Financial Times: Record flows to developing world boost global FDI

Record flows to developing world boost global FDI
By Vanessa Houlder
Published: January 12 2005 02:00 | Last updated: January 12 2005 02:00
Financial Times

Record investment flows to developing countries have sparked a recovery in global foreign direct investment, the United Nations said yesterday.

After three years of decline, world foreign direct investment (FDI) rose 6 per cent to $612bn (€466m, £326m) in 2004 as increased flows to developing countries and central and eastern Europe offset a slump in developed countries.

The UN Conference on Trade and Development (UNCTAD) predicted that a continuing improvement in economic activity, equity market valuations and mergers and acquisitions would fuel expansion of FDI over the medium term.

The positive outlook was underlined yesterday by A.T. Kearney, the consultancy, which declared that "a fundamental shift in investor outlook and risk perception is under way" as corporate investors perceive increased profit opportunities and reduced risk in leading emerging markets.

FDI in developing countries rose 48 per cent to $255bn from 2003. Karl Sauvant, director of UNCTAD's investment division, said the data was "good news" for developing countries, which now accounted for an estimated 42 per cent of global FDI inflows. This compared with 27 per cent in 2001-2003.

The US was the world's largest recipient of FDI with inflows of $121bn, pushing China into second place with half as much. The UK also rose to the top of the European league table with FDI more than doubling to $55bn from $21bn thanks to a revival of corporate profitability and mergers.

But overall, developed countries experienced a 16 per cent fall in FDI to $321bn, largely due to the repayment of intra-company loans in some countries, particularly Belgium, Germany and the Netherlands. These repayments do not appear in the FDI inflow statistics of the country where the parent company is based.

FDI flows to Asia and the Pacific reached $166bn, a 55 per cent increase over 2003. Improved economic performance, a more favourable policy environment, higher corporate profitability and a rise in mergers and acquisitions fuelled the growth.

A strong rebound in commodity prices helped FDI inflows to Africa increase for the second consecutive year to $20bn. UNCTAD predicted a further increase if high commodity prices prompted multinational companies to undertake new exploration projects in Africa, which accounts for just 3 per cent of global FDI flows. FDI flows to Latin America and the Caribbean rose for the first time in five years, up 37 per cent to $69bn. Following a dip, central and eastern Europe attracted a record £36bn worth of FDI inflows.

Resource Investor.com: China Looks to Record Deal to Secure Energy Reserves

China Looks to Record Deal to Secure Energy Reserves
By Xu Zhiqiang
10 Jan 2005 at 03:55 PM EST

SHENZHEN (ResourceInvestor.com) -- China National Offshore Oil Corporation [CNOOC] is said to be considering a $13 billion bid for U.S.-based oil group Unocal. The putative purchase of one of America’s most recognized energy brands underscores China’s growing M&A clout as the country seeks to secure reliable supplies of key resources.

China has displaced Japan as the world’s second largest oil consumer [BRNT] [GSOIL]and has been a net importer for a little over a decade due to strong economic growth. CNOOC is China’s third largest energy parastatal.

According to the Financial Times, CNOOC wants the Asian assets of Unocal and would sell off the US assets. Industry analysts have warned that it is not going to be a simple transaction, not least because of potential liabilities arising from environmental claims.

Unocal has an $11 billion market value and $2.68 billion net debt at 2004 year-end. CNOOC’s market value is about $21.5 billion and had $1.6 billion cash at the end of 2003. Through the $1 billion convertible bond issue last month, CNOOC has $3 billion at hand. As Goldman Sachs points out, that leaves it dependent on an equity issue to pay for the rump of the supposed purchase.

Were the deal concluded, it would be China’s most significant foreign deal to date, easily eclipsing last month’s $1.75 billion purchase of IBM’s computer business.

Unocal has a significant presence in Asia. Of its year-end 2003 total oil and gas reserves of 1.76 billion barrels (38% in oil and 62% in gas), about 50% is in Asia, mainly in Thailand and Indonesia.

Little wonder then that CNOOC is interested since Unocal’s would potentially boost the Chinese company’s reserves by 83% (oil up 47%, gas up 157%) and production volume by 126% (oil up 53% and gas up 591%). Unocal boasts the ninth-largest reserve base among American producers.

Goldman Sachs says it would make more sense for CNOOC to acquire the Asian assets specifically rather than making a potentially hostile bid to acquire the whole company.

Cao Yunshi, vice-president of CNOOC, said in Hong Kong that negotiations with Unocal have not begun yet, and that it would be risky to do a deal in haste since oil and gas prices remain historically high.

Meanwhile, CNOOC has been quite active abroad with a $348 million natural gas deal in Australia and ongoing negotiations for Canadian oil-sands assets.
****
Prudent Investor says: If the deal to buy UNOCAL pushes through this in effect will represent China’s backdoor entry to acquire energy assets in Asia and in the Philippines.

In the Philippines, the local flagship of Unocal, Unocal Philippines formerly Philippine Geothermal Inc. (PGI) has geothermal projects in Tiwi, Albay and Makiling Banahaw (Mak-Ban) covering the areas of Laguna and Batangas.

Aside, in 2004, the American company under the Unocal Sulu Limited invested $41 million (Manila Bulletin, June 14, 2004) in oil exploration at the Sandakan Sulu Sea under Service Contract 41 covering the Zebra 1 and Rhino 1 wells with a consortium of several other foreign and local groups. As I said previously, “Watch it, here they come!!!”

New York Times' Matt Richtel: Momentum Is Gaining for Cellphones as Credit Cards

Prudent Investor says: One promising technology application which may favor the wireless industry....

Momentum Is Gaining for Cellphones as Credit Cards
By MATT RICHTEL
New York Times

People already use their cellphones to read e-mail messages, take pictures and play video games. Before long, they may use them in place of their wallets.

By embedding in the cellphone a computer chip or other type of memory device, a phone can double as a credit card. The chip performs the same function as the magnetic strip on the back of a credit card, storing account information and other data necessary to make a purchase.

In Asia, phone makers are already selling phones that users can swipe against credit or debit card readers, in much the same way they would swipe plastic MasterCard or Visa cards. Trials are now under way to bring the technology to America, industry executives said.

Ron Brown, executive director of the Infrared Data Association, a trade group representing companies pushing the technology for cellphone credit cards, said that the new handsets could become "a major form of payment, because cellphones are the most ubiquitous device in the world." He added, though, that "cash will never go away."

Advocates say that consumers will readily embrace the technology as a way to pay for even small purchases, because it is less bother than taking a credit card out of a purse or parting with cash.

The impending changes to the cellphone happen to coincide with major shifts taking place in the banking industry. Since credit cards are still considered somewhat inconvenient, particularly for quick, small purchases, major credit card companies have developed "contactless payment" technologies for checkout counters that allow customers to wave their cards near an electronic reader without having to swipe the card or sign their name.

MasterCard, for example, has introduced a system called PayPass that lets cardholders wave a card in front of a reader to initiate a payment, much as motorists use E-ZPass and similar systems to pay tolls and ExxonMobil customers use SpeedPass to buy gas. Several major credit card companies issue PayPass cards; McDonald's has agreed to accept them at some restaurants.

And American Express announced late last year that it would have its system, ExpressPay, in more than 5,000 CVS drugstores by the middle of this year. Judy Tenzer, a spokeswoman for American Express, said the technology made it more likely that customers would use credit cards to pay for small items.

Cellphone makers are hoping these new payment systems will also make it easier to market handsets with credit card functions, although they could just as easily represent competition for the practice of paying by cellphone.

The marriage of cellphone and charge card poses some significant challenges, including security problems. To reduce fraud from stolen phones, consumers may be required to punch an authorization code into their phone each time a charge is made.

For more than a year, phone makers, software companies and computer chip manufacturers have been working to develop secure and reliable payment technology for cellphones. After the phone's chip is recognized by the electronic reader, the credit card account number will be verified, as it is now, and the price of the purchase will be added to the consumer's credit card bill.

The new phones may also be capable of being programmed for a prepaid sum from which payments could be deducted.

But there have been some glitches in the product trials, according to Jorge Fernandes, chief executive of Vivotech, a cellphone software company based in Santa Clara, Calif.

In two trials, one at a corporation in the Midwest and the other at Santa Clara University, Vivotech used infrared technology for communications between the phone and the card reader. Participants had to aim the cellphone at the reader in a certain way for the infrared beam to be picked up.

"People got very upset," Mr. Fernandes said. "Pointing your cellphone at a target is very difficult."

Mr. Fernandes said the company believed it might have solved that problem by switching to a technology that uses low-level radio signals. Last month, Vivotech began testing the technology, which allows users to wave the phone within a couple of inches of a reader, at a sports arena in the Atlanta area.

Cellphones are becoming mainstream payment devices in Korea and Japan. In Japan, NTT DoCoMo, the mobile phone operator, said that it had already sold more than a million phones equipped with chips that include the payment function.

More than 13,000 Japanese shops have electronic readers capable of communicating with the phones. For now, the phones are used mostly to debit a prepaid amount, which is deposited by plugging the phone into a machine similar to an A.T.M. that takes cash and credits the handset.

In South Korea, people are already using cellphones as credit cards, said Sue Gordon-Lathrop, vice president for the consumer products platform for Visa International. She said American consumers would eventually embrace these new functions, but acceptance could be slower than in Japan and Korea, where people are more comfortable with using phones for many purposes.

Also, she said, there are more cellphone operators in America, making it harder to set standard technology and business practices. "The phones are exciting, but it's going to be a long time" before a widespread base of merchants and consumers in America are equipped to use them, she said.

For now, some of the major American cellphone companies are monitoring the technology without committing to it. Jim Ryan, senior vice president of product development for Cingular Wireless, the country's largest cellphone provider, said the company was "closely watching" the progress in this field.

Philippine Daily Inquirer: OFW remittances seen boosting property sector

Prudent Investor says: I have said in numerous occassions in my outlook that foreigners have viewed that a domestic spending boom is likely to occur in the Philippines most especially in the environment where Asian economies would allow their currencies to rise against the US dollar. For now it is the Overseas remittances that has prompted for growth in the real estate estate sector. Most importantly I would like to emphasize that these positive prospects are today slowly being covered by mainstream media and would eventually filter into the mindsets of the investing public. So what are you waiting for?

OFW remittances seen boosting property sector
Posted: 8:23 PM | Jan. 09, 2005
Doris C. Dumlao
Inquirer News Service

INVESTMENT Bank Credit Suisse First Boston is bullish on investment spending in the Philippines this year as inflows from overseas Filipino workers start to perk up the property sector.

In its December country report, CSFB projected that the growth of investment spending would remain robust at 8-10 percent, fueled by a rebound in the construction sector.

The report, titled "Philippines: Fiscal Dynamics Unlike Other Emerging Market Debt Defaults, While Economy Likely To Be Robust In 2005," noted that unlike the earlier business cycles when OFW remittances were used for consumption spending, the funds were now fueling investments.

It noted that domestic investment spending expanded by 13-15 percent last year.

"We believe that part of the strong surge in overseas foreign worker remittances is being invested in housing," CSFB said.

"We expect these dynamics to continue in 2005, further fueling the pickup in low- to middle-end residential property where supply constraints are now emerging and pushing aggregate prices up," it said.

In 2004, it said about 20-25 percent of residential sales in Metro Manila had been from overseas buyers, a majority of whom are Filipino professionals working abroad.

"Around 30 percent of overseas workers hold professional jobs who are now contemplating on setting up businesses in their home towns, have a vacation home, or simply coming home to retire after many years of working abroad. This has led to a pickup in the construction sector," CSFB said.

The bank's favorable outlook on the property sector was anchored on a benign interest rate environment as it projected that the benchmark 91-day treasury bill rate would rise by only 40 basis points this year.

"We believe interest rates have to rise by more than 150 basis points in 2005 in order to dampen the demand for residential property," CSFB said.

Outside of the property sector, CSFB has not seen a significant pickup in investment in plant and equipment or machinery.

"However, anecdotally we do see signs of capacity expansion by existing IT hardware firms, some influx of Japanese foreign direct investment in the auto parts and components and pickup in medical transcription activities," it said.

copyright ©2005 INQ7money.net all rights reserved

Two Very Interesting Articles on Biotechnology by the Financial Times and Philippine Inquirer

Prudent Investor says: these are two interesting articles on biotechnology, one from a macro point of view and the other from the grassroots level. I have long shared the belief that biotechnology is one sector that the Philippines should benefit from considering the wealth of resources 'flora and fauna' and the educated stock of our labor sector. Imagine the latest Philippine ingenuity an invention which allows LIVE fishes to be transported waterless...through hibernation (???!!!) Wow!!! How radical!!

Financial Times: Failure to use science 'letting down world's poor', says UN
By David Firn and Fiona Harvey in London
Published: January 7 2005 02:00 | Last updated: January 7 2005 02:00

Governments and development organisations are failing to exploit science and technology to alleviate poverty, United Nations experts cautioned yesterday.

Development experts told a conference in London that the failure to disseminate and benefit from scientific information threatened to derail the UN's millennium development goals.

However, some developing countries are fostering homegrown biotechnology industries in response to the lack of new drugs marketed for them by western pharmaceutical companies, according to a recent study.

Calestous Juma, professor of international development at Harvard University and author of a UN report on science, said: "We have seen with the challenges which Southeast Asia has faced ... that scientific and technical capabilities determine the ability to provide clean water, good health care, adequate infrastructure and safe food.

"The terrible devastation caused by the tsunamis last week raises the question of whether enough was invested in adopting existing technologies which could have reduced the scale of the disaster."

Developing countries are stepping into the breach opened by the dominant North American and European pharmaceutical industry and are becoming adept at importing technology to tackle their healthcare needs, said a three-year study by the University of Toronto Joint Centre for Bioethics. Some of them have developed thriving export businesses in the sector.

Only 16 of the 1,393 new drugs marketed between 1975 and 1999 by western companies were for tropical and developing country diseases. The west accounts for 97 per cent of the biotechnology sector's $47bn (€36bn, £25bn) of annual revenues.

Developing countries such as Cuba, South Africa, Brazil, South Korea and China have now established thriving biotechnology industries making essential medicines.

Cuba's biotech sector is among the world's most successful, despite the country's poverty. Cuba produced the world's first synthetic vaccine against Haemophilus influenzae, the bacteria that causes meningitis-B. It exports biotechnology products to more than 50 countries, mainly in Latin America, Eastern Europe and Asia.

Abdallah Daar, who co-wrote the Toronto study, says developing countries need: a government with the political will and long-term vision to create a biotechnology industry; a niche untouched by established western industry; inspired individuals who can bring scientists, financiers, companies and politicians together; and a strong private sector.

"Unless you have a strong private sector that is interested in biotechnology, you can do a lot of research and it will go nowhere," he says.

Dr Daar says Cuba's biotechnology industry might not have succeeded if it had not been backed by Fidel Castro, who allowed vaccine development to be sheltered from the harsher anti-entrepreneurial aspects of the communist regime.

Halla Thorsteinsdóttir, who co-ordinated the study, says local health needs are the main source of creative thinking for the developing world's biotechnology sector.

Cuba's vaccine industry was prompted by efforts to stem an outbreak of meningitis in the mid-1980s. The collapse of the Soviet Union and the US trade embargo forced it to develop a homegrown solution that has since been licensed to US companies. South Korea and India also make and export biotech vaccines. Egypt manufactures recombinant insulin, and South Africa is developing an Aids vaccine.

"For these kinds of countries it is easy to import technology initially and then to become innovators," says Dr Daar. Biotechnology can thrive in countries with per capita income of $4,000 and good basic education infrastructure, the report says.

Sub-Saharan Africa risks falling ever further behind other developing countries, as they reach the required per capita income.

Dr Thorsteinsdóttir says that apart from South Africa, the region has failed to exploit biotechnology. But "south-south collaboration" can help it, she says.

*******************************************************

Philippine Daily Inquirer: Opportunities abound in RP biotechnology

Posted: 8:34 PM | Jan. 09, 2005
Dennis M. Arroyo
Inquirer News Service

SURPRISE. The Philippines is "one of the world's biologically richest countries," according to the Washington-based Conservation International.

In corals alone, the archipelago displays "the richest diversity of corals on the planet."

Charles Darwin saw the great diversity of life in the Galapagos islands, inspiring his work on evolution. But that doesn't compare with the Philippines.

Ecologist Dr. Lawrence R. Heaney, who did research at the Smithsonian Institution said, "it is reasonable to think of the Philippines as the Galapagos multiplied tenfold."

The nation is drawing scientists and pharmaceutical firms, for more than 70 percent of promising anti-cancer drugs come from rainforests like ours.

However, most Filipinos have yet to tap the wealth offered by such rich flora and fauna. They are ignoring the next big wave, biotechnology, a $250-billion industry fighting 200 diseases.

Pinoy snail bags $80M

Take for example the Philippine sea snail (Conus magus)--it has unleashed a bonanza for pharmaceutical giants. With the help of scientists from the University of the Philippines, Neurex, an American biotech firm, has isolated from the snail's venom a toxin called SNX-111.

This toxin paralyzes fish in seconds. It also interrupts pain signals that travel from the spinal cord to the brain. In fact scientists report that the toxin is 100 to 1,000 times more potent than morphine.

So Neurex turned SNX-111 into a painkiller, Ziconitide. Doctors administered it directly to the spinal cord via a small tube. In the first year that the product was marketed, it earned for Neurex $80 million.

It also saved the French pharmaceutical giant Elan from bankruptcy, as revealed in the article "Elan's $8 B turnaround" (Biocentury: the Bernstein Report on Biobusiness. Jan. 3, 2005).

Bonanza from 'ampalaya'

Another case, though less exotic, concerns the vegetables we call ampalaya and talong, or bitter gourd and eggplant.

According to diabetics experts Dr. Julie Cabato and Dr. Marcelino Salango, as cited in the Earth Times news service, both lower glucose levels in the blood.

The bitter truth is that the US National Institute of Health has acquired a US patent on ampalaya. In turn, the pharmaceutical company Cromak Research in New Jersey has produced an anti-diabetic diet supplement from the two veggies.

Cromak got the patent for the supplement, under US patent number 5900240. The company now caters to a market of 22 million American diabetics.

Seminar on bio opportunities

What other opportunities can Filipino business extract from biotech? They will be discussed in the first Philippine Biotechnology Venture Summit.

The conference at Makati will be held from Jan. 26 to 29, 2005. It is sponsored by the Philippine Society of Biochemistry and Molecular Biology and the Mapua Institute of Technology, Makati.

The overview of biotech business opportunities covers fields like medicine, food, cosmetics, aquaculture, agriculture and industry. The talks will explain how to assess biotechnology business plans. Investors will learn about "judging the science without a PhD."

One of the speakers is coming in from the United Kingdom, an American expert, Prof. Amber Batata of Cambridge University. She got her PhD in health policy from Harvard. The summit will discuss the legal framework as well: biotech regulation in the local and international scene, intellectual property, and how biotech start-ups use regulations to their advantage. The conference features five PhD speakers.

Transporting live fish

Filipino biotech entrepreneurs will speak on their current work.

For example, live fish is very much in demand in restaurants around Asia. The problem though with exporting live fish is that the weight of the tank and the water adds greatly to transport costs. Bonifacio Comandante, who is pursuing his doctorate degree in marine biology, has invented a remedy.

His special solution puts the fish into hibernation.

"It was really a fish. And there was no water. And it was breathing!" the Inquirer (June 19, 2004) quoted Veneeth Iyengar, a US Peace Corps volunteer, who saw a demonstration of the technology.

The engineer likewise amazed Hong Kong businessmen with his trial shipments of the sleeping fish. The fish regain consciousness after nine hours.

"Let it be known in the fishing world that the Philippines has now developed a technology for waterless transport of live fish, a method that will revolutionize the way we normally handle fish after harvest," said then Agriculture Secretary Luis Lorenzo.

Comandante is waiting for the Philippine patent. Then he will go global with the franchise of his award-winning technology.

It's time that Filipinos profit from their own spectacular biological wealth.

Philippine Daily Inquirer: Drilling of 51 oil, gas wells expected in next 10 years

Drilling of 51 oil, gas wells expected in next 10 years
Posted: 1:47 AM | Jan. 08, 2005
Abigail L. Ho
Inquirer News Service

WITH investor interest in exploration and development of petroleum resources expected to increase, the government expects 51 new oil and gas wells to be drilled in the next 10 years.

According to the Department of Energy's updated Philippine Energy Plan for 2005 to 2014, these drilling projects will need P27.3 billion in investment: P24.9 billion for offshore drillings and P2.4 billion for onshore drillings.

A further P6.9 billion will be needed for gathering of two- and three-dimensional seismic data on identified sites, the plan says.

A recent Supreme Court decision affirming the constitutionality of foreign ownership of mining projects resulted in renewed interest in oil and gas exploration.

The Department of Energy recently awarded exploration contracts that had been in limbo since early 2004, when the Supreme Court -- before its recent reversal of decision -- declared that purely foreign entities could not go into mining in the Philippines.

These contracts were awarded to Japan Petroleum Exploration Co. Ltd. for oil and gas exploration activities in the Tanon Strait in Negros Occidental province and to Hong Kong-listed South Sea Petroleum Holdings Ltd. in the Agusan-Davao Basin in Davao province.

The government expects to award around six more contracts in the coming months.

Energy Secretary Vincent Perez earlier said that Malacañang was likely to approve soon an exploration contract that the energy department was currently negotiating with a consortium led by Australian natural gas firm BHP Billiton Petroleum.

BHP Billiton and consortium members Unocal Corp., Amerada Hess, and Sandakan Oil have applied for contracts to explore two blocks spanning 8,000 kilometers in the deepwater part of the southern Sulu Sea. Negotiations were prolonged because of the Supreme Court decision in early 2004.

Under its proposed work program, BHP Billiton will initially invest $1.65 million in geophysical studies on the two blocks and $32 million for drilling four wells.

The government will be holding a second round of petroleum contracting in August, following the success of the first auction in 2003.

Apart from the new drillings, the oil and gas sector will need P453.1 billion in new investments over the next 10 years, according to the Philippine Energy Plan.

This amount will cover development work and production of oil, gas, and condensate.

The oil and gas sector, including the new drillings and other development activities, will require a total of P487.2 billion from 2005 to 2014, the energy plan says.

With INQ7.net

*****

Prudent Investor Says: Given the government's thrust to develop the oil and energy sector, aside from the mining industry, you may expect market activities to focus on issues related to these. The underlying macro fundamentals merits for the development of the said sectors. The mining and oil industry, in my opinion, will be the market leaders for 2005.

Financial Times : Fed insists that the only way for rates is up

Fed insists that the only way for rates is up
By Philip Coggan
Financial Times

Investors should not be in any doubt. US interest rates are heading steadily upwards this year. The minutes of the latest US Federal Reserve meeting, released this week, made that perfectly clear.

At the start of 2004, some economists still believed the US could get through the year without a tightening in monetary policy. In the event, the Fed started raising rates in June and pushed through five quarter point increases over the course of the year. If the Fed were to tighten by a quarter at every meeting in 2005, short rates would be more than 4 per cent by the end of the year.

This steady pace reflects the unusual levels to which rates fell after the bursting of the dotcom bubble, the terrorist attacks of September 11 2001 and the corporate scandals of 2002. The Fed appeared to face a deflationary threat and thus cut rates to crisis levels of 1 per cent. It was slow to move them back up because of its fear of repeating the mistakes made by the Bank of Japan in the 1990s. Once deflation sets in, it can be very hard to reverse, not least because nominal interest rates cannot be cut below zero.

By the middle of last year, it seemed as if the US economy was strong enough to take the strain. Consensus forecasts suggest that US gross domestic product will have grown by 4.4 per cent in 2004. US monetary policy was starting to look far too loose.

The problem for the markets is that rates started from such a low point. There is thus a long way to go before the normal or "neutral" level is reached. And the Fed is unwilling to risk shocking the markets with a couple of big moves of, say, a percentage point. Investors are thus forced to suffer the Chinese water torture of regular small increases.

At what level will rates stop rising? One rough guess is that nominal rates should be around the same level as the trend growth rate of nominal GDP. For the US, that would be around 3.5 per cent.

Another approach is to say that rates should be modestly positive, after inflation. Here, however, the problem is that there are so many different inflation measures. The official US consumer price index was 3.5 per cent higher in November than a year previously. That leaves real rates looking sharply negative. But core inflation, excluding fuel and food, is only 2 per cent. If the latter measure is acceptable, then rates should be at around a neutral level in the range of 3 per cent to 4 per cent.

In the light of history, rates of 3 per cent to 4 per cent would hardly be alarming. After all, short rates were 6.5 per cent as recently as December 2000.

Nevertheless, the adjustment period could be painful. When the cost of financing is low, the temptation to speculate is high. This has been exacerbated by the decline in the dollar. When rates were 1 per cent, investors borrowing in dollars and investing in assets denominated in another currency found that their cost of financing was zero or even negative. The Fed minutes noted that low rates were encouraging "potentially excessive risk-taking in financial markets".

Such risk-taking may be showing up in the low levels of corporate and emerging market bond spreads, or in the speculative surges seen in some commodity prices last year. It may also have encouraged banks to devote more of their capital on trading, an often lucrative but unreliable source of profits.

So far, the adverse effects of higher interest rates have not shown up in the US economy. The housing market was very strong in 2004. Most US homebuyers have fixed mortgage rates and those are set with reference to Treasury bond yields, which, at the longer end, are around the same levels as a year ago.

The bond market was "the dog that didn't bark" in 2004. Traditionally, when short rates rise substantially, long rates move higher as well. Perhaps investors are still relaxed about inflation and relieved that the Fed is taking action. Or perhaps Treasury bond yields are being kept artificially low by buying from Asian central banks.

Either way, one has to wonder whether the dog can stay silent this year if the Fed keeps raising rates. A rate rise every meeting would leave the Fed funds rate equal to the current 10-year Treasury bond yield by the end of the year.

It is not out of the question for short rates to be equal to, or higher than, long rates. But such inverted yield curves tend to occur after inflationary busts, when central banks have been forced to push short rates temporarily high to squeeze the economy.

No such conditions are being forecast for 2005. The consensus prediction for US GDP growth this year is 3.5 per cent, around the trend rate, and consumer prices are expected to rise by only 2.3 per cent.

Something must surely give. Either the economy will have to slow sharply, justifying current long bond yields, or those bond yields will have to rise. The danger is that they might have to rise quite sharply. Another rule of thumb is that the long-term bond yield should be equal to the trend rate of nominal GDP. If one assumes an inflation rate of 2 per cent, that means 10 year bond yields could rise to 5.5 per cent from the current 4.3 per cent.

US equities, which still look overvalued, may struggle either way. A weaker economy would hit earnings while higher bond yields might prompt switching into fixed income.

Then there is the impact on the dollar. In the past few days, it looks as if the dollar's decline against the euro may have come to at least a temporary halt. The last Fed funds increase took US short rates above those in the eurozone. It seems highly unlikely that the European Central Bank will raise rates soon. So the yield attractions of the dollar should grow over the coming year.

For the time being, it also looks as if investors have switched their attention from the US trade deficit to the superior growth rate of the US economy relative to the eurozone. That may allow the dollar to rally in the short term, although the long-term prospects for the US currency do not look bright.

philip.coggan@ft.com

ABS-CBN News: Fitch on RP banks: Very risky

Fitch on RP banks: Very risky
By DAXIM LUCAS
TODAY Senior Reporter

The local banking industry continues to face significant risks owing to stagnant credit demand and a high level of nonperforming assets, according to the latest assessment of international debt watcher Fitch Ratings.

As a result, Fitch has downgraded the ratings of three local banks including that of the country’s largest lender, Metropolitan Bank and Trust Co.

In a statement, Fitch announced that it cut Metrobank’s long-term foreign currency rating to “BB minus” with a “negative” outlook from its previous rating of “BB” with a “stable” outlook.

Metrobank is the country’s largest financial institution with over P107 billion in assets under management as of last year. Its large portfolio masks, however, an underlying problem with asset quality‚ caused by aggressive lending policies—which became obvious only in the aftermath of the 1997 East Asian financial crisis.

Fitch also downgraded Metrobank’s so-called individual rating to “D/E” from “E” reflecting the credit watcher’s opinion of the bank’s riskiness.

According to Fitch, individual ratings attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. “These ratings are designed to assess a bank’s exposure to, appetite for, and management of risk, and thus represent our view on the likelihood that it would run into significant difficulties such that it would require support,” it said on its website.

Fitch maintained, however, Metrobank’s so-called support rating at “3” which represents its view on the ability of the bank’s shareholders to bail out the institution in the event of sudden financial shocks.

Observers note that Metrobank’s multiple downgrade at the hands of an influential debt watcher cements the role of rival Bank of the Philippine Islands as the country’s leading financial institution in terms of asset quality, although not in terms of asset size.

At the same time, Fitch also downgraded the individual rating of the Rizal Commercial Banking Corp. (RCBC) to “D/E” from “D” while putting its long-term foreign currency rating of “BB minus” on a “negative” outlook.

RCBC’s support rating was affirmed at “3.”

Fitch also downgraded the Philippine National Bank’s (PNB) individual rating further to “E”from “D/E” while affirming its support rating at “3.” PNB continues to struggle in its rehabilitation plan after suffering a massive bank run during its troubled privatization in 2000.

Also subjected to lower ratings were Equitable-PCI Bank and midsized lender Security Bank Corp., both of which were put on “negative” outlooks in sympathy with the outlook of the Philippine government.

RATING THE BANKS

Fitch’s “negative” outlook on RP prompts broader downgrade of local corporates.

Metrobank’s risk rating cut to “BB minus” with a “negative” outlook

RCBC risk rating cut to “BB minus” with a “negative” outlook

Equitable-PCI’s risk rating of “BB” reduced to “negative” outlook

PNB’s individual rating downgraded to “E” from “D/E”

Security Bank’s risk rating of “BB” also placed on “negative” outlook

BPI now the undisputed leader among local banks in terms of asset quality

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Prudent Investor says: With these downgrades, the banking sector is unlikely to attract foreign money, probably except for a few (Banco De Oro, Bank of the Philippines Islands, perhaps) which also means they are unlikely to lead the market for the year 2005.

People's Daily Online:Chinese overseas investment hit 1.8 bln US dollars from Jan. to Nov.

Chinese overseas investment hit 1.8 bln US dollars from Jan. to Nov.

China poured 1.8 billion US dollars as non-financial investment in overseas areas in the first 11 months of last year, according to the latest figures from the Chinese Ministry of Commerce (MOC).

Over that period, Latin America surpassed Hong Kong as the largest investment absorber, attracting 889 million US dollars.

About 1.69 billion US dollars, or 94 percent of the total 1.8 billion US dollars, is direct monetary investment. Some 994 million US, or 55.12 percent, flew to the mining industry, MOC statistics show.

The statistics also indicate that the Chinese overseas processing industry improved significantly in the first three quarters of last year. Ninety-five companies engaged in the overseas processing industry were approved by the MOC during the first 11 months of last year, doubling the number from 2003.

Chinese overseas contracting businesses also boomed during the time. The business volume and value of the newly-signed contracts increased 28.8 percent and 43.5 percent from January to November of 2004, respectively, MOC statistics show.

Source: Xinhua

Prudent Investor Says: The Chinese are coming!

William Rees-Mogg for the TimesOnline: This is the Chinese century

This is the Chinese century
William Rees-Mogg
TimesOnline

America may believe it is still at the heart of events, but the future is being shaped on the margins

THE 18TH and 19th centuries were the British centuries, in which industrial, political and imperial development in Britain shaped the world. The 20th century was the American century; the United States changed the world, providing a margin of victory in two world wars, and developing all the major new technologies: telephones, automobiles, television, jet aircraft, the internet and so on. We all assume, as Washington undoubtedly assumes, that we are still living in the era of American hegemony, though it is already clear that China may be an emerging superpower.

I think that we may be missing an idea familiar to economists, which was developed in the second half of the 19th century. That idea is “marginalism”. It is one of those concepts universally accepted by professionals, but little understood outside. All that the “marginalist revolution” really amounted to was the recognition that economic change is determined by what happens at the margin of transaction. The extra apple sets the price for all apples; if there is one apple short, all apples cost more; one surplus, and they all cost less.

The most popular explanation is Mr Micawber’s: “Annual income £20, annual expenditure £19 19s 6d, result happiness. Annual income £20, annual expenditure £20 0s 6d, result misery.” Mr Micawber was an economist of the marginalist school.

Clearly, the United States is still by far the largest and most powerful economy on earth, with the most powerful defence technology. Yet it is China, not the United States, that is changing the global economy.

As a producer, an exporter and as an importer, the growth of the Chinese economy is changing the marginal levels of global supply and demand. Over the weekend I was reading many forecasts by eminent economists of the world economy in 2005. I was also listening to similar forecasts on television, including CCTV International, the Chinese 24-hour news service. The unanimity was astonishing, as one buzzed from channel to channel, subject to subject, and economist to economist.

What is the prospect for the dollar? That depends on China. The euro? China. The oil price? China. Industrial commodities? China. Global equity markets? China. Bond prices? China. World trade? China. World growth? China. In each case, forecast was not based on the absolute size of the Chinese economy, which is still much smaller than that of the United States. The forecasters, looking at their different markets, were all convinced that marginal changes attributable to China would be the decisive factor. That and low Chinese costs.

Some of the figures I found quite unexpected. In the past two years the growth of Japanese exports to China has accounted for 80 per cent of the growth in the Japanese economy. If one measures world trade, the United States and China together account for half of the growth. That certainly makes the United States and China the engines of growth for the whole world economy; by comparison, Europe is a miserable slowcoach. Yet China’s economy is growing at twice the rate of America’s.

In the past 30 years the whole Asian economy has averaged growth which was 3 per cent higher than the rest of the world. China is outperforming the rest of Asia.

On Saturday all the quotas on textile imports were lifted by the World Trade Organisation. This will be an extraordinary opportunity for Chinese textile and clothing manufacturers. Their current share of the US market is about 17 per cent; that is expected to rise to 50 per cent. China’s share of the European Union market is expected to rise from 18 to 30 per cent. We already buy Chinese toys; we shall soon all be wearing Chinese clothes.

Yet China is not content to remain as a producer of low or middle-technology goods. As the purchase of IBM’s personal computer division shows, China is equally a competitor in areas of advanced technology. China has an educational system designed to produce scientists and technologists for the 21st century. Except at the very highest university level, Chinese scientific education has outpaced that of Britain.

China is not only a highly successful exporter, but has also become a very large-scale importer, both of oil and raw materials and of goods from other Asian countries. In Asia, China is a net importer, not only from Japan, but also from other neighbouring Asian countries. Japan also has the benefit of being a major investor in the development of Chinese industry. The big surplus in China’s trade is with the United States, and the surplus in trade with Europe is expected to grow.

In 2008 the next Olympic Games will be held in Beijing. That will be a celebration of the development of China both as an economic power and as a major power in international affairs. There is, inevitably, a long way to go. Deng Xiao Ping’s free-market reforms were initiated only in 1978.

No less than 60 per cent of the Chinese population still works on the land, at low wages and usually with peasant levels of productivity. Yet that gives an indication of the reserve of manpower that still remains to be brought into the modern economy. The Chinese economy probably still has another 25 years of high growth ahead of it. Before it reaches full maturity, the Chinese economy will be a multiple of its present size.

My own optimism is not only based on the growth of the economy, though that is the outstanding economic growth record of the past two decades. China has also understood the important of domestic and international freedom of trade and the need for the best possible relations with trading partners. With direct material and financial support, China has been one of the large contributors to the relief of the Indian Ocean countries after the tsunami disaster. The economic maturity of the new China has been accompanied by increasing political maturity. That is the best guarantee for the future of what is beginning to look like the Chinese century.

Reuters Technology: Researchers See Gigabit Data Over Power Lines

Researchers See Gigabit Data Over Power Lines
Wed Jan 5, 2005 04:23 PM ET

WASHINGTON (Reuters) - Engineers at Penn State University said on Wednesday they had found a way for power lines to transmit data to homes at rates far faster than high-speed Internet connections from cable and telephone companies.

Broadband service over power lines has been highly touted by equipment makers and federal regulators as a possible competitor to cable and telephone services that handle nearly all of the 30 million U.S. residential broadband connections.

But despite dozens of trials, few electric utilities have attempted to sell the service to customers, citing cost and technical problems. The Penn State researchers said while the technology would improve, lowering the costs of power-line broadband would remain challenging.

Power-line broadband systems available today typically promise data speeds of roughly one megabit to three megabits per second, similar to cable and digital subscriber line, or DSL, service.

The Penn State engineers, Pouyan Amirshahi and Mohsen Kavehrad, estimated in a research paper released Wednesday that their system could deliver data at close to one gigabit per second over medium-voltage electrical lines in ideal conditions, with speeds of hundreds of megabits per second available to home users.

Their system would uses repeaters placed every one kilometer, (0.62 miles) and requires power lines to have been modified to reduce interference with the data signals. The engineers said their estimates were based on computer models, and that the data speeds available in a real-world version would depend on how many repeaters a power company used.

The Penn State study was funded with a grant from AT&T Corp. (T.N: Quote, Profile, Research) , which has taken part in prior trials of power-line broadband.

Prudent Investor Says: A looming threat to current broadband providers?