China's chief auditor warns mounting local government debt a risk to economy

China's chief auditor has warned that high levels of local government debt could derail the country's economy, with some observers suggesting that a number of Chinese provinces are even more fiscally-troubled than Greece.

 

By Malcolm Moore in Shanghai
Published: 1:20PM BST 24 Jun 2010

China's chief auditor warns that mounting local government debts could be a threat to the economy. Visitors discuss in front of a model of a real estate development at a property fair in Beijing Photo: Reuters

Liu Jiayi, the head of China's National Audit Office said the financial crisis had left some Chinese provinces with serious debt problems.

"The scale is large, and the burden is quite heavy," he said, in an annual report to the Chinese government.

 

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Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany.

However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.

Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.

He said the audited debts of 18 of China's 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (£279bn) in 2009.

Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (£590bn-£1.08 trillion).

Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China's nominal GDP.

Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.

China's banking regulator said outstanding loans from banks to local government financing vehicles was 7.38 trillion yuan at the end of 2009, rising 70pc year-on-year.

Mr Shih, who researched more than 8,000 of these "local investment companies", said that orders to ramp up spending on infrastructure after the financial crisis could leave China with widespread debt problems.

"I collected data from thousands of sources, including regulatory filings, bond-rating reports and press releases of government-bank agreements," he said, although he admitted that comprehensive data was difficult to track down.

Next year, he is forecasting government debt to hit 96pc of gross domestic product as infrastructure projects continue to eat up cash and produce negligible returns.

"The worst case is a pretty large-scale financial crisis around 2012," he said. "The slowdown would last two years and maybe longer," he added.

The US debt-to-GDP ratio is close to 90pc while Greece's is 130pc.

With Europe's debt problems in the spotlight, the Chinese government has moved to try to fix the problems in its provinces.

Earlier this month, the State Council, China's cabinet, ordered local governments to stop borrowing using special vehicles which rely solely on government income for their revenues and to shut down the public-private partnerships as soon as possible.

The State Council said local government vehicles had "in many cases illegally guaranteed the debt of those vehicles" and had "experienced some problems that demand urgent attention".

The government ordered a progress report to be completed by local governments by the end of the year.

Ben Bernanke needs fresh monetary blitz as US recovery falters

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

 

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:44PM BST 24 Jun 2010

Comment on this

Ben Bernanke needs fresh monetary blitz as US recovery falters Photo: GETTY IMAGES

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

 

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"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.

The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding". Financial conditions are now "less supportive" due to Europe's debt crisis.

The subtle tweaks in language have been enough to set bond markets alight. The yield on 10-year Treasuries has fallen to 3.08pc, the lowest since the gloom of April 2009. Futures contracts have ruled out tightening until well into next year.

Yet the statement may understate the level of angst at the Board. New home sales crashed 33pc in May to an all-time low of 300,000 after the homebuyer tax-credit expired, confirming fears that the housing market has been propped up by subsidies. Unemployment is stuck at 9.7pc. Manufacturing capacity use is at 71.9pc. The Fed's "trimmed mean" index of core inflation is 0.6pc on a six-month basis, a record low.

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness."

Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. "This is very substantial fiscal drag. On top of this the US Treasury is talking of a 'Just War' against the banks, which will further crimp lending. It is absolutely the wrong moment to do this."

Kansas Fed chief Thomas Hoenig dissented from Fed calls for ultra-low rates to stay for an "extended period", arguing that loose money risks asset bubbles and fresh imbalances. He recently called for interest rates to be raised to 1pc by the autumn.

While he has been the loudest critic, he is not alone. Philadelphia chief Charles Plosser says the Fed has blurred the lines of monetary and fiscal policy by purchasing bonds, acting as a Treasury without a legal mandate. Together with Richmond chief Jeffrey Lacker they represent a powerful block of opinion in the media and Congress.

Mr Bernanke has fought off calls from FOMC hawks for moves to drain stimulus by selling some of the Fed's $1.75 trillion of Treasuries, mortgage securities and agency bonds bought during the crisis. But there is little chance that he can secure their backing for further purchases at this point. "He just has to wait until everybody can see the economy is nearing the abyss," said one Fed watcher.

Gabriel Stein, from Lombard Street Research, said the US is still stuck in a quagmire because Mr Bernanke has mismanaged the quantitative easing policy, purchasing the bonds from banks rather than from the non-bank private sector.

"This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it," he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.

Mr Bernanke focuses instead on loan growth but this has failed to gain full traction in a cultural climate of debt repayment. The Fed is pushing on the proverbial string. The jury is out on whether or not his untested doctrine of "creditism" will work.

"We are now walking on deflationary quicksand," said Albert Edwards from Societe Generale.

http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html

UK families saving more money than borrowing for first time in 20 years

Families are banking more money than they are borrowing for the first time in more than 20 years, a Bank of England report shows.

By Philip Aldrick and Myra Butterworth
Published: 10:12PM BST 24 Jun 2010

Charities said it was unsurprising that, at a time of high unemployment, households were being more prudent with their budgets Photo: GETTY

Households last year put £24 billion into deposit accounts and took out £20 billion in new loans. It is the first time since 1988, when the current records began, that savings exceeded new borrowing.

The statistics relating to families reflect a culture of austerity that has also dominated public finance policy. The Chancellor unveiled the biggest cuts to public spending for almost a century in this week’s Budget. Combined with £29 billion in annual tax rises, the Government’s own figures suggest that individuals earning £50,000 will be £1,600 worse off within two years, while the average citizen will be £400 worse off.

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Leading economists said the recent recession – the worst for 60 years – meant households had become increasingly concerned about paying their debts.

Benjamin Williamson, a senior economist at CEBR, the consultancy, said: “Higher unemployment and increased risk aversion mean we will have higher savings as households rebalance their finances.”

Peter Spencer, the chief economic adviser to the Ernst & Young ITEM Club, said: “People are reducing their borrowings. It’s the combined effect of some families not being able to get credit and other families choosing to pay their debts off.”

Overall savings, including pensions and investments, rose last year from 2 per cent of household income to 7 per cent as families prepared for leaner times, according to the Office for National Statistics. This year, the savings ratio has risen further, to 8 per cent, a level not achieved since 1998.

At the same time borrowing has fallen dramatically.

With cheap credit readily available, borrowing hit an all-time high of £125 billion in 2004. The debt binge was driven by rising house prices as families remortgaged to release equity for holidays and other luxuries. At its peak, in 2007, net mortgage lending hit £108 billion.

Last year, by contrast, households borrowed just £20 billion, the lowest level since 1993.

David Hollingworth, of mortgage brokers London & Country, said: “There’s been a complete turnaround in the approach of borrowers. Rather than using mortgages as a cheap way of borrowing – effectively using their home as a piggy bank to fund their luxury purchases – they are now looking to pay down debt more quickly. They are tightening their belts amid concerns about higher interest rates in the future and questions over the employment market.”

The shift from loans to deposits has occurred despite the relatively low rates on offer in traditional savings accounts, which are now offering up to 3 per cent compared with 5 per cent before the crisis.

However, the Bank of England pointed out that savers were getting a good deal compared with the Bank Rate, which remains at a historic low of 0.5 per cent.

Charities said it was unsurprising that, at a time of high unemployment, households were being more prudent with their budgets.

But they warned that families still faced tough times ahead with the prospect of rising interest rates. Delroy Corinaldi, a director at the charity Consumer Credit Counselling Service, said: “Unemployment and pressures on the public purse will ensure the problem of over-indebtedness continues. The crux of the problem will not be about levels of debt but ability to repay, particularly if and when interest rates go up.”

Household finances are likely to be squeezed further because of George Osborne’s Emergency Budget. VAT will rise from 17.5 per cent to 20 per cent, while up to 700,000 more workers are to pay higher rate income tax after the threshold was lowered.

In April, ONS figures showed the average person’s wealth fell by £16,000 in the first part of the recession, a drop of 15 per cent.

http://www.telegraph.co.uk/finance/personalfinance/savings/7852966/Families-saving-more-money-than-borrowing-for-first-time-in-20-years.html

UK State pension Ponzi scheme unravels with retirement at 70

By Ian Cowie Your Money Last updated: June 24th, 2010

69 Comments Comment on this article

Mr Duncan Smith is the latest minister charged with tackling Britain's state-funded pension system.

The great Ponzi scheme that lies behind our State pension is unravelling – as they all do eventually – because money being taken from new investors is insufficient to honour promises issued to earlier generations.

Now the new Coalition Government suggests that we should pay more into the scheme in the form of higher taxes and National Insurance Contributions (NICs) while waiting longer before we take benefits out, by working until we are 70 before we retire.

None of this should come as a surprise. It is many years since experts began pointing out that Britain’s State pension – like most of its public sector pensions – are unfunded promises which rely on NICs and taxes paid by workers this week to pay pensions to old people next week.

This financial model is so fundamentally unstable that it is illegal in the private sector. No private company or insurer would be allowed to carry on as a series of British governments have done. Hence my disrespectful but I hope helpful comparisons with the original wheeze of the American fraudster, Mr Ponzi.

ile none of this mess is the fault of the new Government, that does not mean we should uncritically accept its suggested solution to the problem. Least of all because so much of what Iain Duncan Smith, the Work and Pensions Secretary, is proposing looks identical to what the discredited previous Labour administration had announced.

For example, there is the plan for a new State pension into which all employees will begin to be auto-enrolled from 2012. You can see why socialists might say the answer to a reduction in voluntary savings is to make them compulsory. But why would Conservatives – who used to believe in individual freedom, responsibility and choice – arrive at the same conclusion?

More importantly, why should individual savers agree? Given the multiple disappointments for pension savers over the last 13 years, the new auto-enrolled pension looks horribly like a case of throwing good money after bad.

While it is true that employees who find their paypackets diminished by deductions they never asked to be made may subsequently ask to leave the scheme, the Government hopes it will get off the ground because of many people’s inertia. Just like the flakiest tick box marketing techniques that are now banned in the private sector by financial regulators. No insurer is now allowed to tell people: “You didn’t opt out, so we helped ourselves to your cash anyway.”

Longer lifespans mean we must save more and work longer or retire in poverty. You can opt out of saving but you cannot opt out of growing old. But that does not mean the Government should nationalise our savings, which is what its new auto-enrolled scheme amounts to.

A Conservative solution to the problem of inadequate saving would be to improve incentives for voluntary pension contributions. That need not involve extra costs in the form of tax breaks. For example, the Budgetproposals to give savers greater choice about how they spend pensions savings, by removing the compulsion to buy a guaranteed income for life in the form of annuitiies, will make pensions more flexible and attractive. Savers do not like being told what to do with their own money.

Pensions would be even more attractive if we knew we could get access to the money earlier in life when we needed it; perhaps to fund a business or buy a home. This flexibility already exists in America and there is no reason it could not be introduced here.

Instead, one of the last acts of the Labour government was to delay savers’ access to private sector pensions by five years; when it raised the minimum retirement age to 55. Now the new Coalition Government seems to be heading in the same direction with State pensions.

That will be very hard on many low-income, working class men who tend to die several years earlier than better-off, middle class women; to give just one extreme example of the wide gap in life expectancy recorded by the Office for National Statistics.

It is also an unfortunate reminder of the very first fraudster I met when working in the City more than 20 years ago. Peter Clowes, who was subsequently sent to jail, told me: “If only I had been given more time, I could have paid them all.” Now the Government seems to be in the same position with State pensions.

World's rich got richer despite recession

World's rich got richer despite recession
June 23, 2010

The rich grew richer last year, even as the world endured the worst recession in decades.

A stock market rebound helped the world's ranks of millionaires climb 17 percent to 10 million, while their collective wealth surged 19 percent to $US 39 trillion, nearly recouping losses from the financial crisis, according to the latest Merrill Lynch-Capgemini world wealth report.

Stock values rose by half, while hedge funds recovered most of their 2008 losses, in a year marked by government stimulus spending and central bank easing.

"We are already seeing distinct signs of recovery and, in some areas, a complete return to 2007 levels of wealth and growth," Bank of America Corp wealth management chief Sallie Krawcheck said.

The fastest growth in wealth took place in India, China and Brazil, some of the hardest hit markets in 2008. Wealth in Latin America and the Asia-Pacific soared to record highs.

Asia's millionaire ranks rose to 3 million, matching Europe for the first time, paced by a 4.5 percent economic expansion.

Asian millionaires' combined wealth surged 31 percent to $US 9.7 trillion, surpassing Europe's $US 9.5 trillion.

In North America, the ranks of the rich rose 17 percent and their wealth grew 18 percent to $US 10.7 trillion.

The United States was home to the most millionaires in 2009 - 2.87 million - followed by Japan with 1.65 million, Germany with 861,000, and China with 477,000.

Switzerland had the highest concentration of millionaires: nearly 35 for every 1000 adults.

Yet as portfolios bounced back, investors remained wary after a collapse that erased a decade of stock gains, fueled a contraction in the global economy and sent unemployment soaring.

The report, based on surveys with more than 1100 wealthy investors with 23 firms, found that the rich were well served by holding a broad range of investments, including commodities and real estate.

"The wealthy allocated, as opposed to concentrated, their investments," Merrill Lynch head of U.S. wealth management Lyle LaMothe said in an interview.

Millionaires poured more of their money into fixed-income investments seeking predictable returns and cash flow. The challenge ahead for brokers is convincing clients to move off the sidelines and pursue riskier, more fruitful investments.

"There is still a hesitancy," LaMothe said. "Liquidity is incredibly important and people need cash flow to preserve their lifestyle - but they want to replace that cash flow in a way that does not increase their risk profile."

The report found that investor confidence in advisers and regulators remains shaken. The rich are actively managing their investments, seeking customised advice and demanding full disclosure about the securities they buy.

There were signs that investors were shaking off their concerns. Families that kept money closer to home during the crisis began shifting money to foreign markets, particularly the developing nations.

North American and European investors are expected to increase their exposure to Asian markets, which are projected to lead the world in economic expansion. Europe's wealthy are seen increasing their US and Canadian holdings.

More wealthy clients also are taking a harder look at large companies that pay healthy dividends, as an alternative to bonds and their razor-thin yields.

"Investors are open to areas they hadn't thought about before as they try to preserve their ability to be philanthropic, to preserve their lifestyle," LaMothe said. "To me, the report underscored clients are involved and they're not inclined to stay in 1 percent savings accounts."

Reuters

Big rise in the number of Australia's mega-rich

Big rise in the number of Australia's mega-rich

JARED LYNCH
June 24, 2010

AUSTRALIA'S mega-rich are shunning the real estate market for equities, believing property prices are too high and no longer have much bang for buck, a study shows.

The World Wealth Report, released by Capgemini and Merrill Lynch yesterday, revealed that the number of millionaires in Australia surged by 34.4 per cent last year to 174,000, with most recouping losses sustained in the financial crisis.

And the combined wealth of high-net-worth individuals in the Asia-Pacific region climbed 30.9 per cent to $9.7 trillion, overtaking Europe for the first time, which was $9.5 trillion.

The shift in rankings came because gains in Europe, while sizeable, were far less than those in the Asia-Pacific region, which saw continued robust growth in both economic and market drivers of wealth, the report said.

Merrill Lynch senior vice-president for investments Peter Opie said high-net-worth individuals, defined in the report as people holding investable assets of more than $US1 million ($A1.14 million), were putting money back into the sharemarket rather than property.

''Real estate is forecast to be a big loser,'' Mr Opie said.

''In Australia there is a concern that property valuation is too high.

''The equity markets had a big hit in 2008 and early 2009 and then people came back … because they were cheap again. Whereas perhaps with real estate you did not see as great a degree of movement down and therefore a greater degree of interest from investors.''

The report forecast that equity markets would account for 35 per cent of millionaire assets in the Asia-Pacific region by next year - an increase of 6 percentage points on last year - while real estate would drop from 18 per cent to 14 per cent.

Mr Opie said it was difficult to gauge what impact the forecast change in asset base would have on the real estate sector, particularly large-scale commercial projects.

''It's probably going to have an impact, sure,'' he said.

''But I'm probably not able to answer the question to the extent that the millionaire investors drive residential, commercial and industrial real estate. Much of that is held at the institutional level.''

The rich-list surge catapulted Australia to No. 10 for the number of millionaires after slipping to No. 11 in 2008.

The average individual worth was $2.99 million.

The US, Japan and Germany head the list, having 2.8 million, 1.65 million and 861,000 millionaires respectively.

Worldwide, the wealthy have nearly recouped the losses of 2008 and total assets are approaching levels last seen in 2007, before a US housing crisis triggered the global recession.

With AAP

For every 10 Singaporeans you meet more than one will be a millionaire of USD.

Singapore and Malaysia

The Boston Consulting Group, one of the leading global management consulting firm has just last week released its Annual Wealth Report and found Singapore to be amongst the top 20 countries with the most millionaires households.

Singapore, (once a part of Malaysia) is a tiny nation of 5.1 million population is ranked at no. 18 with the most numbers of millionaires and rank the highest in terms of density with 11.4 percent of the total households being a millionaire in USD (US Dollar). That is about 3.3 million Malaysian Ringgit. And this is of liquid asset which does not include the value of property owned.

(Most Millionaires Countries)

That means for every 10 Singaporeans you meet more than one will be a millionaire of USD.

Malaysia? of course is not in the list but i will try to check the most corrupt millionaire household list, maybe we are there.

As i remembered in the late 70s to early 80s before Mahathir became PM, Malaysia has one of the highest per capita income in Asia and was way ahead of countries like South Korea and Taiwan.

The Singapore dollar exchange rate was at parity with the Malaysian dollar back than at 1 for 1 and after Mahathir became PM we saw the other Asian countries race way ahead and today the Singapore exchange rate is at about RM2.33 for one Singapore Dollar.The Hong Kong dollar back than was about 3 for one Ringgit.

Singapore is today a fully developed country and an advanced nation  of which Malaysia is only still aspiring to become. Singapore enjoys a per capita income of more than USD 37 thousand whereas Malaysia is at less than USD 7 thousand which is way way off the mark being a leader in the region some 30 years ago.

Singapore is the fourth leading financial centre of the world and the fourth richest nation in terms of GDP Purchasing Power Parity per capita.

Singapore is a fine example of a sound and efficient economic management and governance with one of the highest ratings by Transparency International for being clean and the least corrupt.

On the other hand Malaysia will show you how corruption can impoverished its people and after years of progressive corruption has now become terminal and rotted to the core. Malaysia is now a sad story although blessed with rich and abundant natural resources, has 57.8% of its total household of 5.7 million earning a meager income of below 3000 Ringgit a month with an average household size of 4,5 person per household. And more than two third of the Malaysian household earns less than RM4 thousand a month at 70.7%.

(Click on Image to Enlarge)

We could have been like Singapore and we would have been a prosperous nation only if than we had selected our leaders wisely and carefully but instead we had to pick the most wicked and corrupt that has plundered our resources and divided our spirits.

My comment:

The recently announced 10th MP confirmed the demise of the NEM and the continuation of pre-existing policies.  This does not bode well for the future.  As a prudent and frugal investor, your asset allocation should be 90% foreign and 10% local.

Earnings of Golden Hope, Guthrie and Sime Darby from 1990 to 2007

Perincian keuntungan/kerugian tahunan Kumpulan Sime Darby Bhd, Golden Hope Plantation Bhd dan Kumpulan Guthrie Bhd …




From 1990 to 2006 the EBIT of:

• Golden Hope grew 5.9 X
• Guthrie grew 9.0 X
• Sime Darby grew 3.4 X

The combined EBIT of Golden Hope & Sime Darby  in

• 2007 was 3404 million

The EBIT of Sime Darby (post-merger) in

• 2008 was 5248.3 million
• 2009 was 3165.5 million