Financial Times: Cuba to end circulation of US dollar

Cuba to end circulation of US dollar

By Reuters

October 26 05:36

Cuban President Fidel Castro, seeking to rid his country of the currency of his arch-enemy, said on Monday Cuba was ending circulation of the U.S. dollar as of Nov. 8 in response to tightened American sanctions.

Cubans, foreign residents and tourists will have to use locally printed convertible pesos, equal in value to the dollar, for all cash purchases, a Central Bank decree said.

“As of Nov. 8, the dollar will not be accepted in our shops, which will only take convertible pesos,” it said.

A 10 percent commission will be charged for changing dollars into the local currency, according to the decree read on a special television broadcast attended by Castro.

Appearing on television in a sling only five days after falling and fracturing a knee and an arm, Castro said the issue was so important that he had to be there despite Wednesday’s accident that left his left leg in a plaster cast.

“The empire is determined to create more difficulties for us,” he said, referring to Bush administration steps to restrict travel and cash flows to the island nation.

The dollar was legalized in Cuba in 1993 after the fall of the Soviet Union plunged the island into deep economic crisis and forced it to open up to tourism and foreign investment.

Dollars became the dominant currency and are used to buy most consumer goods in dollar stores that will now only accept the local currency.

The decision will effect cash remittances from the United States, a major support for the cash-strapped Cuban economy that amount to an estimated $1 billion a year, unless they are sent in other currencies.

The government encouraged Cubans living abroad to send remittances to their relatives in Cuba in euros, British pounds, Swiss francs or Canadian dollars, to avoid exchange costs.

NO DOLLAR BAN

Castro, wearing his trademark military uniform, said his communist government was not banning possession of dollars, just their use in the economy.

“We are not restoring the penalization of holding dollars; it will not be a crime,” he said.

The move to eliminate use of the greenback was prompted by U.S. moves to squeeze Cuba financially, the decree said.

A four-decade-old U.S. trade embargo against his communist government prohibits the use of dollars in transactions with Cuba unless they are licensed by the U.S. Treasury.

Foreign banks were put on guard in May when the Federal Reserve fined UBS, Switzerland’s largest bank, $100 million for illegally transferring freshly printed dollar notes to Cuba and three other countries subject to U.S. sanctions, Libya, Iran and Yugoslavia.

Foreign bankers in Havana said this had created serious problems for Cuba to deposit its dollars abroad and renew bills in circulation.

Existing dollar accounts will be “totally guaranteed” and their funds can be withdrawn in the U.S. or local currency at any date with no charge, the decree said. Dollar bank transfers will be also be accepted, but not cash deposits.

Foreign companies operating in Cuba, as well as Cuban state enterprises, will not longer be able to make dollar bank deposits in cash.

Cuba’s tourism is based on the dollar, though euros are accepted as currency in some resorts. Tourists will have to exchange their currency into convertible pesos, though the 10 percent charge will only apply to dollars, the decree said.

The commission will not affect credit cards payments. Cards issued by U.S.-based banks are not valid in Cuba.

Cuba took the first step to curb dollar circulation last year when it banned state corporations from using the U.S. currency in their domestic operations.

U.S. President George W. Bush launched a strategy in May to undermine Castro’s government by tightening restrictions on travel from the United States and the amount of dollars licensed visitors could spend on the island.

Castro, who has outlasted nine U.S. presidents and survived the demise of the Soviet Union, said his socialist system will prevail.

“The destiny of this country was decided long ago and nothing can intimidate us,” he said.

Business Report: World trade to grow 8.5%, says WTO

World trade to grow 8.5%, says WTO
October 26, 2004
By Jonathan Fowler

Geneva - Global commerce was expected to grow 8.5 percent by the end of this year despite record oil prices, the World Trade Organisation (WTO) said yesterday.

Oil prices might dampen growth in trade and overall output in 2005, but at present the effects of the rise were being outweighed by economic revival, the WTO said in its annual International Trade Statistics report.

The WTO stopped short of predicting a dollar figure for the value of world merchandise trade for all of 2004, but said it would be 8.5 percent higher than the $7.3 trillion (R45 trillion) recorded for 2003.

Michael Finger, of the WTO's development and economic research division, said the percentage increase was based on constant dollars.

The rate of increase would be even higher if the depreciated dollar and higher oil price were used, he said.

"Growth in world trade in 2004 will not be adversely affected by higher oil prices to any great extent because we are seeing good growth in trade and output in China, Latin America and Africa," said Supachai Panitchpakdi, the head of the WTO.

"We have also seen stronger-than-expected economic recovery in Japan. Strong demand is behind rising prices for oil and other commodities," he said.

WTO said it would release its full statistical report next month.

Initial figures showed that world merchandise trade grew 4.5 percent last year to $7.3 trillion compared with 3 percent growth in 2002 and a decline in 2001, the WTO said.

The recovery was sustained by stronger economic activity in manufacturing and mining, and strong expansion in agriculture, it said. Merchandise trade expanded faster than output.

Demand for foreign goods in the US helped sustain output in other regions, and the US trade deficit continued to rise despite the weakness of the dollar.

The WTO said that strong US demand had helped the global economy, and that a sudden reduction could have "strong repercussions" on world trade.

Trade in the EU was stimulated by its expansion in May to 25 from 15 members. Asian growth in exports and imports was fuelled by China.

"With its rapidly expanding economy, China has become a major trader," the WTO said. "Its surging demand for oil, copper, soybeans and many other primary commodities contributed significantly to higher prices."

"In 2003, as in the second half of the 1990s, China's merchandise export growth was twice as high as that of world trade."

Latin America, which had recorded 12 years of successive deficits, registered a merchandise trade surplus in 2003, with China a major customer.

Some industries did particularly well. Trade in chemicals has accelerated in tandem with a surge since 2000 in pharmaceutical products, with 2003 world chemical exports rising 19 percent to $794 billion and accounting for nearly 15 percent of global trade in manufactured goods.

Bloomberg: Chinese Tourists `Flood' Abroad, Spending $48 Billion

Chinese Tourists `Flood' Abroad, Spending $48 Billion

Oct. 26 (Bloomberg) -- Like almost all of China's 1.3 billion people, Jiang Liang has never been a tourist in Italy. Next month she'll spend $6,000, almost half her annual wage, to visit Venice during a 10-day honeymoon tour.

``It's our dream to go to Europe,'' says the 26-year-old Shanghai accountant, who married a mobile-phone salesman last month. ``I want to see historic buildings and experience the lifestyle. It'll be very romantic.''

Jiang was able to book her trip because on Sept. 1, China's National Tourism Administration added 26 European countries to the 26 mainly Asian destinations it lets tourists visit. Seven years ago, leisure travel was forbidden. Last year, 20 million travelers from China spent $48 billion on items such as Louis Vuitton bags and Accor SA hotel rooms, according to travel researcher IPK International and the Chinese government.

The Chinese may dominate world tourism in coming years, says Nigel Summers, a director at Horwath Asia Pacific Ltd., one of the region's two largest hotel consulting firms. Tourist departures from China will expand 12.8 percent on average a year -- triple the world rate -- to about 100 million in 2020, according to the World Tourism Organization, a Madrid-based United Nations agency.

The new travelers, sparked by a 40 percent increase in urban incomes since 2000, already account for 9 percent of the world tourism total.

``The numbers have grown substantially, and that's with a lot of travel restrictions in place,'' says Summers, who is based in Hong Kong. ``Wherever they are allowed to go, they'll go, and in big numbers.''

Airlines Add Flights

Intercontinental Hotels Group Plc, Accor and Best Western International Inc., have boosted marketing in China in a bid to increase brand loyalty as more Chinese travel.

Air China, the nation's largest international carrier, is ferrying most tour groups to Europe because European airlines have only limited flights from China.

Beijing-based Air China plans a $500 million initial share sale this year to buy more planes. It placed a $360 million order for seven 737-700 jetliners from Chicago-based Boeing Co. on Sept. 2, according to Boeing.

Cologne, Germany-based Deutsche Lufthansa AG, Paris-based Air France-KLM Group and Stockholm-based SAS AB say they will increase flights to China.

Only Hong Kong-listed China Travel International Investment H.K. Ltd. among non-Chinese-owned travel agencies can arrange outbound tours. The agency is 59 percent owned by China's largest travel operator, state-owned China Travel Service, according to data compiled by Bloomberg.

Las Vegas-Bound

Chinese travelers managed before the restrictions were lifted to find their way to one U.S. tourist destination: Las Vegas. That's where about 90 percent of the 250,000 Chinese who visited the U.S. last year went, according to the Nevada Commission on Tourism. It opened a Beijing office in June.

Those visitors had to have either public or private passports, issued only to businesspeople, students or those with relatives overseas willing to sponsor them.

Now the Public Security Bureau, which controls private passports, can issue travel documents to those joining tour groups. Approved travel agents in turn can organize group visas to so-called Approved Destination Status countries, cutting costs and bureaucratic delays.

Only Croatia, Germany, Hungary, Malta and Turkey among European countries had group visa arrangements with China before Sept. 1. Germany got the go-ahead from the China National Tourism Administration in February 2003. It's since hosted 100,000 Chinese in tour groups, says Xu Shengli, a Beijing-based spokesman for Germany's National Tourism Office.

Fifth-Largest Spenders

Added to the list Sept. 1: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Italy, Iceland, Ireland, Latvia, Liechtenstein, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and Switzerland.

``With the pent-up demand from the last 50 years, the flood of outbound travelers will be massive,'' says Bernard Bialylew, the Shanghai-based director of Gulliver Travel Associates of London, the world's largest tourism services provider.

Chinese travelers already are the world's fifth-largest spenders, according to Falls Church, Luxembourg-based IPK International. Last year Chinese paid $2,967 on average for a European tour package, sightseeing and shopping, compared with $3,870 for U.S. tourists and $3,616 for Japanese.

The U.S. and Britain so far are missing out. U.S. security concerns mean tour-group visas can't be negotiated by travel agents, according to the U.S. State Department. The U.S. in any case has not applied for Approved Destination Status.

Response `Amazing'

Britain hopes to be an approved destination soon, says Jonathan Simpson, a London-based spokesman for Visit Britain, the marketing arm of the British Tourist Authority and the English Tourism Council. ``The British and Chinese governments are in talks,'' Simpson says.

At China CYTS Tours Holding Co., China's second-largest travel agent, the first 10-day tour from Shanghai to France and Italy was fully booked about a month before the Sept. 1 departure.

``The response has been amazing,'' says Wang Peijun, director of CYTS Tours' Shanghai office. ``We only advertised in the local newspapers for about two weeks.''

Ten-day tours cost about 14,000 yuan, Wang says. France, Switzerland and Italy dominate bookings.

Shanghai China Travel Services Co. expects to send 10,000 travelers to Europe before year-end -- triple the 2003 total, says Yu Weihong, the general manager.

``People are more keen to travel to countries that have just opened up,'' says Yu. The company runs tours for about 200,000 Chinese each year.

Congee for Breakfast

Berkshire, England-based Intercontinental, the world's largest hotel operator by rooms, opened a Chinese-language booking Web site in February.

It also added Chinese-language signs and menus at some European hotels, says Patrick Imbardelli, the company's Asia- Pacific managing director. About 8 percent of the company's guests worldwide, excluding China, are Chinese nationals.

Accor's European hotels with Chinese tour groups now provide Chinese-language satellite TV and newspapers, as well as congee, or rice porridge, for breakfast, says Reggie Shiu, who heads the Paris-based company's Chinese unit.

``At our hotels worldwide, for every 100 room nights occupied, two are Chinese guests,'' Shiu says. ``Our objective is to double that in the next year.''

Best Western, the world's largest hotel group by number of properties, is promoting mid-price rooms that appeal to more than 80 percent of China's tour-group market, says William Dong, the company's spokesman in China. Rooms cost $80 to $150 a night.

Credit Cards

European tourism authorities are gearing up, too. France expects 1 million Chinese tourists by 2009, said Junior Tourism Minister Leon Bertrand, who greeted the first Chinese tourists at Paris's Charles de Gaulle airport Sept. 1. About 400,000 Chinese visited France last year -- 1 percent of the 75 million total, according to the Tourism Ministry.

About 85 percent of China's tourists chose an Asian destination last year, including Australia and New Zealand, according to the London-based World Travel and Tourism Council. Favorite vacation spots were Thailand, Taiwan and Singapore.

San Francisco-based Visa International Inc., the world's largest credit-card company, says Chinese cardholders touring in Asia spend $253 on average for each transaction, compared with $135 for U.S. tourists and $141 for those from the U.K.

Luxury Brands Expand

In Hong Kong, a special administrative region of China, 60 percent of the record 2.1 million tourists in August came from mainland China, the Hong Kong Tourism Board reported -- a 31 percent increase from 2003. Chinese tourists still need visas to visit the former British colony.

The influx has prompted luxury retailers such as Paris-based LVMH Moet Hennessy Louis Vuitton SA and Geneva-based Cie Financiere Richemont AG to expand in duty-free Hong Kong. China levies duties of as much as 35 percent on imported goods and a 17 percent sales tax.

Jiang, the Shanghai honeymooner, visited France for three days in 2001 on a business visa that took her a month to get. Her tour-group visa for next month's trip to Italy and France was approved in two weeks.

Now Jiang is plotting her next jaunt -- to the U.K. ``It has a lot of history and culture,'' she says.

To contact the reporter on this story:Jasmine Yap in Hong Kong at jyap5@bloomberg.net.

CGES: OPEC pushing limits of oil production capacity

CGES: OPEC pushing limits of oil production capacity
Paula Dittrick
Senior Staff Writer

HOUSTON, Oct. 21 -- Most members of the Organization of Petroleum Exporting Countries are pushing the limits of their oil production capability, and some probably are finding that their sustainable capacity is not as high as originally thought.

London-based Centre for Global Energy Studies reached that conclusion in its Global Oil Report Market Watch for September-October.

"Indonesia and Venezuela cannot meet their quotas, while Nigeria—which produced at surge capacity earlier this year—finds it must now lock in production at many of its aging fields, proving that its stated capacity is not sustainable," CGES said.

OPEC members have frequently talked up their production capabilities with a view to increasing their allocated quotas within OPEC, but only recently has this capacity been tested.

CGES expects that there will be little more than 1.5 million b/d of incremental oil production capacity by the end of 2005.

OPEC's production currently is estimated at just over 30 million b/d of oil, and its current level of spare production capacity is believed to be about 1.4 million b/d of oil at most, representing only 5% of its aggregate output, or 1.7% of estimated world oil demand for the fourth quarter, CGES said.

Algeria and Indonesia

Algerian Oil Minister Chekib Khelil said that his nation's oil production, excluding condensates, is about 1.35 million b/d. CGES estimates the country's oil production at closer to 1.28 million b/d; however, condensates—which do not make up part of the OPEC quota—bring total production of liquids to about 2 million b/d.

Khelil said Algeria's oil production capacity will rise to 1.5 million b/d in 2005 after new fields are brought on stream. Algeria is planning to boost oil production capacity to 2 million b/d by the end of the decade.

Indonesia's oil production has continued to slip this year. CGES estimated oil output in September at 963,000 b/d, 436,000 b/d below the country's OPEC quota. The country became a net oil importer during the second quarter, and production capacity shows little sign of recovering any time soon.

CGES said that Indonesia's oil production capacity looks set to continue to decline next year.

Iran, Iraq, and Kuwait

Iran currently produces about 3.98 million b/d of oil, which appears to be a sustainable capacity level. National Iranian Oil Co. (NIOC) repeatedly has said it plans to raise capacity by 5 million b/d during the next 15 years—well beyond the peak levels achieved before the 1979 revolution.

"By the end of 2005, the [Iranian] oil ministry hopes to have reached a total sustainable capacity of 5 million b/d, but with an annual reservoir depletion rate of about 200,000 b/d offsetting any gains made by multiple active projects, this now looks highly optimistic," CGES said.

Much work has been done to arrest oil production decline as well as upgrade existing fields, CGES noted. Upgrading offshore fields Sirri and Soroush-Nowruz already stemmed a decline in oil production capacity. Major fields that NIOC is looking at upgrading during the coming year to boost capacity include Aghajari, Masjid-e Suleiman, and Zagros.

Iraqi oil production capacity, meanwhile, currently is fluctuating at 2.8 million b/d.

"While plans are afoot to increase this production beyond 3 million b/d by the end of 2005, production capacity will remain constrained by the security situation and the infrastructure available to export this oil," CGES said.

In Kuwait, bureaucracy and politics have hampered efforts to increase its production capacity much beyond the current level of about 2.4 million b/d, which includes production from the Neutral Zone.

"Continuing doubts over the opening up of the Northern oil fields to international consortiums—dubbed Project Kuwait—has led to abandonment of short-term capacity targets in favor of a longer-term goal of 4 million b/d in 15 years," CGES said.

Until international players are granted access to Kuwait's expansion projects, CGES does not expect much of a boost to Kuwaiti production capacity; it should increase by roughly 100,000 b/d by yearend 2005, it said.

Libya
Libya is rushing to add new oil production capacity and is planning to raise the volume of oil it can produce to 3 million b/d by 2010. The Libyan Oil Ministry now claims an oil production level of about 1.7 million b/d.

An official of Libya's National Oil Co. (NOC) claimed during OPEC's recent conference in Vienna that Libya could add 300,000-350,000 b/d of new oil production by mid-2005, raising its oil production capacity to 2 million b/d well ahead of schedule, CGES said.

"However, he gave no indication of where this new capacity might come from. This latest assessment represents a significant acceleration from plans reported as recently as April, which saw production capacity reaching 2 million b/d in 2008 and 3 million b/d by 2014," CGES said.

A number of oil fields operated by international oil companies are expected to begin production, or see significant increases in output levels, in the near future.

There also are hopes that the "Oasis Group" of US oil companies—ConocoPhillips, Marathon Oil Co. and Amerada Hess Corp., which was forced out of Libya by the US government in 1986—will be able to boost production from its former fields by 100,000-200,000 b/d of oil within 2-3 years.

Nigeria
Nigeria's oil production capacity, which the CGES currently estimates at 2.55 million b/d, is expected to reach 2.6 million b/d by the end of the year, possibly rising a further 200,000 b/d in 2005.

"However, it must be asked whether this capacity is sustainable. August saw 250,000-300,000 b/d shut in just to protect the aging onshore oil fields and infrastructure after production reached surge capacity levels in response to high prices, although Presidential Advisor Edmund Daukoru has promised this capacity would be restored by the end of 2004," CGES said.

Daukoru recently was quoted as saying there is a current limit of 2.5 million b/d for Nigeria's capacity.

"While civil unrest in the region and a national workers strike have yet to affect total oil production so far, Nigeria may have its work cut out simply holding on to its current production capacity in the short-term. Increments in production capacity will almost certainly arise from offshore fields, unaffected by unrest and growing maturity," CGES said.

Qatar, Saudi Arabia, and the UAE Qatar currently produces about 800,000 b/d of oil of its estimated 950,000 b/d production capacity. The CGES sees little change in production capacity over 2005, with small incremental additions contributing only 20,000 b/d to overall capacity.

Saudi Arabia's production capacity, including that from the Neutral Zone, currently is about 10.5 million b/d of oil, which is expected to rise to more than 11 million b/d by yearend as Abu Safah and Qatif fields start to make an impact.

Production from these fields is expected to reach 800,000 b/d of oil from the 150,000 b/d they collectively produced during September.

Saudi Arabia has been unable to use its spare capacity to take advantage of high prices and record demand because its oil is heavy and sour. For this reason, a number of projects have been lined up to expand production capacity of Arab Light.

Saudi Arabian officials maintain that the kingdom's spare capacity of 1.5-2 million b/d of oil is a matter of policy to retain its position as "swing producer" and that there is no need to alter their longer-term plans to do this. CGES estimates that by yearend 2005, the kingdom could reach a sustainable oil production capacity of about 11.5 million b/d and a surge capacity closer to 12 million b/d.

In the UAE, Abu Dhabi National Oil Co. has suggested that the emirate's sustainable output capacity could reach 3.6 million b/d of oil in 2005 from its present level of 2.7 million b/d.

CGES estimates that current sustainable capacity is at 2.55 million b/d of oil—about the level at which the UAE is currently producing—and this is set to rise to only about 2.6 million b/d by the end of 2005 as small gains are offset by declining production in Dubai. However, the UAE's capacity increases are due by 2006-07.

Venezuela
Venezuelan production capacity stands at about 2.7 million b/d of oil. The nation struggles to maintain its capacity because of aging oil fields and a lack of qualified workers with experience in working with these fields after the mass cull of state-owned oil firm Petroleos de Venezuela SA's technical staff.

Venezuela's Hydrocarbon Law and its recent hike in royalties due from heavy oil projects are unlikely to have an immediate impact on oil production because of high oil prices, CGES said.

"But unless conditions for foreign investment are made much more stable and favorable, Venezuela under President [Hugo] Chávez will struggle to maintain its present oil production capacity, let alone reach its [oil production] target of 5 million b/d by 2009," CGES said.

October 25 Philippine Stock Market Daily Review:Talk about absurdities

October 25 Philippine Stock Market Daily Review:

Talk about absurdities.

Locals whom have been stampeding out of the market for vacuous reasons once again have plagued the Philippine Market with excuses for a selloff. Oil, inflation, MPC, US markets have prompted locals to take profits after the Phisix’s sensational run up in September. Naturally, the so-called experts are quick to attach bunkums on the after-the-fact events.

As discussed in my newsletter, the ‘October Effect’, which means that the market tends to be soft during this period, has been reinforced by the fact that in the past ten years, October has produced 7 years of losses against only 3 years of gains. This indicates that October presents a statistical probability of 70% that the market will head lower, even as the recent October started at a high of 1,865. This phenomenon could be what is now unfolding right before our very eyes.

Again the local investing mindset manifests its puerile nature in treating equities investment. Had fundamentals such as oil been the factor in today’s market activities apparently we should be seeing rotations to the defensive sector. Oil as of this writing trades above $55 and looks poised for another leg up for another record price high; ironically oil related issues have been even sold down by nincompoops. Gold is likewise $2 dollars away from its decade year high levels (currently at $428 per oz!! bye bye bye US dollar~Bush or Kerry), yet mining issues are sold down, as if the prices of these metals have no relevance to the financial valuations of these exploration and milling companies.

The Phisix closed lower by 26.5 points or 1.5%, the fourth biggest loser in a region haunted by losses for the day. Among the industry indices only the banking and financials index defied the tide up by a scanty .22% largely on Metrobank’s (+1.81%) advance. The Commercial Industrial was the day’s biggest loser down on the country’s duopoly, PLDT (-3.24%) and Globe Telecoms’ (-3.43%), price declines, followed by the OIL index (-1.75%-hahahaha!!!), the mining index (-1.70%-more hahahaha!!!), the foreign supported property index (-.49%) and lastly the ALL index (-.31%). Naturally when locals are bearish the market breadth manifest these; declining issues beat advancing issues 14 to 65. Ugh.

We are seeing continued accumulations by foreign money on the local’s dampened sentiment. Foreign trades accounted for almost 56% of today’s trade while flow of funds to the local equity market registered a positive P 83.150 million worth of inflows. Moreover, overseas investors bought twice more issues than it sold today. Hmmm.

Among the heavyweights only PLDT and San Miguel (-.69%) posted outflows while the most inflows were seen in SM Primeholdings (unchanged), Bank of the Philippine Islands (unchanged) and Ayala Land (unchanged). Other issues as International Container Terminals (-1.96%), DM Consunji (-1.72%), Equitable Bank (unchanged), Filinvest Land (-1.58%) and other second line issues recorded inflows. If these funds from abroad come from institutional investments then what does these entities see in the Philippine market that prompts their accumulations? I thought oil was ah....

Notice too that most of the heavyweights supported by foreign money closed unchanged. The biggest losers among the most active issues are noticeably the ones whom had been the erstwhile market darlings MPC (-5.0%), ELI (-5.88%) and PLTL (-2.54%). Except for MPC the rest looks like a buy buy buy.

Techni-speak, today’s activities brought the Phisix towards key retracement levels. At today’s low, the Phisix corrected by some 43% from its peak while compared to the closing prices at 1,735.69, the Phisix yielded 40% of its current gains.

Robert Feldman of Morgan Stanley: Oil and Water, Japan and China

Oil and Water, Japan and China
Robert Feldman (Tokyo)

No, this piece is not about how Japan and China do not get along politically. Rather, it is indeed about oil and water — or more precisely about how the competition for resources will shape the world in which Japan and China interact over the next decades. This piece is inspired by a recent book by Michael Klare entitled Resource Wars (Owl Books, 2001). In the book, Professor Klare makes the important (but also somewhat obvious) point that the combination of geography, economics, and politics will create intense competition for scarce resources, especially oil and water.

How will Japan and China interact in this world? Are they competitors or allies? Will the competition be diplomatic, negotiated, and peaceful, or will it be military?

The answer depends on the specific resource involved, and the geography (and politics) of the resource. However, fortunately, the details suggest that Japan and China (along with the United States) have much more to gain by cooperation than by competition, especially military competition. This conclusion is clearly good news for financial markets. Even better news is the opportunities that joint development will hold for business. Industries of particular interest include plant engineering and suppliers for energy development projects and trading companies or storage facility providers for agricultural trade in the region.

Oil

Most oil analysts are now convinced that the world does face high oil prices for at least a few years, even if speculative excess and weather-related distortions abate. There is virtually no spare capacity to produce more oil, but global demand will continue to increase. So the equilibrium price will be higher. The question for all countries now is how to find new energy sources and to promote conservation.

For Japan and China, the closest potential sources of new energy are oil from the South China Sea, and oil and/or natural gas from Siberia. In light of competing claims to exploitation rights, the South China oil will be the most contentious. China has claimed vast stretches of the South China Sea as an exclusive economic zone, while other countries do the same. So far, military conflict has been limited. The only direct confrontation between Japan and China concerns the Senkaku (Diaoyu) Islands, where nationalistic groups (from both Taiwan and China) have tried to occupy the islands. The incidents so far have been handled deftly, diplomatically, and with little disruption by the Chinese and Japanese governments — which have many more important problems (such as North Korean nuclear weapons) to handle.

The South China Sea issue for Japan involves two separate questions: passthrough access to sealanes bringing energy from the Middle East, and exploitation of resources that are believed to lie under the ocean floor. The passthrough question is both military and economic. Unsure of how China and other nations will resolve the issue of economic rights, Japan is rightly worried that sealanes could be disrupted. Hence, some military presence is needed. However, to the extent that China and Japan can reduce the need for such military protection of the sealanes, both countries will benefit. (The same is true of the US, which will continue to have a role in defending Japan.) The balance of methodology for dealing with the sealane issue is likely to remain firmly diplomatic and legal, rather than military.

The exploitation issue is harder, because of the many competing claims and lack of clarity in international maritime law on how to resolve the claims. So long as the claims are unresolved, there is very little likelihood that major companies would invest any significant amounts in resource exploitation. Hence, all parties have an interest in creating a stable legal environment for development. The risk is that energy prices climb high enough, and potential users of energy become desperate enough, to occupy territory militarily. I doubt that energy prices could trigger such action, because the economic losses from unilateralism would likely outweigh any benefits. The challenge for countries in the region, therefore, is to work out a rights-sharing arrangement as soon as possible. Oil at $50/bbl is certainly an incentive to cooperate.

Other oil projects are more straightforward. Siberian exploitation will involve negotiation with Russia, and with countries through which pipelines might pass. Ironically, this factor might aid a solution to the problem of nuclear North Korea. A pipeline passing through North Korea could pay access fees to that country in the form of a portion of the energy that passes through, thus providing effective aid to North Korea, and obviating the need for nuclear facilities — the justification for a nuclear program.

Farther afield, China has an interest in building pipelines from Central Asian countries to serve western China, but Japan has little interest in such projects, except as a potential investor or provider of equipment. Such projects would benefit Japan to the extent that they remove pressure on global oil prices.

My reading of the oil situation is that both Japan and China view economic and political stability at home as requiring a cooperative solution to the oil / energy problem. Neither country has either the resources or the military power to pursue a unilateral solution. Hence, there appears to be a bright future for Japan-China cooperation in the energy field.

Water

The other major source of potential conflict that Mr. Klare discusses is water. In particular, he focuses on the scarcity of water, and control over the Nile, Tigris-Euphrates, and Indus river valleys. Obviously, none of these issues has any direct relation to either Japan or China (except to the limited extent that the Indus initially arises in western Tibet). But water is an issue, especially for China. As living standards rise, China will need more fresh water and the products thereof, but sources are limited. Moreover, as my colleague Andy Xie points out, agricultural land in China is under pressure from industrial development projects. How can China raise living standards when water and land are becoming scarcer?

The answer is to import the products that require land and water. Already, China is a huge importer of agricultural products from the US. However, as water becomes scarcer in the US as well, alternatives must be found. Japan is a good candidate. Indeed, water is the one natural resource that Japan has in abundance. Moreover, as Japan's population ages, it will require less food. In addition, the inefficiencies of Japanese agriculture suggest that much improvement in output is possible. Already, Japan supplies limited amounts of high-grade rice to some Chinese cities as a luxury item. The factor endowments suggest that there is more such trade in Japan's and China's futures.

Other Resources

There are many other resources in which Japan and China have common interests in ensuring stable supply. Among these are minerals from Africa, fish from the oceans, and uranium in particular — a source of energy that may well come back into fashion as high oil prices persist. None of these resource issues can be settled in a unilateral way. Rather, China and Japan must cooperate in creating a strong Asian voice for peaceful exploitation. It is in this context that the proposals to re-organize the United Nations’ decision-making structure are key. So are regional initiatives, such as Japan-ASEAN cooperation and regional Free Trade Agreements.

Investment Implications

Investors in Japan will likely be paying more attention to the energy and water issues over the next few years. Japanese companies stand to benefit from new energy projects, not only as suppliers of machinery and materials (e.g., high-grade seamless pipe) but also as designers and implementers of projects. While currently still troubled by balance sheet difficulties and cash flow problems, the Japanese plant engineering companies have much expertise in these areas. Moreover, transportation of energy, particularly natural gas, will require increased fleets of LNG tankers and port facilities. The latter must be constructed some distance from large urban areas, in order to ensure safety, and thus some rather large projects could become necessary.

The implications of the water issue are somewhat different. Japan has no major agribusiness sector, but the imperatives of food supply for the region suggest that such firms could emerge. For this to happen, however, major deregulation would be needed, particularly an expansion of corporate ownership of farmland. In addition, the efficiency of distribution of agricultural products needs work. These inefficiencies are the raw material of business opportunities. Ironically, such a turn of events would reverse the trade flows of the last decade, in which China has become a major supplier of fresh vegetables to Japan. However, as China's needs grow, and as the resources for producing such crops in China dwindle, Japan could help fill the gap, first by replacing China's exports to Japan, and then by exporting to China itself. Trading companies are likely to be major beneficiaries of trade pattern changes, in light of their expertise in project investments and in distribution. Moreover, as agricultural trade grows in the region, the need for storage facilities could help the manufacturers of machinery for this sector.

New York Times: Private Investors Abroad Cut Their Investments in the U.S.

Private Investors Abroad Cut Their Investments in the U.S.
By EDUARDO PORTER
The New York Times

Published: October 19, 2004

The flow of foreign capital contracted in August as private investors lost some of their appetite for American stocks and bonds, underscoring the United States' increasing dependence on financing from central banks in Asia.

The Treasury Department reported yesterday that net monthly capital flows from the rest of the world fell for the sixth time this year, declining to $59 billion from $63 billion in July.

Private investment from abroad fell by nearly half - to $37.4 billion in August from $72.9 billion the month before. Investors appear to be concerned over cooling growth and a rising American trade deficit.

The only reason that the contraction was not more pronounced was that official financing, mainly from Asian central banks, jumped to nearly $23 billion in August from just over $6 billion in July.

Washington has demanded that China end a policy of buying dollars to reduce the value of its currency, the yuan, and make its exports more competitive in American markets. But the new data accentuated how dependent the United States has become on purchases of dollar securities by the Chinese and other Asian governments with links to the dollar.

"Foreign central banks saved the dollar from disaster," said Ashraf Laidi, chief currency analyst of the MG Financial Group. "The stability of the bond market is at the mercy of Asian purchases of U.S. Treasuries."

Net foreign purchases of United States Treasury bonds fell 35 percent, to roughly $14.5 billion, an 11-month low. Foreign governments left a particularly large footprint in this market, stepping up their net purchases to about $19 billion even as private investors sold about $4.5 billion worth.

Holdings of Treasury bonds by Japan, where the central bank has also been intervening to keep the value of its currency from rising, increased by $26 billion in August, to $722 billion. Chinese official holdings rose more than $5 billion, to $172 billion.

The decline in foreign investment seems to have unsettled some investors in the bond and currency markets, who have been on tenterhooks as the American trade deficit has soared to nearly 6 percent of the nation's economic output, requiring foreign investment to finance it.

Through the first quarter of the year, financial flows into the United States exceeded the trade deficit by well over 50 percent. Last month, they barely covered the $54.2 billion deficit.

As private capital flows declined, the American financial balance has been poised precariously. As private financing dwindled, most of this coverage has been provided by foreign government finance.

"If all we have funding our current account imbalance is the good graces of foreign central banks, we are on increasingly thin ice," said Stephen S. Roach, the chief economist at Morgan Stanley. Of Washington's call for China to stop interfering in currency markets, he cautioned, "That could come back and bite us."

Not all economists are that worried about the growing shortfall in the current account, the broadest measure of trade, pointing out that it is sustainable as long as Asians continue on a path of export-led growth that requires cheap currencies against the dollar.

Many economists stress, however, that this symbiotic balance between Asian and American economies will eventually come to an end.

Jeffrey Frankel, an economics professor at Harvard University, said: "The Asians are going to go on buying Treasury securities for a while, preventing the dollar from depreciating and helping keep U.S. interest rates low, which is a good thing. But not forever."

Morris Goldstein of the Institute for International Economics remarked, "This can be a story for one year or two years, not for 10 years."

If the United States were to temper its appetite for foreign money, the Chinese and Japanese could curtail their purchases of American securities without causing financial havoc. The dollar could then drift lower against Asian currencies, benefiting American exporters and manufacturers that compete with Asian imports.

But this would require Americans to increase their rate of savings. Household savings have plummeted to only 1.5 percent of personal income, from 11 percent 20 years ago. With the federal government running a budget deficit of 3.5 percent of the nation's output, the public sector hardly contributes to savings.

A disorderly situation would occur if foreign money dried up suddenly when the United States still needed it. Then, the adjustment in American savings might happen involuntarily. Interest rates would rise sharply, and the dollar could fall abruptly. This could induce a sharp economic contraction, even stagflation.

"The longer we wait," Mr. Goldstein said, "the more likely we'll have the adjustment anyway. But the adjustment will be more chaotic and sharper."

Peter Cooper:Linking gold and oil prices

Linking gold and oil prices

Peter Cooper

Ameinfo.com

What do the price of oil and the price of gold have in common? At the moment, both more and less than you might think.

A crisis in the Middle East, an American president who did not inspire confidence overseas, rising economic powers in Asia and instability in global monetary policies.

In the early 1970s, these destabilizing factors combined to helped to push gold prices steadily upwards towards the peak price of more than $800 per ounce that was reached by the end of the decade.

Today, in a world that seems in many ways to mirror that of three decades earlier, gold prices are hovering in the $400 per ounce range. By some standards that price is quite high; by others, though, the precious metal is a relative bargain - especially compared to oil prices, which are a traditional indicator of the value of gold.

Historically, the ratio of the price of oil to the price of gold has been relatively fixed: the number of ounces of gold required to buy a barrel of oil has averaged .06 ounces. As oil prices soar past the $50 mark, however, gold prices have not kept pace. For gold to reach the historical standard - with oil prices at a more modest price of, say, $42 per barrel - the precious metal would have to trade at $700 per ounce. Put another way, by historical gold-price standards, oil should be selling at just $24 per barrel. By most measures, then, buying gold is currently a smart investment. Which would make Kuwaitis the savviest investors in the Middle East. In terms of value, the emirate saw the greatest surge in gold consumption in the second half of this year, recording growth of 28 percent. Saudi Arabia, the largest market in the Gulf, saw growth of 23 percent, followed by the UAE at 21 percent, Bahrain at 20 percent, Oman at 18 percent and Qatar at five percent.

Overall, second-quarter demand in the region was up by eight percent. Not everyone who buys gold, of course, is concerned with historical standards - or, for that matter, with any standard beyond their latest bank account balance. And the seemingly inexorable rise in oil prices means that, across the Gulf region, those balances are currently looking very, very healthy.

Hedging bets

So will the regional buying trend continue at least for the rest of the year? That seems likely, although the end of the summer tourist season will result in an inevitable short- term decline.

Worldwide, Goldman Sachs argued recently that buying by hedge funds and an expected continued decline in the dollar against the euro means that gold prices will continue to inch up for the rest of 2004. (Investors historically purchase gold as a hedge against declines in US assets when the dollar is falling.)

Its worth recalling that, barely 18 months ago, the outlook for the gold market was extremely bleak, with merchants at Dubais gold souk lamenting a 50 percent drop in sales. Many shops, despite running any promotion they could think of, were reportedly on the brink of going bust.

Our business has shrunk substantially, Joy Alukkas, managing director of Dubai-based Alukka Jewelry, told Arabies TRENDS in March 2003. There is no hiding the fact that the gold jewelry business this time around is very poor. At the time, there was hardly a consensus about the direction gold prices would take.

Some industry analysts argued that prices would inevitably decline, as speculative investment dried up and what they saw as a price bubble finally burst. A rapid sell-off would result in a drop as large as the increase we have seen, said the chairman of one gold trading group in Dubai at the time.

Paradigm shifts

Others analysts strongly disagreed. Leonard Kaplan, a gold analyst with Prospector Asset Management, told Arabies TRENDS more than a year and a half ago that a drop in gold prices was out of the question.

As the US dollar continues to falter, as the equities markets continue their slide, as the paradigm shift from paper assets to hard assets builds a bit of momentum, as the budget deficits of the United States swell - it becomes apparent that gold must rise in response.

At the time, there were fears among some regional bankers of gold hoarding - driven by instability surrounding the war that had just been launched in Iraq - leading to a cash-flow crisis, a proposition that seems laughable today. But in March 2003, despite the fighting in Iraq, oil prices remained well below $30 per barrel, and there was no way to predict the surge that would take prices above the $50 mark.

So what to make of all this? Is the current gold-buying boom in the Gulf a sign of increased or decreased confidence in the future? Are regional shoppers hoarding hard assets based on a fear of future instability, or does the trend simply indicate that so many people have so much money to burn?

The latter is far more likely, of course. But the real test wont come for Gulf consumers until the gold:oil price ratio finally settles to its historical levels. After all, the last time the world looked like it does today, gold prices were on their way to $800 an ounce.

Financial Times: India in plea to investors abroad

Financial Times: India in plea to investors abroad

By Ray Marcelo in New Delhi

Published: October 20 2004 03:00

Last updated: October 20 2004 03:00

Manmohan Singh, India's prime minister, urged foreign investors yesterday to contribute to $150bn worth of planned infrastructure spending, an appeal likely to strain relations further with his government's communist allies.

Mr Singh told a business summit between India and the Association of South East Asian Nations (Asean) that the country's economic growth relied on substantial increases in domestic and foreign investment in physical infrastructure.

"We believe the Indian economy can absorb up to $150bn (£83bn) of foreign investment in infrastructure over the next 10 years. There is therefore a large opportunity for Asean businesses to invest in India," he said. India's ailing airports and railways needed more than $55bn in capital investments, alongside $75bn in power and $25bn in telecommunications, Mr Singh added.

"We will make every effort to promote such investment and to create a climate conducive for investors and entrepreneurs," he said.

Such statements are a further sign of the government's resolve to pursue economic reforms despite opposition from communist parties, which support Mr Singh's multi-party coalition from the outside.

Relations between the government and the communist bloc appear increasingly tense.

Both sides clashed last week over plans to raise the foreign equity ceiling in the telecoms sector from 49 to 74 per cent, part of several industry reforms championed by P. Chidambaram, the finance minister.

Communist parties have opposed raising foreign direct investment (FDI) levels in telecoms, citing concerns over national security. They have argued for a "Chinese strategy", insisting that foreign telecom carriers enter into local joint ventures.

In response, India's pro-reform finance ministry has revealed data showing local telecoms carriers have already exceeded current FDI limits.

Oct 21, 2004 Phisix Crumbles Under the Weight of Local Selling

Philippine Stock Market Daily Review: Oct 21, 2004

Phisix Crumbles Under the Weight of Local Selling

No, I certainly would not ascribe to any particular event solely responsible for the current drag in the Phisix, down 18.33 points or 1.03%, which has broken from an important support level. The 1,770-level served as its platform to establish its most recent record high. The motley reasons that you can expect from mainstream analyst to cite for the recent string of declines would be overnight decline of the US markets, oil (again!! No rotation to oils), local political developments as coup fears arising from corruption crackdown on military hierarchy, economic data, Metro Pacific-driven et. al. and a whole lot of crap.

While these experts presume knowing the mindsets of the market, what we can deduce from the market is what the market internals show. And today’s activities manifest glum outlook by locals responsible for the recent declines.

The Phisix has retraced by more than 23.6% and could probably test the 1,740 level for a 38% correction/retracement from its recent highs before moving higher.

Today’s action was centered on the sell off in the telecoms sector with key heavyweights (PLDT down 2.13% and Globe lower 1.9%) and attendant second liners taking the most damage, Piltel fell 2.41% and Digitel declined 4.34%. The Mining sector was the biggest loser (-1.4%) even as metal prices underpinning the corporate fundamentals such as gold and silver are currently approaching their record highs in dollar terms. The financial sector (-1.33%), weighed by losses from its heavyweights Bank of the Philippine Islands (-2.12%) and Metrobank (-1.8%), came second while the telecom led Commercial Industrial Index (-1.22%) was third. The All Index posted the least decline down by .32% as its heavyweights Sunlife and Manulife were untraded today. The foreign supported property sector (+.4%) defied the market sentiment and posted slight gains for today largely on SM Prime’s advance (+1.38%).

Decliners led advancers by 53 to 15, as foreign money remained bullish on local equity assets particularly on the property sector to register P 111.868 million worth of inflows. Foreign trades accounted for only about 37% of today’s trades, meaning that the psychology of the local investors dictated the tempo of the trading activities in today’s market. ERGO Locals are selling for whatever reasons, Foreign are buying for reasons stated previously in our newsletters.

The September-October period statistically speaking has been one of the weakest period on a month on month basis aside from the July-August and June-July time frame since 1997. Five out of seven months in the past 7 years or a probability of 71.4% showed that the September-October period is predominantly a bear’s lair, although month to date the Phisix is barely up by 5.03 points or .3% which simply means that it is natural to expect the Phisix to head lower because of seasonality factors paving way for strengths in the coming months. Take these indications of weaknesses as opportunity to buy on dips, as I believe that the cyclical shifts, seasonality factors, historical patterns and the technical picture remains tilted in favor of the bulls.

Business Times Asia: Radical Delhi plan to fund infrastructure

Radical Delhi plan to fund infrastructure
Use of US$120b of reserves may have consequences for US budget deficit

By ANTHONY ROWLEYIN TOKYO

INDIA'S plan to use up to US$120 billion of its foreign exchange reserves to help fund domestic infrastructure projects signals a radical departure that could influence the way other developing countries in Asia and beyond finance infrastructure, and could also have an impact on foreign exchange markets.

It comes at a time when the International Monetary Fund and the World Bank are considering fiscal incentives to get developing nations in general to spend more on infrastructure.

The move by the new Congress-led coalition in Delhi is designed to help India overcome serious infrastructure deficiencies in its road, railway and power sectors that could hinder economic growth.

It marks the boldest step so far by any Asian government (which collectively hold nearly US$2 trillion in reserves) to deploy its reserves actively in the domestic economy instead of keeping them invested in US and other foreign government securities.

China has diverted some US$45 billion of its reserves to dealing with its banking sector problems but India's initiative is much bigger.

Analysts say the move could have considerable significance for the funding of the US budget deficit, as well as for the exchange rate of the US dollar, if other countries opt to use their reserves more actively in their domestic economies.

India has not so far been able to attract foreign investment in basic infrastructure on anything like the scale that China has. At the same time, the Indian banking system has proved incapable of providing long-term bank loans for infrastructure on the scale needed, while the domestic bond market is also underdeveloped. Recently the Asian Development Bank issued its own rupee bonds in India to help bridge the infrastructure gap.

According to a report in Saturday's Financial Times, critics of the government plan say it would be an inappropriate use of India's foreign exchange reserves and would add to the already high fiscal deficit.

But Indian officials argue that the country's foreign exchange reserves have tripled in the past three years and are now high enough to cover almost 20 months of imports - far higher than the IMF-recommended minimum ratio.

The fiscal deficit issue may not prove to be a problem for India or other countries that opt to spend more money on infrastructure development. This is because at their annual meetings in Washington this month, the IMF and the World Bank decided to examine the idea of giving developing countries more 'fiscal space' to deal with their infrastructure funding needs.

According to an IMF spokesman, developing countries that invest in infrastructure, and thereby add to a nation's income-generating potential, would be able to deduct such spending from their budget, for the purposes of achieving the 'primary balance' which is regarded as the good housekeeping seal of fiscal management.

Debt services payments on infrastructure loans from multilateral development banks would also be deductible.

This would be a significant concession to emerging market economies at a time when there has been a massive shortfall in hoped for private sector investment in infrastructure, leaving governments bearing around 70 per cent of the total burden.

Those governments that invest most claim they are penalised in terms of the way their primary budget balance is calculated by the IMF.

World Bank president James Wolfensohn estimated in Washington that developing countries need to double infrastructure investment to around 7 per cent of GDP if they are to meet economic growth and poverty reduction targets.

Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.

New York Times: Insurance Investigation Widens to Include a Look at Costs

Insurance Investigation Widens to Include a Look at Costs
By JOSEPH B. TREASTER
New York Times

An investigation into the insurance business is expanding, investigators said yesterday, as Eliot Spitzer, the New York attorney general, increasingly turns his attention to whether American corporations and their employees are paying more for life, disability and accident insurance than they should be.

In California, John Garamendi, the state insurance commissioner, said last night that he, too, was concerned about extra costs to individuals for life, disability and accident insurance and that he was considering legal action against at least one broker and several insurance companies that sell what are known as employee benefits.

While the current focus of the New York investigation is on bid-rigging and price-fixing among commercial insurance brokers and insurance companies, investigators say Mr. Spitzer is also pursuing reports of payoffs that may increase coverage costs for tens of millions of individuals.

"Eliot Spitzer's interest is in the retail stuff, the effect on regular people,'' said David D. Brown IV, the chief of the state attorney's investment protection bureau.

"Our investigation is broadening and deepening,'' Mr. Brown said. "We are going to look across product lines, across insurers and across brokers, the big and the little."

The insurance controversy became public last week, when Mr. Spitzer sued Marsh & McLennan, the world's biggest commercial insurance broker, accusing the broker of rigging bids from insurance companies and fixing prices for corporate customers in exchange for fees from the insurance companies.

Three insurance companies have entered guilty pleas to rigging bids, and more criminal charges are expected, perhaps as early as this week.

Such bid-rigging schemes, investigators contend, have indirectly increased the costs of everything from houses to toothpaste as corporations pass along the expense. The bid rigging was discovered, Mr. Spitzer said last week, during an investigation into incentive fees insurers pay to insurance brokers.

But there are other potential conflicts of interest in insurance that may have a more direct impact on consumers. Investigators in New York and California are now examining whether brokers and consultants are demanding extra fees for favored treatment in the sale of employee benefits like group life and disability coverage.

Like the investigation into commercial insurance brokers, this inquiry began when Mr. Spitzer's office received a tip. In this case, an industry executive, upset by deals involving brokers and employee benefits insurers, telephoned the attorney general.

In June, subpoenas were issued to Aetna, Cigna and MetLife, some of the biggest sellers of what the industry calls group benefits.

These include life, disability and accident insurance bought for workers by businesses and nonprofits, who often allow employees to add to their coverage if they dip into their own pockets.

"We're very interested in health-related lines and auto insurance,'' one investigator said, "because those are the ones that affect consumers the most.''

In California, Mr. Garamendi said he had been discussing with his staff and other California officials either filing a lawsuit or joining in with others in a lawsuit on employee benefits. He said he planned to announced his decision later this week.
"We are on the verge of taking legal action,'' he said.

The California commissioner said he also planned to draft new regulations that would require insurance brokers to disclose all compensation from insurance companies and explicitly prohibit brokers from steering business to insurers in exchange for payoffs.

The role of insurance brokers is to obtain the best coverage for corporate insurance clients at the best price in exchange for a fee. They are supposed to deal with insurance companies at arms length. Long ago, however, they began collecting fees from the other side of the deal, from the insurance companies, creating a conflict of interest, some industry experts said.

In the field of employment benefits, brokers and consultants often receive two kinds of special payments in their dealings with insurance companies, according to an executive who works in the field.

The most widespread form of payments is a reward to the broker or consultant from an insurance company for a certain volume of business and for business that is expected to have few claims and therefore be especially profitable. This kind of payment, investigators and industry executives said, is the same as the kind widely used in commercial property and casualty insurance; in property casualty insurance, it raises the cost of insurance generally.

These arrangements are known as contingency fees, placement service agreements and market service agreements, just as they are in property casualty insurance.

But an additional form of payment that is absent in property casualty transactions results in higher individual costs for corporate employees who choose to buy life, disability or accident coverage beyond the amount provided by employers.

In those transactions, the executive said, the insurance company tacks on an additional annual fee of perhaps $5 to $15 for every worker who increases coverage.

While the extra money is collected by the insurance companies, the executive said, it is passed on to the brokers. Sometimes, the executives said, employers are aware of the extra charge, sometimes not.

In any case, the executive said, because of the hidden fees on workers, the corporation gets the services of a broker for less in direct costs than otherwise.

The degree to which incentive fees were important to Marsh was illustrated late yesterday, when the company said that it took in $843 million in such fees last year, or about 12 percent of its brokerage revenue of $6.9 billion. The disclosure was the first time the company had outlined the financial impact of the payments.

Marsh said on Friday that it was halting the incentive payments. Yesterday, the company said that the decision would "negatively impact near-term operating income.'' The payments represent 7 percent of its overall revenue. (Marsh's other main businesses are Putnam Investments and Mercer Consulting.)

Mr. Spitzer said on Thursday that the incentive payments could represent more than 50 percent of the parent company's income of $1.5 billion last year.

But Marsh said last night that it could not be sure how much income it earned through the payments because it was unable to determine the expenses associated with them. Marsh said, however, that it paid at least $340 million in expenses in connection with the payments in 2003.

Jeffrey Greenberg, the chief executive of Marsh & McLennan, had previously said that it was company policy not to break out either the revenue or the profits from the payments in its financial statements.

Two rating agencies, Fitch Ratings and Moody's Investors Service, lowered their estimates of Marsh's ability to repay debt and said further downgrades were possible.

Earlier yesterday, shares of Marsh & McLennan fell for a third day. The stock closed down $3.63, at $25.57. Since Mr. Spitzer announced the lawsuit on Thursday, the shares have tumbled 45 percent.

And the investigation is gathering speed. Already, Mr. Spitzer has 20 lawyers investigating the insurance industry, or nearly double the number involved in the investigation into mutual funds.

"This is a much bigger team,'' Mr. Brown said, "and it's much more interdisciplinary. The other cases were largely investor protection. This one involves people from our consumer fraud unit and antitrust as well as from criminal prosecutions."

Referring to Marsh, Mr. Brown said, "The first place we looked, we found massive issues.

"We're going to keep pounding on this,'' he said.

World Bank Commentary: Boost Growth By Reducing the Informal Economy.

Commentary: Boost Growth By Reducing the Informal Economy.

World financial leaders gathered recently in Washington for the annual meetings of the World Bank and International Monetary Fund. But missing from their agenda was one of the biggest and most misunderstood barriers to economic growth: the vast agglomeration of businesses that evade taxes and ignore regulations, often referred to as the "informal economy,” writes Diana Farrell, director of the McKinsey Global Institute, in Monday’s edition of The Asian Wall Street Journal.

The informal economy is not just the unregistered street vendors and tiny businesses that form the backbone of marketplaces in Asia and other emerging markets. It includes many established companies, often employing hundreds of people, in industries as diverse as retail, construction, consumer electronics, software, pharmaceuticals and even steel production. In India, Pakistan, Indonesia and the Philippines, as much as 70 percent of the non-agricultural workforce is employed in informal businesses.

Despite the prevalence of the informal economy, Asian policymakers show surprisingly little concern. Some governments argue that it helps relieve urban employment tensions and will recede naturally as the formal economy develops. Development experts contend that informal companies themselves will grow, modernize, and become law-abiding if given some help. And most policymakers implicitly assume that the informal economy does no harm. But there is little evidence to support these beliefs. Research by the McKinsey Global Institute found that informal economies are not only growing larger in many developing countries, but are also undermining enterprise-level productivity and hindering economic development.

The reasons why informal economies grow -- and keep growing -- are not hard to uncover: high corporate tax rates and the enormous cost of doing business legally. It takes 89 days to register a business in India, compared with eight days in Singapore. It takes 33 days to register a property in the Philippines, compared with 12 in the US. It takes five and a half years to close an insolvent business in Vietnam. All in all, emerging-market businesses face administrative costs three times as high as their counterparts in developed economies. No wonder so many choose to operate in the gray.

Reducing the tax burden on businesses is perhaps the most critical step to reducing informality, since high taxes increase the incentives for companies to operate informally. For many Asian governments, one path to lower taxes is through broadening the tax net: collecting taxes from more companies can enable governments to cut tax rates without reducing tax revenue, while simultaneously breaking the tax-evasion cycle. Another key to reducing the extent of the informal economy is to streamline regulatory procedures. Registering a new business is often an onerous process, Farrell writes.

Martin D. Weiss: The Greatest Scam of All

The Greatest Scam of All

Martin D. Weiss, Ph.D.
Editor, Safe Money Report

Chairman, Weiss Ratings, Inc

Eliot Spitzer has just launched a major frontal attack on the insurance industry. But it's just the first battle in a long and bitter war.

I know. I've fought a similar battle myself for many years, albeit on a much smaller scale.That's why most insurance companies still don't like me very much. Some may even want me dead.

About 12 years ago, soon after I launched my Weiss insurance ratings, I sent out a press release listing the ten largest insurance companies most likely to fail. The media picked it up, and U.S. News & World Report featured it in a major story.

The next day, my phone began to ring off the hook with calls from insurance company lawyers. They yelled at me and threatened me with litigation. They said my ratings were slanderous. They talked about suing me for many times the money my small Florida company made in a lifetime.

One large company on my "most vulnerable" list, First Capital Life of California, went even further: They sent an entourage of top executives to visit our offices and intimidate me.
Insurance company exec:

"Weiss better shut the @!%# up or get a bodyguard."

We welcomed the group into our humble conference room, and they distributed copies of their presentation.

Then for the next two hours, they ranted about their grand plans for the future. They raved about the top ratings they were still getting from S&P, Moody's, and A.M. Best. They even talked about how they could "help" Weiss build its own business.

But I didn't budge from my D- rating. "Look," I responded. "Your own filings with the state insurance commissioners show you're loaded with sinking junk bonds, but you have virtually no capital to cover the losses. Your own books show you've got money from investors that could be pulled out at a moment's notice, but you have virtually no liquid assets to sell to meet their demands for cash." I made it clear that the company was a time bomb that could go off almost any day.

That's when one of First Capital's executives issued the ultimate threat: "Weiss better shut the @!%# up," he whispered to my associate during a break, "or get a bodyguard."I did neither. To the contrary, I intensified my warnings. And within weeks, the company went belly-up — still boasting high ratings from major Wall Street firms on the very day it failed. In fact, the leading insurance rating agency, A.M. Best didn't downgrade First Capital to a warning level until 5 days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company's stock crashed 99%, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the earth. Three of the company's closest competitors — Executive Life of California, Executive Life of New York, and Fidelity Bankers Life — were also biting the dust. Unwitting investors lost over $20 billion.

If you have cash-value policies in failed insurance company YOUR MONEY WILL BE FROZEN

Meanwhile, the regulators stepped in to take over and froze all the money policyholders had paid in for whole life polices and fixed annuities.

The people weren't allowed to cancel their policies. They weren't even allowed to take the money out through a policy loan. And by the time the freeze was finally lifted many months later, they had lost up to 50 cents on the dollar.

All told, over six million policyholders were trapped. Among these, about two million had cash-value policies, such as whole life and fixed annuities, frozen in limbo for months. (For details, see, "Toward a Full Disclosure Environment in the Insurance Industry," my 1992 testimony before the U.S. Senate Committee on Banking, Housing, & Urban Affairs.)

These policyholders asked: "How could this happen? All of these insurance companies got "good" or "excellent" ratings from A.M. Best, S&P, Moody's, and Duff & Phelps (now Fitch). Why is it that Weiss was the only one that gave them bad ratings?"Congress asked the same question. So did the U.S. General Accounting Office (GAO), now called the Government Accountability Office.

Indeed in a special study comparing Weiss to the other rating agencies, the GAO concluded that Weiss was the only rating agency to consistently warn consumers of the failures in advance; all of the other rating agencies typically issued their first warnings only AFTER the companies failed.

According to the GAO, for the six largest insurance companies that failed in the early 1990s, "Best assigned a 'vulnerable' rating before [failure] in only one of six cases and this was only six days before the [failure] occurred. In one case, Best stopped rating the insurer and never assigned a 'vulnerable' rating. In the remaining four cases, it assigned a 'vulnerable' rating only after the [failure]."

Best complained bitterly. They said their "B" ratings, listed as "good," in their own manual, should also have been considered "warnings of failure" in the GAO study. The GAO disagreed. But they added: "If we had placed Best's "B" and "B-" ratings in the "vulnerable" category, Weiss would still have been first overall. Weiss' advantage would have been decreased from about three to one to about two to one."

But still, the GAO still didn't answer the original question: Why? Why did the other rating agencies fail so miserably?

I can assure you it wasn't because we had better access to insurance company management than the other rating agencies. Nor did we have more analysts. Rather, the fundamental difference between us and them was embodied in one four-letter word: BIAS. The ratings of our competitors were biased by serious conflicts of interest. Ours were not.

You see, A.M. Best, Moody's, S&P, and Duff & Phelps were paid substantial sums BY the insurance companies to provide ratings FOR the insurance companies, a blatant and direct conflict of interest.

To make matters worse, if the company didn't like the rating, the rating agencies agreed not to publish it. The leading insurance company rating agency, A.M. Best, even created a special category for ratings that were non-published because the companies "disagreed with their rating."

Ironically, nearly everyone in the industry knew what was going on. They knew that most of the ratings were bought and paid for by the rated companies. They knew the industry's capital had deteriorated over the years. And they knew that too many large companies were loading up with too many high-risk bonds and speculative real estate. They just didn't talk about it in public, and did everything possible to keep it secret.For example, in the January 1990 issue of Best's Review, Harold Skipper, Professor of Risk Management and Insurance at Georgia State University, pointed out: "with increasing competition from all quarters, insurers are seeking ways to operate on thinner margins, to enhance investment performance through the purchase of ... riskier investments."

In the same issue, Earl Pomeroy, President of the National Association of Insurance Commissioners (NAIC), wrote: "State insurance regulators are observing ominous signs of emerging solvency problems in what traditionally has been the most secure line of all-life insurance."

Similarly, in the March 1990 issue of Best's Review, David F. Wood, past president of the National Association of Life Underwriters, under the title "The Insolvency Chill," stated: "It is widely acknowledged that life insurers' profit margins have declined significantly, primarily because of rapidly increasing costs, slower growth, declining interest rates in the face of long-term higher rate guarantees and stiffer competition. All these factors have severely eroded the capital base of many companies...."

Thus, Best itself was publishing this alarming information on the industry. But they did nothing to downgrade their own ratings.

You'd think the industry and its regulators would have learned a lesson from this experience. But today, very little has changed. The insurance industry continues to harbor deep conflicts of interest that everyone in the industry knows about, that routinely result in hardships to millions of Americans, but that persist just the same. Here are just three examples ...

Conflict of interest #1.

The Insurance Industry with The Insurance Company Rating Agencies

To this day, the established rating agencies — A.M. Best, Moody's, S&P, and Fitch — are still paid huge fees for their ratings.

Plus, they typically empower the rated companies to decide when to be rated, how, and by whom. They often give the companies a preview of the rating before it's published and some agencies grant them the right to suppress publication of any rating they don't agree with.

This is no secret. A.M. Best & Co. clearly states in its 1995 Insurance Reports, page xv: "NA-9 Rating (Company Request): Assigned to companies eligible for ratings, but which request that their rating not be published because they disagree with our rating." And beginning with its 1996 Insurance Reports (page xiv), Best changed its "NA-9" category to "NR-4," but the definition is very similar.

With this mechanism, ratings which might otherwise have served as warnings to the public are removed from public view, with disastrous consequences for consumers.

Indeed, in its 1994 report, the GAO states that in four out of 30 cases rated by both Best and Weiss, "Best never actually assigned a 'vulnerable' rating. Instead, Best changed these ratings from 'secure' to one of its 'not assigned' categories." And in a follow-up report using the same methodology as that used by the GAO, I found that, subsequently, there were another 16 companies in Best's NR category that failed.

In each case, Best's standard operating procedure was to cooperate with the companies, remove the bad ratings from circulation, and hide the financial weaknesses from the public. And in each case, the companies failed, causing severe hardships to consumers.

Some of the agencies have since modified some of their worst practices, but they have not altered their basic business model — the ratings are still bought and paid for by the rated companies.

How much exactly do they charge? No one knows for sure. But one of the nation's most stubborn critics of the insurance industry, Joseph Belth, has documented the fees charged by insurance company rating agencies in his widely respected monthly publication, The Insurance Forum.

A few years ago, Belth reported that Standard & Poor's charges from $10,000 to $50,000 per company per year, Moody's charges from $15,000 to $45,000, and Best's fees were similar to those of Standard & Poor's and Moody's. Belth has not reported on this since, but I suspect that the fees are probably significantly higher today.This is uncanny. You wouldn't eat at a restaurant or send your children to a movie if you knew that their ratings were based on this kind of a payola system. Yet millions of Americans have entrusted a good portion of their life savings — and their life's safety net — to companies that are rated precisely in this way.

Conflict of interest #2.

The Insurance Companies with Insurance Agents and Brokers

Last week, Eliot Spitzer accused some of the nation's largest insurance companies and the world's largest insurance brokers of rigging bids for insurance polices and taking millions of dollars in kickbacks as a standard operating procedure in their business model.

Joseph Treaster, in his New York Times article of October 16, provides the specifics:"The lawsuit brought by Mr. Spitzer against the broker, Marsh Inc., a unit of the Marsh & McLennan Companies, contends that Marsh conducted sham bidding to mislead customers into thinking that they were getting the best price for the coverage they needed. ...

"In addition to the lawsuit, two executives of the American International Group, one of the world's largest insurance companies, pleaded guilty to criminal charges of rigging bids with Marsh.

"While Mr. Spitzer's target yesterday was Marsh, he made clear that he was taking aim at a widespread practice in the insurance industry. 'This investigation is broad and deep and it is disappointing,' he said.

"Mr. Spitzer suggested that he had also come across indications of wrongdoing in the sale of many kinds of personal insurance, including coverage on cars, homes, and health insurance. 'Virtually every line of insurance is implicated,' he said."

"The lawsuit names American International, or A.I.G., and three other insurers, as participants in the bid rigging and steering: the Hartford, a unit of Hartford Financial Services; Ace Ltd., which is based in Bermuda but is a major player in the American insurance market; and Munich American Risk Partners, a unit of Munich Re with offices in Princeton, N.J."

My view: Mr. Spitzer has barely begun.

Reason: The entire system of selling insurance in America — through agents that are ostensively working in the best interests of the consumer but who are actually driven by commissions determined by the insurers — is, itself, a massive and fundamental conflict of interest.

Look. If you want to buy insurance — for health, life, or an annuity ... or for your auto, home, or business — you almost invariably MUST go through an agent. You rarely have the option of buying directly from the insurance company. And it is the insurance company that effectively sets the goals and agenda for most agents.

To get a better idea of how this works, our company once ran an analysis of the ads in an insurance industry magazine for insurance agents.

Most of the ads were placed by insurance companies offering agents all kinds of special commissions to direct business their way. In addition to cash bonuses, they touted special premiums like two-week vacations at Club Med or free cruises in the Mediterranean. The ads appealed to agents selling annuities, life insurance policies, and more.

So I called the publisher to ask if he thought these special commissions deals wouldn't push the agents to sell policies to consumers that might not be in their best interest.The publisher was indignant: "Are you a registered insurance agent? No? Then how did you get a hold of our publication? Our publication is not for you. It's strictly for insurance agents!"

Apparently, I wasn't supposed to know. Nor were millions of American consumers.

My main point: Insurance agents are routinely driven to sell the policies that make them the most money — not the policies that are best for you. Some agents bend over backwards to do what's best for their customers. But to do so, they must often sacrifice their own livelihood.

That's a system that's rotten to the core, and Mr. Spitzer's opening salvo barely scratches the surface.

Insurance Newspeak

Long ago, insurance agents discovered that their customers didn't want to talk about their death, let alone buy insurance for it. So taking a chapter out of Orwell's 1984, they called it "life insurance" instead.

It didn't seem to help much, though. Life insurance was still a very hard sell, and agents who pushed it too hard got a bad reputation for bringing up unpleasant subjects. "Want a row of seats all to yourself on your next flight to Chicago?" went a popular joke. "Then just tell your fellow passengers that you sell life insurance."

Prudential, the Rock-of-Gibraltar, largest insurance company in the world, came up with another very "creative" solution. They figured out a way to disguise the life insurance as an annuity, trained their agents to obfuscate the real nature of the product, and sold it to millions of investors from 1982 through 1995. All annuity policies sold by insurance companies do have a small life insurance component. But that's a far cry from being an actual life insurance policy.

It took many years of litigation before the regulators caught up with them. Prudential execs said they were sorry. The regulators said that wasn't quite enough to make amends. After much heated debate and negotiation, the company belatedly agreed to pay $2.7 billion in restitution to more than 1 million maligned customers, many times more than the largest previous settlement in insurance history. They sold insurance as a "retirement plan," failing to disclose the risks and using policy illustrations, which projected fabulous dividend accumulations as foregone conclusions.So did agents at New York Life and Allstate. Meanwhile, Equitable Life Assurance Society was fined $2 million for selling more than $100 million of improper life insurance policies. If the larger companies can do it, just imagine what the smaller, fly-by-nights are getting away with!

The Prudential, Metropolitan, Allstate, and Equitable messes were finally cleaned up. However, the fundamental problem inherent in the insurance agency system remains.Conflict of interest #3

The Insurance Industry with The Insurance Regulators and Legislators
You know about the long-disputed "revolving door" between private industry and government: Key officials in an industry are appointed as officials to write laws or regulate the same industry ... and then go back again to become lobbyists or executives for top corporations.

This is an inevitable aspect of our democratic, capitalist society. But it is especially egregious in the insurance industry.

For example, in an analysis released over a year ago, the Consumer Federation of America (CFA) found that "at least 40 percent of the leadership of the National Conference of Insurance Legislators (NCOIL), an organization that offers model bills and resolutions on how to regulate insurance, have worked for or with the insurance industry."Furthermore, most of these NCOIL members have current business ties to the insurance industry. NCOIL, which says its primary mission is to 'help legislators make informed decisions on insurance issues,' has taken a series of recent positions on high-profile insurance issues that are favorable, if not identical, to insurance interests and have frequently undermined consumer protections."

"Too often, NCOIL's advocacy is virtually indistinguishable from those of insurance interests," said J. Robert Hunter, CFA's Director of Insurance and former Texas Insurance Commissioner.

Bottom Line

When you buy insurance, watch out! Shop around aggressively, and get quotes from more than one agent and from as many insurers as possible. Despite all the problems in the industry, there are still good companies and good policies worthy of your money. Just make sure the insurer is safe and won't die before you do. I recommend companies that have earned my rating of B+ or better, but I can't vouch for all their policies.

And if you own shares in an insurance company or insurance brokerage firm, take advantage of any rally to get out. Yes, they've already fallen sharply in the past few days. But given the enormity of the scams and conflicts still to be revealed, the share price declines you've seen so far are small in comparison to what's likely still ahead.

Mineweb's Gareth Tredway: Twenty-year bull market

Twenty-year bull market
By: Gareth Tredway
Posted: '14-OCT-04 16:00' GMT

© Mineweb 1997-2004

JOHANNESBURG (Mineweb.com) -- China’s entry into global markets, which has been pushing commodity prices ferociously higher on the back of high demand, could last longer than the historical five-year cycles experienced in the past when other powers have entered the global arena.

This is according to Michael Power, a strategist at South Africa’s Investec Asset Management, who dubs China’s entry onto the world scene as “the most important geo-economic event of our lives.”

“Basically there were two periods when we did see this, and that was when continental Europe in the late-1950s joined global markets, and then when Japan basically joined global markets in the late sixties,” Power told Mineweb Radio Wednesday evening, “And then you basically ended up with a mean reversion trend after they had joined the market.”

“But for a five-year period in both instances, you saw this rising saw-tooth shape in the markets. I think in the case of China, it is going to be longer, and the reason why is that: China is bigger, but it is not just China. What is happening actually is an Asian phenomenon that is centered on China. And standing waiting in the wings is India. And India is another billion people. In fact the Indian sub-continent if you throw in Pakistan, Bangladesh, and Sri Lanka, is actually a larger population than China. So I think we could see something here that could last 20 years. That is going to make life very difficult for investors, because you have to have nerves of steel to play a saw-tooth formation.”

Power says that, on a recent visit to China, he was told by a trading company that the Chinese are now getting wise on how to manage the high prices that are coming from the forecasts of high Chinese demand.

“The rest of the world thinks they are a one-way trade and you can basically sell anything in terms of agricultural and mineral sources to them, and they basically had to take the price that you are selling them at. The Chinese have learned that if they accumulate a little bit of stock, more than they absolutely need in the immediate sense, they can pop bubbles as they arise and basically give particularly speculators a bloody nose. I suspect they may well have been behind the base metals wipe out that we saw today, and I think it did start in Shanghai.”

On Wednesday commodities and resource shares took a knock worldwide, for quite a few reasons, depending where you ask. Robin Bahr, a base metals analyst at Standard Bank in London says the drop was driven by commodity trading advisors and unnerved weak and speculative longs. “Macro funds were happy sitting on their long positions, as there is good potential in base metals,” says Bahr. Bahr says the market does not give the Chinese enough credit, and says they knew that, if they start buying, prices would move against them.

On Wednesday the copper price dropped 10.8 percent from Tuesday’s price, nickel 16.56 percent and aluminium 6.07 percent. Precious metals and resource shares also felt the bite. Bahr calls it a “healthy correction” as prices had been on an unabated rise for over a month. Prices did show small gains by Thursday afternoon, adding meat to Power’s “saw-tooth” theory. Bahr says prices would have to fall another 10 to 20 percent for “what they call” a bull market to become a bear market.

In any event company’s like BHP Billiton, Kumba Resources and Anglo American that have already gained from the China factor, are still tipped as good investments by David Shapiro, a trader from BJM. “I am going Billiton, and Kumba, and I am not sure on my third, I should stay with Anglo American,” Shapiro told Mineweb Radio on Wednesday evening.

Power himself agrees on the diversified players, but also mentioned South African Breweries as a player and Anglo Platinum, the world’s largest platinum producer, as an interesting one. “I think if you have a ten-year horizon I think SA Breweries is going to make an absolute killing in China. I think Amplats (Anglo Platinum) is an interesting one because platinum is something that the Chinese understand extraordinarily well. In 1994 China did not feature in the top 20 platinum consumers in the world, today it takes 21 percent of the world’s platinum.”

As a third choice, Power chose De Beers, the world’s largest producer of rough diamonds and which is owned 45 percent by Anglo American. “The dark horse would be De Beers, there is early signs that they are catching on in terms of their diamond consumption,” says Power, “If you see what De Beers did to Japan in 1945. The diamond giving habit did not exist in Japan, and today over 90 percent of couples getting married use diamonds to seal their fates. You see it when you walk around the streets of Shanghai now, the combination of platinum and diamonds is the gift.” From a South African perspective, Trans Hex, a Johannesburg-listed diamond producer was also pointed out.

China Daily: 15% income tax in Shanghai from expatriates

15% income tax in Shanghai from expatriates (China Daily)Updated: 2004-10-13 00:16
Some 30,000 expatriates in Shanghai were responsible for 15 per cent of the income tax collected during the first half of this year.

Expatriates from 102 countries and regions living and working in Shanghai paid 1.6 billion yuan (US$190 million) in income tax revenue in the first six months of 2004, recent statistics show.

Since the city officially started issuing expatriate work permits on May 1, 1996, some 59,384 people have found employment here.

"We have seen a 30 per cent annual increase, on average, on the work permits," said an official surnamed Sun from the Shanghai Labour and Social Security Bureau.

By the end of September, the bureau had issued 11,106 expatriate work permits.

One out of three were given to Japanese people.

"Japanese investment always makes up the largest proportion among all foreign capital," said Sun.

Americans came in second place, taking some 11 per cent, and South Koreans, about 9 per cent.

The statistics showed that 90 per cent of these expatriates have a university degree or above.

Approximately 70 per cent work in management positions, and another 15 per cent are engineers or senior engineers.

"The city now has at least 3,600 foreign general managers," said Sun.

Most work in foreign invested companies or representative agencies of foreign companies.

"Only about 13 per cent of them are in non-foreign invested companies," said Sun.

"Like any big city in the world, expatriates and immigrants play a vital role in Shanghai's economic and social development," said Zhang Ziliang, researcher from the Shanghai Institute of Public Administration and Human Resources of the Shanghai Personnel Bureau.

"But there are negative impacts too, like their influence on local employment," said Zhang. "The government has realized this and taken measures to tackle it."

The city is becoming more strict in handing out work permits and residence cards to foreigners.

"The government will evaluate the qualifications of every foreigner who applies for residence or a job here, and give them a score," said Zhang.