’s worth trying anything to avoid being taken hostage. Although the Somali pirates, which are currently holding 300 hostages, treat their captives fairly well—they are, after all, worth a lot of money to them—negotiations can last weeks or months. The MV Faina, a Ukrainian ship carrying 33 Soviet-made tanks, was captured in late September and is still being held in the port of Eyl, in the Puntland region of Somalia. “These guys are very patient people,” says Stephen Askins, a maritime lawyer at London firm Ince & Co. “One guy may be having a bad day and he’ll say, ‘I want $5 million,’ and the next guy might say, ‘Well, I’m a bit more reasonable than that.’ It’s not like buying a car. It’s a very long, drawn out process.”

Fear and Loathing in Moscow

Newsweek — Fri, 24 Oct 2008 14:39:36 GMT

By Anna Nemtsova

Moscow, Russia -- As the financial crisis deepens, the Russian government has been amplifying its anti-American stance, and Robert Schlegel, the youngest deputy in the Russian Duma, is leading those efforts on the streets. On a recent day, Schlegel was standing along the Garden Ring avenue in Moscow, across from the U.S. Embassy, looking for a convenient place to set up a video screen. The screen will come in handy during the anti-American protest that Schlegel, in cooperation with the Nashi, a militantly pro-Kremlin youth group, will hold there on Nov. 1. He expects 15,000 young Russians to show up in Halloween costumes, holding pumpkins and candles and shouting slogans like "Stop your Big American Show!" and "Revolution Now!"

Schlegel lived most of his life in authoritarian Turkmenistan. A former activist for the Nashi, Schlegel is best known for organizing street protests and pranks targeting Putin's few domestic critics. Now he drives an Alfa Romeo, wears an expensive coat and goes on business trips to London and Germany. In other words, people like him are no longer marginal. In his role as a Duma deputy, Schlegel is responsible for Moscow's “information policy.” He’s founded a government-supported television channel for youth, BL (which stands for “Beautiful Life”), which has produced a video for the protest.

The video has high production values and makes a good effort to rile up viewers. It features a computer-generated cartoon of President Bush, who wears cowboy gear, slurps whiskey and revels in American power. At one point, the cartoon Bush says, "I control the world's oil, economy, wars, culture, science and information. I will tell you how we achieved that. I call it ‘A Big American Show.’” Graphic images of World War I, Nazi Germany, the Vietnam War, and September 11 set the tone. As Schlegel says, “The American Empire Show, as we call it, is threatening Russia's stability. We young Russians have to put an end to it.”

And young Russian are heeding the call. As Russia grows richer and nationalism grows, the size of pro-Kremlin patriot youth movements crescendos. Nashi involves at least 200,000 activists. The Youth Guards have another 100,000 activists. The New People and Young Russia each attract tens of thousands of young patriots.

But of all youth movements, Stal, or Steel, a Nashi submovement, most fully reflects the new nationalism fostered by Vladimir Putin. “We are going to change the world from knowing nothing about Russia to respecting and even recognizing Russia as a new fashion,” says Nadezhda Tarasenko, 23, the leader of Stal. “It is important to consolidate around our leader, so nobody inside or outside the country can damage our stability and unity. One thousand activists in my movement are not afraid of using tough methods to stop America's influence on Russia.”

International Banks: Winners and Losers

Newsweek — Tue, 21 Oct 2008 21:01:05 GMT

By Michael Miller

The financial crisis has hit the banking industry hard. The market values of the top 20 banks in the world have dropped significantly. The biggest losers, of course, are those banks that were heavily involved in mortgage backed securities--American lenders like Citigroup and Bank of America.Over the past year, Bank of America has lost more than 40 percent of its market value. A number of European banks have also suffered from subprime lending. UBS, a Zurich-based bank heavily invested in securities, just received an $8 billion bail out from the Swiss government. Its market value has plummeted more than 56 percent since this time last year. In comparison, Credit Suisse, another Swiss bank much less reliant on derivatives trading, is in much better shape, opting for a private capital infusion.

Yet while some institutions are now shadows of their former selves, others may eventually emerge stronger than ever. Chinese banks, for instance, have emerged from the crisis in pole position. Despite sizable losses of their own, China’s big three banks are flush with funds and have unmatched market-to-book ratios—an indicator of market strength. This newfound swagger has already led the Industrial and Commercial Bank of China (ICBC) to open a branch in New York City, a powerful symbolic gesture. That said, even Chinese banks could be hiding serious problems. In the past, China’s banking industry was plagued by bad loans made to state-owned enterprises. Whether these loans are still lurking under the surface somewhere is anyone’s guess.

The runaway winner in all of this is Wells Fargo. It alone among the world’s top 20 banks has seen its market value rise—an almost unreal 10.5 percent—over the past year. Not only did it beat out Citigroup to scoop up Wachovia, but also it had to be forced into accepting Congress’s bailout package. “Wells Fargo is generally considered the best run of the major banks,” says Beim, an impression reinforced by its handling of the past few months. Coming in second is HSBC, the only major British bank to avoid PM Gordon Brown’s capital infusion plan, with another American bank, US Bancorp (USB) a close third. Both HSBC and USB have managed to keep leverage low while generating high return on assets.

Is China's Economy Starting to Stagger?

George Wehrfritz — Sun, 12 Oct 2008 15:09:21 GMT

On May 26, the Singapore-based financial company OCBC Investment Research initiated coverage of FerroChina, a small Chinese steelmaker listed on the city’s main stock exchange. OCBC’s inaugural report hailed the Jiangsu-based smelter for “sterling” 2007 performance, characterized it as smartly positioned to answer an “urgent need” for infrastructure steel in its home market following a devastating earthquake in Sichuan earlier this year, and cited FerroChina’s overseas expansion into Vietnam to justify a “buy” rating on the company. On Friday, Oct. 10, OCBC suspended coverage of the steelmaker after it revealed that it couldn’t repay $104 million in bank loans that had come due. “FerroChina is technically insolvent,” OCBC analysts Kelly Chia wrote in what will likely be her final report on the company.

In a week when panic gripped global stock markets, the FerroChina implosions made barely a ripple. But it might, in time, prove to be a symbolically important inflection point for Chinese industry. The core issue: are the factors that led to its apparent demise exceptional among the tens of thousands of companies that drive the world’s fastest-growing major economy today, or commonplace?If FerroChina is no aberration, watch out.

For starters, the steelmaker – like most companies in China – had stellar performance numbers until very recently. According to Bloomberg, it reported in August that net profits for the April-June quarter tripled from the second quarter of 2007 to $35 million; the first indirect hint of liquidity problems came when it announced last month that it was looking for a strategic investor. Yet in a statement issued on Thursday, it cited “the current economic crisis” for its inability to honor “working capital loans” now due and said that it had begun negotiations with lenders and would seek “new equity and loan funding.” The company reportedly shut down its main production facility, which makes corrugated metal sheets, last week, triggering demonstrations among its workforce.

Due to the lack of transparency that typifies China Inc., it is hard to determine if FerroChina’s problems arose due to reckless expansion, a sudden evaporation of new business or cash-strapped clients that can’t pay their bills. The safe guess is that each factor contributed to the fall (though an outside observer would be forgiven for thinking that the company looked great right up until it the moment it revealed that a crisis was at hand).

Experts have long-realized that China’s steel industry is particularly risk-fraught. Overcapacity is a chronic problem, yet investment in additional mills is forecast to rise more than 20 percent in 2008. Most analysts believe a painful consolidation is looming, and demand – linked as it is to the production of everything from white goods to cars and skyscrapers – is highly dependent on China’s ability to clock double-digit growth rates. Of course, that’s getting harder for the world’s largest exporter as the global economy lurches toward recession. In a report on Asia’s steel sector issued three weeks ago, the Hong Kong-based brokerage CLSA wrote that a “death spiral” for the industry in late 2008 “has to be the base case for China.” Indeed, it may have begun.

But is steel the exception, or the rule? Construction, autos, and other sectors have also experienced explosive growth in China since 2000 but now are visibly sluggish. And like steel, they too are thick with small-time players like FerroChina that may also be undercapitalized and operating on thin margins. With growth slowing and stock prices in China down almost 70 percent from their peak a year ago, the risk is that a large number of small and medium-sided companies in key industries could now be falling into stealth distress. For China’s rising middle class, that would spell greater job insecurity and a further stock portfolio battering. Systemically, the biggest danger is that non-performing loan rates will soar, hobbling China’s financial system.

According to Kelly Chia’s final FerroChina report, Chinese lenders hold most of the steel-maker’s problem loans, making it Exhibit A for how firms struck down by the global economic slump will pass on the pain to the major source of investment capital in China: state banks. And because so much of China’s manufacturing capacity now targets export markets, faltering demand in the U.S. and Europe “cannot help but slow China’s export economy,” wrote Peking University finance professor Michael Pettis on his blog last week, adding that an export slowdown “is one of the most likely channels by which global financial difficulties will become Chinese financial difficulties.”

It’s important to watch Beijing’s policy response should failures like FerroChina’s multiply. Speculation is rife that an economic stimulus package is in the works, yet the details aren’t yet known. If it aims primarily to boost domestic consumption, thereby weakening the national economy’s dependence on export markets for growth, great. But if Beijing props up the export sector by, say, halting renminbi appreciation, reducing taxes on exports or otherwise intervening against market forces, the outcome will be sustained over-production. And that will only make today’s problems worse.

Will America's Cold Make Brazil Sneeze?

Mac Margolis — Wed, 01 Oct 2008 20:20:15 GMT

Like samba, futebol and carnaval, “crise” (crisis) has long been a staple of the Brazilian popular lexicon. After all, Brazil suffered through nearly fifteen years of three digit price rises – the longest bout of hyperinflation in contemporary history – which ended only in 1994. But for the first time in recent memory Latin America’s largest nation is in a lather over someone else’s economic debacle. Talk of the U.S. credit crunch and its fallout permeates the chatter from newsrooms to boardrooms, and from beauty salons to corner bars. Newspapers and Web sites have broken out “crisis glossaries” to explain every nuance and twist of the gathering financial imbroglio – from subprime mortgages to stock market circuit breakers – to the curious and the bewildered.

Thanks largely to a bull run in the world’s tenth largest economy, which has kicked the economy into high gear (creating 1.9 million jobs this year alone) even as the U.S. economy stalls, until now many Brazilians have felt cocooned against the ruin in the international financial markets. National leaders have been remarkably calm and at times even flippant. “Thank God, the crisis has not crossed the Atlantic,” President Luiz Inácio Lula da Silva said as late as last weekend. “At the moment, the one who’s really worried is Bush,” he quipped to a reporter the day after Wall Street’s Black Monday, and even as the São Paulo Stock Market, Bovespa, fell by nearly 12 percent. Central Bank chief Henrique Meirelles predicted that, at most, Brazil might come down with “a bad cold” from the U.S. credit crisis.

Others are not so sure. Beyond the official spinmeisters, no one this side of the equator in the Americas is touting the wonders of decoupling anymore – that sunny notion that the emerging market economies will thrive even as the world’s largest economy stumbles. Upon learning of the stock market crash, Demétrio Martins, a fervent evagangelical Christian, who lives in the tough Rio de Janeiro favela Complexo do Alemão, said (channeling Sarah Palin) “we must be living the end of days.” Others are puzzled and a bit resentful over the potential fallout, as if a trusted world ally had suddenly let them down. “Just when Brazil’s economy is doing so well, along comes this guy [President Bush], screwing up everybody else’s lives,” says free lance office messenger Gilberto dos Santos Durval. Sebastião dos Santos Muniz, who sells fruit at a Rio street fair, was more philosophical. “My idea of the United States has totally changed,” he says. “How could a state that is so all powerful at the same time be so fragile and as vulnerable as everyone else?”

Will U.S. Be Fair to Foreign Banks?

Newsweek — Mon, 22 Sep 2008 21:21:31 GMT

By Sophie Grove

As stock markets fall and oil surges, the U.S. Congress appears ready to move quickly on a financial bailout package—possibly by Wednesday. To find out what they’re likely to do and what impact measures are likely to have on overseas banks operating in the United States, Newsweek’s Sophie Grove talked with Julia Coronado, Senior US Economist at the British bank Barclays Capital. Excerpts:

Newsweek: At the moment the question of foreign debt is still in limbo. What do you expect the US Treasury Secretary, Henry Paulson, to do over the next few days?

Coronado: I expect it to be a broad base. Keep in mind that many of the large foreign banks have US domicile operations. Many big banks foreign-based banks are also US broker dealers. But some of that distinction isn't that meaningful here. What will be key is the definition of the assets. I think most of the assets that they take will be generally domestically based in the sense that they are US mortgage related—both residential and commercial. They're not going to be taking mortgage securities from mortgages originated in Germany. The assets will all be US based. [With regard to] the participating institutions, that has yet to hammered out. I think it will definitely include a lot of the global banking groups, even if [Congress] says domestic financial institutions only. Right now the Treasury Secretary is seeking flexibility in terms of participation.

But what will happen in Congress?

There are a number of possible amendments—Congress has talked about ensuring that the Treasury pursues the kind of potential loan modifications to prevent foreclosures that were encouraged in the Housing and Economic Recovery Act of 2008. All of those provisions will also apply to the Treasury if they then inherit these assets. Secondly, they are talking about potential limitations on executive pay. I'm not sure exactly what form that will take. One thing that's been floated is that there will be limitations on executive pay in the event of misreporting of results. So that's still up in the air.

Will Congress rule out foreigners?

Again, no, I don't think that they will. Most of the big banks that hold these assets are global in their operations and so they will be allowed to participate even if Congress includes some provisions. That won't preclude most of the global banks from participating, they are global in their operations – and they do have US operations -- so they will be able to come to the table.

Is there a question of fairness here?

I think that they are trying to address the question of fairness in the sense that they want to keep the participation broad enough so that anyone that is holding a major amount of these US-based bad assets can come to the table. You don't want to send the message that you can invest in US [assets] and if it goes terribly wrong they're going to punish foreign investors. That would send a very bad signal in encouraging people to invest in US assets. The Treasury is very aware that having foreign confidence in our financial system is also very important. There are a lot of foreign intuitions that invested in US assets -- some of those went bad – and certainly they wouldn't want to exclude those institutions from participating in this fund.

Paulson said yesterday that he'd been "talking very aggressively with other countries around the world" about similar bailouts. Do you think foreign governments will follow his lead?

That's very possible. This crisis is certainly global in nature so it's quite possible that we would see some other parallel moves.

Is $700 billion enough to stop the credit crisis? This is really going to be hard work flogging ahead and getting to a more functional point in financial markets broadly.

Brazil's Gross National Hubris

Mac Margolis — Mon, 28 Jul 2008 19:29:30 GMT

There are many ways to measure a society's fortunes, from per capita income to gross national happiness. In São Paulo perhaps the best thing to check is the skyline. High over this Brazilian hypercity, where office towers pierce the smog, helicopters swarm. Ferrying corporate rainmakers over the gridlocked streets, they light on rooftops and bank away again, steel dragonflies pollinating a stone jungle.

Brazil today boasts 1,100 privately owned helicopters (half of them in São Paulo), the world's third largest fleet and growing at the clip of 15 percent a year. For those below, condemned to battling one of the worst rush hours on the planet (on a bad day, traffic pileups can run to 160 kilometers or more), the view isn't so inspiring. But like the crowded skies, the clotted streets are emblems of the remarkable new moment in a nation that has hoisted itself from the ranks of chronic underachiever to emerging market upstart. (Read this week's magazine story, Weathering the Storm.)

The new bullishness has taken many by surprise. For half a century Brazil has been flirting with greatness, aiming for the clouds and then flaming out. At its loftiest the country has charmed a host of believers, but their convictions have wavered. Fleeing Europe to Brazil ahead of World War II, the Austrian writer Stefan Zweig famously declared his adoptive country “the land of the future” but then lost hope in the world and downed a lethal dose of vironal in 1942, in the middle of carnival, at that. The future would have to wait. Charles DeGaulle looked down his spacious nose at much of the world, but the Brazilians always took personally his generic snub that "Brazil is not a serious country."

It's poetic justice of sorts that the Brazilians are looking down on much of the serious world today. In the quarter century or so I've been keeping an eye on this country, this is the first time I can recall that the dark talk of "crisis" refers not to some domestic debacle but to the mess beyond national borders. "Hey, Bush, we've been waiting 20 years to grow," scolded president Luiz Inácio Lula da Silva in an impromptu speech the other day, referring to the global spillover from the U.S. subprime credit crunch. "Get your act together."

Except for on the football pitch or the catwalks, such hubris is new for this chronically underperforming country. Maybe it's the currency. When I first arrived in Rio, in the early 80s, with inflation topping three digits, the greenback was almighty. Converted into wads of pink and green cruzeiros or cruzados or new cruzeiros (pick your perishable banknote), a hundred U.S. dollars could buy you a week on the town. Now and then the officials in Brasília tried to do something about it, lopping three zeros off the currency and decreeing drastic price freezes, so bringing only a flicker of stability. It wasn't as bad as Bolivia, where I once saw them weighing money instead of counting it in the Chapare district, but it left the continent's biggest country dysfunctional, all the same.

I keep a box in my drawer stuffed with inflation memorabilia from those days. Lost in the rubble of half a dozen versions of soiled bank notes and a kilo or so of useless coins, there's a small paper chit with the number 2147 stamped on it. It's the waitlist number I drew for the São Paulo-Rio de Janeiro air shuttle, which thanks to the price freeze during the so called Cruzado Plan, of 1986, cost $38, about half the current bus fare. When prices are kept steady, goods tend to disappear, and the Cruzado Plan was no different; Brazil's airports became flop houses as stranded passengers waited hours for an available seat.

It's not always easy to pinpoint a nation's turning point, but 1994 has to be a modern Brazilian watershed. That was the year of the Plano Real, a radical new stabilization plan named for the eponymous currency, backed this time by fiscal discipline, not a price freeze or any of the other "heterodox" hocus pocus of former plans. Brazilians were skeptical and who could blame them, after a quarter century of band-aid reforms and Monopoly money?

Today, with foreign investors tripping over themselves to pour money into Brazil, the real has outgunned the world's top 16 currencies, from Euro to Yen, gaining 13 percent against the dollar this year alone, and nearly 60 percent since 2004. To my knowledge Brazilian supermodel Gisele Bündchen never actually turned down work for U.S. dollars, but when the rumor that she had went viral in Brazil I knew the earth had shifted in this part of the hemisphere. Now it's outbound Brazilians changing their reals into wads of greenbacks and having the time of their lives in Paris or Disney World.

You don't have to go that far to watch them frolic. The boom that has seen Brazil's economy soar has also deepened pockets. The country now boasts 20 billionaires on the Forbes list (up from just four in 2003) and 140 millionaires, a 19 percent rise year to year, against a 6 percent rise for the rest of the world. Boutique banks and private asset managers have decorated the skylines with their logos and heli-pads.

The bonanza is not just for those commuting in choppers. Climbing wages (overall payroll is up 16 percent year to year), a flood of consumer credit (growing by 30 percent yearly) and plenty of new jobs (1 million this year, 7.3 million since 2004), have hoisted countless poor into the consuming classes. Much is made of how China's surging economy has lifted tens of millions out of poverty. In fact, Dragonomics has increased the wealth gap, while Brazil has managed to reduce inequality at the same it booms. Brazil's poorest ten percent have seen their wages grow by 57 percent in real terms between 2002 and 2006, against a nine percent rise for the richest tenth, says economist and poverty scholar Marcelo Neri of the Fundação Getúlio Vargas, a business school.

And while the middle class in the developed world moans about slipping downmarket, Brazil's just keeps on rising. Some 20 million Brazilians have moved up to the middle class in the last decade, and are now putting 800 new cars a day on the road in São Paulo alone. Sound exaggerated? Check out rush hour.

The G8: Butting Heads on Climate

Katie Paul — Mon, 07 Jul 2008 17:07:59 GMT

Finding ways of capping carbon emissions is on the agenda for this week’s G8 Summit, which begins today on the pristine Japanese island of Hokkaido. But if anything is getting capped, it’s expectations for a meaningful agreement on climate change.

A competing jumble of climate change negotiations have turned the forum itself into a debate topic as polarizing as the carbon markets and global targets being proposed. Not one, but two extra groups have joined the G8 at Hokkaido, each with the potential to reach its own set of conclusions. The G8 + 5 group brings major developing emitters like China and India into the fold, and the Major Economies Meeting (MEM), George W. Bush’s brainchild, adds three other big carbon emitters—Indonesia, Australia and South Korea—into the mix. Together, the groups account for 80 percent of greenhouse gas emissions. Washington would prefer to settle the major points at the MEM before tackling the unwieldy 200-country United Nations gatherings, which are coming up against their deadline for a post-Kyoto treaty to be approved in Copenhagen in December of 2009. Coming out of Hokkaido empty-handed will make pre-Copenhagen talks this fall just that much messier.

Still, while none of the three groupings at Hokkaido will likely produce a major consensus on emissions caps, they are producing a lively diplomatic chess match. E.U. members, who want the group to commit to steep cuts in carbon emissions by 2050, are butting heads with Bush over his unwillingness to commit to numerical targets. Meanwhile, Japanese Prime Minister Yasuo Fukuda is trying to broker a compromise. With a more green-friendly Obama or McCain administration only months away, Fukuda apparently believes that a tussle with Bush is counterproductive. Instead, he’s pushing for agreements on less-polarizing issues, such as encouraging carbon capture and storage technology for coal power plants, promoting nuclear energy and lowering tariffs on clean technology.

“There are some folks out there who think the rest of the world can settle on their own agreement and expect the United States to then come and join under a new administration,” said Council on Foreign Relations environmental expert Michael Levi on a recent press conference call. “But the Japanese understand that, regardless of substance, the United States is going to have to be part of creating whatever agreement happens if there’s any chance that the U.S. will end up being part of that agreement.”

China: Parliament Hears Corporate Pain

Newsweek — Fri, 14 Mar 2008 12:07:03 GMT

By Mary Hennock

China's parliament is frequently dismissed as a rubber stamp body whose delegates agree with every government measure and avoid controversy. This year's session has seen a new trend at work. The two-week gathering of the National People's Congress has seen protesters lobbying hard against a key government policy. No, not Tibet independence activists, angry farmers, or unemployed workers, but company bosses. Many delegates are entrepreneurs, and they're objecting to China's new labor contract law, introduced just over two months ago. "The law is overly-protective of workers' rights," delegate Zong Qinghou told Reuters, adding, "It isn't reasonable." Zong is the chairman of Wahaha Group, China's biggest private soft drinks company.

The new legislation compels bosses to provide written contracts and contribute to health insurance and pensions schemes. What's more, they can no longer dismiss staff at whim. Some bosses are painting these modest steps towards labor rights as a return to the jobs-for-life policies of the Mao-era. It's a line that has forced government officials like NPC spokesman Jiang Enzhu to issue denials, insisting to local media that the new law is "not an iron bowl or a life-long contract".

There's no doubt that the law is causing corporate pain as wage bills rise. Of 91 small firms surveyed by CLSA Asia Pacific in February, the majority said the law had added at least 10% to their labor costs. The manager of Zhejiang-based shoemaker Hassan Manufacturer Co (who is not a delegate) told NEWSWEEK on the phone that his company has suffered a 20% cost increase that "has made us feel more disadvantaged in competition".

Curbs on flexible hiring and firing are controversial, particularly with small firms who often expand and contract their workforces to suit their order books. Doubts about the law appear to have made companies more cautious about hiring than at any time in three years: that's the finding of Manpower Inc's latest quarterly employment outlook report, which polled 4,055 employers in seven cities across China.

What's more, added protection means "workers are no longer acting as obedient as they were before", says the chairman of Jiangsu Huarui, a garment-maker with 8,000 staff. One reason is better protection from dismissal; another is that companies can no longer ask new hires to pay a fee that's forfeited if they leave.

China's second richest woman, Zhang Yin, has been one of the labour contract law's staunchest critics. Zhang, who's $10 billion fortune comes from her Hong Kong-listed paper-making empire, is a member of the government's highest consultative body - Chinese People's Political Consultative Conference (CPPCC) that meets alongside the parliamentary session. Critics of a new "iron rice bowl" are angry about clauses that entitle workers to open-ended staff contracts after 10-years' service, or after two short-term contracts. Ms Zhang suggested this should not apply to labour intensive industries like her own.

Several delegates say they support fairer labor laws, but want key parts of this one changed. According to He Yongzhi, CEO of a chain of hot-pot restaurants, "the intention of the law is good" but it is a "vague legal blueprint" that needs guidelines, some of which should "better balance" shopfloor and boardroom needs. Like her, Wahaha's Zong is hoping amendments will be introduced when implementation guidelines are drawn up. "I think there is room for some revisions", he said.

Corporate protesters will not be able to stampede down this law. It's a vital part of the government's policy of creating a more harmonious, less fractured society. Senior government officials have dismissed calls for the new law to be scrapped: "The issue now is not revision, but full enforcement," according to China's Vice-Minister of Labor and Social Security. However, the ruckus is an instructive snapshot of the new China. While grassroots activists still risk jail for demanding workers' rights, the National People's Congress is a lobbying channel for entrepreneurs.

Shanghai: Pipe-dreams made real

Melinda Liu — Sat, 08 Mar 2008 21:51:57 GMT

Beijing isn't alone in its "edifice complex," the massive urban makeover that has transformed the Chinese capital in the run-up to the Summer Olympics. In Shanghai the remodeling of the city's famous Bund waterfront has led to some raised eyebrows. My colleague Duncan Hewitt writes from Shanghai:

When Shanghai does something, it doesn't do it by halves. For years, local urban planners have admitted that the city made a mistake in the 1990s, when it routed one of its major highways right along the famous Bund waterfront. Since then conservationists have dreamt of the day when the traffic would be rerouted, or even put underground in a tunnel, to spare the historic structures from pollution and improve the view of the famous old stretch of colonial-era buildings.

Yet the amount of work involved meant that such an idea seemed like, perhaps literally, a pipe-dream -- not least because Shanghai's notoriously marshy riverbanks are hardly the most ideal environment for tunnel construction (many of the Bund buildings themselves have sunk several feet in the past half century). But the World Expo, which Shanghai is to host in 2010 - the first time such an event has been held in a downtown area rather than out in the leafy suburbs - seems to have concentrated minds: last month the city announced a host of spectacular plans: the old elevated highway link which brought cross-town traffic onto the Bund would be demolished, and a network of new roads and tunnels would be built at a cost of almost a billion US dollars.

Most spectacularly, the plans include not only a traffic tunnel right underneath the Bund, but a double-decker tunnel, no less, with two layers of road carrying traffic in different directions, located just a few metres below ground in order to avoid existing subway tunnels. And the famous old Garden Bridge, a quaint steel girder structure which has carried traffic from the north end of the Bund across the adjoining Suzhou Creek for a hundred years, is to be dismantled piece by piece, cleaned and repaired, then re-erected one year later. City officials dismissed suggestions that this might be a rather excessive way of cleaning the bridge, saying that they wanted to strengthen the structure of its base, in order to enable it to "carry traffic for at least another fifty years."

For the observer, it's another of those cases where one can't help thinking: 'only in Shanghai', a city famously obsessed with grand plans - and with change in general. And this being Shanghai, officials are not wasting any time in putting the plans into practice. Barely a week after the public was first informed of the project, which will mean major upheavals in the city's traffic infrastructure while construction is underway, the builders were already at work, closing the concrete highway bridge which previously swooped down in a spectacular curve onto the Bund, tearing up the road surface along the waterfront, and beginning to dismantle the Garden Bridge.

For the first few days there were major tailbacks on Shanghai's streets, as residents struggled to find alternative routes: the city government admitted there had been problems, pledged to improve its strategies, and publicly expressed thanks to residents for their 'understanding'. But for many Shanghai citizens, this kind of sudden imposition of a major restructuring of part of their city with very little advance warning is now part of life, something they've become used to in recent years. Most shrugged their shoulders and sat in the traffic jams. "If it's not something the authorities can make money from then they'll never bother to publicise it in advance", said one cynical driver.

For the owners of the luxury designer shops and restaurants which have in recent years returned to the refurbished buildings of the Bund, there are mixed feelings. Some expressed frustration at the fact that after all the money they've invested in building their businesses, they received only very cursory consultation from the officials in charge of the reconstruction project; indeed some of those running businesses in the Bund area received no advance warning at all about a plan which could mean two years of roadworks outside their front doors. But others have set their hopes on the end result being worthwhile, with the Bund becoming a peaceful area for leisure and tourism.

Still, many such people remain a little perplexed: most automatically assumed that building a tunnel under the Bund at such vast expense was in order to allow the creation of a pedestrianised zone at ground level, which would fit perfectly with the government's official plan to turn the area into an upmarket leisure destination. But that's not quite the case, according to Qin Kangde, director of the local office in charge of tunnel and road construction: "We'll have four to six lanes of road, mostly for tourist buses and visitors to local shops and restaurants," he says. It's certainly an improvement on the current eleven lanes of traffic racing past the Bund on the way to somewhere else - and the public areas and riverbank walkway will be beautified too. But it's also a reminder that in Shanghai, home to two of China's largest auto factories, the era of the car is not quite over - even on the Bund...

Between the Rock and a Hard Place

Stryker McGuire — Mon, 18 Feb 2008 16:39:29 GMT

He was known, more than anything else, for his supposed economic competence. So what was British Prime Minister Gordon Brown doing standing before the TV cameras today and announcing the nationalization of Northern Rock, a failed mortgage lender? It's a complicated story, but as Brown rightly said it all leads back to the sub-prime mortgage crisis in the United States. Still the Northern Rock affair, which has now forced the government to pull the trigger on what it calculated all along was the worst possible option, has been badly handled by Brown's Labour government since the debacle came to light last August. The "£100 Billion Gamble With Your Cash" takeover (as the Daily Mail put it) is the first nationalization in Britain since the bad old days of 1970s. Back then the Labour Party dug its own political grave and paved the way for Margaret Thatcher through its association with punishingly high taxes, steep unemployment and a plague of strikes. Brown knew that to nationalize the Rock would recall those times and threaten to undermine all that "New" Labour had done to rebrand itself as business-friendly and an ally, not an enemy, of mammoth financial interests in the City of London. As he ended the press conference and headed back to his office, Brown could be deemed fortunate in only one respect: he doesn't have to call an election for another two years.

Brazil's Bulls Are Running--Up Hill

Mac Margolis — Fri, 18 Jan 2008 09:40:36 GMT

In Brazil these days, armor is the new normal. From bullet-proof luxury rides to the caveirão, a police assault wagon built like a tank, Brazilians have fortified themselves against the hazards of modern living. In Rio, one evangelical Christian church in a crime-ridden favela is raising a steel-plated, 30-meter containing wall to keep the flock from harm's way when the shooting starts. So fashionable is the concept these days that Brazilians have even come to believe that their charmed economy is innured to world economic downturn.

No doubt there is some ground for optimism. Inflation is under control. Hard currency reserves are topping $160 billion, a continental record. Foreign debt is history. And while the largest economy on earth skates on the edge of recession, Brazilian officials confidently project growth of 5 percent or more this year, or, if the international markets tank, "maybe a little less," shrugs Finance Minister Guido Mantega. Give us your best shot, the bulls in Brazil seem to be saying, for Latin America's drowsy giant has not only stirred but "decoupled" - or broken free - from the vagaries of the globe's overlord economy.

But anyone watching the stock markets lately would be forgiven for feeling woozy. Share prices have been melting on the Sâo Paulo stock exchange, losing ten percent this week alone, in lock step with the plunging Dow Jones Industrial average, the DAX, the FTSE and the rest of the alphabet soup of bourses around the world. Nothing tragic there. After all, shares on Bovespa swelled nearly 60 percent in dollars last year, so there is fat to burn. But how much?

So far, Brazil has taken advantage of the commodities bonanza, driven largely by bottomless Chinese demand for everything from steel to soybeans. Brazil has also hedged its bets (armored up, if you prefer) by selling more of its goods to Asia, Latin America and other emerging nations, where growth is still strong. In fact, the World Bank recently predicted that not just China but the emerging markets as a whole will be barely winded, growing by over 7 percent in 2008 - and pulling the world economy in tow. The irony of the poorer half of the planet rescuing the rich will not be lost on the economic orthodoxy.

Still, it's probably too soon for champagne. While Chinese demand will not be easily sated - the other BRICs are nibblers next to the Dragon - it cannot yet make up for the United States's lack of appetite if recession hits. The Chinese economy is only one-fifth as big as America's and has just one twentieth the per capita income, notes Waler Molano, emerging markes analyst at BCP Securities.

Not that Brazil is in grave danger. But if the world economy continues to slump, Brazil is bound to swoon as well. In fact, there's been little talk of decoupling in the boardrooms lately. After a banner year of initial public offerings in the world markets, nearly a third of the companies counting on raising fresh cash through IPOs this year have shelved their plans due to the gathering crisis, the financial daily Valor Econômico reported on Jan. 18.

Some hazards not even kevlar can stop.

The U.S. and China: Back to Bludgeoning Each Other

Melinda Liu — Thu, 20 Dec 2007 22:55:34 GMT

What will 2008 --with the Beijng Games and the U.S. presidential elections -- mean for ties between China and America? Here's a fearless forecast from Steve Glain, who's based in Washington and has spent several weeks reporting in China:

The War on Terror has burned through America’s human and financial resources and empowered radical Islam. But for China, it’s been a lucrative reprieve.

However weakened are Sino-US ties – and they’ve taken a beating this year – the most important trans-Pacific relationship would be a lot worse if not for the Bush administration’s pre-occupation with the Middle East. His predecessor will likely declare a victory of sorts in Iraq and Afghanistan and slowly draw down the US military presence there. The White House will focus on domestic concerns like health care, immigration, and trade. Media interest in the terrorist threat will wane. (If there is a clash of civilizations and no one around to videotape it, does it get posted on YouTube?)

And with that, imperial America and once-and-future imperial China can get on with the serious business of bludgeoning each other. The two nations’ shared interests, of which there are many, will be subverted by cheap politicking on both sides. For a glimpse at how this will play out, consider the sagging trajectory of the Strategic Economic Dialogue, the launch vehicle that was to propel Sino-American ties from a feeding frenzy into a high-brow affair.

The SED, as it is called, is a biannual round of meetings between senior officials from Washington and Beijing. It was conceived by investment banker Henry Paulson as a pre-condition for his appointment as US Treasury Secretary. Paulson was an inspired choice for the job. At Goldman Sachs, he arranged the public listings of some of China’s top state-owned companies, which placed him on intimate terms with the country’s senior officials and businessmen. Paulson knew the Chinese and enjoyed the rarest coin in a realm awash in liquidity: respect.

The SED’s charter was to engage China in a sustained, workmanlike way. Paulson’s experience and expertise, it was assumed, would buy him enough credibility from Congress to vouchsafe the round from partisan politics. In return, he would negotiate “deliverables” from Beijing on such controversial issues as market access and the dollar-yuan exchange rate. But his enthusiasm was never matched on the Chinese side. From the outset, Paulson’s expectations for diplomatic parity with Premier Wen Jiabao were dashed. When the new Treasury Secretary hand-delivered a letter to Wen requesting he represent China’s side in the dialogue, Wen gave it a quick read and passed it to Vice Premier Wu Yi. (“Too bad, you get me,” she told Paulson jokingly, according to someone close to Paulson’s office.)

The first session of the SED was held a year ago in Beijing. It yielded nothing but understandings on procedural matters, despite a US delegation that included 13 US cabinet members and Federal Reserve Chairman Ben Bernanke.

Since then, China has come under growing criticism in the US. Lawmakers have passed bills that would impose punitive tariffs on Chinese-made goods in retaliation for Beijing’s manipulation of its currency, the yuan. Pundits like CNN’s Lou Dobbs have intensified their already high-decibel attacks on China for “stealing” American jobs and menacing US interests abroad. Most Democratic presidents campaigning for the Fall ’08 election, and even a few Republican ones, talk about the need to “deal” with China. American nativism, never far from the surface since 9/11, has assumed a decidedly Sino-phobic veneer.

By the time SED III came and went – the three-day event was held in Beijing last week – the US-China relationship had been damaged further by the controversy over tainted and defective Chinese exports, the Dali Lama’s reception in Washington, and Beijing’s decision to block a US aircraft carrier from entering Hong Kong harbor. A week prior to the round, Vice Premier Wu betrayed symptoms of dialogue fatigue when she berated a visiting EU delegation for constantly nagging Beijing about its undervalued currency. No one was surprised when the concessions made by both sides at the most recent SED were largely symbolic. The round is now hobbling alongside the lame duck president who bought into it and Paulson is preoccupied with America’s credit crisis.

In retrospect, the SED was doomed from the start, led as it was by a man who knows China and Wall Street better than he does Congress, and compromised by legislators who know little about anything beyond Washington and Main Street.

Historians may note the SED as the last such diplomatic initiative of the unipolar world. China’s emergence as a regional hegemon is inevitable and it will require bold leadership in Washington to accept this. America has built an empire – its far-flung garrisons and deep-water fleets – on the pretense that it alone should be entrusted as custodian of the world’s natural resources. It markets this not so much as a burden but as an obligation, one that obviates the need for other powers to challenge US access to oil fields and gas terminals. But China is not coming along. It is building a strategic waterway linking its ports to the Persian Gulf while sewing up excavation rights to energy-rich, and mostly authoritarian states in Africa. The Pentagon characterizes this as an ominous “Eastern Way” of energy security: controlling fuel supplies rather than the “Western Way” of buying them in the open market. (Saudi Aramco was a beneficent mentor, apparently.)

The Chinese respond by condemning the US for wanting to deny it the resources it needs to become a power in its own right. Washington deploys long-range F-22 fighter-bombers to Japan and flirts with the idea of selling them to Tokyo. Beijing accelerates the modernization of its military by privatizing its once state-run defense sector. Soon, China will have its own military-industrial complex which, should it bear any resemblance to its US counterpart, will be an empire in itself.

Under the Bush administration, American “engagement” with the world has become as debased as the dollar. The next US president would be wise to refresh it. For all its faults, the SED was at least a good try. It would be sad and possibly tragic if it turns out to be the last one.

Yuan Power

Melinda Liu — Tue, 18 Dec 2007 08:39:33 GMT

Now even your Christmas stocking may play a role in the Great Chinese Yuan Debate. My colleague Stephen Glain explains:

The “China price” is heading North -- at least when it comes to specialized hosiery. According to press reports, Wal-Mart is once again buying from Langsha, a top athletic-sock maker based in Zhejiang province, after refusing to pay the higher prices the footwear giant was demanding in August. (Langsha would not comment; a Wal-Mart spokesman said he was unaware of the Langsha contract which he says may have been negotiated with a sub-contractor.) It was Wal-Mart that so effectively used its vast market share to squeeze suppliers in the first place. So if the uber-retailer is backing off, dirt-cheap Chinese goods – a key factor in keeping inflation at bay worldwide - may be a thing of the past.

Or not. Market leaders like Langsha may be able to demand modest price increases, but most Chinese manufacturers are still at the mercy of overseas buyers and a growing number of them are relocating their production facilities abroad to escape withering inflation at home. China’s economy is growing so fast that even its abundant labor force isn’t large enough to keep up with demand. Wages are rising along with inflation – October’s 6.5 percent increase in China’s consumer price index was the largest monthly hike since 1997 – a byproduct of speculative funds infiltrating the economy in anticipation of a further appreciation of the Chinese yuan.

Beijing has already allowed its currency to rise against the US dollar by 6 percent or so over the last year. Further increases would benefit Chinese companies which import raw materials and finished goods – airlines, for example, which buy foreign-made aircraft, or utilities companies, which import fuel. A more valuable currency would also make US assets, already cheap due to the weak dollar, look increasingly appetizing to cash-rich Chinese corporations and investors. But an upward adjustment in the yuan’s value would hurt most of China’s exporters, which rely on exchange rates that make their products affordable abroad, and nearly all its farmers, who fear a stronger currency would enable local consumers to import more agricultural goods at their expense. And as the rump of China’s economic growth is still generated by export sales, it is politically unpalatable for most of the country’s leaders to promote a stronger yuan.

Anyone who openly supports yuan appreciation,” says Teng Binsheng, a professor at Beijing’s Cheung Kong Graduate School of Business, “would be public enemy No. 1.

Not everyone is mute, however. In the December 3^rd edition of The Economic Observer, economist Zhou Qiren argued that because so much of the country’s inflation is generated by speculative investment in local assets, the government should give the punters what they want in one sharp adjustment and get it over with. A strong yuan, he wrote, would also reorient the Chinese economy away from exports while encouraging investors and businesses to develop neglected markets at home.

It was a surge in exports of cereal products, argues Zhao, that contributed to this year’s spike in pork prices. “So long as private individuals or government officials see an undervalued yuan, they will focus on exports,” Zhou wrote. “And that means a widening trade surplus, over-liquidity and spiraling inflation.”

Zhou has an ally in US Treasury Secretary Henry Paulson, who was in Beijing last week to lead the US side in the Strategic Economic Dialogue, a biannual round of Sino-US discussions. Paulson, Washington’s point man in its relationship with Beijing, has been urging China to let the yuan strengthen, both to ease inflationary pressure in China and to ease its trade friction with the US. He returned to the US with only symbolic concessions and no movement at all on foreign exchange issues.

While neither Zhou nor Paulson may get what they want anytime soon, the increasingly complex debate over the yuan’s fate illustrates how quickly the world’s fastest growing economy is evolving. Not long ago, China was known for importing jobs from the developed world and exporting capital to the debt-laden US economy by purchasing its sovereign debt. Now the country is exporting low-margin work to developing countries in Southeast Asia and Africa while importing a torrent of hot money – much of it from American hedge funds and private equity specialists betting on a stronger yuan. Given the extraordinary pressures now squeezing the world’s fastest growing economy, it’s looking more and more like the smart wager.