Bank Negara ups interest rates

Overnight policy rate increased to 2.25%

PETALING JAYA: Bank Negara raised its overnight policy rate (OPR) by 25 basis points to 2.25% yesterday, signalling the time was ripe to normalise interest rates with the improvement in economic conditions.

The Monetary Policy Committee (MPC) said the hike was to prevent any financial imbalance that could take place should rates remain too low for longer than necessary and said Malaysians should expect the rate of inflation to rise but remain moderate given the prevailing economic conditions.

The hike in OPR, the benchmark interest rate which determines banks’ lending rates, is the first increase in close to four years.

“The recovery in the global economy is progressing amidst continued policy support and improvements in financial conditions,” the central bank said in a statement yesterday.

Dr Yeah Kim Leng (left)expects an increase of between 75 and 100 basis points this year

 

It said going forward, domestic growth was expected to strengthen further, supported by domestic demand and continued improvement in external demand, particularly from the regional economies which had expanded strongly in the fourth quarter.

Malaysia recorded its first growth of 4.5% after three consecutive quarters of contraction in the last quarter after a combination of government spending, a lower inflation rate and accommodative monetary policy helped boost domestic demand.

“Given this improved economic outlook, the MPC decided to adjust the OPR towards normalising monetary conditions and preventing the risks of financial imbalances that could undermine the economic recovery process,” it said.

While external factors, including rising global commodity and food prices might exert some additional upward pressure on domestic prices, inflation was expected to remain moderate this year, Bank Negara said.
Domestic consumer prices rose for a second month in January, up 1.3% year-on-year.

The OPR has remained at a historical low of 2% since February last year amid a severe and fundamental economic downturn. “These conditions no longer prevail,” Bank Negara said, adding that the stronger growth performance in the fourth quarter affirmed that the economic recovery was “firmly established”.

Accordingly, the floor and ceiling rates of the corridor for the OPR were raised to 2% and 2.5% respectively yesterday.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng described the hike both as a signal of the central bank’s confidence that the local economy recovery was on track and as a “gradual normalisation” of the historically low rates.

Bank Negara had earlier also indicated the need for the normalisation of rates, adding that any increase should be viewed as “normalisation” and not “tightening”, which is normally implemented to slow consumer demand in an overheated economy with high inflation.

According to Yeah, a “normal” level for the OPR is between 3.25% to 3.5%. He expects an increase of between 75 basis points to 100 basis points this year backed by improving economic conditions.

AmResearch Sdn Bhd senior economist Manokaran Mottain said the increase was within AmResearch’s expectations and believed that given increasing inflationary pressures, there would be at least another increase of 25 basis points this year.

“It is needed for a gradual move towards the normalisation of rates,” he said.

At the new OPR level, the stance of monetary policy continued to remain accommodative and supportive of economic growth, said Bank Negara yesterday.

For Bank Negara statements click here

Source: The Star, By Yvonne Tan 

States, Innovate in IT or Else

California and other states lumber along with antiquated, expensive IT systems, leaving them on the outside of innovation 

While Grandma can flip through photo albums on a state-of-the-art laptop or, before long, an Apple (AAPL) iPad, many government agencies and corporations are still entrusting critical tasks to antiquated computer systems that cost a fortune to operate and maintain.

The probtlem is particularly acute at the state level. Each U.S. state has its own unique computer systems to process the same types of information and provide the same services as every other state. Worse, even within states, each division or agency has its own IT department and maintains its own computer systems. We're talking about hundreds of billions of dollars of IT spending every year—on clunky old infrastructure.

Consider California. The most populous U.S. state is more advanced than most, though it faces big IT challenges. It has roughly 130 agencies and departments, each with its own IT staff and computer systems. Each collects its own information and maintains its own databases. The systems of one department are not usually integrated with the systems of another. When they do share data, it is usually through the computer equivalent of Excel spreadsheets. The state has more than 40 separate computer applications to collect the same personal and demographic information about citizens. So, for example, when a business has to update an address, it typically has to inform multiple agencies.

Keeping up with regulatory changes is also a huge burden for the state's IT staff. Simple changes cost tens of millions of dollars and can take years. When President Obama signed legislation extending benefits for unemployed workers in November, out-of-work Californians had to wait as long as two months because the systems couldn't be updated.

New Technologies

Today's PCs and the Web are often more robust, secure, and fast than the massive enterprise systems used by governments and some businesses. A modern laptop has greater processing power than the mainframes for which many enterprise systems were designed.

A social networking site like Facebook or Twitter processes more transactions (in the form of messages) in a day than many financial companies and states process in a month. Sophisticated computer applications that used to take years to build can be built in months. And the newer applications are usually far easier to use and much more scalable.

So why isn't there a massive move to new technologies? If anything, the chasm between the old and new has grown wider. This was made plain to me after I posted a blog to the tech Web site TechCrunch. I wrote about California's IT challenges and encouraged Silicon Valley entrepreneurs to come to the rescue. I cited an example of one system for which the state has budgeted $50 million over several years, which I believed could be rebuilt for less than $5 million in less than a year. I received several credible offers.

Yet the idea appears to be very threatening to a handful of large system administrators that have built enormous businesses on antiquated state systems. I was challenged by a senior vice-president at CA Inc. (CA) who called me naive and chided me for knocking something I "know absolutely squat about." Her argument was that standards, processes, and people had to change first. Otherwise disaster would happen and "set California back even further." Others wrote to argue that government procurement processes can't be changed and that big government contractors with political connections would always hold back progress.

Out-of-Touch Opponents

I believe these critics are simply out of touch with the new reality. Security breaches of large government IT systems are common due to the ongoing cyberwars taking place between nations. Amazon.com (AMZN) is just as juicy a target, but has a far better history of IT security than most big government agencies. As for my lack of understanding of the problem: In my tech days, I developed several large enterprise systems, and I started two companies that marketed systems development and legacy systems reengineering software.

So I know there is a problem and a relatively simple solution. I also realize the challenges for governments to allocate contracts in a fair and equitable manner. But the disaster I see is if we continue the way we are. And it's a failure beyond the bloated costs, entrenched mainframe systems integrators, and dated computer 
languages. The greater danger is that, by trapping the public-sector IT architecture in this tired old wrapper, we miss out on huge chances not only to improve system performance but also to reinvent government. The public sector is effectively walled off from the innovation that has made Web 2.0 a rich, contextually relevant environment. In this context, there will be no Netflix (NFLX) Prize, no Google (GOOG) voice-automated transcription engine, and virtually no other true technology innovation.

Many people realize this. Web founder Sir Tim Berners-Lee has just launched a venture for the U.K.government to make public data available online so that entrepreneurs can build technologies to harness this information.Federal Chief Technology Officer Aneesh Chopra also launched an initiative to make federal government data available.And in the wake of my earlier posting, California Chief Technology Officer P.K.Agarwal has launched a crowd-sourcing Web site where he's asking the public to weigh in on how the state might improve its tech strategy.

So there is progress. More states need to make similar moves. We need to open the bidding to new players, loosen opaque requirements written under the false guise of security and compatibility, and retool our way of thinking about IT for the public sector. In the cloud computing era, big government IT doesn't have to be so big. The rest of America has done more with fewer IT dollars for over a decade now. It's time for Uncle Sam and his state and local brothers and sisters to join the parade.

By Wadhwa, who is senior research associate at the Labor & Worklife Program at Harvard Law School and executive in residence at Duke University. He is an entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com. Follow him on Twitter "@vwadhwa".

China Plans Lowest Increase in Defense Spending in a Decade

March 4 (Bloomberg) -- China plans to boost defense spending by 7.5 percent, the slowest pace of expansion in a decade, as the government seeks to allay concerns about the country’s growing military might.

The increase to 532.1 billion yuan ($78 billion) compares with a 14.9 percent rise in 2009. China’s defense budget had been expanding by at least 10 percent a year for the past 10 years.

“The Chinese government has always paid attention to controlling the size of our defense spending,” National People’s Congress spokesman Li Zhaoxing, a former foreign minister, told reporters in Beijing today. “China is committed to a policy of peaceful development.”

China’s military spending is second only to the U.S., which aims to spend $636.3 billion this year, and is more than double India’s budget of $32.1 billion.

“While this year’s increase is down a bit, we are still talking about an increase that is much bigger than Western nations and one that allows for a significant military build-up to continue,” Andrew Davies, director of Operation and Capability at Canberra-based Australian Strategic Policy Institute, said in a telephone interview.

The country’s sustained military buildup comes as other governments in the region have either cut or held expenditure steady, raising concerns that a power imbalance was building. China has territorial disputes with neighbors including Japan, India and Vietnam, and regards Taiwan as a renegade province that will be reunited by force if necessary.

Relative Growth

“Their capability is increasing relative to others, and countries in the region are worried about that,” Phillip C. Saunders, a distinguished research fellow at the National Defense University’s Institute for National Strategic Studies in Washington, said by telephone. “A lot of people think China wants to be a dominant military power in the region.”

China’s military is starting to have a presence far from its shores. Last year Chinese navy ships protected sea lanes from Somali pirates in the Middle East.

“This was unprecedented strategically,” David Finkelstein, the director of China Studies at the Center for Naval Analyses in Alexandria, Virginia, said in a telephone interview. “This is the first time Chinese navy vessels operated outside of Asia.”

The country is also considering sending combat troops abroad for United Nations peacekeeping efforts, retired Chinese Navy Rear Admiral Yin Zhuo told reporters on March 3.

Taiwan Tension

China’s defense budget comes amid tensions with the U.S. over its plans to sell $6.4 billion of missiles, helicopters and ships to Taiwan. After the sale was announced in January, China said it was suspending military-to-military contacts and would sanction U.S. companies whose weapons were sold to Taiwan.

Saunders said this year’s actual spending could be as much as two and a half times the official budget, which does not include items including purchases of foreign weapon systems and pensions.

The U.S. says that China’s actual military spending may be more than twice the published budgets because it omits many items. In 2008 actual spending may have exceeded $140 billion compared with the stated budget of $58.8 billion, according to the Pentagon’s annual report to Congress on China’s Military Power, published last March.

“Although academic experts and outside analysts may disagree about the exact amount of military expenditure in China, almost all arrive at the same conclusion: Beijing significantly under-reports its military expenditures,” the Pentagon said in the report.

Economic Expansion

Chinese defense experts say the rise in spending is only natural given the country’s expanding economy and isn’t meant to threaten its neighbors.

“China does not seek to be a military superpower,” Yin said. China only wants a military “commensurate with our national interests and strength.”

That strength includes development of a new generation of long-range nuclear Intercontinental Ballistic Missiles capable of reaching the U.S., Saunders said.

The next big development for military watchers is whether China will build its own aircraft carrier, he said.

--Michael Forsythe. Frederik Balfour. With reporting by Chua Kong Ho in Beijing. Editors: Ben Richardson.

Buffett Casts a Wary Eye on Bankers

“Don’t ask the barber whether you need a haircut.”

That little nugget was buried in Warren E. Buffett’s annual letter to Berkshire Hathaway shareholders published over the weekend. It was his thinly veiled dig at Wall Street bankers and the perverse incentive system for corporate “advice” on mergers and acquisitions — namely that bankers are paid only if a deal is completed. (Bankers typically earn nothing if a deal is abandoned or collapses, giving them little reason to recommend against pursuing a transaction.)

It was a timely note from Mr. Buffett — Monday ushered in more than $50 billion worth of merger announcements — and it resurrected an age-old debate on Wall Street about how bankers are compensated for their counsel to corporate boards.

And it’s an issue that resonates far beyond Wall Street. Just think of all the other parts of life where people offer only encouraging words — “You should do this!” — because that’s the only way they get paid (real estate agents, stock brokers, the list goes on).

And Mr. Buffett has trained his sociologist’s eye on this phenomenon more broadly, too. In his 1989 letter to shareholders, he famously wrote about the “institutional imperative,” which describes, among other things, how an entire organization can rise up to help a boss justify some deal he’s inclined to do, regardless of its merit.

It’s nice to think some things can change, but the deal incentive for bankers probably isn’t one of them.
“You shouldn’t earn a lot less by keeping your client from doing something stupid, but that’s the way it is,” Felix Rohatyn, the financier and elder statesman of Wall Street, told me. “The majority of fees are conditional.”

Mr. Buffett’s letter made a bold suggestion that isn’t sitting well with the establishment.

“When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion,” he wrote. “Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.”

Of course, acquirers often hire more than one banker to advise a board, to act as a check on the other. But all too often, both banks are given the incentive to recommend the deal.

Since 2008 in the United States, in 131 of the 230 deals that were worth over $1 billion, the acquirer hired more than one bank, and in some cases more than five. Those banks were paid an estimated $3.3 billion for advisory services, according to Thomson Reuters and Freeman Consulting.

The problem, as Mr. Buffett explained when I called him on Monday, is that the system is skewed. Companies are willing to pay advisers a supersize fee when they do a deal because then it is merely a rounding error, a tip on a lavish, celebratory meal.

It would be hard to justify a big payment if there were no deal, so the system has evolved into an all-or-nothing game. Banks are willing to play it, because the rewards are so high, and they are not shy about offering attaboys and go-get-em’s to help make it happen.

When Berkshire recently acquired Burlington Northern, Goldman Sachs and Evercore Partners — which advised Burlington — were paid almost $50 million for what equated to only a couple of weeks of work.

Mr. Buffett, of course, did not use an investment banker.

“If we need advice for a deal, we probably shouldn’t be doing it,” he said with his trademark chuckle. He told a story about how First Boston (now Credit Suisse) tried to gin up interest in the mid-1980s for Scott Fetzer, a hodgepodge of small businesses based in Cleveland. It called on 30 firms to help make a sale, but failed to find a buyer.

Mr. Buffett then called Scott Fetzer’s chief executive himself and negotiated the deal face to face. Just as they were about to sign the deal, a banker for First Boston said that the bank was still entitled to a $2 million fee. The banker asked Mr. Buffett’s partner, Charlie Munger, whether he’d like to read the firm’s analysis of Scott Fetzer. Mr. Munger replied, “I’ll pay $2 million not to read it.”

That’s not to say that Mr. Buffett won’t ever pay investment bankers. “If someone brings me a deal, I’m more than willing to pay them,” he said, referring to his favorite banker, Byron Trott, a former managing director at Goldman Sachs, who helped broker deals including Berkshire’s investment in the $23 billion Mars-Wrigley merger and its acquisition of Marmon Holdings. However, Mr. Buffett insists that typically, “I don’t think we’ve ever paid for advice.”

Mr. Buffett’s biggest gripe is not just that bankers are given improper incentives, but he thinks their advice is suspect, especially when valuing stock-for-stock deals.

He had some experience this past year with such deals when Berkshire bought Burlington (he issued 80,932 Class A shares and 20 million B shares). He was also uncharacteristically vocal with his criticism of Kraft for paying $19.6 billion for Cadbury, much of it in stock (he’s a big Kraft shareholder).

He thinks that too much attention is paid to the value of the company that may be acquired, and not enough attention is focused on the value of the stock that the acquirer is shelling out.

“In more than 50 years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given,” he wrote in his letter.

“Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy. The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we ‘sell’ a significant part of the company at that same inadequate price by issuing our stock in a merger?”

Despite hearing from some of Wall Street’s biggest names about Mr. Buffett’s critique of their profession on Monday, most were circumspect in their reply.

“As usual, Mr. Buffett has an interesting point,” said Joseph Perella, one of the deans of the deal business and the co-founder of Perella Weinberg. He said he was happy to report that some clients had begun paying flat quarterly fees for advice, regardless of whether his firm recommended for or against a deal. However, he acknowledged, “most clients aren’t doing that.”

When I invited Mr. Rohatyn to critique Mr. Buffett’s view of his profession, he replied, as so many in the business did: “Warren is Warren,” is all he would say.
•
I will once again be in Omaha for Berkshire Hathaway’s annual meeting on May 1 asking questions of Mr. Buffett and Mr. Munger. If you have questions for either gentleman, please send them to arsorkin@nytimes.com. (Let me know if I can identify you by name if I ask your question. Also, please tell me if you’re a Berkshire shareholder.)
By ANDREW ROSS SORKIN

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Singapore tech prodigy rides mobile apps boom

10-year-old Singapore tech prodigy rides mobile apps boom

	Photos 1 of 1 10-year-old Singaporean Lim Ding Wei is being feted by local media as the city state's youngest programmer of mobile applications.

SINGAPORE : As 10-year-old Lim Ding Wei blasts alien space ships on a computer screen in his living room, his father Lim Thye Chean looks over his shoulder proudly.

"This is way beyond me already, because I do not know how to do 3D programming. I can't teach him any more," he said proudly as his son zips around in outer space fully rendered in 3D.

From being the teacher, Thye Chean, 40, a chief technology officer at a local firm, has now become the student of his son, whom local media reports fete as Singapore's youngest programmer of mobile applications.

The game is the latest in Ding Wei's repertoire of mobile applications, which include the hit Invader Wars 1 as well as art scrawler Doodle Kids that has registered more than half a million downloads since it was posted on the iPhone App Store last year.

Fifth-grader Ding Wei is just one of a growing number of local programme developers jumping on the bandwagon as analysts predict a boom in global mobile applications, or 'mobile apps', industry this year.

"I plan to be a software programmer," said the boy, whose favourite subject in school is mathematics.

Mobile applications come with mobile phones and other hand-held devices, allowing users to access a wide array of Internet services while on the go, including finding one's way in a shopping mall or playing games online.

Information technology research firm Gartner forecasts that revenue from mobile phone applications worldwide will hit US$6.8 billion in 2010, up 60 per cent over last year.

Downloads from the massively-popular Apple App Store also accounted for at least 99.4 per cent of the 2.516 billion downloads of the mini-programmes last year, Gartner said.

The recently-released iPad tablet computer, which has already stoked interest among tech aficionados, can also run iPhone applications from the App Store, Apple chief executive Steve Jobs has said.

In addition to the upbeat figures, local developers have been heartened by local telecom firms Starhub and Mobile One breaking incumbent SingTel's stranglehold on iPhone sales.

"With the other two telcos coming in, there is definitely a boom in the number of (iPhone) handsets going out," said Sunny Koh, president of local game developer Personae Studios.

There is "huge potential" for the mobile application market to grow this year, he added.

"Singapore's market is growing and it is a good time for us to emerge as a publisher," Koh said.

Aside from games and quirky localised programmes like cash machine locators and mall directories, developers are also creating applications for schools to aid students in subjects like creative writing and chemistry.

Education application developer Elchemi Education said demand was growing as more students and teachers got hold of the latest smartphone and gained access to mobile application platforms.

"A lot of teachers are exploring mobile devices and a lot of students have iPods and iPhones... so with the kids having these existing devices, the school would also want to tap on using them," said director Joanne Chia.

The developer has rolled out applications in collaboration with schools and students.

One programme called S!Plot consists of virtual wheels which can be spun to generate random scenarios for students to practise their creative writing skills.

"A lot of kids like the graphic interface, so we use the iPhone or iPod Touch to wow them," Chia said.

In addition, the company has set up a club in conjunction with five secondary schools specialising in creating iPhone applications for their primary-level counterparts.

"The students can take their creativity and skills, like photo-editing, creating websites and all. Now they use those skills in iPhone (applications) development," said Chia.

But 10-year-old Ding Wei is looking at home, rather than school, for his next project: an open-ended simulation game centred around the management of a condominium, and modelled after his favourite game series, The Sims.

"I want to create a 'MyCondo' game," he says.

- AFP/il

America's hidden debt bomb

By Jeanne Sahadi, senior writerMarch 1, 2010: 4:59 AM ET

NEW YORK (CNNMoney.com) -- America's total debt load is on pace to top $13 trillion this year, and $22 trillion by 2020 -- and that's just the debt we're counting.

What's not being counted: potential debt bombs that don't get factored into most budget analysis.

When anyone talks about U.S. debt, they typically refer to two numbers.

The first is the debt held by the public. That's money owed to those who have bought U.S. Treasurys, most notably big bond mutual funds and foreign governments. Debt held by the public today is roughly $8 trillion and rising.

The second number is the money the federal government owes to government trust funds, such as those for Medicare and Social Security. The government has used revenue collected for those programs to cover other outlays. Currently, the debt to the trust funds is approaching $5 trillion.


The two combined is the total gross debt that's accounted for. But deficit hawks also worry about what's not on the books.

Here is just a sampling of the unseen or underplayed obligations that could worsen the debt outlook:

Losses from Fannie Mae and Freddie Mac

Mortgage giants Fannie Mae and Freddie Mac are private companies that for years had the implicit backing of the federal government. That backing assured investors that if anything went seriously south for the companies Uncle Sam likely -- although not absolutely -- would step in.

Well, things did go south, and now both are run by the federal government.

While the implicit guarantee has become explicit for Fannie and Freddie, its treatment in the budget is up in the air.

"Our budget doesn't have Fannie Mae and Freddie Mac on it, even though it's owned lock, stock and barrel by the American taxpayer," said Rudolph Penner, a former director of the Congressional Budget Office (CBO) during a conference held by the Peterson-Pew Commission on Budget Reform.

Last year, the CBO did start to account for both companies as if they were federal agencies on the budget. But the White House Budget Office only includes some potential costs because the future of the two companies is still under consideration. Last week, a Republican congressman introduced a bill that would require the two agencies be put on the budget.

It's still not clear what the companies' total hit to the federal budget will be. Amherst Securities, a broker-dealer in residential mortgage-backed securities, estimated that the total loss on the mortgages backed by the companies could reach $448 billion, with a portion of that covered by reserves or assumed by outside parties.
The CBO estimated the net costs to the government could top $370 billion by 2020.

These are just estimates. But what's clear is that Fannie and Freddie are not cheap dependents.
That's why some argue that lawmakers should assess the potential costs of implicit government guarantees well before things go to pot.

0:00 /5:34Debt chairmen: 'Everything's on the table'

"Their costs are largely unmeasured, unrecognized in the budget and unmanaged," federal budget expert Marvin Phaup wrote in a recent paper. "A troubling aspect of current policy aimed at restarting the financial markets is the likely expansion of implied guarantees to include the obligations of additional private financial institutions."

Unfunded promises

The governments' accrued debt to the Social Security and Medicare trust funds is known. And making those payments -- which begin in earnest this decade --won't be easy given the drop in federal revenue and the surge in government spending.

"[Lawmakers] need to acknowledge they have no way of funding them right now," said tax expert Len Burman, a professor of public administration and economics at Syracuse University.

But the piece of future entitlement debt that's not reflected under current budget protocols is what the government will have to pay into the system after its payments to the trust funds end -- which will happen by 2037 for Social Security and within the next decade for Medicare.


At that point, the programs will only be collecting enough in taxes to pay a portion of the benefits currently promised. There will be enormous pressure on the government to make up the difference, and Uncle Sam would have to borrow a lot of money to do so.

Some budget experts like Stuart Butler, vice president for domestic and economic policy at the conservative Heritage Foundation, would like to see the long-term obligations to Medicare and Social Security included in lawmakers' annual consideration of the federal budget.

Right now, money allocated to both entitlement programs is considered "mandatory" spending and therefore the spending increases for the programs are on autopilot and the financial commitment is uncapped in future years.

True cost of tax breaks

Everybody loves tax breaks. And there's more than a trillion dollars of them to love.

That's the amount of money the Treasury foregoes in annual revenue as a result of the many breaks in the tax code. And that effectively increases the government's need to borrow.

But that trillion-plus isn't really up for consideration during annual budget discussions. "Tax expenditures are basically hidden," Burman said.

No one advocates abolishing tax breaks altogether. But Burman and others believe tax breaks should be treated as discretionary spending. The idea is to bring them into the open so lawmakers can make a conscious decision annually about what they spend on tax breaks and recognize the costs associated with that decision.

Long-term costs of new rules

This year is the first year in which high-income investors with traditional IRAs or 401(k)s -- both of which let savings grow tax-deferred until withdrawn -- will have a chance to convert their accounts into Roth IRAs, where investments grow tax-free.

The new conversion rule is scored as a revenue raiser on the federal budget over the next decade because those who convert must pay the tax owed on their traditional IRA savings the year they convert.

But long-term it's a different story. Since investments in the converted accounts will grow tax-free, Uncle Sam will collect less revenue than he otherwise might have had the investors kept their ever-larger savings in a traditional IRA and paid taxes on them in retirement.

"It will cost federal coffers a lot beyond the 10-year window," Burman said. 

China surpasses Japan as the 2nd largest world economy

China's growth and challenges

It Surpassed Japan as the second largest economy in the world in the fourth quarter of 2009
 

 CHINA surpassed Japan as the second largest economy in the world in the fourth quarter of 2009.

Although Japan’s gross domestic product (GDP) for 2009 at US$5 trillion was higher than that of China at US$4.9 trillion, from the fourth quarter, China produced more goods and services (i.e. enjoyed higher GDP) than did Japan.

It still has some way to go before catching up with the United States, which had a GDP of US$14.5 trillion in 2009.

If China can grow 4% faster than the US annually, it is likely to surpass the US economy in 25-30 years. This could be sooner if the undervalued renminbi is revalued upwards.

Advantages

On a purchasing power parity (PPP) basis, which assumes similar cost for identical products and services in different countries, China overtook Japan in 2001 (see chart) and could overtake the US by 2020.

As per the International Monetary Fund, China’s GDP per capita in 2009 at only US$3,566 was still significantly lower than that of Japan (US$39,573) and the US (US$46,443).

Growing from a low base was the easy part; the challenge is to sustain growth when China becomes a middle income nation.

China has a few advantages that will help it sustain growth. First, it has a strong pro-growth government that can implement its plans.

In the past, such plans like the Great Leap Forward and the Cultural Revolution were socio-economic disasters but under the collective leadership structure, policies are more measured.

A strong government has enabled China to quickly modernise its infrastructure (unlike India) and enhance its strong position in certain sectors like renewable energy, steel and manufactured exports.

Second, China has a very large domestic market that enables domestic producers to achieve economies of scale and attract foreign direct investments and technology into the country.

Third, China has made good strides in education and research and development. According to Unesco, China’s share of global researchers rose to 20.1% from only 14% in 2002.

Challenges

China also faces immense challenges. There is, firstly, an over-reliance on investments and exports to boost the economy while private consumption as a percentage of GDP remains low.

In the longer term, China will require a basic social net that will encourage Chinese to save less for future medical and other bills.

China’s strong one-party rule may be suitable for leading a country from a low to middle income nation but to make the leap to a high income nation requires a focus on innovation and a liberal environment that retains and attracts talent (like the US).

Taiwan and South Korea have made the transition from autocratic governments to democratic governments.
The challenge is for China to maintain stability and yet sufficiently relax its grip on its people to allow this transition.

Another challenge lies in how an emerging China interacts with the US and the Western world. Both sides will have to resolve tensions from differing world views and competition for natural resources and markets.

In the longer term, China faces a demographic time bomb due to its one child policy. China’s rapidly aging population is expected to peak at 1.45 billion in 2030 according to a UN study.

By then, China could suffer from what Japan is suffering now, a stagnant economy and a declining population that represents a strain on its healthcare and social welfare system.

China was the world’s richest nation until 1850, a position that was toppled by an inept government in the last days of the Manchu dynasty and unfair treaties imposed after the Opium War in 1842, aimed at reducing British trade deficit with China by selling opium to the Chinese in exchange for Chinese goods.

Barring major military conflicts (unlikely in the nuclear age) and major policy blunders, China is likely to resume its position as the world’s richest nation, a position it held for almost 2,000 years since the days of the Han Dynasty (206 BC–AD 220) which rivalled the Roman Empire.

The nature of the world will change as an emerging China interacts with a declining but still powerful West.
Western liberal democratic traditions focused on individual rights will square off with Eastern collectivist paradigm putting society above the individual.

Inter-Asian trade and relations will strengthen China’s influence in Asia and position the renminbi as the de facto trading currency for the Asian bloc.

Failure of China and the West in accommodating each other could lead to trade war and even a new cold war, an outcome that can be avoided if more moderate voices that value an open diverse world can prevail over xenophobic ultra-nationalistic/religious voices.

In this new global reality, Malaysia will find it increasingly difficult to compete in manufacturing. Malaysia has to fight tooth and nail to retain and attract talent and boost services (like tourism). This means crafting an attractive liberal environment for its citizens and foreign talent.

·Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd.