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Saturday, April 27, 2013

International Banks Lending to the Middle Class in Asia: Profit vs. Planet

In April 2013, debt levels in Asia were reaching record levels as international lenders were extending short-term loans to a growing middle class. Nonmortgage consumer credit in Asia outside of Japan had increased 67% from 2007 to reach $1.66 trillion by the end of 2012. This credit included credit cards and loans for cars, electronic products, and appliances. Outside of Japan, Asian car and motorcycle loans nearly doubled from 2007 to 2012, to reach a record $219.7 billion. Appliance and electronics loans also more than doubled, reaching a high of $10.9 billion. Meanwhile, credit-card loans grew by 90% to reach a record $234.1 billion, according to Euromonitor. The incentive for the banks is not difficult to fathom. By 2020, more than half of the world’s middle class is expected to be in Asia. That translates into more than 100 million more people per year. For the banks, this is an opportunity for growth that was not possible in the European Union or United States from the financial crisis of 2008 to at least well into 2013. Lest the debt-loads go to wherever the banks’ incentives lead, government regulators in China, Malaysia, and Indonesia began reining in mortgage, credit-card and auto/motorcycle lending. Interestingly, the European Commission was also working on regulatory proposals that would limit the incentives of mortgage servicers to produce too many “bubble-creating” mortgages. Two levels of concerns can be extracted from this trend in Asia. I contend that the more immediate concerns are crowding out attention that ought to be paid to the larger but longer-term problems.
One sort of concern posits that the international banks may have been providing too much credit to people entering the middle class. Such borrowers, similar to the sub-prime mortgage borrowers in California, Arizona and Florida, may not be able to handle their new debt-loads. At the beginning of 2013, debt levels relative to individual income in many Asian economies, including Malaysia, China, South Korea, Thailand, Indonesia and India, were up to 30% higher than in the United States. Citigroup’s claim that it was expanding its lending to the middle class in Asia in a “disciplined manner” should be considered in light of the financial growth incentives facing the bank, given the continued weak economies in Europe and North America. The fear that another debt melt-down might trigger another recession is sufficient to focus attention on whether the middle-class borrowers can handle their debt-loads. The baleful consequences that are larger and presumably further off get pushed aside, given the human mind’s preoccupation with today.
The upsurge in auto loans, for example, points to an expansive auto market in Asia. Sometime after 2000, the number of cars in use in China was doubling every year. Meanwhile, the Chinese were building an “interstate” highway system that would dwarf the network of highways in the contiguous United States. Loans enabling an exploding middle class to buy cars increase the global demand for oil, and thus can be expected to result in a higher price at the pump. Indeed, given the magnitude of the surge in projected use of fossil fuel in Asia, it may be that the Earth’s reserves of oil will be fully extracted earlier than expected, perhaps before alternative sources of energy are sufficient to pick up the slack.
 
                                                                   More people=More cars=More pollution    source: Businessweek
 
Furthermore, the increased carbon emissions that we can expect can be expected to facilitate global warming. To be sure, it can indeed be argued that the Asian middle class deserves the same freedom and ease provided by owning a car in the twenty-first century that the American and European middle-classes enjoyed in the twentieth century. However, the global climatic threat to the species had not been pressing during the industrial revolution and the ensuing consumerism of the twentieth century. Even though a person starting to smoke at 50 can point to a person starting at 20 and say, “I should be able to have my years of smoking too,” the person who smokes when old faces more health risks than the person who smokes when young because an older body is past its prime. Is it worth a heart attack to a 50 year-old to insist on the right to have five or six years of smoking too?  Similarly, the question of more oil for more cars, as well as more coal-sourced electricity powering electronics and appliances—all being facilitated by the upsurge in loans—can legitimately be answered differently when it is feared that the survival of the species itself hangs in the balance.

                                 As these diverging patterns demonstrate, the threat of over-population is not uniform across the globe.   source: fashionzombie.net
Therefore, taking Citigroup at its word that it is lending in Asia in a “disciplined manner” in spite of the rather unique opportunity for bank profit there, it can be asked whether international banks have a responsibility to society, and even the species itself, to help limit the additional cars put into use in Asia by resisting the temptation to extend more auto loans to the rising middle class. To such a bank, this might seem like muzzling the golden goose, particularly given the soft economies in North America and Europe. Hence, responsibility involves some voluntary restriction on a company’s financial self-interest. Duty is not meant to be convenient; otherwise, it would not operate as a tug on a banker’s conscience.
If corporate social responsibility is not strong enough—owning the forcefulness of the profit motive and the voluntary nature of responsibility—then government regulation may have to pick up the slack. But if industrialization and development is in the interest of the Chinese government, so as to mollify any potential political resistance from the people, the question may be whether the U.N. should be given the authority to construct and enforce international limits on carbon emissions. Put another way, will the absolutist interpretation of national sovereignty have to be compromised in order to the species to survive?  Problematically, the Chinese government holds that interpretation and so much of the increases in carbon emissions come from Chinese cities. There is the rub, one might say.
In conclusion, both corporate social responsibility and government regulation may be insufficient , together or separately, to protect humanity from the econo-climatic repercussions that must someday catch up with the massive growth in global population. The spread of capitalistic industrialization from the developed world to the Asian tigers (i.e., newly industrializing countries), whose strong governments could concentrate enough spending on the infrastructure needed for foreign direct investment by multinational corporations, has allowed the economic and climatic implications of 7 billion people to catch up.

Source:

Kathy Chu, “Consumer Loans Surge Across Asia,” The Wall Street Journal, April 22, 2013. 

Thursday, April 25, 2013

Executives and Directors Planning to Unload Shares: A Front for Insider-Trading?

The U.S. Securities and Exchange Commission (SEC) initiated preset-trading arrangements known as 10b5-1 plans in 2000 so corporate executives and nonexecutive directors would have a way to announce their plans to sell shares. According to John Nester, a spokesman for the SEC, the 10b5-1 plan was devised “to give executives a way to sell some shares of their own companies despite being exposed to nonpublic information.” Therefore, the plans must be set up when the executive or director does not possess inside information, so as to obviate any potential charges of insider trading. The question I address here is whether the plans are subject to abuse by non-executive directors. Such abuse could involve the exploitation of a conflict of interest.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Wednesday, April 24, 2013

China’s Yuan To Be More Market-Driven

According to the Wall Street Journal, “China's central bank plans to widen the yuan's trading band in the near future, People's Bank of China Vice Governor Yi Gang said  . . . , suggesting that China's leaders will press ahead with change despite the surprise slowing of the economy. ’The exchange rate is going to be more market-oriented,’ Yi said on a panel at the International Monetary Fund’s 2013 spring meetings in Washington. ‘I think in the near future we are going to increase the floating band even further’.” The yuan had risen 0.9% against the US dollar since the beginning of the year, and 1% the previous year. With exports becoming more expensive as a result, the Wall Street Journal reported in April 2013, “China's economic growth slowed to 7.7% in the first quarter, year-over-year, down from 7.9% in the last quarter of 2012. That was well below expectations, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies. Mr. Yi's comments are an early indication that China will continue to focus on market-oriented reform even if that might make it tougher for exporters who would prefer a cheaper yuan.” The implications are more profound than merely shrinking exports.
 
                                    The yuan in 2011. The steadily rising value suggests that the market viewed the currency as being undervalued. 
                      
With labor costs steadily rising in China and the rising prices of crude oil making shipping half way around the world more expensive, some American corporations began to reassess manufacturing domestically. A trend in this direction would reduce American unemployment, and thus the U.S. budget deficits as there would be less demand for unemployment compensation and food-stamps and more tax revenue. It is not as though it could be expected that everyone in the U.S. would participate in a “non-manufacturing” knowledge economy. To reach full employment, an economy must be diversified and thus able to tap into the various types of labor. It is not as though people are clones, having the same aptitudes.
In the U.S., the unemployed would stand to gain while discount store customers would lose the once-cheap Chinese imports. That is to say, a rising yuan is not entirely in Americans’ interest, financially. On the other side of the world, a rising currency is not necessarily contrary to China’s economic interests. In order to move to a more viable economy, the Chinese government had been urging more domestic demand so the economy would not be so dependent on exports. A recession in the U.S. and E.U. could mean a major downturn in an exports-oriented Chinese economy.
From a big-picture perspective, balance or equilibrium in the global economy is in everyone’s financial interest. Keeping a currency artificially low is like a dam keeping waters from reaching a balance. The pressure from the held-up water can be expected to destabilize the global economy. China’s policy to gradually let the yuan’s value be market-determined is thus a prudent step.

Source:
Natasha Brereton-Fukui and Bob Davis, “China Vows Wider Yuan Movement,” The Wall Street Journal, April 17, 2013.

Monday, April 22, 2013

The E.U. as Peace-Maker: Bringing in Serbia and Kosovo

Serbia and Kosovo reached an agreement on April 19, 2013 bearing on how much autonomy Kosovo would allow Serb cities in return Serbia’s recognition of Kosovo’s remaining authority in the cities. Kosovo had seceded from Serbia in 2008, and the ensuing conflict kept both states from joining the European Union. As it turned out, the prospect of accession gave both Serbia and Kosovo enough incentive to reach an agreement. Indeed, only a few days after the agreement had been reached, the governments of Serbia and Kosovo approved it. Such swiftness indicates how strong of an incentive accession can be for belligerent republics in Europe. The E.U.’s deployment of this “carrot” is fully in line with the main objective of the European Union: to prevent war in Europe. According to the New York Times, the accord is thus “an important victory” for the E.U.

 
In the wake of World War II, the European Coal and Steel Cooperative was formed in order to keep an eye on Germany’s use of iron, should the Germans seek to re-militarize. The EEC was also formed to obviate war in Europe, and the E.U. inherited this central aim. Accordingly, it is fitting and proper that, as Kosovo’s deputy minister of foreign affairs, Petrit Selimi put it, “The incentive of joining the E.U. played a huge role in clinching an agreement.” The E.U. thus played a role in forging greater peace in Europe. In fact, the negotiations took place in Brussels, according to Catherine Ashton, the E.U.’s secretary of state. “It is very important,” she told reporters, “that now what we are seeing is a step away from the past and, for both [Kosovo and Serbia], a step closer to Europe.” Days after the agreement was signed, the European Commission recommended to the European Council  that talks start on Serbia’s accession. Belgrade had “taken very significant steps and sustainable improvement in relations with Kosovo,” the Commission announced. The Commission also noted that as Kosovo had met all its “short-term priorities,” talks toward a Stabilization and Association Agreement, a precursor to Kosovo gaining statehood, should commence.

Bringing both Serbia and Kosovo into the Union would represent a more permanent means of forestalling war in Europe. As this depends too on how much power the E.U. has in reconciling conflicts between the states, giving the federal government sufficient competencies in this regard would also represent a step toward sustained peace in Europe. While the prospect of accession has been shown to be enough of an incentive for a meaningful agreement to be reached, better still is the incorporation of trouble spots into the European Union, where more pressure can be brought to bear on any bellicose states such that any nascent conflicts between them can be peaceably resolved. Indeed, the E.U.’s competency, or enumerated power, to remove state obstacles to a common market is in part geared to forestalling potential conflict between discriminating states. This is also a reason behind the interstate commerce clause in the American system.

Lest a fixation on any of the contemporary crises hitting the E.U. inculcates a pessimism that is destructive to the Union and thus ruinous to its more basic purposes, it should be helpful to keep an eye raised to one of those fundamental aims of the project. Given the two major wars in Europe during the first half of the twentieth century, it is wise to keep perspective regarding the role of the E.U., both directly and indirectly, in obviating war.

Sources:

Dan Bilefsky, “Serbia and Kosovo Reach Agreement on Power-Sharing,” The New York Times, April 20, 2013.

Vanessa Mock and Gordon Fairclough, “Serbia Ready for EU Accession Talks,” The Wall Street Journal, April 22, 2013.
 

Sunday, April 21, 2013

Britain Challenges the E.U.’s Financial Transactions Tax

In April 2013, the state of Britain mounted a legal challenge at the European Court of Justice against E.U. financial transactions tax (FTT) going into effect in eleven other states. The way in which the challenge was depicted by state officials in Britain suggests that the real challenge was not just to more European integration, but also to the E.U. itself.
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.