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Thursday's Top 10 with NZ Mint: How Chinese officials launder their money; The key to China's hard landing; Norway's housing bubble; The Shareholder Value myth; Dilbert
Here's my Top 10 links from around the Internet at3.30 pm today in association with NZ Mint.
We welcome your additions in the comments below or via email to firstname.lastname@example.org.
My must read today is #9 on the weaknesses of American banks if the Euro-zone dissolves. No one is quite sure what the trillions of dollars worth of euro-denominated derivatives might be worth in a euro-breakup scenario....
1. A tug of war - FT's Beyondbrics blog reports on the battle between central and local governments in China over property market controls.
It is a crucial one to watch for those trying to work out where the Chinese economy is going.
When China unleashed a 4 trillion yuan stimulus in 2008 and 2009 to respond to the Lehman crisis the main channel was increased borrowing by local governments to invest in apartment developments.
That triggered an investment boom by families looking for wealth preserving alternatives to bank accounts and a spike in apartment prices to unaffordably and unsustainably high levels.
So through 2011 the central government imposed controls on buying second homes and on loan to value ratios to take some heat out of the apartment market. The local governments had also maxed out their borrowing from state banks through local government financing vehicles, many of which are now behind on their payments, or rolling them over.
That has been a major factor in the slowdown in China, which is building up iron ore and coal stockpiles. Commodity prices have slumped and companies such as BHP have put investment plans on hold while they work out if China's growth will fire up again.
That nexus, therefore, between central and local government over property, is crucial.
Here's Beyondbrics with the latest incident where a local government desperate for land sales revenue eased controls and then was over-ruled by the central government.
The tug of war between local government and Beijing can be seen in many sectors of the economy, but particularly in property. Cities and provinces have long relied on land sales to generate revenue. As home prices fall, land revenues dry up, making it harder to pay for that lovely new sports arena or that handsome bridge to somewhere. So hard up are they, that some have started flogging their wheels.
But Beijing has called time on the game. And it doesn’t look like budging. Even though house prices in many parts of the country have returned to what is considered ‘affordable’ – some places are still stuck in bubble territory.
2. How Chinese officials launder their money - They buy property in 'safe' countries such as Britain. I bet there's a fair bit of this going on in New Zealand too.
Here's an FT investigation of how Bo Xilai's family squirreled their money away into boltholes around the world.
The family of the disgraced Chinese leader Bo Xilai bought luxury London properties through a front company with the help of a French architect, a Financial Times investigation has found. Like Neil Heywood, the British businessman whose death Mr Bo’s wife Gu Kailai has been linked to by Chinese authorities, Mr Devillers was close to the family. An FT investigation found that he also played an important role in securing at least part of the Bo family’s jet-setting life.
Mr Devillers’ relationship with the Bo family and role in their business enterprises overseas highlights what has been one of the crucial elements of the Bo case. Besides casting a light on China’s opaque leadership politics, it has also illuminated the growing wealth of many elite Chinese and their connections with overseas fixers.
Before his downfall, Mr Bo’s official salary was just $20,000 a year, and in his last public appearance in March, he said his wife had given up her legal career many years ago to become a housewife.
Chinese citizens are restricted to exchanging no more than $50,000 of foreign currency each year and are supposed to be taxed on their global income. Senior Communist party members are barred from unauthorised international travel and are not supposed to own assets abroad. But, in practice, many officials have secreted large fortunes outside the country.
3. Norwegian housing bubble - As the Atlantic says, this chart is worth more than a few words.
Two stories explain Norway's runaway housing prices. The first is the country's safe haven status. Foreign capital pours into Norway during uncertain economic times -- which pretty much describes the entire past five years -- because it controls its own currency and its oil-based economic fundamentals are strong. That sounds great, but it's not so great if it makes their currency so expensive that exports become uncompetitive. And that creates a catch-22 for Norway's central bank. If they raise interest rates, even more foreign money will pour in -- higher interest rates would be quite enticing in a world with precious little yield -- and cripple their non-oil export economy. So Norway has kept interest rates low -- and that's helped push housing prices into the stratosphere.
4. Here we go again - Bloomberg reports Slovenia may need a bailout.
5. Barclays' stunning LIBOR admission - Reuters reports on this amazing story that will cause waves across financial markets. Astonishingly, people have kept their jobs, but given up their bonuses.
The outrage will build, as will the admissions and compensation.
U.K. bank Barclays will pay $453 million to U.S. and British authorities to settle allegations that it manipulated key interest rates, increasing pressure on other banks to cooperate in a probe that could cost the financial industry billions of dollars.
The settlement raises fresh questions about the reliability of the London interbank offered rate, or Libor, which underpins some $360 trillion of loans and financial contracts.
The attempted manipulation, which according to authorities took place from 2005 through 2009, meant that millions of borrowers paid too little or too much interest on their debt.
Chaos is mounting in the ongoing labor riot that began on Monday in the town of Shaxi in Zhongshan City, Guangdong Province.
On Tuesday, thousands of migrant workers swarmed into Shaxi from Guangzhou, Foshan, Jiangmen and other neighboring cities, overwhelming the local police force. Rioters are wrecking every motor vehicle they see, stopping moving cars in order to batter them. Police cars, privately owned cars and bus stops have all been destroyed. A number of shops have been broken into as well. The Zhongshan Fuhua Station was set on fire and burned for close to 24 hours. The Shaxi town hall has also been ruined.
Here's the book summary:
Executives, investors, and the business press routinely chant the mantra that corporations are required to “maximize shareholder value.” In this pathbreaking book, renowned corporate expert Lynn Stout debunks the myth that corporate law mandates shareholder primacy. Stout shows how shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors. And she looks at new models of corporate purpose that better serve the needs of investors, corporations, and society.
Here's Jesse with his take, which I agree with.
It's clear that something is deeply wrong with our capital markets. Stock market returns have been terrible for well over a decade. Wall Street investment banks, pushing their stock prices ever higher, took on risks that blew up the global financial system. In the early 2000s, companies sought to lift their share prices through an epidemic of accounting fraud.
The professor's argument is that as companies have increasingly focused on their stock prices, and given managers more shareholdings, they have inadvertently empowered hedge funds that push for short-term solutions. Mutual funds, dependent on winning money from retail investors, have become myopic as well. The average holding period of a stock was eight years in 1960; today, it's four months.
The biggest ill has been to align top executives pay with performance, usually measured by the stock price. This has proven to be "a disaster," Ms. Stout says. Managers have become share price obsessed. By focusing on short-term stock moves, prices managers are eroding the long-term value of their franchises.
The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilising force, attempting to sustain spending. At the very least, we should not be making things worse with big cuts in government spending or big increases in tax rates on ordinary people.
The big mistake. After responding well in the first, acute phase of the crisis, policy took a wrong turn – focusing on government deficits and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. Instead of playing a stabilising role, fiscal policy has ended up reinforcing the damping effects of private-sector spending cuts.
9.' US banks not ready for Euro crisis '- Simon Johnson writes at Bloomberg about how America's banks are not ready for the coming European crisis.
Even the optimists now say openly that Europe will only solve its problems when the alternatives look sufficiently bleak and time has run out. Less optimistic people increasingly think that the euro area will break up because all the proposed solutions are pie-in-the-sky. If the latter view is right -- or even if concern about dissolution grows in coming months -- markets, investors, regulators and governments need to worry not just about interest-rate risk and credit risk, but also dissolution risk.
What’s more, they also need to worry a great deal about what the repricing of risk will do to the world’s thinly capitalized and highly leveraged megabanks. Officials, unfortunately, appear not to have thought about this at all; the Group of 20 meeting and communique last week exuded complacency and neglect.
Very few people seem to have gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.
10. Totally Stephen Colbert on America's economy.