Investing overseas: What you need to know

Saturday, 26 March 2016

BY YAP MING HIU MONEYandYOU

WITH the ringgit weakening over the past year or so, those of you who haven’t already, are probably starting to toy with the idea of investing overseas.

Diversification across markets, asset classes and currencies is one of the basic tenets of investing. Those who follow this strategy religiously would likely have seen their investment portfolios perform better than those who remained entrenched in the local market.

What used to be considered fairly robust returns – such as ASB dividends of 8% per annum and EPF dividends of 6.5% per annum – now seem menial if you take into account the 30% drop in the value of our ringgit.

It is no surprise then that by now, many Malaysians have accepted the fact that the ringgit may not bounce back to RM3.20 to US$1 anytime soon, and that it is time to diversify their assets by means of foreign investments.

This is good. But before putting your money into foreign investments, you need to know what you are getting yourself into, and carefully consider your decisions before making your moves.

Firstly, how much of your investable assets should you allocate to foreign investments?

The rule of thumb is to allocate not more than 30% of your investable assets into foreign currency investments. The reason for this is that your daily life still revolves around the Malaysian currency, and your foreign investment is merely a means of bolstering your net worth.

Besides, if the US currency weakens, you run the risk of losing a significant amount of money if your primary invested assets were in US dollars. In recent months, anyone who bought into the pessimistic view out of fear that the ringgit would touch RM5 to US$1 would have seen the value of their foreign investment shrink owing to the strengthening of the Malaysian currency. Therefore, putting more than 30% of investable assets into foreign investments would be over-investing, not to mention highly risky.

The second point to consider is, how do foreign investment markets fare in comparison to Malaysia?

If you have not had any experience investing overseas, you may be in for a big surprise. Many Malaysians assume that the investment market overseas works more or less the same way as it does locally. However, this is not the case.

Unlike Malaysia, foreign investment markets such as US, Singapore and Hong Kong are far more open and have fewer regulatory restrictions. There’s also less government support for their market. As such, while these markets enjoy higher levels of global portfolio fund flows, they also experience higher levels of volatility and price fluctuations.

Let us take the example of bonds. In Malaysia, bond investments behave almost like a fixed deposit type of investment – steadily up and predictable (partly due to the accreting value of bond coupons recognised by the fund over time). However, the same can’t be said in other countries.

In the graph, you can see that a Malaysian bond fund (Fund A) moved up steadily over the period of comparison whereas the US (Fund B) and European (Fund C) bond funds experienced higher levels of price volatility and underperformed Fund A. All three funds invest in somewhat similar investment grade papers, only that they invest in different markets. This is mind blowing for most Malaysian investors.

In fact, I had a client who once lost up to 20% of his investment in an Asian bond fund domiciled in Singapore. What made him very upset was that he wasn’t properly advised by the banker of the risk exposure of such a fund. Had he done a little more due diligence or consulted an independent financial advisor before investing into the fund, he would not have been caught off-guard and suffered such a significant loss.

The same applies to equity investment overseas. Many investors would have a hard time trying to adapt to markets that are more volatile than our FTSE Bursa Malaysia KL Composite Index.

The next point to consider is this: How safe is your capital when investing in foreign products? If things are not going well, will you be able to retain your capital at the least?

Let me highlight the example of an offshore commodity product that I once came across. This product focused on physical trading of commodities like timber, metals, aquaculture, rice, plant-based oil, crude oil and biofuel. It supposedly had an attractive track record, yielding double-digit annualised returns for more than two years since its inception. It targets to provide investors with a fixed 2.25% quarterly distribution (i.e. a total of 9% per year).

One of the most common mistakes made by Malaysian investors, however, is the tendency to look at foreign investments through the lenses of their local perspective and experience. At first glance, you might think this investment is no different than any other equity unit trust funds available in Malaysia – a credible alternative investment with good diversification credentials worthy of consideration.

However, the product turned out to be a scam and the investors lost all their money. This is not an isolated case. Due to their limited knowledge and experience, many Malaysian investors fail to differentiate genuine investments from scams. That costs them a lot of money.

Cashflow needs

Thus when investing in foreign markets, it is always better to stick to licensed and reputable fund managers that invest in regulated investments and markets. Lastly, before putting your money into foreign investments, you should thoroughly assess your cashflow needs in order to maximise the holding power of your investments.

A good cashflow management practice is to establish one’s ideal cash reserve before dabbling in investments. For working adults, this emergency fund should be able to cover six months of one’s cashflow needs such as living expenses, loan repayments and any other lump sum cash requirements over the next three years. I recall an incident where a client of mine underestimated the amount of cash he would need to execute his plans of building a bungalow on a plot of land he owned.

Only midway through the construction process did he realise that he was short of cash, after having invested the remainder of his liquid assets in foreign investments. In the end, in order to complete his dream home, he was forced to withdraw his foreign investments at a loss.

A situation like this could have been easily avoided with a little bit more cashflow planning and foresight. Make the necessary provisions for your short-term cashflow needs and you will position yourself to better withstand any unexpected investment market volatility.

Diversification of investments across markets, asset classes and currencies is a recommended risk management strategy for any investor and should be diligently pursued. However, never assume that investing overseas is similar to investing in your home ground. In the case of Malaysia’s relatively stable investment environment, entering into foreign investment markets could be akin to stepping into rough sea from a calm bay – it might come as a shock if you are unprepared.

Conduct your research thoroughly – find out more about the investment environment, the country’s regulations, and study the investment product carefully. Consult a professional if required, such as an independent financial advisor, to address any concerns you may have. Once you’ve considered the above and decided to invest, make sure that you monitor the performance of your investment closely.

The more volatile a market, the faster you’ll need to take action on your profits or losses. Park your profits somewhere safe to prevent losing it to the fluctuating market. If your investment is making a loss, then act fast with a contingency plan at hand.

Remember, the more prepared you are, the more likely you are to succeed. All the best!

Yap Ming Hui (yapmh@whitman.com.my) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm. For more information, please visit his website at www.whitman.com.my

Bank Negara Malaysia 2015 Annual Report

http://www.bnm.gov.my/files/publication/ar/en/2015/BNMAR2015_slides.pdf

http://www.bnm.gov.my/files/publication/ar/en/2015/ar2015_en.pdf

Outlook for the Malaysian Economy in 2016 

The international economic and financial landscape is likely to remain challenging in 2016 and will be a key factor that will influence the prospects of the Malaysian economy. Depending on their nature, global developments can pose both upside and downside risks to the Malaysian economic growth. The Malaysian economy is expected to grow by 4.0 – 4.5% in 2016. Domestic demand will continue to be the principal driver of growth, sustained primarily by private sector spending. Private consumption growth is expected to trend below its long-term average, reflecting largely the continued household adjustments to an environment of higher prices and greater uncertainties. These moderating effects, however, will be partially offset by continued growth in income and employment, as well as some support from Government measures targeted at enhancing households’ disposable income. In an environment of prolonged uncertainties and cautious business sentiments, private sector investment growth is projected to be slower compared to its performance in the past five years. Capital expenditure in the upstream mining sector will continue to be affected by the environment of low energy and commodity prices. Support to private sector capital spending will mainly stem from the implementation of on-going and new investment projects, particularly in the manufacturing and services sectors.

 Reflecting the Government’s commitment to more prudent spending, growth of public sector expenditure is also expected to be more moderate but would continue to be supportive of overall growth. Public investment is, however, projected to turn around to register a positive growth, reflecting higher spending by the Federal Government on fixed assets and the continued implementation of key infrastructure projects by public corporations. The external sector is expected to remain resilient in 2016. Despite subdued commodity prices, Malaysia’s export performance is projected to remain positive, in line with the modest improvement in external demand. The well diversified nature of Malaysia’s exports will continue to support the overall growth in exports. Gross imports are projected to expand further amid an increase in intermediate imports to support the sustained performance of manufactured exports and the higher growth in capital imports due to continued expansion in domestic private investment. The overall trade balance in 2016 is expected to continue to record a surplus, albeit one that is smaller. The services account is projected to record a narrower deficit on account of an expected improvement in tourism activity. Overall, the current account surplus is projected to narrow further to 1.0 – 2.0% of gross national income (GNI). On the supply side, all economic sectors are projected to expand, albeit at a more moderate pace in 2016. The services and manufacturing sectors will remain the key drivers of overall growth. Despite the lower oil and gas prices, growth in the mining sector will be supported by new gas production capacity. Growth momentum in the construction sector is projected to moderate slightly in 2016 amid a modest expansion in both the residential and non-residential sub-sectors. Headline inflation is projected to be higher at 2.5 – 3.5% in 2016 (2015: 2.1%), due mainly to increases in the prices of several price-administered items and the weak ringgit exchange rate. However, the impact of these cost factors on inflation will be mitigated by the low global energy and commodity prices, generally subdued global inflation and more moderate domestic demand. The trajectory of inflation during the year, however, could be more volatile given the uncertainties relating to global oil and commodity prices as well as the pace of global growth.


Economic and Monetary Management in 2016 

Monetary policy in 2016 will focus on ensuring that monetary conditions remain supportive of sustainable domestic growth with price stability, taking into consideration the evolving risks in the external and domestic environments. In particular, global economic and financial developments will need to be closely monitored and assessed in terms of their implications for the domestic growth and inflation outlook. Monetary policy will also continue to take into account the risk of financial imbalances. In addition, given the expectation of continued volatility in external flows, the Bank’s monetary operations will be directed towards ensuring that domestic liquidity in the financial system will remain sufficient to support the orderly functioning of the domestic financial markets. Fiscal policy in 2016 will continue to focus on fiscal consolidation. The 2016 Budget was recalibrated in January 2016 to incorporate the expected decline in global oil prices. 
Government spending was reprioritised and measures were introduced to broaden revenue sources. Fiscal spending will be prioritised towards high impact infrastructure projects that could have large multiplier effects by increasing the productive capacity of the economy. In addition, emphasis will continue to be accorded towards ensuring inclusive and sustainable growth through welfare enhancements, particularly in the form of socio-economic support to the lower- and middle-income segments to help them cope with the rising cost of living. Given the expectation of a challenging global financial environment, Malaysia will likely be confronted by volatile movements in capital flows. However, Malaysia’s deep and developed financial markets are well-positioned to intermediate these flows, thus ensuring that the functioning of the domestic financial markets will continue to be orderly and supportive of the real economy. Malaysia’s ability to withstand external shocks will also be augmented by its ample buffers and robust policy frameworks that have been steadily built over time. 

UK student property getting popular in Malaysia

March 18, 2016, Friday

London Spring Place is a new purpose-built student housing project comprising 386 fully managed en-suite rooms and self-contained studio suites.

KUALA LUMPUR: Cornerstone International Properties has launched the second phase of the London Spring Place (LSP) project in Malaysia following the sell-out launch of Phase 1 in Malaysia in 2015. London Spring Place is a purpose built student accommodation in the UK.

In a press statement to The Borneo Post yesterday, it stated that Phase 1 of LSP, which sold out within months, was a runaway success in Malaysia, a sign that more Malaysians are seeing the viability and benefit of investing in UK student property, especially in light of the ringgit volatility and local and global economic uncertainty.

“Traditionally reserved for institutional investors, UK student property is now open to individual and private investors and has grown in popularity in Malaysia,” said Cornerstone International Properties director Virata Thaivasigamony.

“We are firm believers in this investment type as it has proven to be recession-proof and the strongest performing asset class in the UK with annual nett yields as high as 8 per cent, superseding the meagre 4 per cent and 2.5 per cent gross yields from residential rental projects in Kuala Lumpur and London, respectively,” said Virata, citing Felda’s investment in a student property in the UK in 2015 in a move to diversify assets.

“We saw a sharp increase in our UK student property sales numbers compared to residential property in Malaysia. In 2015 alone, 73 per cent of our inventory sold to Malaysians was UK student property. Our top-selling student property project, London Spring Place (Phase 1) which was extremely popular among Malaysian investors, sold out last year.

“In fact, Cornerstone International Properties sold an impressive 80 student units for the developer of London Spring Place alone! We just launched Phase 2 early this month and the take up rate has been extremely positive.”

Cornerstone International Properties is the exclusive marketing agent for LSP in Malaysia. LSP units come furnished with a fully equipped gym, cinema room, communal study and games rooms, onsite laundry, and high-speed WiFi in every room.

The popularity of UK student property is largely attributed to its strong performance, the strongest performing asset class in the UK since 2011, surpassing all other property asset types, according to Knight Frank. The risks are low as there is an acute undersupply of purpose built student accommodation in the UK. Default in rent is rare as a result of parental guarantee, thus investors are assured of regular and timely rental returns.

Malaysians investing in UK student property are excused from capital gains tax in addition to relief from rental income tax.
The London Spring Place Phase 2 roadshow will be in Sabah and Sarawak from 10am – 7pm this Saturday and Sunday (March 19 & 20), at Le Meridian Hotel Kota Kinabalu, Sabah; Pullman Hotel in Kuching, Sarawak; and RH Hotel in Sibu, Sarawak. For details call 016-228 9150 or 016- 228 8691.

Read more: http://www.theborneopost.com/2016/03/18/uk-student-property-getting-popular-in-malaysia/#ixzz43iDL4ulZ

Malaysian capital market continues to expand in 2015 despite headwinds — SC

March 11, 2016, Friday

Ranjit said RM86 billion was raised through the issuance of private debt securities (PDS) and RM4 billion via initial public offerings.

KUALA LUMPUR: Notwithstanding various headwinds, the Malaysian capital market continued to expand in 2015 to reach RM2.82 trillion in size compared with RM2.76 trillion in 2014, the Securities Commission said.

Growth was driven by the equity market which grew from RM1,651 billion in 2014 to RM1,695 billion by end-2015 while the bond market improved to RM1,125 billion against RM1,110 billion registered in the previous year, said Chairman Datuk Seri Ranjit Ajit Singh in the SC Annual Report 2015.

“Such expansion attests to the sustained ability of issuers to obtain long-term financing from the Malaysian capital market, as fundraising activity remained robust throughout the year,” he said.

Ranjit said RM86 billion was raised through the issuance of private debt securities (PDS) and RM4 billion via initial public offerings (IPOs), bringing the total funds raised through the primary market to RM90 billion in 2015 compared with RM92 billion in 2014.

Meanwhile, a sustained expansion in buy-side liquidity over the year also contributed towards the relative resilience of the capital market, with assets under management (AUM) by fund management companies rising by six per cent to RM668 billion in 2015 from RM630 billion in 2014.

Unit trust funds continued to be the largest source of clients’ AUM with net asset value of RM347 billion by end-2015 compared with RM343 billion in 2014.

The unit trust industry, which is an important proxy for retail investor confidence in the capital market, also recorded surplus sales over redemptions, with the number of units in circulation growing from 425 billion in 2014 to 458 billion in 2015.

While the capital market recorded net portfolio outflows in 2015 in line with global emerging market trends, the value of foreign ownership in the corporate bond market increased slightly from RM13.9 billion in 2014 to RM14.0 billion by end-2015.

Liquidation of foreign portfolio positions in the equity market also took place at a measured pace, with the FBMKLCI recording a decline of -3.9 per cent compared with the MSCI Emerging Markets index which fell -17 per cent over the same period, said the report.

In 2015, Ranjit said the SC continued to diversify channels for financing and investments while broadening access to the capital market by pursuing measures to deepen existing market segments and nurturing new growth areas.

One such area of focus was the Islamic capital market, where Malaysia had firmly established its reputation as a global leader in Islamic finance and the world’s largest issuer of sukuk.

He said extensive work was underway in formulating a roadmap which articulated the SC’s strategy to establish Malaysia as a global Islamic fund and wealth management hub, the release of which was slated for 2016.

Another key market developmental thrust is SC’s ongoing efforts to facilitate access to market-based financing for early and growth-stage companies.

“One of our first initiatives in this regard is the establishment of a regulatory safe harbour for equity crowdfunding (ECF), a class of fundraising activity which enables entrepreneurs to obtain market-based financing for start-ups and early-stage companies,” Ranjit said.

In February 2015, SC became the first regulator in the region to introduce a framework for ECF, with six applicants subsequently approved to become registered ECF platform operators in Malaysia.

Also, as a long-standing champion of initiatives to strengthen the quality of corporate governance in Malaysia, the SC recently concluded the implementation period of the Corporate Governance Blueprint 2011 with 83 per cent of its recommendations already fully implemented.

Moving forward, near-term deliverables included revisions to the Malaysian Code on Corporate Governance 2012, as well as, the release of the Corporate Governance Priorities 2020 which will detail SC’s initiatives for the next five years, he added. — Bernama

Read more: http://www.theborneopost.com/2016/03/11/malaysian-capital-market-continues-to-expand-in-2015-despite-headwinds-sc/#ixzz43iC2FzXt

Help young M’sian graduates own houses, urges INCEIF deputy dean

March 21, 2016, Monday

KUALA LUMPUR: Young Malaysian graduates, especially those who kick off their working lives in the major cities, usually face tough obstacles in terms of sustaining their daily costs of living.

The average monthly salary of fresh graduates, mainly degree holders, is only around RM3,000 and for diploma holders lower.

With the current house prices, which are appreciating, it is impossible for the young graduates to own houses in the Klang Valley and other major cities.

The house values in these areas are over 100 times the monthly income of a fresh degree holder. Thus, more graduates have opted for depreciating assets, including cars and motorcycles, to fulfil their desires to own assets.

Associate Professor Dr Mohd Eskandar Shah Mohd Rasid said this trend was unhealthy for the graduates, especially in their long-term financial journey.

The International Centre for Education in Islamic Finance (INCEIF) School of Graduate Studies deputy dean, said the government, as the regulator, may need to find a solution to help these graduates own something that would help them move up in the value chain as the time goes by.

By purchasing only the depreciating assets, he said, it would be harder for them to improve their standards of living in the future.

“One thing the government can do is to look at subsidising the purchase of properties as we are currently subsidising quite a lot in terms of (other) consumption.

“Maybe the savings that we have from removing all these subsidies can be channelled into subsidising property purchases because it’s so important for the young graduates to own something (appreciating assets) in the country and build up their life,” he told

Bernama.

By allowing graduates to own a house at a subsidised price for a start, Mohd Eskandar said, it would eventually help them in their long-term financial journey, as well as moving away from debt-based society to ownership society.

“Another way the government can do is maybe to make the car prices more competitive, which in turn could free up some of their financing to make them available to purchase a house,” he said.

Mohd Eskandar said a study on housing subsidy was needed.

“There must be a mechanism so that only the right group of people would benefit from the incentive.

“We have to undertake the study. If you do not do it properly than the people can also abuse the subsidy. We don’t want that to happen,” he said.

Mohd Eskandar also suggested the government adopt the Singapore Housing and Development Board model, which, in a way, provided subsidy for its people in purchasing houses.

“By allowing people to own the appreciating assets, it would allow them (in the future) to move into a better houses.

Rather than setting the standard (house price) too high, we should allow the people to own something first.

“Without taking the first step, they will not be able to move to higher step,” he said.

Meanwhile, Mohd Eskandar said, INCEIF was concerned the saving rate among Malaysians was going down, and that they were borrowing a lot.

“It is not a good sign of sustainable economy. We need to change that. Maybe the reason people are not saving is that they are not getting the value for their savings,” he said.

He said this is where Islamic finance could play the role.

“When you follow the Islamic finance value, which is more of risk sharing, you take higher risk to get higher return.

And if the banking system can  provide better value for the investments rather than looking at the customers as depositors but investors and give better value, they might encourage more people to save,” he said.

The scholar said creating wealth was important in Islamic finance, as well as chanelling wealth through zakat and waqaf. — Bernama

Read more: http://www.theborneopost.com/2016/03/21/help-young-msian-graduates-own-houses-urges-inceif-deputy-dean/#ixzz43i71qqDT

Money to burn? China firms seek new investors

March 22, 2016, Tuesday

SHANTOU, CHINA: The Guangdong Yixiang Folk Culture Co has a licence to print money – thousands of lookalike US dollars roll off its clattering presses every minute, intended as burnt offerings for the heavenly bank accounts of Chinese ancestors.

But in the earthly realm, small- and medium-sized companies like this have a devil of a time getting a loan from China’s big state-owned banks, which prefer to lend to large, often state-owned, firms.

Business is booming, says general manager Xu Shaohong, and it is ready to expand its products from ‘Bank of Hell’ currency to paraphernalia for events earlier in the cycle of life, such as weddings and births.

Like thousands of other capital-starved enterprises in the upside-down world of Chinese corporate finance, it has applied to list on the National Equities Exchange and Quotations (NEEQ), a little-known stock market based in Beijing.

The NEEQ, also known as the ‘New Third Board’, has exploded, growing from 356 companies at the end of 2013 to more than 6,000 today – with nearly 1,000 joining since January 1.

It already has twice as many listings as the Shanghai and Shenzhen stock exchanges combined and is expected to add as many as 5,000 more by the end of 2016.

“It’s the next NASDAQ,” Xu said, referring to the US exchange favoured by technology startups.

As the world’s second-largest economy falters, Beijing is counting on small, private companies to help move it away from dependency on heavy industry and plodding state-owned enterprises.

Guangdong Yixiang is a prime example. Its offices in the southern city of Shantou are bright and modern.

It has almost 80 employees and mostly exports to Hong Kong and diaspora Chinese communities across Asia.

Documents submitted to NEEQ as part of its listing application show three years of healthy profits – more than two million yuan (US$300,000) in 2015.

With reliable income from one of life’s two certainties, it would seem to be an attractive borrower.

For years, China has promised to make it easier for such firms to access capital, and last year Premier Li Keqiang urged the country’s banks to increase financing for them.

But lenders remain risk-averse, said Suzie Wu, a managing partner at Tianxing Capital, which invests in NEEQ-quoted firms.

“They actually only support the big companies,” she said, leaving companies like Guangdong Yixiang to turn to ‘shadow banks’, unofficial lenders that often charge exorbitant, profit-sapping interest rates.

“Until the NEEQ market came, it was very difficult for the small, medium enterprises to get financial support.”

There were 2,565 share issues on NEEQ last year, generating US$18.7 billion, according to data from the exchange, with another US$4.07 billion raised in the first two months of this year.

But unlike most major global stock exchanges, joining NEEQ does not of itself provide corporate funding, as new listings do not necessarily sell shares in an initial public offering.

When Chinese and Asian football champions Guangzhou Evergrande Taobao – one of the most high-profile companies quoted on NEEQ – listed last year, it simply declared its shares to be worth 40 yuan apiece.

It was not until this January that it sold new investors a little more than five percent of itself, raising 869 million yuan – giving it a market capitalisation close to that of Manchester United.

More than half the listed companies have never recorded a single share sale on the board, data on the NEEQ website shows.

But companies who cannot find buyers can still use their shares as ‘collateral for loans’, said Christopher Balding, of Peking University’s HSBC Business School in Shenzhen.

As such “being on the New Third Board is better than not being on the New Third Board”, explained Yang Peng, a consultant for Guangdong Yixiang.

If nothing else “it will definitely make it much easier to get a bank loan”.

Loose listing requirements are another large part of the NEEQ’s appeal, a contrast to the heavily regulated flotation process in Shanghai and Shenzhen.

Until now, companies wanting to go public in China have generally had to show years of profitability, but the New Third Board asks them to demonstrate little more than two years of existence and that their business activities are legal.

As such, Balding said, the bourse does not require “full and accurate disclosure” of the “financial risks that investors might be facing”.

But Xu, the banknote printer, had no qualms, imagining a future financed by NEEQ investors, with automated production lines and orders fulfilled online.

Who knows, she said, “maybe we can even make tombstones”. — AFP

Read more: http://www.theborneopost.com/2016/03/22/money-to-burn-china-firms-seek-new-investors/#ixzz43i6UdkX3

A plea for help: How China asked the Fed for its stock crash play book

 March 22, 2016, Tuesday

WASHINGTON: Confronted with a plunge in its stock markets last year, China’s central bank swiftly reached out to the US Federal Reserve, asking it to share its play book for dealing with Wall Street’s ‘Black Monday’ crash of 1987.

The request came in a July 27 email from a People’s Bank of China official with a subject line: “Your urgent assistance is greatly appreciated!”

In a message to a senior Fed staffer, the PBOC’s New York-based chief representative for the Americas, Song Xiangyan, pointed to the day’s 8.5 per cent drop in Chinese stocks and said “my Governor would like to draw from your good experience.”

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil.

The Chinese central bank and the Fed had no comment when reached by Reuters.

In a Reuters analysis last year, Fed insiders, former Fed employees and economists said that there was no official hotline between the PBOC and the Fed and that the Chinese were often reluctant to engage at international meetings.

The Chinese market crash triggered steep declines across global financial markets and within a few hours the Fed sent China’s central bank a trove of publicly-available documents detailing the US central bank’s actions in 1987.

Fed policymakers started a two-day policy meeting the next day and took note of China’s stock sell-off, according the meeting’s minutes. Several said a Chinese economic slowdown could weigh on America.

Financial market contagion from China was one of the reasons cited by the Fed in September when it put off a rate hike that many analysts had expected, a sign of how important China has become both as an industrial powerhouse and as a financial market.

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood major central banks.

The exchanges also show that while the two central banks have a collegial relationship, they might not share secrets even during a crisis.

“Could you please inform us ASAP about the major measures you took at the time,” Song asked the director of the Fed’s International Finance Division, Steven Kamin in the July 27 email.

The message registered in Kamin’s account just after 11 a.m. in Washington. Kamin quickly replied from his Blackberry: “We’ll try to get you something soon.”

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 percent on Oct. 19, 1987.

Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports that were attached to the email.

All of the attached documents had long been available on the Fed’s website and it is unclear if they played a role in shaping Beijing’s actions.

Kamin’s documents detail how the Fed began issuing statements the day after the market crash, known as Black Monday, pledging to supply markets with plenty of cash so they could function.

By the time Song wrote to Kamin, China had spent a month fighting a stock market slide and many of the actions taken by the PBOC and other Chinese authorities shared the contours of the Fed’s 1987 game plan. — Reuters

Read more: http://www.theborneopost.com/2016/03/22/a-plea-for-help-how-china-asked-the-fed-for-its-stock-crash-play-book/#ixzz43i5QBQDZ

Warren Buffett - It is Your Future

Q&A: what are negative interest rates?

European Central Bank has cut the interest rate banks receive when they deposit money with the ECB

The ECB has cut its headline interest rate to a new record low of 0.15%, and also imposed negative interest rates of -0.1% on eurozone banks – to encourage them to lend to small firms rather than to hoard cash.

How do negative interest rates work?

Instead of earning interest on money left with the ECB, banks are charged by the central bank to park their cash with it. The ECB cut its deposit rate to -0.1% on Thursday and the hope is that this will encourage the banks to stop hoarding money, and instead lend more to each other, to consumers, and to businesses, in turn boosting the broader economy.

Will it work?

No one knows. In theory it sounds attractive but it has never been attempted by the eurozone and could have unpredictable and unintended consequences. Those consequences include the possibility that banks will pass on to customers the costs they incur for depositing money with the ECB.

A broad risk is that a negative return on parking funds with the central bank might encourage banks to invest in riskier assets to secure a return, potentially driving new asset bubbles and more pain further down the line.

As part of this bid to find alternative investments, banks are likely to increase their purchases of government bonds. However, this has potentially serious consequences if banks are holding bonds to such an extent that government borrowing costs are artificially low. If a financial shock occurs, the banks and governments could find themselves so intertwined and interdependent that they drag each other - and the economy - down.

Has it happened before?

Sweden and Denmark have introduced negative deposit rates on a temporary basis in recent years. In Denmark, the aim was to cap an unwanted rise in its currency, which was pushed higher when foreign money flooded into the country as investors looked for safe havens outside the crisis-ridden eurozone. The move to negative deposit rates did not cause financial meltdown, with the Danish central bank issuing plenty of advance warning. Nor did it lead to a noticeable change in the interest rates charged by banks for bank loans. But then again negative deposit rates have never been tried by an economy on the scale of the eurozone, and the fear is that the Danish example will have little read-through for the 18-member bloc.

What would it mean for me?

Very little in terms of the detail of the policy and any impact on retail banking rates. However, if it provided the desired boost to the eurozone economy and put it on the path to a sustainable recovery, that would be good news for the UK economy too. On the flipside, if there were some nasty unintended consequences, including a shock to the eurozone banking system, Britain's economic recovery could potentially be undermined.

Negative Interest Rates

Less Than Zero

By Jana Randow and Simon Kennedy | Updated Mar 10, 2016 10:19 AM EST

Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.

The Situation

The Bank of Japan surprised markets by adopting negative interest rates in January, more than a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. With other options to stimulate the economy limited, more policy makers are willing to test the technique. They acknowledge that sub-zero rates can crimp the ability of banks to make money or lead them to take additional risks in search of profit. The ECB cut rates again March 10, charging banks 0.4 percent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans. Sweden also has negative rates, Denmark is using them to protect its currency’s peg to the euro and last year Switzerland moved its deposit rate below zero for the first time since the 1970s. Janet Yellen, the U.S. Federal Reserve chair, said in November that a change in economic circumstances could put negative rates “on the table” in the U.S. Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By February, more than $7 trillion of government bonds worldwide offered yields below zero. That means investors buying bonds and holding to maturity won’t get all their money back. While most banks have been reluctant to pass on negative rates for fear of losing customers, a few began to charge large depositors.

Source: Bloomberg

The Background

Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area. While it’s still too early to tell if they will work, ECB President Mario Draghi said in January 2016 that there are “no limits” on what he will do to meet his mandate. Europe’s central bank chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan. Policy makers in both Europe and Japan are trying to prevent a slide back into deflation, or a spiral of falling prices that could derail the economic recovery. The euro zone is also grappling with a shortage of credit and unemployment is only slowly receding from its highest level since the currency bloc was formed in 1999.

Source: European Central Bank

The Argument

In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there’s a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead, robbing lenders of a crucial source of funding. But there’s mounting concern that when banks absorb the cost of negative rates themselves, that squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend. The Bank for International Settlements warned in a March 2016 report of “great uncertainty” if rates stay negative for a prolonged period. And if more and more central banks use negative rates as a stimulus tool, there’s concern the policy might ultimately lead to a currency war of competitive devaluations.

The Reference Shelf

• A Bloomberg comic explains how negative interest rates aim to put money to work.
• The Bank for International Settlements published a March 2016 report on negative rates.
• An analysis of the impact of negative rates in 2015 from Sweden’s central bank.
• Blog posts from Francesco Papadia, a former director general for market operations at the ECB, on whether the central bank should have negative rates, and a discussion about where rates could go.
• A speech by Benoit Coeure, a member of the ECB Executive Board, on monetary policy and the challenges of the zero lower bound.
• A Bloomberg News article outlining the pros and cons of a deposit rate of zero or below and a QuickTake on the ECB’s debate over quantitative easing.
• An ECB research paper on non-standard monetary policy and a Bank of England study of negative rates.

http://www.bloombergview.com/quicktake/negative-interest-rates