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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

Posted in Opinion

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 bernard.hickey@interest.co.nz.

See all previous Top 10s here.

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.

6. Riots in China - These happen regularly, usually over disputes between grumpy townspeople and local officials over corrupt land deals. Here's a recent one courtesty of China Digital Times

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.

7. The Shareholder Value Myth - This book from Cornell Law Professor Lynn Stout looks like a cracking read. HT Jesse Eisinger at Propublica.

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.

8. 'A manifesto for economic sense' - Paul Krugman and Richard Layard have written one in an Op-ed at FT.com.

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.

 

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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29 Comments

NZ is making the same

NZ is making the same mistakes of the 1930s in running down defence for short term cost 'savings'

Defence force personnel are quitting the country for Australia, as morale plummets.

Defence Minister Jonathan Coleman has revealed to a select committee that morale in the military is at an all time low of just 35 percent.
There are 1000 fewer people in the defence forces than a year ago and Labour MP Iain Lees-Galloway is putting it down to the increased number of civilians doing jobs.
He says the Australian Defence Force is making enticing offerings to New Zealand personnel, as is the mining industry.
"It's very difficult for the defence force to compete with the wage rates that are on offer in Australia."
 

 

It's a disgrace. When I

It's a disgrace.
When I joined the Royal New Zealand Navy in 1958, support vessels and coastal patrol craft aside, the RNZN fighting fleet comprised these actual warships:

  • 1 Dido class light cruiser active plus 1 in reserve.
  • 4 Loch class frigates active plus 2 in reserve and 2 Rothesay class building.
  • 2 minesweepers in commission (used as corvettes) plus 2 in reserve.

We could hold our heads up in comparison with those allies committed to watching our backs. Since then it’s been downhill all the way. We now have:

  • 2 Anzac class frigates.

Much of the time, one or other—or both—of those frigates are in refit or deployed far from our shores. One frigate versus 1 hunter-killer submarine—goodbye frigate.
In the year I joined the navy my contemporaries in the air force were flying de Havilland Vampire jet fighters and English Electric Canberra fighter bombers. I don’t know how many were operational at that time but we owned or borrowed 63 Vampires and 31 Canberras.
Now we have no fixed wing combat aircraft.
Zero. Zilch. Nada.
If anyone's interested I recently had a rant about it right here.

That hunter killer could have

That hunter killer could have also sunk 5 or 6 of the above 7 more easily than the one above........number make no odds, just look at the tank battles in iraq etc.....pretty much one sided turkey shoots.
Even if we had say 20 frigates, china could send 100.....when the technology is more or less equal its shear numbers....
regards

Not so. The accepted

Not so. The accepted scenario, and realistic exercises war games make defence folk reasonably confident, is 3 anti-submarine surface vessels (with AS choppers) vs 1 hunter killer, bye-bye sub.
2 AS vessels, 1 sub, 50:50 odds.
1 AS vessel vs 1 sub, bye-by surface ship.
I may be a little out of touch now, but I don't think it's changed much. We needed at least 4 frigates. Or none.
OK, we have AS aircraft to even up the odds close to shore but our expensive AS frigates are pretyy much a waste of resources and if we weren't prepared to spend an adequate amount on defence we should have stuck with large and heavily armed off-shore patrol craft.
It was ever thus, in my 20 years in the services 58-78 we were well trained, well regarded by our allies, under-equipped, over-extended, under-paid, and in some branches very over-worked. Lots of our people went to the Australian armed forces and were weelcomed with open arms even then.
I don't think anything has changed.

"Even if we had say 20

"Even if we had say 20 frigates, china could send 100"
I missed that point Steven. Of course, you're correct. But nobody, inside or outside the defence force expects us to tackle any attacking force alone. Our armed forces have always been planned as an "add-on" to the Aussies and the Americans, before that, the Brits.
If we're not going to contribute a fair share, and at the moment it's risible, we may be better forswearing a defence force, scrapping all treaties, and just having civil defence and coastguard.
When Commodore Bainimarama took over in Suva some ill-informed people here made noises about intervening militarily. There is no way we could do that. Fiji's army would be well beyond our capacity.

What Navy ?? What

What Navy ?? What frigates??
 
Whats the point of spending billions on Frigates and warships when our sailors are joining in droves the Australian Navy with 200K bonus ??
 
Just joint Australia......

Wanna buy some

Wanna buy some Skyhawks, 
Wanna buy some LAVS,
Wanna buy a new frigate...
Wanna play with the big boys...toys.
 
Oh frig-it.......
As usual...Delesions of adequacy, Delusions of grandeur, delusion, after delusion, after delusion................. after all is said and dunne ......cannot afford...it...oh frig-it.
Its an asset....sell it orf.....after already...running the staff into the ground....(Mine joke).
As I always say...It ain't buying something, it is running it....for the entire life of owner-ship.
GOVT ain't no different to most business people.... totally delusional.
Ya need good staff, ya need good will, ya need to not over tax and over spend yer CUSTOMERS ability to ...actually ....pay, nor your workers, willingness...to actually.. WORK..
Ya cannot spend what ye have not GOT...in-deaf-in-ately. (Not worth shouting...here).
Cannot sea the writing on the wall.  Cannot forsee the future.
Maybe we can borrow a few more billion off an AUSTRALIAN BANK...I am sure they will oblige.
And theycan  take em all in a MORTGAGEE SALE....they are ASS-ets after all.
(And the asses bought em, with borrowed munny....does history repeat itself...or is it just me)
And they is welcome...to em.
Or we could offer em to Harvey Norman...
5 years...interest free....and put their logo on em.....and ...and...and.
Then they would still end-up............. AUSTRALIAN OWNED....
buy New Zealand...........owe..............n......errs...courtesy of No-Zeal-and...errs.
At least they will then have a complete package...
Boy have I gotta deal....for you. ..Australia..

Out of frying pan into the

Out of frying pan into the fire. Leave a "guarenteed" job for a flakey one at best? and where.... 
 
Someone tell them people are not buying as much raw materials.
 
I know of someone just went over to find the job gone.
 
 

I don't believe that any NZ

I don't believe that any NZ job is more guaranteed than any Aussie one. When it hits the fan and China don't (can't) come to the rescue this time, Aussie will be in it deep, but we'll be in it a lot deeper.

Bernard, Not there

Bernard,
Not there yet
 
http://www.bbc.co.uk/news/world-europe-18620965
 
European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.

The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.

But Mrs Merkel told parliament that eurobonds were "the wrong way" and "counter-productive", adding: "We are working to breach the vicious circle of piling up debt and breaking [EU] rules."

She said to loud applause: "It is imperative that we don't promise things that we cannot deliver. Joint liability can only happen when sufficient controls are in place."

But Mrs Merkel continues to insist that before anything is done to increase the burden on German taxpayers, building blocks towards greater fiscal, banking and, eventually, political union must be put in place.
Roll on United States Of Euope, they will never give up.

No one is quite sure what the

No one is quite sure what the trillions of dollars worth of euro-denominated derivatives might be worth in a euro-breakup scenario....
 
Maybe - but we'e already in for a penny so it's probably in for a pound because they are too big to fail. If it was true then, it's true now.

You can store trillions of

You can store trillions of dollars on a couple of kilobytes of disc space costing about 50 cents.
If anyone thinks that the world economy is going collapse for the sake of 50 cents and that the 1% will loose all their dough, then i think not.

Mikeb - that's funny.   The

Mikeb - that's funny.
 
The 'dough' expects to be traded for goods/services.  If someone offers me spuds in exchange for some eggs, will I take some binary data in a wee piece of plastic instead? Not likely. The spuds are real. The eggs are real. The 'trillions of dollars' are worth 50c. Recycled, perhaps less.
 
You weren't the one swapped the family cow for five magic beans, perchance? It's not a goer, these days. You're not allowed a structure that high, and OSH won't let you climb it anyway.. The goose would have to be free range, the golden egg will no doubt be destroyed by MAF, and the Giant won't believe you weren't visiting his wife. What I mean is that the cow was worth something - magic beans = trillions of binary digits.

@ powerdownkiwi If i asked

@ powerdownkiwi
If i asked you to show me your money you would pull out a platic card and say "It's in here". You believe that even though you cannot see, smell, tast or touch this money you supposedly have.
The FED sit at a computer, type in a trillion dollars and hey preso thats money.
Based upon the above do you believe they are going to let the financial system melt when they can just type in some extra digets. Sure, they don't care if you and a few other million suffer, but no way will they miss out,"just type me in another couple of mil"
The point is money is an illusion and it works because we all believe it.

I will only accept your $s if

I will only accept your $s if in turn it buys me something(s) multiply the 1s and 0s well then If an apple is worth $1000 then I'll expect my work for you to be equally "highly" paid.....so its all a relative game....comes back to only so many real things in the world....If on the other hand someone offers me apples for work thats something real....the rich with all those ones and zeros are not in the equation....
Further consider the likes of the French revolution, assets such as castles and houses are static, they are only owned by the rich as long as the poorer allow it......the rich cant keep it if the poorer say no.
regards
 

No.7. If the Jesse Thesis is

No.7. If the Jesse Thesis is correct in the USA it must be even more so in NZ, as dividend payments as a percentage of company profits here, historically, have been more than double the US rate. I know it is not a company but take Fontera, it borrows to subsidise payouts.
Ergophobia 

Even microsoft has gorn soft

Even microsoft has gorn soft on paying its staff more......
Maybe their computers know something our poor defenceless lot...do not know.

#2 I wonder how much 'hot''

#2
I wonder how much 'hot'' Chinese money has found its way into the Auckland housing market.
An Asian is prepared to accept $480 rent for a house he paid $660,000 for and its rates are close to $3000 annually. Add the insurance and possible dropped rental on change of tenancy and the return is pathetic.
Just visit any local property auction and see how many Asian buyers are there often bidding way above the CV and cutting out genuine locals who want a house to live in. Thus these locals stay renting.
Time for action Mr.Key instead of smiling and waving to any who will respond.
 
 
 
 
 

Quite true,  BB III. Money

Quite true,  BB III.
Money from Asia, and especially China, is flowing into NZ.  Most of it untraceable.
Verifying of Source of Funds is a standard requirement under measures enforced since 9/11.
Do NZ Banks verify where the incoming funds come from, and how they were generated.
The answer is NO.
Which is why the people I deal with offshore, advise bouncing cash via Singapore or HK, before bringing it into NZ.   Easy Peasy.
Which is a shame.    NZ naivety at its worst.
 
 
 
 
 

I personally have no problems

I personally have no problems with subsidised rental from my Chinese owner....
 
At the rate I am paying, it serves me well to rent than to buy ....Whats the problem ??
 
Can my Chinese Landlord take the house home to China ??  He is trapped in a lose-lose situation.

I thought this was

I thought this was interesting when New Zealand is considered.
 
Get Ready for a Massive Reversal in the Yen
 
"Japan is now running budget and trade deficits….. Twin deficits decrease confidence in a currency, increase the likelihood of high levels of debt monetization (that the central bank will simply print money, likely devaluing the currency in doing so), and create a scenario where the currency is naturally sold more than it is bought in the course of international trade. Personally, twin deficits is one of the biggest signs I look for to find a currency worth shorting."

Scarfie, I believe the

Scarfie,
I believe the article you have highlighted is fallacious or misleading on a couple of key counts.
Japan does now have  trade deficit, but due to its decades of trade and current account surpluses, it still had a current account surplus of NZ$125 billion for the year to March 2012. Thats approximately $1000 for every person in Japan. The difference between the current account position and the trade balance, is primarily the earnings they receive from overseas investments. While the Japanese government has a very large debt, it is effectively 100% held by Japanese people, so no leakage out of the country. Arguably the older wealthy people loan them the money interest free, as a preference to paying taxes. In time they will need to sort it out, and as a country they have the wherewithall to do so.
The only deficit or surplus that in logic should affect the currency at all, is the current one. Given they have a surplus, their currency will alll else being equal tend to drift up, and only stays down because of their government intervention. So on fundamentals the yen shorts should continue to struggle.
NZ on the other hand, as we know, has a massive current account deficit- roughly $3000 to $4000 per person in the country, per annum, we are borrowing off future generations. (Nothing to do with the government deficit here).
Yet the bankers, speculators, and pollies have conspired to keep the $NZ up. Not sustainable. I would rather fix it, than have it fix us. 

While my intent was to cast

While my intent was to cast dispersions on the analysts(?) proposals when considering the way the NZD behaves, I did wonder about the claims against the yen as well. I hoped someone with better knowlege of the yen would jump in :-)

No problem at all. I think

No problem at all. I think Japan is a good case study of how a people have determinedly had current account surpluses for decades, leading to them now having a pretty good buffer as times get quite a bit tougher. So am glad you brought it up. 
New Zealand doesn't have an economic buffer at all, other than basically sound and attractive infrastructure, good rule of law, and mostly friendly and willing enough natives (us). Other places also have those things though, so I'd rather have the buffer, rather than sell it off.

Bernard, regarding Norways

Bernard, regarding Norways housing market, the Atlantic article is part of Deutsche Banks Allan Ruskins piece in regard to which countries had still not found fair value since 2007 up to end 2011 with a few more graphs in which he writes ' the problem for the likes of Spain , the UK, Norway, Denmark and New Zealand is that even after adjustment, these markets are still substantially overvalued by widely used metrics( cue Hugh).

The euro at present is

The euro at present is unhappy.

Compluters, laptops, tablets,

Compluters, laptops, tablets, ebooks, cell phones all boot up using a computer chip. On first boot the BIOS starts and identifies the type of hardware being used and then boots up an operating system.
The BIOS is being replaced by  the UEFI ( Unified Extensible Firmware Interface). One of the processes it runs, known as Secure Boot, checks that the operating system hasn't been tampered with before it's started.
A heavyweight, such as Microsoft, could put pressure on the industry so that only their (Microsofts OS) could boot up and so push out all competitors.
Microsoft has reassured the indudtry it would never contemplate such a thing.
Microsoft is to allow desktop users to control (and disable) Secure Boot but not allow it on all other portable devices. If you buy a windows 8 equipped tablet, netbook or smartphone , you'll never be able to run an OS other than Windows.
See full details in July NZ PCWorld.
Looks like the whole mobile, internet is going to end up in the hands of just a few companies like Microsoft and Google.

Further to the comments

Further to the comments regarding defence at the top. I think it's worth even economists and money manipulators contemplating the vulnerable situation we're putting ourselves in.
We've been bludging off our allies since WWII.
When the Asian climate undergoes massive change, the Himalayan snows recede, the monsoons fail, the great Asian rivers dry up for much of the year, the flood plains become sea beds, and there are maybe a billion people displaced they're going to be like the boll weevil.
Looking for a home.
Where are they going to go?
Maybe a bit of under-populated fertile land which is predicted to not come off too badly in the climate washup.
Remind you of anywhere?
Our allies will have plenty of their own problems. Will they give a rat's arse for us when we've been spending a fraction of their relative defence budget for decades?
I feel a blog post coming on. And another glass of red and a lie down.

I think Krugman just did a

I think Krugman just did a minsky,
"Then people remembered the dangers of debt, and we moved from leveraging to deleveraging. But the problem is that this isn’t symmetric, because you can’t get real interest rates low enough to induce sufficient spending on the part of those not deep in debt.
So one way to explain our depression is to say that debtors, as a group, are trying to deleverage too fast, in the sense that the collective rate at which they are trying to pay down debt isn’t feasible given the zero lower bound on interest rates."
http://krugman.blogs.nytimes.com/2012/06/26/deleveraging-monetary-policy...