Déjà vous

Archive for March, 2009

Demonstrators against the G20 summit had their first march in last Saturday with an estimated 35,000 people to demand economic and environmental reforms. This week’s summit is the first major summit in London since a G7 gathering in 1991.

The organisers of the protests are environmental campaigners, anti-capitalist and religious groups. According to an activist, “greedy corporate leaders were responsible for the economic crisis and and they were still trying to fill their own pockets despite the biggest economic collapse in decades.” Up to now, the crisis has pushed millions of worker into unemployment and hundreds million into poverty.

1/ A draft of the G20 summit’s communique has been leaked to the German magazine Der Spiegel (meaning The Mirror, as one of the largest European weekly magazines) included proposals of more than $US14 trillion spent in extra fiscal stimulus by governments. Its is supposed to be an act of sabotage by European leaders, especially those of Germany and France, against the G20 summit. Noted that the German government, along with the French, are most resistant to the idea of further economic stimulus. They are also the major activists for prevent the spreading of off shore tax havens, most of which are or were British territories. (read the Tax haven entry)

2/ There are signs in the US raising hope that the economic downturn is getting near to its bottom based on some indicators from  the Commerce Department. First, consumer spending and consumer sentiment rose marginally in February and the US housing market has stabilised from its freefall. Secondly, although I don’t really get its idea, it is possible because the number of Americans filling new claims for unemployment benefits has started to fall in March and evidences from past recessions show that it has hit its peak about four week before the economy begin to recovery. But a recovery is not a synonym with positive growth. With the 8.1 per cent unemployment rate and marching higher, the 7-8 per cent annualised GDP fall and nearly 30 percent drop of both business investment and exports, it is hard to believed that the US economy will turn towards positive growth soon. But all the optimists, together with us, are hoping that we’re getting close to the turning point.

3/ On the website Viet-studies.info there’s a link to a WSJ’s article indicated that Chalco, a Chinese based mining firm has experienced a nearly 100% profit plunge in 2008. The editor of Viet-studies left a comment kind of what’s the hell that Vietnamese government are gonna cooperate with such an unsuccessful company like this. Although I totally agree that no Chinese mining firm should be allowed to invest in Vietnam due to defence and social responsibily issues, I do not agree with the comment at all. The last year 2008 was a recently worst year of mineral market. Copper was down a touch from $US 9,000/tonne to just above $US 3,000 in the second half of 2008. Lead, nickel and tin were also big losers. Tin stocks at the LME (London Metal Exchange) are now at their highest point for 52 weeks. Supposed that the metal price decreased by three times in last year, Chalco’s performance was acceptable and it still is among the survivors.

Update (1/4): I made a big misunderstanding here. A plummet of nearly 100% in net profit of Chinalco is a drop from 10.75 billion yuan in 2007 to 9.2 million yuan in 2008. However, I keep the opinion that the Chinalco’s financial performance is not really terrible when the metal prices are falling dramatically.

Today is the last day of the Australian Grand Prix in Melbourne, the first of 17 rounds of F1 World Championship in 2009. The 60th Grand Prix this year is somehow special in term of this occasion in which 400 tonnes of luxurious cars and dozens world-class racers gather together despite the ashes of Honda’s decision to quit F1 due to the global financial crisis. And it’s also special in term of the new British winner Jenson Button, a former Honda’s racer.

Button compared his champion as the ending of a fairytale. This is the first performance of his new team Brawn GP after a buy-out of his old Honda team by former Ferrari guru Brawn. This is the first time since 1977 a Formula One team has won on debut. And this it the first time since Mercedes in 1954 a team has secured a  one-two on debut. Just forget Ferrari!

Today after taking some photos at the MCG, I was heading to Albert Park Lake to watch the race of highest-class F1 cars although i didn’t have any ticket. Their sound was so exciting!

There were two rounds of fences like that...

So I had to stand up like these people to look inside

It's not very comfortable

At last, I took a photo of Grand Prix but it was not about the racing cars. it was about some aircrafts in the sky hehe.

A chicken run

And I came up with the idea that living in Melbourne is much more interesting than in Sydney.

One eldery man to another sitting in arm chairs.

Whereas most of the countries have been suffering the biggest economic crisis since the 1930s’ Great Depression and some of them have carried out bail-out plans to rescue their big banks and they need every cent of taxation revenue to pay for the bailouts, some other ones are just saving the hot money coming in as a flow of tax from all over the world. They are considered as tax havens, where certain taxes are levied at a low rate or not at all.

Some strong economies such as Switzerland, Singapore, Hong Kong, Belgium, Luxembourg and Australia are widely recognised as tax havens or, more theoretically, secretive offshore finance centres although they have well-regulated and relatively transparent banking system. As being considered as tax havens by OECD, some of them have certain tax rates which are not high enough or have protection of personal financial information rules such as Switzerland preventing the taxpayers from scrutiny of foreign tax authorities.

Other tax havens recognised by OECD are smaller territories that have low tax rates and poor regulation and most of them are or were British territories. Most of the world’s hedge funds were registered in the Caymans island, an overseas territory of Britain and many shadow banking system, many of the most debt instruments and big banks that got into trouble are managed offshore or did much of their business through offshore subsidiaries. Ignoring the European calls for greater regulation, Britain seems to help many of them, like Bermuda and the Caymans, to become tax havens as an aim to support its own financial industry. For example, every single law passed in those places has to be signed by the Queen, meaning it is actually signed by British ministry of constitutional affairs. As being said by Murphy, a British tax accountant and anti-haven campaigner, “London is the biggest tax haven in the world because all these other places are just branches of London”.

However, in current situation tax havens is likely a problem rather than a solution. First, even though financial crisis was caused largely by the collapse of the US subprime mortgage market rather than tax evasion, “havens also play an important role in amplifying the crisis because they are regulatory havens as well as tax havens,” said Murphy. Secondly, seemingly supporters of tax havens such as Gordon Brown now need the revenue from tax than ever before to pay for his government’s bail-out plans. So, during planning for the G20 summit in next week, the tax haven issue has generated the strongest consensus, which is about the deal with the problems of offshore tax heavens and the cross-border supervision to prevent them.

These action has created a threat to Switzerland, the first “true” tax haven. After the World War I, whereas many other countries increased the tax paid to raise revenue for reconstruction, Switzerland still maintained a lower tax rate and therefore, Swiss banks had become capital havens for the foreigners. But now when the governments need tax revenue, such places as Switzerland are no longer on protection. It is leading a rush of offers to exchange tax information to other governments. These actions is unlikely to take enough action on havens because the governments would need to provide proof of tax fraud (which is somehow and sometimes not considered as a fraud in Switzerland) and the list of the accounts and people involved. During some years the Swiss needs to take to negotiate and legislate for the agreements, its bank can reform with new structures and even new bases.

Whatever difficulties they face, these actions show that the current economic crisis are producing a heavy pressure on tax havens. Obviously, the benefits from tax havens are now outweighed by the need for taxation dollars to pay for the government’s deficits. In the near future, there will be few tax havens that can survive and the winner is the one who are better regulated, more transparency and more willing to exchange personal financial information of tax payers to other governments. Hong Kong, Singapore, Dubai, Jersey and Bermuda will likely be the survivors. At that time, perhaps Switzerland will be a transformed place.

Reference:

Wilson, p 2009, ‘Pirates of the Caribbean’, The Australian, 27 March, p. 11.

The term “beggar thy neighbor” refers to protectionism policies which have become more popular in this economic crisis. Due to heavy deflation, which causes unemployment and illness of the domestic market, some countries have to carry out policies seeking for their own benefits first, rather than to contribute to the global economic balance and stability.

As opposed to free trade, protectionism restrains trade among nations. Those policies aim to enhance domestic market and to reduce the rate of unemployment. Protectionism governments might impose either tariffs or quotas on imports to restrain imports and by doing so, they shift demand onto domestic production. Two instances are from Mexico and Russia. Another measure which is often used by protectionists is to devaluate the domestic currency, or to use exchange rate manipulation. Doing so will raise the cost of imports and lower the cost of exports, thus improve that country’s trade balance. (Noted that this policy can lead to inflation.) China is one of the recent examples that use this policy.

The benefits of free trade can be explained by David Ricardo’s comparative advantage theory, as the illustration below.

P[world] is the original price of the product and P[tariff] is the higher price after imposing a tariff. Because of the tariff, a tax revenue is created and consumer surplus decreases by a higher rate than the increase of producer surplus. As a result, there is societal loss as the two pink pieces.

In this crisis, a cure for the economics downturn is to inhance the global trade, which was predicted two days ago in the WTO’s most pessimistic report in its 62-year history. This report estimates that the global trade will slump by 9 per cent in this year and the falling rate in developed countries will be higher than that of developing ones, which is just 2-3 percent. Therefore, protectionism policies as a barrier against free trade should be prevented by all the countries. According to World Bank, it is estimated that 17 of the 20 countries coming to London on April 2 had already broken free-trade promises. So, the firm stand against protectionism which many expect the G-20 to take seems having lack of the support from its own members.

Update (27/3): Hanoi plans to support its export by widening the daily trading band for VND, which means allowing the dong to deppreciate faster. (@Financial Times)

Banker reading to child in bed.

As I’ve said in yesterday’s entry, it is expected that the IMF will at least double its budget to $US500 billion to deal with the increasing toxic assets from banks, especially recently emerging ones from banks in central and eastern Europe. This issue will be one of the themes of next week’s G-20 leaders meeting. But the concern is how to refund the resources of the IMF. The answer of this tricky question is relied on some dynamically emerging economies such as China, India, Russia and Brazil. Whereas the EU accounts for 32 per cent of IMF’s budget, the US 17 percent, China’s stake is only 3.7 per cent. So for the bigger institution where the world are currently working together and specifically for their greater voting rights, developing countries has to share the bigger stakes in IMF’s resources.

Among the developing world, why is China a better place to rely on? It is because of China’s sound fiscal position, low public debt burden, huge surplus and significant amount of foreign currency holdings (which was about $US2 trillion in last year).

However, playing an increasingly important role in global financial ground China also realizes that how risky it is when putting up more cash on such an instrument of some wealthy nations which are now injured the most by the current economic tumour. China wants an international economic order less dominated by the US and several other developed countries. Moreover, the unique role of the US dollar as the world’s standard bothers China’s leaders much.

As reponse to the financial crisis and to the near-coming G-20 summit, China central bank governor Zhou Xiaochuan has proposed the creation of a new global reserve currency in place of the US dollar, according to The People’s Bank of China. He explained that China has been holding a great deal of US government bonds, together with a huge amount of foreign currency reserve on its account; therefore, any fluctuations in the value of the dollar and changes in US economic policies will have a sharp influence on China economy and the exchange rates. In short, China wants more control on the factors which drive its national fund. It wants more freedom on this anti-monopoly ground. Of course, Obama’s administration (and Kevin Rudd also) rejected the Chinese call.

(In fact, the prelude of using a world single currency was the use of SDRs, which stands for “special drawing rights”. It was created by the IMF in the 1960s and is valued by a basket of major currencies such as US dollar, the euro, Japanese yen and the pound.)

Although Mr Zhou’s suggestion is unfeasible in a short- to-medium term, this idea shows the China’s desire, or even request, for having a louder voice on the debating table.

Update (26/3):

• After the Chinese call about the replacement global currency, Obama, Geithner (Treasury Secrtary) and Bernanke (chief of Federal Reserve) showed their defence behind the greenback yesterday. Also, economists assert that the shift away from dollar would create a great credit turmoil.
• China presently holds about $US1 trillion in US debt and $US1.95 trillion inits total foreign reserves.

Woman says to man as they walk down street.

On April 2, the G-20 summit will be hold in London to discuss three main issues: the global economy’s stability (included the aspects of growth and employment), global financial system and international financial institutions reforming (particularly IMF). G-2o is the meeting of financial ministers and central bank governors in the world’s most 19 largest economies and the EU. As the 15th biggest economy, Australia plays an important part in this international forum and as her prime minister, Kevin Rudd has to deliver a highly influential voice in such a big play like that.

So, what message will Kevin Rudd deliver?

In the first place, he strongly believes that it is the right time for US to return as the global leader in the battle against the global economic crisis. Before heading to London, he has a first face-to-face meeting with Barack Obama in Washington, focusing on four main themes: the upcoming G-20 summit, the US-Australia alliance, Afghanistan policy and China. In this talk, Kevin expects US action to remove toxic assets in big banks’ balance sheets. As being said by Tim Duy, “For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.” In addition, China will also be a significant topic. his message to Obama is to bring China into the global system and to create a new institutional framework for the 21st century.

Another considerable message is about the reforming of IMF. It is expected that the G-20 will come up with the plan to double or even tripple the IMF’s $US250 billion budget. If so, Kevin Rudd suggests that China would have to contribute funds (China has currently a 3.7 per cent voting stake in the IMF), and thus, have more influence in this financial institution. He argues that in reforming the IMF, some emerging economies should have greater voice on the global governance table. More specifically, it is just one step of Kevin to lobby for Beijing in new global order. Moreover, the issue of restructuring IMF is also put on the table. Hitherto the managing director of the IMF is always a European.

With relentless work for G-20 preparation, it is expected that the Australia’s PM will bring his country close to the centre of global institutions. And as I have said, it is a big play, not just for Kevin but for any leaders.

A photo of Kanh Kuk, my aggressively quite housemate.

I took these photos of some stuffs in my room.