Is all the global gloom and doom getting you down? Moody’s Investors Service has an upbeat report on Chinese life insurers, who entered 2008 with record high profits and whose exposure to the sub-prime mortgage crisis is limited.
Chinese insurers..are in a relatively good position versus their foreign counterparts because their exposures to structured fixed income investments and foreign securities are minimal, due mainly to regulatory restrictions.
China’s life insurance industry is the third-largest in Asia behind Japan and South Korea, but its penetration of the market is still relatively low, Moody’s noted, and it expects premiums growth for 2008 in a range of 30 percent to 40 percent.
The industry is highly concentrated, with China Life Insurance Co. Ltd. (NYSE:LFC), Ping An Insurance Group Co. of China (PNGAY) and privately held China Pacific Life Insurance Co. accounting for more than 65 percent of China’s total life insurance premiums, Moody’s said.
For details, see “Industry Outlook: Chinese Life Insurance.”
Technorati Tags: (LFC), (PNGAY), Asia-investment, Asia-Pacific-region, china, China Life, China Pacific Life, Chinese investment, Chinese life insurance, Ping An Insurance
Looks like China grabbed the Olympic torch this summer and is bringing it to Washington DC to claim its place at the head G-table. Though it is uncertain what, if anything, the G-20 summit will accomplish, one thing is clear: China is striking a claim to a major role in global economic and financial policy. Its aggressive stimulus program makes US policy actions look half-baked. What once looked like bold moves by Paulson and Bernanke are now looking increasingly tentative and malleable, just what a market looking for clarity and certainty does not want. It all goes to show that China ‘s experience at dealing with toxic products is paying off, and that China is much better at the Socialism thing than recently converted free market groupies.
Certainly, you would never see senior Chinese officials arguing publicly over who has the best mortgage relief plan. Treasury and the FDIC’s Sheila Bair had better sort this out in hurry: CreditSights cites an alarming increases in subprime mortgage delinquencies as unemployment rises and the stimulus rebate checks are long since spent.
Whatever flaws the TARP may have, they are magnified by a failure to communicate. Ever since the botched rollout of the “bank bailout” plan Paulson has been on the back foot, alternately pleading for support and protesting that people just don’t understand. Maybe he should send everybody a copy of Research Primer: Understanding the Credit Crisis.
President-elect Barack Obama, meanwhile, is keeping a safe distance from the perils of Paulson, but will eventually have to nail his colors to the mast, to thoroughly mix metaphors. His healthcare agenda came under scrutiny this week with several reports on Research Recap garnering attention. This includes Moody’s handicapping of the winners and losers under the plan. A PricewaterhouseCoopers analysis came to the shocking conclusion that the plan might turn out to be more expensive and deliver fewer savings than claimed. In addition, Standard & Poors noted that the weak economy is posing increased risks for health insurers.
And as if things weren’t bad enough already for real estate, the mounting problems of retailers such as Circuit City are adding to their woes, as noted in CMBS Outlook Uncertain as U.S. Retail Sector Nosedives.
Research Recap Quote of The Week:
The ongoing adjustment in housing markets still has a long way to go. - OECD
Technorati Tags: china, CMBS, credit-crisis, G-20, health insurers, Healthcare, housing, mortgage-backed-securities, retailers, TARP, zei
A detailed analysis of powerplants in China by MIT researchers debunks the widespread notion that outmoded energy technology or the utter absence of government regulation is to blame for that country’s notorious air-pollution problems., According to the study, Greener Plants, Grayer Skies? , the real issue involves complicated interactions between new market forces, new commercial pressures and new types of governmental regulation.
China’s power sector has been expanding at a rate roughly equivalent to three to four new coal-fired, 500 megawatt plants coming on line every week, says at MIT.
After detailed survey and field research involving dozens of managers at 85 power plants across 14 Chinese provinces, Edward S. Steinfeld, associate professor of political science and his co-authors, Richard Lester and Edward Cunningham, found that in fact most of the new plants have been built to very high technical standards, using some of the most modern technologies available. The problem has to do with the way that energy infrastructure is being operated and the types of coals being burned.
New market pressures encourage plant managers to buy the cheapest, lowest quality and most-polluting coal available, while at the same time idle expensive-to-operate smokestack scrubbers or other cleanup technologies.
The physical infrastructure is advanced, but the emissions performance ends up decidedly retrograde.
Steinfeld said the Chinese government lacks reliable data on how the nation’s powerplants are built and operated. Officially available data tend to be collected haphazardly and often by local authorities who have a vested interest in the outcomes. The MIT survey work represents a first-of-its-kind effort by outsiders to collect unbiased, objective data of this sort at a national level.
One of the most surprising findings was that “the kinds of technology currently being adopted in China are not cheap. They’re not buying junk, and in some cases the plants are employing state-of-the-art technology.”
The findings suggest that emissions levels from Chinese powerplants “depend almost entirely on the quality of the coal they use. When they’re hit by price spikes, they buy low-grade coal.” Lower-grade coal, which produces high levels of sulfur emissions, can be obtained locally, whereas the highest-grade anthracite comes mostly from China’s northwest and must travel long distances to the plants, adding greatly to its cost. Contrary to what many outsiders believe, the Chinese state has substantially improved its ability to implement and enforce rules on technology standards. It has been slower, however, to develop such abilities for monitoring the day-to-day operations of energy producers.
In some respects, the situation is more amenable to change than many people had assumed, according to Steinfeld. “With expanding regulatory capacity and increasingly sophisticated efforts to regulate through market-friendly pricing mechanisms, reformers could achieve change relatively quickly.”
Technorati Tags: china, coal, greenhouse-gases, Power
Efforts to get a better handle on the activities of sovereign wealth funds face a number of challenges, notably from China, according to Oxford Analytica.
“The worsening of the global credit crunch and acute financial crisis over the last two weeks has highlighted the often-cited shift in financial clout from West to East,” OxAn says in SWFs are likely to remain opaque. “In particular, the realisation has firmly taken hold that mainly Asian and Middle Eastern sovereign wealth funds (SWFs) have become a potential provider of capital to the US and European financial systems. However, the extent to which they can realise this potential hinges partly on the level of protectionism they encounter from Western governments.”
OxAn says many Western governments seem to have concluded that the legislative frameworks they already had in place will be sufficient for monitoring and, if necessary, rejecting SWF investments. “Meanwhile, many SWFs appear to have been waiting both for financial markets to stabilise and for clarity about Western governments’ responses to SWFs, before seeking more high-profile, substantial stakes. This phase may partly culminate with the release of the set of voluntary principles that have been drafted by the IMF, which will be presented at the IMF/World Bank Annual Meetings in Washington on October 6-13.”
However, the foreign investment activities of China’s State Administration of Foreign Exchange (SAFE), a branch of the People’s Bank of China are bringing an additional dimension to the global debate on SWFs:
- Potentially, SAFE may have access to a significant part of China’s approximate 1.8 trillion dollars of foreign exchange reserves to invest in equities. It has been suggested that SAFE’s equity investments abroad may already amount to close to 100 billion dollars.
- SAFE has taken stakes of about 1% in some multinational companies, including BP and Total.
- According to media reports, SAFE — whose investment activities are very non-transparent — has also been investing internationally via opaque subsidiaries.
However, structurally SAFE is not a SWF, so there is a risk that the forthcoming IMF principles may not be easily applicable to it, OxAn says. If they are not, this will clearly diminish the principles’ overall ability to catalyse change.
This will also demonstrate to other SWF-owning governments that pressure for adherence to the principles can be avoided by channelling investments through vehicles other than SWFs.
Even if the IMF principles are applicable to non-SWF investment vehicles, the cultural and operational changes required for SAFE to become adherent to the principles are likely to be so significant that such changes would, at best, take a long time.
Technorati Tags: china, People's Bank of China, SAFE, Sovereign-Wealth-Funds, SWF
McKinsey has weighed in on the topic of how higher oil prices and wages are eroding the manufacturing advantages of Asian nations.
As Research Recap reported in May, CIBC World Markets estimates that in 2000, when oil prices were near $20 a barrel, the costs embedded in shipping were equivalent to a 3% tariff on imports. Today, that figure is 11%—meaning that the cost of shipping a standard 40-foot container has tripled since 2000.
McKinsey says this not only affects exports from Asia but also sharply increases the price its manufacturers pay for raw materials. It now costs about $100 to ship a ton of iron from Brazil to China—more than the cost of the mineral itself. Wage inflation, coupled with a weaker dollar, adds to the challenge: in dollar terms, annual wage inflation in China has averaged 19 percent since 2003 , McKinsey notes.
“An average production worker, paid $1,740 a year in 2003, makes $4,140 today. By contrast, wage inflation in the United States has averaged only 3 percent. The wage differential between Mexico and China has also narrowed significantly. In 2003, Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15 times. Combined, these trends are reshaping the competitive landscape for offshore manufacturing in a number of locales.”
Products that were once profitably made in areas where the local costs are lowest are therefore moving into the near-shoring zone or in some cases may now be suitable for production in the United States.
A midrange server, for example, made profitably in China three years ago, has slipped below the breakeven line because of higher wages and freight costs. The server now could be produced more economically at a plant closer to consumers (in Mexico, for example, where the mix of logistics and labor costs is more favorable).
Technorati Tags: china, manufacturing, offshoring, oil-&-gas, steel, trade, transportation
While China’s athletes continue to collect gold medals in the Olympic Games, the host country’s venture capitalists are busy with their own quests for gold, reports Dow Jones Venture Wire.
The amount of venture capital fueling companies in China surged 85% in the first half of 2008, thanks partly to large injections of capital into mature Internet concerns.
Venture firms invested $2.15 billion in mainland China companies during the six-month period, up from $1.16 billion a year earlier, according to data released today by Dow Jones VentureSource.
A $430 million investment in Internet conglomerate Oak Pacific Interactive fattened the latest amount, but even excluding that deal, investment still rose 48%. Of the six largest deals of the second quarter worth more than $30 million, four including Oak Pacific were late-stage Internet companies. The others were Tudou.com ($57 million), 51.com ($51 million) and Leyou.com ($35 million).
While the overall amount invested rose significantly in the first half, the number of deals dropped to 116 from 123, continuing a trend of the past few quarters. Venture capital firms are simply placing larger bets in more mature companies while remaining highly selective with their early-stage investments.
Eighty deals, or 69% of the first-half total, involved companies “shipping product,” while another 30, or 26%, deal with profitable companies, according to VentureSource. Those companies were funded with $2.11 billion. Only $42.3 million went into six companies in product development, while no companies getting off the ground received capital.
Technorati Tags: china, internet, venture-capital
Continued rapid development of China’s infrastructure is expected to help boost its construction spending by almost 10 percent annually over the next gew years, according to a new report from Freedonia Group.
Construction expenditures in China are expected to rise 9.2 percent per annum in
real terms through 2012. A rapidly expanding domestic economy, continuing efforts to upgrade physical infrastructure, sustained strength in foreign investment funding, healthy demand for Chinese manufactured goods, ongoing urbanization, and further population and household growth will all boost construction spending in China, Freedonia says in its Construction Outlook in China.
Nonbuilding construction will be the fastest growing sector, advancing 10.2
percent annually in real terms through 2012.
Growth will be fueled by government initiatives to expand and upgrade the country’s physical infrastructure, especially its highways, railways and subway systems.
Utilities construction will also contribute to nonbuilding construction spending gains, as the government continues to increase the country’s power generation capacity and improve electricity transmission networks, as well as expand and improve municipal water supply coverage and natural gas distribution.
Nonresidential building accounted for the largest share of construction spending in China in 2007, reflecting the nation’s emergence as an economic powerhouse over the last decade and its position as the largest producer of manufactured goods in the world. Nonresidential construction expenditures are projected to increase 8.9 percent annually in real terms through 2012.
China’s ongoing industrialization and modernization will help to boost investment in manufacturing, office and commercial facilities.
Real residential building construction expenditures will grow at an 8.4 percent annual pace through 2012. Advances will be spurred by rising employment and personal income levels, further urbanization of the population, and increasing average per capita living space in both urban and rural areas.
Advances will be spurred by rising employment and personal income levels, further urbanization of the population, and increasing average per capita living space in both urban and rural areas. However, government efforts to prevent the real estate market from overheating (for example, by raising the one-yearlending rate and restricting second home purchases) and a deceleration in household growth will provide an offsetting influence, preventing demand from advancing at a faster rate, Freedonia says.
Freedonia’s Construction Outlook in China is available for purchase here.
Technorati Tags: china, construction, infrastructure
Evidence that the golden age of Chinese manufacturing may be coming to an end continues to mount.
Soaring oil prices raise both the cost of production and transportation to Western markets, eroding China’ cost advantage. This is exacerbated by extra demand for deisel fuel as a result of the recent earthquake.
On top of this, add exchange rate problems and a shortage of skilled labor exacerbating inflation pressures.
Deloitte Economist Sunil Rongala notes that the primary purpose for having a fixed rate policy was to promote exports by making the Chinese renminbi (RMB) more competitive. This fixed rate has made China hyper-competitive; a result is that trade surpluses and foreign exchange reserves have swelled.
Though the fixed rate policy was loosened in 2005, the still interventionist exchange rate policy is not sustainable because it is partly responsible for higher levels of inflation in China.
Inflation in China has been on an upward trend and it was 8.5 percent in April 2008: a near 12 year high (the highest was 8.7 percent in February 2008). The cheap exchange rate is partly responsible because it has led to massive capital inflows because of high trade surpluses, and because speculators have brought in a lot of money into China to make a capital gain from an expected exchange rate revaluation. Banks expect the renminbi to appreciate by 8.5 percent in a year’s time and it is very likely to continue appreciating post that, Rongala writes.
Meanwhile, manufacturing costs in China are going up. The producer price index was up 8.1 percent YoY in April 2008 – the highest it’s been since December 2005. This is understandable given rising commodity prices but manufacturing firms in China typically operate on razor-thin margins and rising costs have forced many manufacturing units to shut shop.
Another problem is that labor prices are increasing rapidly because there is a talent shortage in China. Between 1997 and 2006, the average annual wage of the U.S went up by 40.1 percent while China’s went up by a staggering 224.5 percent.
In fact, the annual average wage in China went up by 362.8 percent between 1994 and 2006.
Labor laws in China have always been lopsided with employers having a stronger hand. On January 1, 2008, a new labor law, the ‘Labor Contract Law’, went into effect and this law gives labor unions a stronger hand is widely expected to increase labor costs.
Technorati Tags: china, manufacturing
In addition to having a direct impact on inflation, current high oil prices have profound implications for world trade patterns, according to CIBC World Markets. The cost of shipping a standard 40-foot container from East Asia to the North American east coast has already tripled since 2000 and will double again as oil prices head towards $200 per barrel.
Exploding transport costs may soon remove the single most important brake on inflation over the last decade - wage arbitrage with China.
It currently costs $8,000 to ship a standard 40-foot container from Shanghai to the North American east coast, including in-land transportation, the report said. That’s up from just $3,000 in 2000 when oil was $20 per barrel. At $200 per barrel of oil, the cost to ship the same container is likely to reach $15,000, CIBC’s Jeff Rubin and Benjamin Tal write in Will Soaring Transport Costs Reverse Globalization.
“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” the report says, as quoted by the Financial Post.
As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage. Already the impact of rising oil and transport costs are having an impact on manufacturing that is expensive to transport.
Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. Market.
“Instead of finding cheap labour half way around the world, the key will be to find the cheapest labour force within reasonable shipping distance of your market,” they write, according to the Globe and Mail.
Look for Mexico’s maquiladora plants to get another chance at bat when it comes to supplying the North American market.
Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Rubin and Tal say, calling the cost of moving goods “the largest barrier to global trade today.”
“In fact,” they say, “in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.”
When oil was $20 a barrel, transport costs were equivalent to a 3-per-cent tariff rate; now it’s above 9 per cent.
Aggravating the problem is the fact that modern new container ships travel faster than old bulk carriers and so use up more fuel, doubling fuel consumption per unit of freight over the past 15 years.
“This is an environment in which shipping from the Pacific Rim may not make sense any more,” Tal told the Globe and Mail.
George Friedman of Stratfor agrees that East Asia has been most affected by sustained high oil prices. Japan, which imports all of its oil and remains heavily industrialized (along with South Korea), is obviously affected. But the most immediately affected is China, where shortages of diesel fuel have been reported.
China’s miracle — rapid industrialization — has now met its Achilles’ heel: high energy prices.
China is facing higher energy prices at a time when the U.S. economy is weak and the ability to raise prices is limited, Freidman writes in a new analysis : The Geopolitics of $130 Oil. “As oil prices increase costs, the Chinese continue to export and, with some exceptions, are holding prices. The reason is simple. The Chinese are aware that slowing exports could cause some businesses to fail. That would lead to unemployment, which in turn will lead to instability.”
The Chinese have their hands full between natural disasters, Tibet, terrorism and the Olympics. They do not need a wave of business failures.
Technorati Tags: china, manufacturing, oil-&-gas, steel, trade, transportation
As its urban population almost doubles from 2005 to 1 billion people by 2030, China should focus on boosting the productivity of large cities to mitigate the negative effects of growth on the planet. That’s the recommendation of the Mckinsey Global Institute in recently released study of what this explosive demographic change entails, and how policy makers should oversee China’s growth.
China will add more than 350 million people to its urban population by 2025, more than the population of today’s United States.
“The policy choices that China’s leaders make at national and local levels can alter the shape of urbanization significantly. MGI finds that an urgent shift in focus from solely driving GDP growth to an agenda of boosting urban productivity—achieving the same or better economic results with fewer resources—is not only an opportunity but a necessity. ”
221 Chinese cities will have more than 1 million+ people living in them by 2030 - Europe has 35 today .
MGI says the need to shift Chinese policy in the appropriate direction is important for every citizen on the globe: “By moving in this direction, China would cut its public spending requirement by 2.5 percent of GDP or 1.5 trillion renminbi a year, reduce SO2 and NOx emissions by upward of 35 percent, halve its water pollution, and deliver private sector savings equivalent to 1.7 percent of GDP in 2025 mainly through reduced natural resource consumption.”
At the heart of the study’s recommendations is a focus on the benefits of extremely large cities, such as Shanghai, as opposed to a more distributed growth strategy. The study notes several specifics:
- Larger cities attract more talent and investment than small and medium-sized urban areas
- City “network effects” stimulate economic growth
- There is a more efficient use of energy in densely urban environments
- Public transportation is more efficient
- Less arable land is lost
- Better control over pollution
- 20% higher GDP per capita than some other approaches
The study, accompanied by an interactative graphic overview, holds out hope that “China can mitigate the financial, environmental and social costs of urbanization while still realizing its full economic potential.”
Technorati Tags: china, Urban-Policy
