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Sunday 10 October 2010

Lee Kuan Yew: The last farewell to my wife; A pioneer in her own right

This eulogy by Singapore’s Minister Mentor Lee Kuan Yew was delivered at the funeral service of his wife, Kwa Geok Choo, at a private ceremony at Mandai Crematorium on Wednesday. 

Kwa Geok Choo
1920-2010


ANCIENT peoples developed and ritualised mourning practices to express the shared grief of family and friends, and together show not fear or distaste for death, but respect for the dead one; and to give comfort to the living who will miss the deceased.

I recall the ritual mourning when my maternal grandmother died some 75 years ago. For five nights the family gathered to sing her praises and wail and mourn at her departure, led by a practised professional mourner.
Such rituals are no longer observed. My family’s sorrow is to be expressed in personal tributes to the matriarch of our family.

In October 2003 when she had her first stroke, we had a strong intimation of our mortality.

Lee Kuan Yew bidding farewell to his ‘tower of strength’. –AFP
 
My wife and I have been together since 1947 for more than three quarters of our lives. My grief at her passing cannot be expressed in words. But today (Wednesday), when recounting our lives together, I would like to celebrate her life.

As a young man with an interrupted education at Raffles College, and no steady job or profession, her parents did not look upon me as a desirable son-in-law. But she had faith in me.

We had committed ourselves to each other. I decided to leave for England in September 1946 to read law, leaving her to return to Raffles College to try to win one of the two Queen’s Scholarships awarded yearly. We knew that only one Singaporean would be awarded. I had the resources, and sailed for England, and hoped that she would join me after winning the Queen’s Scholarship. If she did not win it, she would have to wait for me for three years. In June the next year, 1947, she did win it.

We have kept each other company ever since. We married privately in December 1947 at Stratford-upon-Avon. At Cambridge, we both put in our best efforts. She took a first in two years in Law Tripos II. I took a double first, and a starred first for the finals, but in three years.

Returning to Singapore, we both were taken on as legal assistants in Laycock & Ong, a thriving law firm in Malacca Street. Then we married officially a second time that September 1950 to please our parents and friends. She practised conveyancing and draftsmanship, I did litigation.

In February 1952, our first son, Hsien Loong, was born. She took maternity leave for a year.
That February, I was asked by John Laycock, the Senior Partner, to take up the case of the Postal and Telecommunications Uniformed Staff Union, the postmen’s union.

They were negotiating with the government for better terms and conditions of service. After a fortnight, they won concessions from the government. Choo, who was at home on maternity leave, pencilled through my draft statements, making them simple and clear.

Over the years, she influenced my writing style. Now I write in short sentences, in the active voice. We gradually influenced each other’s ways and habits as we adjusted to and accommodated each other.

We knew that we could not stay starry-eyed lovers all our lives; that life was an on-going challenge with new problems to resolve and manage.

We had two more children, Wei Ling in 1955 and Hsien Yang in 1957. She brought them up to be well-behaved, polite, considerate and never to throw their weight around as the prime minister’s children.
As a lawyer, she earned enough to free me from worries about the future of our children.

She saw the price I paid for not having mastered Mandarin when I was young. We decided to send all three children to Chinese kindergarten and schools. She made sure they learned English and Malay well at home. Her nurturing has equipped them for life in a multi-lingual region.

We never argued over the upbringing of our children, nor over financial matters. Our earnings and assets were jointly held. We were each other’s confidant.

She had simple pleasures. We would walk around the Istana gardens in the evening, and I would hit golf balls to relax. Later, when we had grandchildren, she would take them to feed the fish and the swans in the Istana ponds. Then we would swim.

She was interested in her surroundings, for instance, that many bird varieties were pushed out by mynahs and crows eating up the insects and vegetation. She discovered the curator of the gardens had cleared wild grasses and swing fogged for mosquitoes, killing off insects they fed on. She stopped this and the bird varieties returned. She surrounded the swimming pool with free flowering scented flowers and derived great pleasure smelling them as she swam.

She knew each flower by its popular and botanical names. She had an enormous capacity for words.
She had majored in English literature at Raffles College and was a voracious reader, reading everything from Jane Austen to J.R.R. Tolkien, from Thucydides’ The Peloponnesian Wars to Virgil’s Aeneid, to The Oxford Companion to Food, and Seafood of Southeast Asia, to Roadside Trees of Malaya, and Birds of Singapore.

She helped me draft the Constitution of the PAP. For the inaugural meeting at Victoria Memorial Hall on 4 November 1954, she gathered the wives of the founder members to sew rosettes for those who were going on stage.

In my first election for Tanjong Pagar, our home in Oxley Road became the HQ to assign cars provided by my supporters to ferry voters to the polling booth.

She warned me that I could not trust my new found associates, the leftwing trade unionists led by Lim Chin Siong. She was furious that he never sent their high school student helpers to canvass for me in Tanjong Pagar, yet demanded the use of cars provided by my supporters to ferry my Tanjong Pagar voters.

She had an uncanny ability to read the character of a person. She would sometimes warn me to be careful of certain persons; often, she turned out to be right.

When we were about to join Malaysia, she told me that we would not succeed because the Umno Malay leaders had such different lifestyles and because their politics were communally-based, on race and religion.
I replied that we had to make it work as there was no better choice. But she was right. We were asked to leave Malaysia before two years had passed.

When separation was imminent (in 1965), Eddie Barker, as Law Minister, drew up the draft legislation for the separation. But he did not include an undertaking by the Federation Government to guarantee the observance of the two water agreements between the PUB (Public Utilities Board) and the Johor state government. I asked Choo to include this. She drafted the undertaking as part of the constitutional amendment of the Federation of Malaysia Constitution itself.

She was precise and meticulous in her choice of words. The amendment statute was annexed to the Separation Agreement, which we then registered with the United Nations. The then Commonwealth Secretary Arthur Bottomley said that if other federations were to separate, he hoped they would do it as professionally as Singapore and Malaysia.

It was a compliment to Eddie and Choo’s professional skills. Each time Malaysian leaders threatened to cut off our water supply, I was reassured that this clear and solemn international undertaking by the Malaysian government in its Constitution will get us a ruling by the UNSC (United Nations Security Council).

After her first stroke, she lost her left field of vision. This slowed down her reading. She learned to cope, reading with the help of a ruler. She swam every evening and kept fit. She continued to travel with me, and stayed active despite the stroke. She stayed in touch with her family and old friends.

She listened to her collection of CDs, mostly classical, plus some golden oldies. She jocularly divided her life into “before stroke” and “after stroke”, like BC and AD.

She was friendly and considerate to all associated with her. She would banter with her WSOs (woman security officers) and correct their English grammar and pronunciation in a friendly and cheerful way. Her former WSOs visited her when she was at NNI (National Neuroscience Institute). I thank them all.

Her second stroke on 12 May 2008 was more disabling. I encouraged and cheered her on, helped by a magnificent team of doctors, surgeons, therapists and nurses.

Her nurses, WSOs and maids all grew fond of her because she was warm and considerate. When she coughed, she would take her small pillow to cover her mouth because she worried for them and did not want to infect them. Her mind remained clear but her voice became weaker. When I kissed her on her cheek, she told me not to come too close to her in case I caught her pneumonia. When given some peaches in hospital, she asked the maid to take one home for my lunch. I was at the centre of her life.

On 24 June 2008, a CT scan revealed another bleed again on the right side of her brain. There was not much more that medicine or surgery could do except to keep her comfortable. I brought her home on 3 July 2008. The doctors expected her to last a few weeks. She lived till 2nd October, 2 years and 3 months.

She remained lucid. That gave time for me and my children to come to terms with the inevitable. In the final few months, her faculties declined. She could not speak but her cognition remained. She looked forward to have me talk to her every evening.

Her last wish she shared with me was to enjoin our children to have our ashes placed together, as we were in life.

The last two years of her life were the most difficult. She was bedridden after small successive strokes; she could not speak but she was still cognisant. Every night she would wait for me to sit by her to tell her of my day’s activities and to read her favourite poems. Then she would sleep.

I have precious memories of our 63 years together. Without her, I would be a different man, with a different life. She devoted herself to me and our children.

She was always there when I needed her. She has lived a life full of warmth and meaning.
I should find solace in her 89 years of a life well lived. But at this moment of the final parting, my heart is heavy with sorrow and grief.

October 4, 2010

A pioneer in her own right

LKY’s late wife, however, chose to remain on the sidelines in public, content to play a supporting role.

IN life, Kwa Geok Choo was a quiet, dignified cheongsam-clad presence by her husband Lee Kuan Yew’s side. In death, she leaves behind a void that not only her husband, but also the entire island nation, will feel.

Kwa, known to the world as the wife of Singapore’s first Prime Minister Kuan Yew, died on Saturday evening at her Oxley Road home. She was 89.

Life-long lovers: A Sept 9, 2004 file picture of Lee and Kwa during the wedding ceremony of Brunei’s Crown Prince Al-Muthadee Billah Bolkiah and Sarah Salleh in Bandar Seri Begawan.— AFP
 
Her husband of 63 years was in hospital with a chest infection.

Elder son Singapore Prime Minister Lee Hsien Loong, 58, cut short an official visit to Belgium where he was to attend the Asia-Europe Meeting summit.

The wake will be held today and tomorrow at Sri Temasek, the official residence of the Prime Minister located within the Istana grounds. Kwa had spent many hours watching her children, and later her grandchildren, play at Sri Temasek, while their father went about his business or exercised.

Visitors may pay their respects there from 10am to 5pm on those days. A private funeral will take place on Wednesday at the Mandai Crematorium.

In a moving tribute, President S.R. Nathan said: “To know Mrs Lee’s greatness, one has to listen to what has not been said of her until now. Mrs Lee was great in many ways – as a legal luminary, as a mother of an illustrious family, and more than that, for her stoic presence next to Mr Lee Kuan Yew during times of turbulence and tension in the many years of his political struggle.

“There was not a single important event or development that she was not an intimate witness of. Indeed, she lived a life that had its fair share of pain and uncertainty, which was not evident in public.”

Prime Minister Datuk Seri Najib Tun Razak and Taiwanese President Ma Ying-jeou also conveyed their condolences to the Lee family.

Kwa had been ill for some time. A stroke in 2003 had left her frail, with weakened peripheral vision, but she remained bravely active, accompanying Lee on numerous official functions here and overseas.

On one trip to China, she gamely donned a long-sleeved swimsuit with long pants, and swam in the hotel pool, never mind zig-zagging across the lane. Her gait was uncertain and she needed a supporting arm, but she continued in good cheer, her sharp wit intact.

In 2005, on a visit to Temasek House in Kuala Lumpur, Lee pointed out a photograph on the wall and described the picture to her: “This is a picture of you doing the joget.” Her swift retort: “Put it in the furnace.”

She suffered another two strokes in 2008 which left her unable to walk or speak. Nurses cared for her at the Lees’ Oxley Road home.

In the last two years, Lee had spent many hours by her bedside, reading from her well-thumbed copies of English poetry and novels and telling her about his day.

In an upcoming book to be published by The Straits Times in January, Lee reveals that in her last days, “I’m the one she recognises the most. When she hears my voice, she knows it’s me.”

Theirs was a life-long love story.

Kwa, a brilliant student who came out tops in her Senior Cambridge year, and who went on to build a successful law practice at Lee & Lee, was the intellectual equal of Lee, but she saw herself first and foremost as a wife and mother, in keeping with her upbringing in a conservative Straits-Chinese home.

In public, she was a traditional Asian wife who metaphorically walked two steps behind her husband, as she once quipped.

In private, she was a devoted mother, a caring, gentle woman, and a quick-witted conversationalist who loved literature, classical music and botany. She was a “tower of strength” to her husband and family, emotionally and intellectually.

She believed in the same causes as Lee did – independence from colonial rule in the early years, and later, a multiracial, meritocratic Singa­pore.

She saw Lee through the nation’s toughest moments in 51 years in office, 31 as Prime Minister, girding him for battle the way only a wife can. She helped him through the anguish of separation. She shared with him her instinctive grasp of character among the people they met. She helped him draft and polish his speeches, memoirs and even legal documents.

She engaged him in heated debate on policy matters like the rights of women and was wont to chide him if she thought him too demanding of others.

An intensely private woman who shunned the limelight, Kwa trod softly through Singapore’s history. She was a pioneer in her own right, but she chose to remain on the sidelines in public, content to play a supporting role.

But her imprint on Singapore was no less significant for being so gentle. Her quiet dignity and self-discipline, her selflessness and modesty, were unique. The nation will not see the likes of Kwa again. — The Straits Times / Asia News Network

Saturday 9 October 2010

News Analysis: For global recovery, a laundry list of risks

More than two years since the onset of the worst recession since the 1930s, advanced economies are starting to revive -- at a snail's pace.

While respectable growth is expected of the global economy -- nearly 5 percent this year and more than 4 percent next year -- demand is still weak in many advanced countries and unemployment still lingers at or near the double digits in both the United States and the Euro zone, according to the International Monetary Fund (IMF)'s World Economic Outlook released on Wednesday.

While a rebound is proceeding, experts fear any number of factors -- from debt consolidation to anti-trade sentiment -- could damage the still fragile recovery.

FISCAL CONSOLIDATION

According to the IMF, the main challenge for advanced economies is fiscal consolidation.

"What is essential here is not to so much to phase out fiscal stimulus now, but to offer a credible medium term plan for debt stabilization, and eventually for debt reduction," said the IMF's chief economist Olivier Blanchard at a press briefing on Wednesday.

Still, many will be reluctant to cut spending if growth is weak, and there are risks in cutting spending too soon.

Dean Baker, co-director of the Center for Economic and Policy Research, said the greatest risk to the recovery is the push to austerity in much of Europe and even in the United States, as the end of the stimulus will be contractionary.

"This could very well upend an extremely weak recovery," he said.

HOUSING

Diane Swonk, chief economist at Mesirow Financial, said weakness in the U.S. housing market will impact the global recovery for some time to come, as the level of activity in this crucial sector of the world's largest economy will be so muted that it will hold down growth.

Indeed, the level of current housing sector activity is more consistent with a recession, she said.

A large chunk of the millions of American jobs lost in this recession have been in the construction industry, and the housing sector continues to be a major factor holding down employment, as it is not reviving enough to create a sufficient number of jobs, she said.

VARIED PACE OF GROWTH

The IMF is also urging more coordination between developed and developing economies, as the two worlds are seeing very different levels of growth.

Blanchard said on Wednesday that demand in developed world nations remains weak, as people are saving more and spending less, while emerging economies are rebounding at a much faster clip.

The IMF forecasts sluggish growth for advanced economies, at 2. 7 percent for 2010 and 2.2 percent for 2011. For the Euro area, a 1.7 percent growth is forecast for this year and 1.5 percent for 2011.

But in emerging economies, consumption and investment are contributing to strong growth, which as a whole is forecast to reach 7.1 percent in 2010 and 6.4 percent for 2011, according to IMF statistics.

"Sustained, healthy recovery rests on two rebalancing acts: internal rebalancing, with a strengthening of private demand in advanced economies, allowing for fiscal consolidation; and external rebalancing, with an increase in net exports in deficit countries, such as the United States, and a decrease in net exports in surplus countries, notably emerging Asia," according to the World Economic Outlook.

Many interpret this to mean that a part of the IMF's push for a "rebalancing" should involve appreciating the Chinese Yuan.

But Chinese Premier Wen Jiabao on Wednesday urged European leaders in Brussels to refrain from pushing for a stronger Chinese currency.

"If the yuan is not stable, it will bring disaster to China and the world," he said in a speech. "I say to Europe's leaders: Don't join the chorus pressing to revalue the yuan."

"If we increase the yuan by 20 percent or 40 percent, as some people are calling for, many of our factories will shut down and society will be in turmoil," he said.

IMF Chief Dominique Strauss-Kahn on Friday urged nations not to succumb to a currency war.

RISING TIDE OF ANTI-TRADE FEELING

Perhaps the greatest threat to recovery in the long run, according to some economists, is growing populist sentiment against international trade, which is on the rise in the United States.

"This issue seems to be unraveling quickly. And we know from history that protectionism shrinks the economy and does not increase the economy," Swonk said.

"We got ourselves into this mess together, and the only way out of it is to coordinate policies across borders and instead we are all starting to throw stones and we all live in glass houses," she said.

Ralph C. Bryant, senior fellow at the Brookings Institution, said such feelings are worrying.

"It's very easy to look at foreigners and say 'you're preventing us from exporting' and there have been times in history when it has had adverse effects," he said.

UNANSWERED QUESTIONS

Still, the fundamental question at the heart of the global economic recovery remains unanswered: where is demand going to come from?

Ben Carliner, director of research at the Economic Strategy Institute, said the global economy has not yet adjusted to a decrease in demand from the developed world.

The continuing efforts in the United States and Europe to recover from systemic financial crises have left consumers, banks and public sectors struggling to improve their balance sheets, he said.

As these efforts depress aggregate demand, easy monetary policies, in the form of low nominal interest rates and in some cases quantitative easing, are and will continue to be used to offset the demand shock, he said.

For emerging economies that depend on exports of manufactured goods, the principal challenge is how to respond to this external shock, as foreign demand for emerging world exports has dried up, he said.

IS THERE HOPE?

In spite of the many risks that could derail a recovery, there may be some good news on the horizon, some economists said.

The countries that did not experience the drastic slowdown via housing will most likely be able to perform much better, said Andy Busch, a global currency and public policy strategist at BMO Capital Markets.

While unemployment is high in the United States, a new congress will be voted in November, and could move to settle down some of the uncertainties for small business, which some economists say are unable to make hiring decisions because they do not know what legislation will come out of Washington next.

"That will lead to faster growth than many people are anticipating right now," he said. Still, not all economists agree with that assessment, and some observers predict that Congress will continue to be deadlocked along party lines after the elections.

Source: Xinhua

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Beggaring the world economy

COMMENT
By RAGHURAM RAJAN

GLOBAL capital is on the move. As ultra-low interest rates in industrial countries send capital around the world searching for higher yields, a number of emerging market central banks are intervening heavily, buying foreign capital inflows and re-exporting them to keep their currencies from appreciating.

Others have been imposing capital controls of one stripe or another. In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets.

Why does no one want capital inflows? Which intervention policies are legitimate, and which are not? And where will all this intervention end if it continues unabated?

The portion of capital inflows that is not re-exported represents net capital inflows. This finances domestic spending on foreign goods.

So, one reason countries do not like capital inflows is that it means more domestic demand “leaks” outside. Because capital inflows often cause the domestic exchange rate to appreciate, they encourage further spending on foreign goods as domestic producers become uncompetitive.

Another reason is that some of it might be “hot” (or dumb) money, eager to come in when foreign interest rates are low and local asset prices are rising, and quick to leave at the first sign of trouble or when opportunities back home beckon.

Volatile capital flows induce volatility in the recipient economy, making booms and busts more pronounced than they would otherwise be. But, as the saying goes, it takes two hands to clap.

If countries could maintain discipline and limit spending by their households, firms or governments, foreign capital would not be needed, and could be re-exported easily without much effect on the recipient economy.

Countries can overspend for a variety of reasons. The stereotypical Latin American economies of yesteryear used to get into trouble through populist government spending, while the East Asian economies ran into difficulty because of excessive long-term investment.

In the United States, in the run up to the current crisis, easy credit – especially for housing – induced households to spend too much, while in Greece, the government borrowed its way into trouble.

Unfortunately, though, so long as some countries like China, Germany, Japan, and the oil exporters pump surplus goods into the world economy, not all countries can trim their spending to stay within their means. Since the world does not export to Mars, some countries have to absorb these goods, and accept the capital inflows that finance their consumption.

In the medium term, over-spenders should trim their outlays and habitual exporters should increase theirs. In the short run, though, the world is engaged in a gigantic game of passing the parcel, with no country wanting to take the habitual exporters’ goods and their capital surpluses.

This is what makes today’s beggar-thy-neighbour policies so destructive: though some countries will eventually have to absorb the surpluses and capital, each country is trying to avoid them.

So which policy interventions are legitimate? Any policy of intervening in the exchange rate, or imposing import tariffs or capital controls, tends to force other countries to make greater adjustments. China’s exchange rate intervention probably hurts a number of other emerging market exporters that do not intervene as much and are less competitive as a result.

But industrial countries, too, intervene substantially in markets. For example, while US monetary policy intervention (yes, monetary policy is also intervention) has done little to boost domestic demand, it has spurred domestic capital to search for yield around the world.

The US dollar would fall substantially – encouraging greater exports – were it not for the fact that foreign central banks are pushing much of that capital right back by buying US government securities.

All this creates distortions that delay adjustment – exchange rates are too low in emerging markets, slowing their move away from exports, while the ease with which the US government is being financed creates little incentive for US politicians to reduce spending over the medium term.

Rather than intervening to obtain a short-term increase in their share of slow-growing global demand, it makes sense for countries to make their economies more balanced and efficient over the medium term.

That will allow them to contribute in a sustainable way to increasing global demand. China, for example, must move more income to households and away from its firms, so that private consumption can increase.

The United States must improve the education and skills of significant parts of its labour force so that they can produce more of the high-quality knowledge and service-sector exports in which the United States specialises. Higher incomes would boost US savings, reducing households’ dependence on debt, even as they maintained consumption levels.

Unfortunately, all this will take time, and citizens impatient for jobs and growth are pressing their politicians. Countries around the world are embracing shortsighted policies that cater to the immediate needs of domestic constituencies.

There are exceptions. India, for example, has eschewed currency intervention thus far, even while opening up to long-term rupee debt inflows, in an attempt to finance much-needed infrastructure projects.

India’s willingness to spend when everyone else is attempting to sell and save entails risks that need to be carefully managed. But India’s example also provides a glimpse of what the world could achieve collectively.

After all, beggar-thy-neighbour policies will succeed only in making us all beggars. — © Project Syndicate

Raghuram Rajan, a former chief economist of the IMF, is professor of finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

Currency wars at a time of deficient demand

WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN

LAST week, Brazil’s finance minister said: “We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.”

This says it all. The International Monetary Fund has since warned of widespread currency interventions which could derail the fragile recovery. Many nations are engaged in policies to weaken their currencies. Further competitive devaluation will inflame global tensions.

At a time of continuing deficient demand, this is not the time for the world’s major currencies to face off in what can only be described as an “ugly contest”.

By the third quarter of this year (Q3), attention had shifted from the deep woes engaging the eurozone to re-emerging economic and fiscal fissures in the United States.

This sudden re-orientation of focus helped the euro reverse most of its springtime collapse, and saw the US dollar lose more lustre.

Then there is the ever-strong yen. Japan is faced with a deep economic malaise and is anxious to ease exporters’ burden. It is not surprising that Q3 highlighted the standoff over which of the three most actively traded currencies has the lousiest outlook.

The euro hit a new low against the US dollar (1.1917) on June 7 and for the first half of 2010, it was 15% from where it started the year.

But the euro rose 11.5% in Q3. Against the yen, the US dollar fell to a 15-year low (83.10 yen) in mid-September. That prompted the unleashing of a US$20bil blitz of yen selling, driving it off its high.

The yen has since returned to its pre-intervention rate. The end result: the US dollar not only slid against the euro and the yen, but also fared worse against most emerging market currencies.

When measured against a basket of major currencies, the US dollar sank to its lowest level since January. By Oct 5, the ICE Dollar Index was below 78, against 88 in June.

The grass gets crumpled

This is not the first time we see a currency conflict. In August 1971, the “Nixon shock” ended US dollar convertibility to gold. In September 1985, the Plaza Accord devalued the US dollar, notably against the yen. This time around, the target is the Chinese yuan.

The East has a saying – when tigers fight or make love, the grass gets crumpled. The United States has pressed hard on China to revalue faster; the European Union (EU) and Australia have since raised the volume of their rhetoric on China. Meanwhile, others have been intervening to hold their currencies down.

Australia warned Europe against reviving protectionism masquerading as environmentalism. The situation can only get worse. Already, the Institute of International Finance (IIF), representing 420 leading financial institutions, just revised upwards its latest forecast for net inflows of capital into emerging markets, showing a sharp increase to US$825bil for 2010. All in search of higher yields, thereby risking instability.

Of course, the United States and EU blames all this on China. But many emerging economies blame ultra-low interest rates in rich countries (reflecting aggressive quantitative easing, or QE) for diverting vast amounts of cheap funds to their domestic markets, creating a policy dilemma for most.

Their economies are growing nicely in the face of rising inflation. This limits the use of interest rates to curb these funds inflow.

On Oct 4, Brazil doubled a tax on foreigners’ purchases of local bonds. Australia and Indonesia kept their benchmark rates unchanged to ward off further inflows. The Philippines is expected to hold their rates. India and Thailand are considering new steps of protection.

The big problem remains. Globally, ad hoc currency interventions don’t work. At its heart is the US dollar, trapped in a downward spiral as expectations of further monetary easing by the Federal Reserve Bank (Fed) drags it lower.

The global architecture is broken. But how best to move away from a system where the US dollar plays the role of a major reserve currency and the United States sets global interest rates?

It looks like the entire Asian sovereign community is suddenly buying euro and yen – so much so the Japanese on Oct 6 lowered the target for its key overnight rate to 0.0% and 0.1%.

John Connally (Nixon’s Treasury Secretary) says it best when he famously told Europeans that the “US dollar is our currency, but your problem.”

In the absence of currency adjustments, the Chinese response appears to be, in the words of Financial Times’ Martin Wolf: “In effect, the United States is seeking to inflate China and China, to deflate the United States.” It’s a stalemate. The grass continues to get crumpled.

There is now, according to the IIF, “an environment of unilateralism and bilateralism laced with isolation and parochialism.” Somewhat exaggerated, but in essence, correct as I see it.

The yuan scapegoat

Reality check: The developed world suffers from chronic deficient demand. The IMF just cut its growth forecast. The six biggest high-income nations’ gross domestic product (GDP) in Q2 is nowhere near what it was in Q1 of 2008.

They are operating up to 10% below potential. In the United States and eurozone, core inflation is only 1%. Deflation beckons.

Those with trade deficits and surpluses alike all love to have export-led growth. In a zero-sum world, this can only happen if emerging nations shift to run huge current deficits. That’s not about to happen.

Also, the vast accumulation of foreign reserves complicates any meaningful adjustment. Between January 1999 and May 2010, reserves went up by US$6.8 trillion to reach US$8.4 trillion. China accounted for 30% of the world total, or equivalent to 50% of its own GDP. That’s the big picture.

Until the early 1970s, currency rates were fixed under the Bretton Woods monetary system. It fell apart with the US-inspired inflation of the 1970s. So the world moved to floating rates.

But most nations still chose to peg to the US dollar. With the euro, most of Europe moved to fixed exchange rates. Pegging offered the benefits of exchange rate stability, eliminating a source of uncertainty for investment and trade to flourish.

One catch though: pegged nations give up monetary independence. In the US dollar-bloc, they yield to the Fed and in the euro-bloc, the European Central Bank (ECB).

This is what China did when its yuan was pegged to the US dollar. In exchange for the benefits of exchange rate stability, it subcontracted much of its monetary discretion to the Fed.

For more than a decade, this served the world economy well; Americans raised their living standards and millions of Chinese enjoyed prosperity.

For years, the United States had pressed the yuan to revalue in the name of reducing the US trade deficit. What’s not so obvious is that much of this deficit is intra-company trade, that is, US firms outsourcing production to China to stay globally competitive.

Beijing bent for a while in the middle of last decade and adopted a crawling peg, allowing the yuan to revalue by 18% with little impact on US trade deficit. China re-pegged amid the financial panic in 2008. American clamour to revalue revived and the yuan relented and moved to greater “flexibility” last June. Recently, the yuan reached its strongest since 1993 – up 2% to 6.69 per US dollar but fell 10% against the euro. That’s far too slow for the United States and Europeans.

The US trade deficit with China surged to US$268bil in 2008, up from US$202bil in 2005. Currency is but one factor influencing where firms manufacture.

Furthermore, the United States no longer make many of the goods China exports. So a shift in business out of China would more likely mean relocation to other low-cost Asian nations, rather than rebuild US capacity.

The yuan has appreciated 55% against the dollar since 1994, when Beijing begun to overhaul its forex system. That bilateral imbalance is structural. As I see it, the only way the United States can fight off Chinese competitive challenges is to innovate and boost productivity at home.

Both the United States and EU now urge China to allow “an orderly, significant and broad-based appreciation” of the yuan. I think China is right to resist these calls, not least because a large revaluation is likely to damage China’s growth and basic restructuring plans.

China’s continuing expansionary “train” is pulling along growth in East Asia nicely, and to a lesser extent, that of the developed world as well.

“The world has already become partially de-coupled” says Nobel laureate Joseph Stigliz. China has learned from past experience, including that of Japan, which bowed to similar US pressures in the 1980s and 1990s, revaluing the yen from 360 per US dollar to a high 80 in 1995.

According to Stanford’s Prof R. McKinnon, one result was domestic deflation and its lost decades in growth. Meanwhile, Japan continues to run a trade surplus as imports fell with slower growth and cross-border prices adjusted. China helped lead the world out of recession and the world needs that to continue.

What’s China to do?

The media wants us to believe the biggest sinner in this game of beggar-thy-neighbour is China. But, in their own way, the United States, Britain and EU are engaged in much the same thing.

Massive QE has effectively created negative interest rates and debauched their currencies to boot with floods of liquidity. QE proved a highly effective way to devalue the dollar.

Indeed, it is a much more powerful form of persuasion than the threat of tariffs. The very prospect of more QE can rattle China and most of Asia to submission.

But the global imbalances that created the crisis have yet to be addressed by centring criticism on China. Reform of the international monetary architecture is needed to resolve the problem, with a global “clearing” organisation acting independently among nations to manage “surpluses” and “deficits”. This institution is intended to keep the world in balance. This won’t happen.

Maybe, the approach is wrong. I think the real problem is not the yuan’s exchange rate but its inconvertibility and capital controls. As a result, the yuan’s development has been stunted since private markets can’t recycle the flow of dollars arising from continuing large surpluses.

China’s huge reserves represent a significant misallocation of global resources. Instead of letting these reserves find their optimum private investment use, China uses them to buy US Treasuries and bonds.

Once made convertible, capital and trade flows will adjust through private markets rather than the Peoples’ Bank. That’s how Germany recycles its surpluses. In this way, a one-time modest revaluation accompanied by convertibility can assist in the global adjustment process, while avoiding the perils of Japan-like deflation.

Whether China is ready for convertibility of its yuan is a key question. All I can say is that stage-by-stage convertibility increases domestic pressures for China to further liberalise to develop its financial system, which in turn, helps in global rebalancing.

What’s important is for China and the other surplus nations (Germany and Japan) to understand that their policies are not helping the United States to rebalance.

Similarly, the United States and EU need to understand that the surplus nations simply can’t adjust fast enough to suit them.

Resolution requires realistic “grown-up” behaviour on the part of core parties in this dispute to agree to global rebalancing with care and with determination.

For a start, I see merit in the IIF’s call for a new coordinated currency pact by the core parties to hammer out with haste, an understanding to help rebalance the global economy.

It needs a more sophisticated version of the Plaza Accord to include “stronger commitments to medium-term fiscal stringency in the United States and structural reform in Europe.” The world deserves more, not less.

Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time teaching and promoting the public interest. Feedback is most welcome at
starbiz@thestar.com.my.

Buffett : US Wall St like a Church with Raffles

Buffett Compares Wall Street to Church With Raffle  

Warren Buffett
Warren Buffett, chairman of Berkshire Hathaway Inc. Photographer: Nelson Ching/Bloomberg 

"You should go broke. And I think your wife should go broke, too" Buffett says of CEOs whose firms require bailouts - AFP

Use of derivatives 'makes mockery' of federal rules, he says. 

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said Wall Street is like a church that benefits society, then falters by operating a gambling venture on the side.

Wall Street “does a lot of good things and then it has this casino,” Buffett, 80, said today at Fortune magazine’s Most Powerful Women conference in Washington. “It’s like a church that’s running raffles on the weekend.”

Buffett relies on investment banks to help finance acquisitions such as his $27 billion purchase of railroad Burlington Northern Santa Fe and to offer derivative contracts that allow him to speculate on stock markets. Omaha, Nebraska- based Berkshire invested $5 billion in Goldman Sachs Group Inc. in 2008 at the depths of the credit crisis. Buffett has also faulted Wall Street for excessive bets on U.S. housing.

“People have a propensity to gamble, and it gets made easier and easier for them,” Buffett said. “One of the problems we still have is we have unbalanced incentives for managers of huge financial institutions.”

Buffett has called for greater accountability from bank executives whose risk-taking produces losses for shareholders and imperils the economy. The use of derivatives has allowed banks to add risk and “makes a mockery” of federal rules designed to limit losses, Buffett said. “You should go broke,” he said of chief executive officers whose firms require government bailouts to protect society.

‘Your Wife Should Go Broke’
“And I think your wife should go broke, too,” he said. 

Berkshire, where Buffett serves as CEO, weathered the financial crisis without taking a capital injection from the U.S. government. Some of Berkshire’s biggest investment holdings took bailouts, including Goldman Sachs, the most profitable Wall Street firm, which got $10 billion in taxpayer funds. Wells Fargo & Co., which counts Berkshire as its biggest investor, got $25 billion.

Buffett reiterated praise for financial-company bailouts, and said government’s treatment of shareholders won’t create a so-called moral hazard in the equities market. Stockholders of companies including insurer American International Group Inc. and Citigroup Inc. lost at least 90 percent of their investments, Buffett said.

“The common shareholders did not get bailed out of those institutions, they lost hundreds and hundreds and hundreds of billions,” Buffett said. “There is no moral hazard in terms of big financial company stockholders.”

Goldman Sachs

Goldman Sachs and San Francisco-based Wells Fargo repaid their U.S. rescues.

Buffett built an equity portfolio of about $55 billion by buying and holding stocks of companies that he believes have durable competitive advantages. Berkshire is the largest investor in Coca-Cola Co. and American Express Co.
 
His investment in Goldman Sachs came with warrants that enable him to buy $5 billion of the company’s stock at $115 a share, compared with yesterday’s closing price of $146.57. Exercising the option at that price would generate a profit of more than $1.3 billion.

Buffett’s pronouncements on markets and on the economy are watched by policy makers and investors. Buffett, the world’s third-richest person, oversees more than 200,000 employees at Berkshire and the company’s more than 70 subsidiaries. At the conference today, he said his businesses are “coming back” after the recession. When asked for his outlook on equity and fixed-income markets, Buffett said investors buying bonds after yields fell this year “are making a mistake.”

‘Stocks are Cheaper’

“It’s quite clear that stocks are cheaper than bonds,” Buffett said. “I can’t imagine anyone having bonds in their portfolio when they can own equities.”

Buffett said wealthy individuals should pay higher taxes. The billionaire, who said he probably pays a lower tax rate “than the cleaning lady,” criticized cuts made under former President George W. Bush. President Barack Obama, whom Buffett advised during his election campaign, is seeking lawmaker support to phase out breaks for families making more than $250,000.

“I have no tax shelters, I have no tax accountant, my tax shelter really was the Bush administration,” Buffett said. “They took care of me. They thought here’s this endangered species, kind of like the bald eagle out in Omaha, and if we don’t take care of this guy they’ll all quit working and we won’t have any arbitrageurs or hedge fund operators. So we’ve gotta give this guy a special kind of break.”

Lawmakers are considering measures to raise revenue under the shadow of a U.S. deficit previously forecast by the White House budget office to be a record $1.47 trillion for 2010 and $1.42 trillion for fiscal 2011, which started Oct. 1.

“If you’re not going to get it from guys like me, why should we get it from the people who served us lunch today,” Buffett said.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Natalie Doss in New York at ndoss@bloomberg.net.
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

Friday 8 October 2010

Currency wars 'hurt global markets', World leaders seek currency peace,China yuan reform

Currency wars 'hurt global markets' 

International Monetary Fund and European Union warn nations 
against undervaluing their currencies.
Dominique Strauss-Kahn, IMF Managing Director, says re-balancing currencies should be the main goal [AFP] 

Global policymakers clashed over currency policies as Western leaders warned China and other emerging markets that widespread efforts to weaken exchange rates threaten to derail economic recovery.

Officials around the world fear that a rush to undervalue currencies may trigger trade tariffs and other measures that could damage global economic growth.

Using exchange rates "as a policy weapon" to undercut other economies and boost a country's own exporters "would represent a very serious risk to the global recovery," Dominique Strauss-Kahn, the International Monetary Fund (IMF) director, said ahead of Friday's twice-yearly IMF meeting.

European officials said on Thursday that a rapidly rising euro, victimised by an undervalued US dollar and Chinese yuan, could threaten eurozone recovery and vowed to press both Washington and Beijing to take action.

European Union leaders contend that the euro - currently at an eight-month high of more than $1.40 - is being squeezed in a  transglobal race for trading income.

"The euro is currently bearing a disproportionate burden in the adjustment of the global exchange rate," a spokesman for Olli Rehn, the European Union Economic Affairs Commissioner, said.

"This may affect recovery of the European economy," the spokesman stressed, reiterating that the yuan is "still significantly undervalued."

'Singled out'

But China, which the West accuses of keeping the yuan artificially weak to promote exports, has rebuffed the criticism.

Al Jazeera's Melissa Chan, reporting from the Chinese capital of Beijing, said that while China is typically "singled out" as a currency manipulator, within the country, there is an understanding that its economy must move "from an export-driven model to a consumer-based one".

"But while everyone knows that China has a trade surplus with the United States, few know that China has a trade deficit with countries like Brazil, South Korea and Japan."

On Wednesday, Premier Wen Jiabao told the European Union to stop piling pressure on Beijing to revalue the yuan, saying a rapid exchange rate shift could unleash disastrous social turmoil in China.

"Many of our exporting companies would have to close down, migrant workers would have to return to their villages," Wen said during a visit to Brussels. "If China saw social and economic turbulence, then it would be a disaster for the world."

EU Commissioner Rehn's spokesman also contended that US currency policies were also troubling the European Union and said the EU would raise the same complaints it did with China on Wednesday "to the Americans, to Geithner too".

Competitive devaluations

However, Timothy Geithner, the US treasury secretary, continued his attacks on countries with large trade surpluses, saying they must let their currencies rise lest they trigger a devastating round of competitive devaluations.
"When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," Geithner said on Wednesday, in remarks that appeared aimed at China.

Some economists suspect that it suits the United States to have a weak dollar and a strong euro when the pace of recovery is so dependent on winning the competition for exports with emerging powers such as China, India, Russia or Brazil.
Low interest rates in Europe and Japan and expectation that the Federal Reserve will launch another round of money printing that could weaken the dollar have pushed currencies to the top of the agenda at the IMF meeting and at Friday's gathering of finance leaders from the Group of 20 economies.

Al Jazeera's Steve Chao, reporting from Tokyo, Japan, said that while the Yen is seen as a stable investment, "hordes of speculators" have switch to the currency, driving its value up. This, he said, lead to a "rebellion of sorts" as the government had to take unilateral action in manipulating its currency.

"And there lies the vulnerability. Facing major pressure from Japan's own industries, the Bank of Japan slashed interest rates to zero, and sold off a trillion yen," our correspondent said.

"That marks the largest one-day currency action ever in this country."

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World finance leaders seek currency

peace


International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn (R) and World Bank President Robert Zoellick chat at the beginning of G-24 ministers meeting during the annual IMF-World Bank meeting in Washington October 7, 2010. REUTERS/Yuri Gripas
International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn (R) and World Bank President Robert Zoellick chat at the beginning of G-24 ministers meeting during the annual IMF-World Bank meeting in Washington October 7, 2010.
Credit: Reuters/Yuri Gripas
WASHINGTON | Fri Oct 8, 2010 12:27am EDT
WASHINGTON (Reuters) - World finance leaders on Friday will try to soothe simmering currency tensions which threaten to drag on an economic recovery that is already too slow and uneven for their liking.

The Group of 20 finance ministers scheduled a working breakfast on the sidelines of this weekend's International Monetary Fund and World Bank twice-yearly meetings.

The smaller G7 grouping of advanced economies holds a closed-door dinner later on Friday.
Neither group is expected to issue a formal statement, but G20 officials said foreign exchange matters will be discussed at both events amid concerns that countries will intentionally weaken their currencies to pursue export-led growth.

China, usually at the center of the currency debate, has company this time. Officials are still leaning on Beijing to allow the yuan to rise more rapidly, but Japan's intervention last month to weaken the yen put Tokyo on the hot seat, too.

The United States can also expect criticism over its seemingly benign neglect of the sinking dollar, which has led investors to chase bigger returns in emerging markets such as Brazil, driving up asset prices and inflation.
"What we all want is a rebalancing of the global economy and this rebalancing cannot happen without ... a change in the related value of currencies," IMF Managing Director Dominque Strauss-Kahn said on Thursday.

The currency strains are symptomatic of a deeper problem: most advanced economies are not growing rapidly enough to reduce unemployment despite trillions of dollars in government stimulus spending and emergency loan guarantees.

U.S. Treasury Secretary Timothy Geithner may get an unpleasant reminder of that when U.S. monthly employment data is released on Friday -- right in the middle of the G20 breakfast.

Economists polled by Reuters think the report will show virtually no net growth in employment, with the jobless rate ticking up to 9.7 percent.

For Geithner and most of his European counterparts, options for providing more stimulus are limited because either politics, creditors or both prevent them from amassing significantly larger piles of government debt.
Until rich nations find their footing, emerging markets will be the strongest source of global growth. So far, they appear to be up to the task. The IMF expects emerging markets to grow at three times the pace of advanced economies.

Those countries are clamoring for greater decision-making power at the IMF, commensurate with their growing economic prowess. This has been another thorny issue for G7 and G20 leaders who have yet to agree on how exactly to divvy up power when no one wants to relinquish their own position.

The United States thinks Europe ought to give up some if its seats on the IMF executive board, while European countries have proposed a seat-sharing rotation.

IMF officials are scheduled to attend Friday's G20 breakfast, and are hopeful that some progress can be made toward resolving reform issues by a G20 leaders summit in Seoul next month.
(Editing by Leslie Adler)

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Related Video

China to further reform of yuan
exchange rate formation
mechanism:senior official

08:38, October 08, 2010    

China would continue to further the reform of the formation mechanism of its currency (RMB) yuan exchange rate, but a sharp rise in the value of the currency would damage the Chinese economy, a senior official of the People's Bank of China (PBOC), China's central bank, said here on Thursday.

"Chinese Premier Wen Jiabao said recently that a steep appreciation of yuan would cause social unrest and serious unemployment problem," Yi Gang, vice governor of the POBC, made the remarks at a Thursday seminar, one part of the International Monetary Fund and World Bank annual meetings program.

Yi contended that although some currencies had depreciated against the U.S. dollar during the financial crisis, China kept its currency basically stable, greatly contributing to the global economic recovery.

China announced in June this year that it would further the reform of the formation mechanism of the yuan exchange rate to improve its flexibility.

Yi noted that Chinese enterprises were still mostly at the lower ladder of the global industry chain. China has registered surplus in trade in goods, but deficits in services trade, and had surplus in processing trade with deficits in general trade.

China further deepened the reform of the yuan exchange rate mechanism in July 2005. The yuan has appreciated by 22 percent against the U.S. dollar since then. During this period of time, however, China's trade surplus against the United States has still increased by a large margin, Yi said, adding that yuan appreciation cannot help the United States to solve its trade surplus problem.

"We have had surplus in trade with the U.S. and the EU, but deficits in trade with South Korea, Japan and the Association of Southeast Asian Nations (ASEAN). Doesn't all this show that it is an issue of trade structure instead of a mere exchange rate?" Wen said earlier this week in Brussels.

China has made big efforts to invest in social safety network building, infrastructures, urbanization process, environmental protection in recent years, to stimulate domestic consumption, industrial restructuring and boost domestic demand, Yi added.

Source:Xinhua
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Wen's speech at the 6th China

-EU Business Summit

(Xinhua)
Updated: 2010-10-07 18:20
BRUSSELS - The following is the full text of Chinese Premier Wen Jiabao's keynote speech delivered at the 6th China-European Union Business Summit here on Wednesday:

Confidence was the keyword of my speech at the China-EU Business Summit two years ago when the financial crisis just broke out. Today, the keywords are calmness, wisdom and courage.

With so many Chinese and European business leaders sitting in front of me, I would like to focus on several issues the EU business community is concerned with and use this opportunity to make a few clarifications so as to eliminate misunderstandings and boost our cooperation.

It is a basic fact that the bilateral trade and investment between China and the EU have been growing rapidly. EU statistics show its overall exports declined in 2009 due to the impact of the financial crisis. However, its exports to China increased by 4 percent. In the first half of this year, EU exports to China surged by as much as 42 percent.

Last night, I paid a brief visit to Germany. I told Chancellor (Angela) Merkel that the monthly bilateral trade between China and Germany averaged about 10 billion US dollars, and that the 2010 total would probably surpass 120 billion dollars. The trade between China and the EU was worth some 400 billion dollars in 2009, and it would likely exceed 500 billion dollars this year. These are the basic status quo and facts.

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On the exchange rate of the Chinese yuan, I said yesterday when meeting with the Euro Group troika that European political and business leaders should not join the "chorus" to pressure China to appreciate the yuan. 
Again, let's take a look at some basic facts. The yuan has appreciated by an accumulated 55 percent in terms of the real effective exchange rate since China initiated the reform of the yuan exchange rate mechanism in 1994. Some major currencies have all depreciated during this period.

China further deepened the reform of the yuan exchange rate mechanism in July 2005. The yuan has appreciated by 22 percent against the US dollar since then. During this period of time, however, China's trade surplus against the United States has still increased by a large margin.

We have registered surplus in trade in goods, but deficits in services trade. We have had surplus in processing trade, but deficits in general trade. We have had surplus in trade with the US and the EU, but deficits in trade with South Korea, Japan and the Association of Southeast Asian Nations (ASEAN). Doesn't all this show that it is an issue of trade structure instead of a mere exchange rate?

The euro exchange rate experienced large fluctuations recently, but it was caused by the US dollar, instead of the yuan. How can you place the blame on China? The imbalance of trade is caused by structural problems against the backdrop of globalization. It should not be politicized. We pursue balanced and sustainable trade, and in no way seek surplus.

In the cold winter in January 2009, I visited Europe and brought with me not only the confidence needed to overcome the financial crisis, but also a procurement delegation to place orders to the European countries.

The EU is a strategic partner to China, and China did not look on unconcerned when some eurozone countries were in trouble. We continued to hold and buy euro-denominated bonds and helped Iceland, Greece, Spain, Portugal and Italy in their most difficult time.

We will continue to render assistance and tide some countries over their difficulties. China is a friend indeed and I believe the entrepreneurs here all know it.

You should not pressure China on the yuan's appreciation if you consider the issue from another perspective. Many Chinese export enterprises have profit margins of only 2 to 3 percent, 5 percent at most.

Should the yuan appreciate by 20 to 40 percent, as demanded by some people, a large number of Chinese export enterprises will go bankrupt, the workers will lose their jobs and the migrant workers will have to go back to the rural land, making it hard for society to remain stable. The world will by no means benefit from a crisis in the Chinese economy.

China contributed about 50 percent of the global economic growth in 2009. It is a huge market with great potentials for many enterprises. Once again, I would like to tell our friends in the industrial and business community candidly: Don't pressure China on appreciation of the Chinese yuan.

We will stick fast to the reform of the yuan exchange rate mechanism. The reform involves developing a managed floating exchange rate system based on the market supply and demand and adjusted to a basket of foreign currencies, to gradually allow more flexibility in the yuan exchange rate while maintaining its basic stability on a reasonable and balanced level.

If the yuan exchange rate is unstable, enterprises will also be unstable. So will be employment, and society in general. Should China have problems in economy and society, it will be disastrous for the world.

The second question is whether the investment environment in China is good or not. I would like to tell you that China will steadfastly push forward its reform and opening-up process and will in no way deviate from the path. Only through reform and opening to the outside world will China develop further. The basic policies that have been established in the reform and opening-up drive will not be changed. The only changes that have taken place are that foreign investment is now under better and more orderly regulation.

Entrepreneurs' concern for the investment environment does not go beyond three aspects -- intellectual property, innovation and government procurement. I can tell you in a responsible manner that all foreign businesses that are legally registered in China are entitled to enjoy national treatment, and that all products made by foreign-invested enterprises in China are made-in-China products. We will protect not only your intellectual property, but also all your legitimate rights and interests.

The third question regards the export of raw materials, specifically the export of rare earth. As a long-time researcher on rare earth metals, I have a say on the issue. There are two kinds of rare earth metals, the heavy rare earth elements and the light rare earth elements. China has rare earth deposits in different regions, with the heavy ones located mainly in the south, such as Jiangxi Province. The light ones are mainly in the north, such as Baotou City in Inner Mongolia. In the 1980s and 1990s, there was a lack of well-regulated management over rare earth metals in China, and also a lack of extraction technologies in the country. Some countries bought a large amount of rare earth metals from China at low prices in a period of time when management over rare earth in China was the most chaotic, and even now they still have a considerable stockpile, which they know very well. China contributes a large proportion of the global rare earth output, which far outdoes its share of the world's total rare earth deposits. 

We haven't imposed, and will not, impose an embargo on the industry. We are pursuing a sustainable development of the rare earth industry, not only to meet the demand of our own country, but also to cater to the needs of the whole world. We not only need to accommodate the current demand, but also, more significantly, need to take a long-term perspective. It is necessary to exercise management and control over the rare earth industry, but there won't be any embargo. China is not using rare earth as a bargaining chip. We aim for the world's sustainable development.

China wishes to forge more extensive, deeper and closer economic and trade ties with EU countries. The EU is now China's largest partner in terms of trade and investment,ahead of the United States and Japan. To be frank, the EU has done a better job in relaxing restrictions on high-tech exports to China. For instance, there is cooperation on the Galileo satellite project, with Airbus and there is nuclear power cooperation, to name a few. This morning, the Belgian King also mentioned to me about cooperation on the fourth generation micro-nuclear technology.

It is in the fundamental interests of both China and the EU to develop bilateral trade and economic relations. Standing here today, I am feeling under a heavy responsibility. I will try my best to promote China-EU trade and economic cooperation and overcome the temporary difficulties and problems that have emerged in the process of cooperation.

So, let's join hands to promote the development of China-EU trade and economic relations and jointly usher in broad prospects for future development of the China-EU comprehensive strategic partnership.

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Thursday 7 October 2010

China's Competitive Edge In The Outsourcing Space

Egidio Zarrella, 10.07.10, 06:25 AM EDT

China's calculated move from being the world's factory to becoming the world's back office is increasingly becoming a reality, as our recent outsourcing survey finds.


image

Egidio Zarrella

China’s size, infrastructure and talent pool all indicate a promising future for outsourcing over the coming decade. The numbers speak for themselves: in 2009, industry revenues totalled $13 billion and they are projected to grow to $44 billion by 2014, according to IDC KPMG analyses and Datamonitor.

As China comes to the fore in this space, India remains ahead of the game, which is not surprising given it has a 20-year lead in this space. To put it in context, the vendor industry in India is worth around $60 billion, whereas in China it is a fledgling industry, worth around $25 billion. However, the key point is that it is no longer an India play, as multinationals are increasingly opting to have a balanced portfolio, with outsourcing centers located in a number of countries and regions. This is in order to mitigate potential social, economic and political risks, and to avail of favourable government incentives, which tend to vary from country to country.

China’s outsourcing industry has also been shaped by different factors to those of India. Its growth has been founded on the domestic market as well as nearby overseas markets such as Japan and Korea. It continues to branch out into new markets, taking advantage of its strong infrastructure and talent pool, as well as diverse language skills. Our latest survey (KPMG Pulse Survey: Shared Services and Outsourcing in China) confirms the extent to which outsourcing has become prevalent amongst organizations across Asia. These activities are no longer the preserve of US and European companies looking to offshore their back office functions.

Eighty-one percent of the 280 Asia-based respondents said they had a strategy that involved outsourcing. China was their number-one choice of location, ahead of India and Singapore. Most respondents said they had outsourced to more than one other country, with many still choosing more developed hubs like Singapore and Hong Kong as well.

It is important to note that Asian companies outsource just as much as their Western counterparts, as they all look for efficiencies in their supply chains. To illustrate this point, the survey indicates that almost 80% of respondents either have shared services in one location or two, as well as outsourcing various functions.

One of the key drivers to outsource is that of demographics. Australia, Korea and Japan are aging populations, and as a result they are increasingly tapping into the workforce of countries like China, India, the Philippines and Malaysia. In contrast to India, where the industry moved up the value curve sequentially, it appears that IT Outsourcing (ITO), Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) functions are all emerging simultaneously in China. This is a seismic shift as China increasingly becomes home to more of the world’s intellectual firepower.

China’s scale--and the number of potential outsourcing cities and service providers to choose from--offers huge opportunity for the market ahead of its competitor nations. Organizations are able to source multiple suppliers within one country, which reduces their dependence on a single location or supplier. It has a large domestic market, a government that invests heavily in infrastructure and a large pool of graduates that form the workforce. It offers good logistics operations, in addition to competitive wages. It does now need to shift from manufacturing into services, in order to maintain its competitive edge. Its main consumers in Europe and the US are purchasing less and this means their importance to China will lessen as its economy continues to expand. There will be less opportunity to sell its goods to overseas markets. This will equate to steady volume growth, while margins continue to fall and investment in factories and equipment will decline. Hence the need to shift its focus to services.

Current developments are encouraging, as we continue to see China’s political leadership support the growth of the outsourcing sector. This is evidenced by the series of Five Year Plans, where the foundations were laid for the development of the service outsourcing industry. There are now twenty-four designated outsourcing cities and over 9,000 service providers in China.

While India has tended to provide outsourcing for US and European organisations, China has mainly serviced the Korean and Japanese markets, partly due to geographical proximity and similar time zones. Our survey found that outsourcing strategies are no longer just about cost arbitrage. Equally or even more important is the need to ensure access to a reliable supply of abundant and skilled talent. China’s workforce boasts an impressive array of language skills, both Asian and European.

The government has made English a priority in schools and universities, boosting the country’s ability to win business from western markets. Another source of high quality skills is the large number of Chinese returnees who have the much needed project management experience. While China has a massive pool of outsourcing professionals, special domain expertise is crucial in order to maintain a competitive edge.

Government support continues to play an important role, with more encouragement being given now to domestic companies to outsource as well. China plans to train 1.2 million service outsourcing professionals by 2013, while 1 million college graduates are expected to find jobs in this sector within the same time frame. Financial subsidies for training and tax incentives also help to drive more interest in this sector.

Infrastructure is crucial, as without adequate telecommunications and transportation networks, it is difficult to attract investors and multinationals. China has invested heavily in a modernized telecommunications network with high-speed broadband connections in the major cities. It has also developed technology parks to further attract multinationals to locate here.

China has also made rapid progress in the development of shared services facilities. Accounting and finance already surpass IT as the most common functions being conducted by shared services centres in China, while HR functions are increasingly being outsourced or offshored. In terms of moving up the value chain, as service providers expand and the industry continues to mature, many are providing higher-value services. The government has also initiated a drive to encourage multinational corporations to set up research and development (R&D) centers in China. There are now over 1,200 R&D centers established by multinationals across China, benefiting from the vast R&D talent pool, according to numbers provided by the Ministry of Commerce.

It is also increasingly looking at the potential of its domestic market, particularly for automotive, telecommunications and financial services. Historically, the domestic service providers have primarily served the local government and state-owned enterprises (SOEs). While they may have an edge over the international players in the local market, they are limited by their size and experience of managing large scale and complex projects. The anticipated domestic demand on outsourcing services is a major differentiator compared to India, where the outsourcing industry is more offshore demand-driven.

No one destination will offer everything on the checklist and a new paradigm is emerging in which multinational companies assess several attractive markets, scoring them on their existing strengths. Companies increasing want global sourcing, not simply from India or China, but from both. As Chinese companies grow in size and complexity, the business case for setting up outsourcing arrangements becomes stronger. India remains a juggernaut in this space however the key differentiator for China is the rising potential of its domestic outsourcing industry.

Egidio Zarrella is a Partner in the Advisory practice at KPMG China.

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