By Martin Hutchinson
After pretending an unwonted firmness for a few weeks, the central banks in both Britain and the United States caved last week, accepting financial-sector bailouts and, in the US Federal Reserve's case, lowering interest rates. Moral hazard has thus been made immoral certainty; financial-market participants who indulge in grossly speculative activity can be "highly confident" (in the words of the old Drexel Burnham commitment letters) that they will be bailed out by the taxpayer. Rarely has there been such an obvious subsidy of the overpaid by the beleaguered. It raises the question: What if anything is the point of central banks in the new world we have entered?
With the Northern Rock debacle, Britain suffered its first run on a major bank since the Overend, Gurney collapse of 1866. The Bank of England initially took the same principled (if, in that case, mistaken) line it took over Barings in 1995. As queues of withdrawing depositors spread over British TV screens, however, it was quickly overruled by Chancellor of the Exchequer Alistair Darling.
Darling, not content with rescuing just one bank, grandly announced that all failing banks would have their deposits guaranteed by the taxpayer, thus flushing 313 years of bank-supervision policy down the pan. (It will be remembered that in 1720 the Sword Blade Bank, bankers to the South Sea Company, was allowed to fail, since Robert Walpole, unlike his distant successors, had a shrewd grasp of the "moral hazard" concept.) By the middle of the week the Bank of England was offering to lend money against dodgy home-mortgage portfolios.
Meanwhile in the United States, the Fed cut interest rates, thus causing a massive Wall Street stock surge, undermining the value of the dollar, sending gold up to US$740 per ounce and doing very little to help the home-mortgage borrower, since long-term rates rose almost as much as he had cut short-term rates - unlike Fed chairman Ben Bernanke, the bond market fears inflation.
Then their regulators allowed the over-leveraged and accounting-inept housing agencies Fannie Mae and Freddie Mac (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp) to buy another $20 billion of mortgage-backed securities, to the further ultimate risk of the taxpayer - Freddie promptly snapped up CIT's US$4 billion portfolio of securitized subprime junk, precisely the rubbish that puts its solvency in most jeopardy. Finally Ben Bernanke appeared before Congress and supported legislation allowing Fannie Mae and Freddie Mac "temporarily" to guarantee "jumbo" mortgages above the current statutory limit of $417,000.
The idea that large mortgages should be in effect government-guaranteed beggars belief in principle. It also supports the overbuilt high end of the housing market, bailing out borrowers who, being richer, should be more able to bear the risk of lower house prices and higher interest rates than their poorer countrymen.
It is a subsidy from the middle class to the rich, supporting the least productive, most energy-inefficient and least deserving sector of the US economy. John Edwards, he of the $400 haircuts and the 28,000-square-foot home, is no doubt rejoicing at the news.
This is all very depressing. When King Philip II of Spain sat in the gloomy Escorial, counting his gold and silver hoard from the Americas, he doubtless pulled at his beard in puzzlement at where all the damn inflation was coming from. One rather hoped that modern central bankers had gotten beyond Philip's limited monetary understanding. However, it appears that in times of crisis, when badgered by politicians, they revert to a 16th-century world view. It's as if after the Chernobyl nuclear disaster scientists had resorted to alchemy in the hope of preventing it happening again.
It is now clear that all the intellectual advances in central banking of the past 300 years have disappeared. Gone with the wind are the concept of "moral hazard", the idea that central banks should be independent of political control, the idea that lowering interest rates might cause inflation and the knowledge that widespread deposit guarantees and bank bailouts impose huge long-run costs on taxpayers and the economy. In 1720, when the financial world was young and innocent, this would have been forgivable; today as then, it is likely to bring economic chaos in its wake.
Once the long-run costs of bad policy become all too clear, policymakers will make changes, to ensure that they are not repeated. It's thus worth pondering what changes one might recommend.
Regrettably, one possible change, a reversion to a gold standard, is not immediately practicable. Gold supplies can be increased by new discoveries by at most 1% per annum or so. Since world population is currently increasing at about that rate, any significant economic growth, requiring an increased monetary base, would become impossibly deflationary.
Deflation, as Bernanke helpfully but irrelevantly pointed out in 2002, is more dangerous than inflation, because the ability to store money in bullion form without interest can cause the working money supply to collapse (if you can get a safe zero return on cash with 100% liquidity, and prices are dropping 3% a year, why ever would you invest in anything else?).
The gold standard worked fine in the 19th century, with the help of large gold discoveries in California, the Transvaal and the Yukon, but once world population growth started to accelerate after 1900, it became impossibly deflationary, as was discovered in 1925-31. Reversion to a gold standard is an admirable long-term aim, but it had better be deferred until after the magic date around 2050 when the world's excessive population stops increasing and begins to decline.
Theoretically, it should not be impossible under fiat money to run a central bank that does a good job. After leaving the gold standard in 1931, Montagu Norman did an excellent job at the Bank of England, in an exceptionally difficult period. In 1931-39 his policy provided stable prices and facilitated in Britain an economic performance that relative to its major competitors was better than any since Lord Liverpool's time.
In the United States, Paul Volcker in 1979-87 did a brave and admirable job in spite of the Fed being an exceptionally politicized institution by central-banking standards (his successor Alan Greenspan when appointed appeared likely to be as brave and successful, but wasn't). Bundesbank presidents from Karl Blessing through Karl Otto Pohl to Helmut Schlesinger made the Deutschmark the most trusted currency in Europe during the half-century of its independent existence.
These three successes were achieved with very different legal and financial structures. They shared only one common feature: exceptional independence from political pressure. In Norman's case his prestige - he was governor for 24 years - was huge, and in 1931-39 his political counterpart Neville Chamberlain was both capable and sympathetic to his policies.
In Volcker's case, the alternative policy of sloppy inflationism had been wholly discredited by failure. In the Bundesbank's case, the institutional structure worked well; its strength and independence had been set up carefully by chancellor Konrad Adenauer, himself no mean student of monetary discipline.
Independence is not merely statutory; it must be accepted by the political and banking system. In Britain, the incoming Labour government made the Bank of England nominally independent in 1997, but emasculated it in the following year by removing its banking-supervision powers and transferring them to the Financial Services Authority quango.
Why, given its lack of responsibility for Northern Rock's operations, the bank should be expected to bail it out is an interesting question; the system is a horrid mess, which doesn't represent true independence. A free marketer might suggest privatizing the Bank of England and returning it to its pre-1946 corporate form, but in today's world that would doubtless result only in its being bought by Dubai, China or Gazprom, not an improvement.
The US had two perfectly good central banks in the two Banks of the United States, but on both occasions populist pressure led to their being dissolved. The Fed is a messy compromise, typical of progressive legislation in that it has been given several internally contradictory mandates, and is constrained by an altogether excessive level of political control.
While the Bundesbank worked fine, the European Central Bank appears to work rather less well. In theory, it should be exceptionally independent, since the various political factions pulling at it should be impossible to unite across Europe's strong national borders. In practice, it appears to be frightened of stirring up political opposition, not surprising since politicians have spent the past decade blaming all economic problems on the creation of the euro, which it manages.
Its conflicts are likely to become sharper in the future. The euro in the next few years will be perpetually overvalued against the rest of the world's currencies, so deflation in the Eurozone is almost inevitable. It appears impossible to create a monetary policy that avoids harsh deflation in some European countries such as Italy without causing idiotic housing booms in other countries such as Spain and Ireland.
Logically, we have now arrived at a position where no central bank can be trusted against the twin temptations of the gigantic financial-services industry and the gigantic public sector. On the other hand, unraveling a century of "progress" and returning to a pure gold standard might be economically damaging as well as politically impossible.
Setting up a supervisory committee of top economists is also unlikely to help much; a feature of the US monetary expansion and bubble creation since 1995 was the support for Greenspan's folly by the world's leading monetary economist, the late Milton Friedman. The only solution is to find another Paul Volcker or Montagu Norman, but those don't grow on trees.
Rather than try to adapt a fiat money system to remove its deficiencies, it may be simpler to adapt a gold standard to remove its excessive deflation. The best way to do this might be that dusty staple of 1890s politics, bimetallism. If gold and silver were both coined, at a fixed ratio between them, new discoveries of both would increase the world's money supply, giving it more flexibility than a pure gold standard (also, silver supplies could presumably be increased more rapidly than gold, as the metal is more plentiful in the Earth's crust). A world monetary conference could be held once a decade to make modest adjustments to the coinage ratio between the two metals or, if necessary, to debase the coinage slightly.
Such a mechanism would give just sufficient flexibility to avoid excessive deflation. More important, it would provide an automatic check on central-bank money creation, thereby preventing asset and stock-market bubbles of more than modest size and duration. If such a system had been in effect in the late 1990s, for example, a money flow out of the US at the time of the Long Term Capital Management crisis would have brought the bubble to a halt 18 months earlier than it did, even if such a flow had not occurred earlier, at the time of Greenspan's "irrational exuberance" speech. After 2001, a bimetallic standard would have prevented Greenspan from lowering interest rates so far, thus preventing the housing bubble, while the capital inflow in 2001-02, at the time of the strong dollar, would have avoided deflation.
A new monetary system will be demanded in the next few years, after the excessive inflation and moral hazard of the present system have caused the inevitable major crash. At that point, a bimetallic quasi-gold standard should be the alternative to work for against the statist and inflationary nostrums that will doubtless be proposed.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com. Copyright 2005-07 David W Tice & Associates.)
Thursday, September 27, 2007
Inflation eats into China's mooncakes
By Antoaneta Bezlova
BEIJING - The beloved national tradition of nibbling sweet pastry mooncakes and admiring the fullness of the harvest moon in the Mid-Autumn, or Moon, Festival has been hit by China's runaway inflation, forcing vendors to opt for frugal variations of the rich treat.
The round pastries eaten and given away as gifts during the lunar festival, which this year falls on Wednesday, have fallen prey to inflationary pressures along with all other food products. Annual inflation in China hit an 11-year high of 6.5% in August, raising fears of rapid erosion of living standards and potential social unrest.
Producers of mooncakes have found themselves in a bind. As China's food prices have soared, the cost of raw materials to produce the cakes has increased by 15-30% too. But worried that surging prices could touch off unrest across the country, the government has issued stern edicts warning against price gouging and dictated that the prices of the traditional treat should be kept stable.
Once splurging on luxurious packaging of wood, silk and even gold to entice their customers to choose from a tantalizing variety of mooncakes, vendors now have to reduce production costs by settling for plain and down-to-earth packaging.
Many producers, including such established brands as Holliland and Guixiangcun, have joined a government-supported initiative to revive the traditional spirit of the Mid-Autumn Festival by packaging their cakes in environment-friendly recycled paper.
Others, still hoping to offset the higher prices of manufacturing, have opted for pairing the cakes with health supplements, trumpeting a new, "green" way of celebrating the centuries-old tradition.
The Mid-Autumn Festival is believed to commemorate a Chinese uprising against the Mongol rulers of the Yuan Dynasty (1271-1368). Plotting to overthrow the Mongol government, Chinese conspirators exchanged secret messages about the day of the rebellion written on slips of paper and hidden inside mooncakes. The uprising, which brought down the Yuan Dynasty, took place on the 15th day of the eight month of the lunar calendar.
Long void of its rebellious meaning, the Mid-Autumn Festival has come to celebrate the end of the summer harvest season when the moon is closest to the Earth. Families would gather together to enjoy the beauty of the full harvest moon and snack on little cakes with a round shape that imitates its fullness.
The small pastries with a thick, sticky filling either of lotus seed or red bean paste are so rich in taste that tradition dictates they have to be cut into slivers and consumed with sips of tea.
This accompaniment has inspired several companies to include brands of famous Chinese tea in gift packs for the festival. A packet of aged Pu'er tea - China's mystery tea famous for its health-giving benefits (see The bubble bursts for Pu'er tea, Asia Times Online, June 26 - added to a simply adorned box of mooncakes has become the hot trend of this year's Mid-Autumn Festival, according to several vendors.
"It is only natural that as people become more concerned about their health and well-being, they prefer healthful selections of mooncakes rather than any of the modern versions that are so rich and fattening," said Zhu Yanhua, a saleswoman for Holliland mooncakes staffing a stall in front of supermarket in suburban Beijing.
Recent years have witnessed the rise and fall of fashions in trendy new cakes made in every imaginable style: ice-cream mooncakes marketed and sold weeks ahead of the festival by ice-cream giant Haagen-Dazs, chocolate mooncakes produced by Belgian chocolatiers, jelly mooncakes and even foie gras and champagne mooncakes.
But the explosion of taste varieties is only part of the mooncake-transformation story. Purists have deplored what they call the fashion of waste and decadence, which has dictated ever more elaborate and pricey packaging year by year.
The Chinese press has reported about resourceful producers in the central city of Zhengzhou who came up with mooncakes made of silver and adorned with 56 precious stones selling at a price of 6,900 yuan (US$920).
Not to be outdone, their counterparts in the northern city of Changchun produced a 1,800-yuan mooncakes box containing also a golf club, while mooncake makers in Yunnan province have also managed to pack a digital camera in with the traditional pastries.
"Such travesties have caused the degeneration of mooncakes as a symbol of family reunion during the harvest season," argued Beijing Youth Daily columnist Pang Hongqi. "These are no longer family mooncakes but by-products of a vulgar gift-bearing culture".
Announcing their price-cutting campaign to sell mooncakes in simple, recycled paper rather than lavish wrappings and boxes, government officials have tried to present the current inflation as a crisis with a silver lining. The packaging drive will help spread the concepts of frugality, rationality and health, Liu Jian, a marketing official with the Beijing municipal bureau of commerce, told the Xinhua News Agency.
"Luxurious packages not only distort the meaning of mooncakes but are necessarily wasteful," he was quoted as saying.
(Inter Press Service)
BEIJING - The beloved national tradition of nibbling sweet pastry mooncakes and admiring the fullness of the harvest moon in the Mid-Autumn, or Moon, Festival has been hit by China's runaway inflation, forcing vendors to opt for frugal variations of the rich treat.
The round pastries eaten and given away as gifts during the lunar festival, which this year falls on Wednesday, have fallen prey to inflationary pressures along with all other food products. Annual inflation in China hit an 11-year high of 6.5% in August, raising fears of rapid erosion of living standards and potential social unrest.
Producers of mooncakes have found themselves in a bind. As China's food prices have soared, the cost of raw materials to produce the cakes has increased by 15-30% too. But worried that surging prices could touch off unrest across the country, the government has issued stern edicts warning against price gouging and dictated that the prices of the traditional treat should be kept stable.
Once splurging on luxurious packaging of wood, silk and even gold to entice their customers to choose from a tantalizing variety of mooncakes, vendors now have to reduce production costs by settling for plain and down-to-earth packaging.
Many producers, including such established brands as Holliland and Guixiangcun, have joined a government-supported initiative to revive the traditional spirit of the Mid-Autumn Festival by packaging their cakes in environment-friendly recycled paper.
Others, still hoping to offset the higher prices of manufacturing, have opted for pairing the cakes with health supplements, trumpeting a new, "green" way of celebrating the centuries-old tradition.
The Mid-Autumn Festival is believed to commemorate a Chinese uprising against the Mongol rulers of the Yuan Dynasty (1271-1368). Plotting to overthrow the Mongol government, Chinese conspirators exchanged secret messages about the day of the rebellion written on slips of paper and hidden inside mooncakes. The uprising, which brought down the Yuan Dynasty, took place on the 15th day of the eight month of the lunar calendar.
Long void of its rebellious meaning, the Mid-Autumn Festival has come to celebrate the end of the summer harvest season when the moon is closest to the Earth. Families would gather together to enjoy the beauty of the full harvest moon and snack on little cakes with a round shape that imitates its fullness.
The small pastries with a thick, sticky filling either of lotus seed or red bean paste are so rich in taste that tradition dictates they have to be cut into slivers and consumed with sips of tea.
This accompaniment has inspired several companies to include brands of famous Chinese tea in gift packs for the festival. A packet of aged Pu'er tea - China's mystery tea famous for its health-giving benefits (see The bubble bursts for Pu'er tea, Asia Times Online, June 26 - added to a simply adorned box of mooncakes has become the hot trend of this year's Mid-Autumn Festival, according to several vendors.
"It is only natural that as people become more concerned about their health and well-being, they prefer healthful selections of mooncakes rather than any of the modern versions that are so rich and fattening," said Zhu Yanhua, a saleswoman for Holliland mooncakes staffing a stall in front of supermarket in suburban Beijing.
Recent years have witnessed the rise and fall of fashions in trendy new cakes made in every imaginable style: ice-cream mooncakes marketed and sold weeks ahead of the festival by ice-cream giant Haagen-Dazs, chocolate mooncakes produced by Belgian chocolatiers, jelly mooncakes and even foie gras and champagne mooncakes.
But the explosion of taste varieties is only part of the mooncake-transformation story. Purists have deplored what they call the fashion of waste and decadence, which has dictated ever more elaborate and pricey packaging year by year.
The Chinese press has reported about resourceful producers in the central city of Zhengzhou who came up with mooncakes made of silver and adorned with 56 precious stones selling at a price of 6,900 yuan (US$920).
Not to be outdone, their counterparts in the northern city of Changchun produced a 1,800-yuan mooncakes box containing also a golf club, while mooncake makers in Yunnan province have also managed to pack a digital camera in with the traditional pastries.
"Such travesties have caused the degeneration of mooncakes as a symbol of family reunion during the harvest season," argued Beijing Youth Daily columnist Pang Hongqi. "These are no longer family mooncakes but by-products of a vulgar gift-bearing culture".
Announcing their price-cutting campaign to sell mooncakes in simple, recycled paper rather than lavish wrappings and boxes, government officials have tried to present the current inflation as a crisis with a silver lining. The packaging drive will help spread the concepts of frugality, rationality and health, Liu Jian, a marketing official with the Beijing municipal bureau of commerce, told the Xinhua News Agency.
"Luxurious packages not only distort the meaning of mooncakes but are necessarily wasteful," he was quoted as saying.
(Inter Press Service)
Indonesia's richest man loses his mine
By Bill Guerin
JAKARTA - Indonesia's richest man last week lost a drawn-out legal tussle over his 40% ownership claim to the country's second-largest coal-mining company, PT Adaro Indonesia (Adaro). This comes crucially at a time when the energy commodity is enjoying its biggest boom ever. The decision was made by Singapore's High Court, bypassing Indonesia's notoriously politically pliable judiciary, though paper and plantation tycoon Sukanto Tanoto is weighing his appeal options.
The legal saga over the highly coveted mine's ownership is as complicated as it is contentious among the competing international claimants to the assets, which includes the world's biggest exporter of power-station-grade coal. Tanoto claimed that PT Dianlia Setyamukti (Dianlia), owned by another tycoon, Edwin Soeryadjaya, together with his cousin T P Rachmat and others conspired illegally with Deutsche Bank to buy his shares in PT Adaro Indonesia and PT Indonesia Bulk Terminal, which serves the Adaro mine.
The shares had been pledged as collateral by Singapore-based investment company Beckkett, partly owned by Tanoto and Hashim Djojohadikusumo and his sister-in-law, Titiek Prabowo, former president Suharto's second daughter, through their Tirtamas group. Beckkett held the shares through a subsidiary, PT Swabara Mining and Energy (SME).
The roller-coaster saga stretches back as far as 1991, when PT Asminco Bara Utama (Asminco) took over management of the Adaro concession. Asminco, which owned a 15% stake in Adaro, then borrowed US$100 million from Deutsche Bank in October 1997, mainly to buy out the 25% stake in Adaro and 15% in the related bulk terminal held by Tirtamas. The guarantor of the loan was Beckkett, which owned Asminco and pledged all 40% of its shares as collateral
However, no repayments were made on the loan, prompting Deutsche Bank to sell the shares at an alleged below-market value of $46 million to Dianlia in a November 2001 agreement made under Singaporean law. With coal prices rising even then, the stake was estimated to be worth more than $400 million. Beckkett held the shares through SME, and claimed that because the sale was illegal under Indonesian law, it was therefore invalid.
Undaunted, Soeryadjaya, son of the founder of Indonesia's national car company Astra, in June 2005 sold Adaro to a consortium of international banks and strategic investors for $950 million, leaving him and Rachmat each with about one-third of the company. Among the foreign investors were the Singapore Investment Corp, owned by the Singapore government, and the private-equity arms of Goldman Sachs Group and Citigroup.
Along with his family, Tanoto, who owns the widely diversified Singapore-based Raja Garuda Mas International, with core businesses in pulp and paper, palm oil, energy, and construction and engineering, had a net worth of $2.8 billion as of September 2006, according to Forbes Asia. The magazine noted that Tanoto and Eka Tjipta Widjaja, a fellow ethnic-Chinese tycoon who is worth an estimated $2 billion, had built their fortunes by turning Indonesia's trees into paper and pulp.
The timing of the court verdict could hardly be worse for Tanoto, or better for Soeryadjaya, in terms of the profit potential of coal, currently the world's fastest-growing energy source despite growing global-warming concerns. Indonesia's coal output is on track to reach an expected 205 million tonnes this year, up from 193.5 million tonnes in 2006. According to the Indonesian Coal Mining Association, output could jump to as much as 218 million tonnes next year, which would be double the level five years ago.
Even before the verdict, Soeryadjaya had disclosed plans to capitalize on Indonesia's coal potential, including plans to buy up to four more mines and form a new asset-holding company that would go public with a planned $600 million listing on the Jakarta Stock Exchange by early next year.
King of coal
Indonesia has coal deposits of about 38.9 billion tonnes and, thanks to Adaro's output, has overtaken Australia as the world's largest exporter of thermal coal, the type used in power stations. Regional thermal-coal prices have almost doubled since 2004, and hit a record high of $72.37 a tonne last month, up almost 50% at the same time last year, and pushed up because of supply constraints after certain Indonesian mines said for undisclosed reasons they would miss some contracted shipments.
Domestic demand is also rising fast, expected to increase to 58 million tonnes in 2008 from about 49 million tonnes this year, to fuel several more coal-fired power plants expected to come on line early next year as part of the government's drive to slash its consumption of expensive crude oil. State-owned electricity utility PLN is building several coal-fired plants to meet spiking domestic electricity demand, which is growing by some 7% a year.
These should add an extra 10,000 megawatts to the national grid by the end of 2009. While PLN still uses petroleum-based fuels in about a quarter of its power plants, the lower production costs associated with new coal-fired plants in 2006 helped PLN cut losses to just over Rp1 trillion ($95 million) from Rp4.92 trillion in 2005.
Meanwhile, exports are expected to reach 160 million tonnes in 2008, up slightly from an expected 156 million tonnes this year, amid surging demand from China and India. Both energy-starved economic giants continue to seek out regionally long-term secure coal supplies. Analysts at UBG Investment Research predict that
up to 73% of China's new power capacity built between now and 2020 will be coal-fired; southern China's Guangdong province imported 4.5 million tonnes of Indonesian coal in the first half of 2007, almost two and a half times the amount in the same period last year.
Coal prices are expected to remain strong as production continues to lag behind demand, creating lucrative investment incentives for foreign acquisitions or minority share purchases of local mining companies. China's largest coal miner Shenhua Energy reportedly plans to buy Indonesian coal operations and India's Tata Power has bought 30% stakes in both PT Kaltim Prima Coal and PT Arutmin.
They paid $1.3 billion in April to Bumi Resources (Bumi) for shares in the two mines that have made Bumi the country's top coal producer. It is controlled by the Bakrie family, including holdings by the country's coordinating minister for people's welfare Aburizal Bakrie.
In March 2006, Bumi announced an agreement to sell the lucrative mines for $3.2 billion to a consortium headed by Borneo Lumbung Energi, an affiliate of Jakarta-based investment bank Renaissance Capital, and the Marubeni Corp, Japan's fifth-largest trading company. Marubeni was expected to fund up to 50% of the purchase, rationalizing that it needed more coal to boost existing supplies from its own mines in Australia and Canada to meet increased demand for coal at power plants in both Japan and China.
Bumi's total outlay for the two mines had been just under $251 million, so the sale would have earned it a net profit of just under $3 billion. Renaissance Capital could not close the deal, which was officially canceled a few weeks later. Another recent Bumi deal was the joint-venture agreement struck with Australia's coal-seam gas company Westside Corp Ltd to develop these types of projects in Kalimantan along with PT Arutmin.
Thailand's biggest coal miner, Banpu, is also planning an initial public offering of its 95%-owned local unit PT Indo Tambangraya Megah, which operates four coal-mining concessions in Indonesia. The IPO, expected during the first quarter of next year, will still leave Banpu owning 80% of its Indonesian unit.
Surging regional demand and skyrocketing prices for coal mean the recent Singaporean court decision against Tanoto represents a big loss to his company's future profitability. A spokesman for Beckkett has said it is too early for the company to make a decision on whether it will move to appeal the verdict to Singapore's Supreme Court, although the option is not being ruled out and the company is also still considering filing a counter-lawsuit in Indonesia.
A Deutsche Bank statement in Hong Kong suggested that the verdict fully vindicated the bank's legal position and actions in recovering a long overdue debt. "In confirming the lender's rights, it will be welcomed by the broader banking community," spokesman Mike West said in the statement. Whether it will be welcomed by the broader borrowing community is still open to debate, however.
Beckkett noted in its written statement that the verdict had actually affirmed the claims it had made all along: that Deutsche Bank did not undertake the share sale in a proper manner. For its part, RGM International is forging ahead with a $4 billion expansion of its pulp-and-paper, palm-oil, energy, and other interests toward the aim of increasing its asset base by 70% by 2009, Tanoto told Reuters in an interview in May.
Meanwhile, Indonesian mining firm PT Darma Henwa shares soared nearly 70% in their stock-market debut on Wednesday, making it one of Jakarta's best-performing first-day issues this year. The shares opened at Rp550 and then quickly rose to Rp565, well above the offer price of Rp335. The firm's businesses include mining, infrastructure services, coal marketing and power generation. Darma Henwa, owned by British Virgin Islands-based Zurich Assets International and local company PT Indotambang Perkasa, raised $117.25 million from the IPO for its working capital.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
JAKARTA - Indonesia's richest man last week lost a drawn-out legal tussle over his 40% ownership claim to the country's second-largest coal-mining company, PT Adaro Indonesia (Adaro). This comes crucially at a time when the energy commodity is enjoying its biggest boom ever. The decision was made by Singapore's High Court, bypassing Indonesia's notoriously politically pliable judiciary, though paper and plantation tycoon Sukanto Tanoto is weighing his appeal options.
The legal saga over the highly coveted mine's ownership is as complicated as it is contentious among the competing international claimants to the assets, which includes the world's biggest exporter of power-station-grade coal. Tanoto claimed that PT Dianlia Setyamukti (Dianlia), owned by another tycoon, Edwin Soeryadjaya, together with his cousin T P Rachmat and others conspired illegally with Deutsche Bank to buy his shares in PT Adaro Indonesia and PT Indonesia Bulk Terminal, which serves the Adaro mine.
The shares had been pledged as collateral by Singapore-based investment company Beckkett, partly owned by Tanoto and Hashim Djojohadikusumo and his sister-in-law, Titiek Prabowo, former president Suharto's second daughter, through their Tirtamas group. Beckkett held the shares through a subsidiary, PT Swabara Mining and Energy (SME).
The roller-coaster saga stretches back as far as 1991, when PT Asminco Bara Utama (Asminco) took over management of the Adaro concession. Asminco, which owned a 15% stake in Adaro, then borrowed US$100 million from Deutsche Bank in October 1997, mainly to buy out the 25% stake in Adaro and 15% in the related bulk terminal held by Tirtamas. The guarantor of the loan was Beckkett, which owned Asminco and pledged all 40% of its shares as collateral
However, no repayments were made on the loan, prompting Deutsche Bank to sell the shares at an alleged below-market value of $46 million to Dianlia in a November 2001 agreement made under Singaporean law. With coal prices rising even then, the stake was estimated to be worth more than $400 million. Beckkett held the shares through SME, and claimed that because the sale was illegal under Indonesian law, it was therefore invalid.
Undaunted, Soeryadjaya, son of the founder of Indonesia's national car company Astra, in June 2005 sold Adaro to a consortium of international banks and strategic investors for $950 million, leaving him and Rachmat each with about one-third of the company. Among the foreign investors were the Singapore Investment Corp, owned by the Singapore government, and the private-equity arms of Goldman Sachs Group and Citigroup.
Along with his family, Tanoto, who owns the widely diversified Singapore-based Raja Garuda Mas International, with core businesses in pulp and paper, palm oil, energy, and construction and engineering, had a net worth of $2.8 billion as of September 2006, according to Forbes Asia. The magazine noted that Tanoto and Eka Tjipta Widjaja, a fellow ethnic-Chinese tycoon who is worth an estimated $2 billion, had built their fortunes by turning Indonesia's trees into paper and pulp.
The timing of the court verdict could hardly be worse for Tanoto, or better for Soeryadjaya, in terms of the profit potential of coal, currently the world's fastest-growing energy source despite growing global-warming concerns. Indonesia's coal output is on track to reach an expected 205 million tonnes this year, up from 193.5 million tonnes in 2006. According to the Indonesian Coal Mining Association, output could jump to as much as 218 million tonnes next year, which would be double the level five years ago.
Even before the verdict, Soeryadjaya had disclosed plans to capitalize on Indonesia's coal potential, including plans to buy up to four more mines and form a new asset-holding company that would go public with a planned $600 million listing on the Jakarta Stock Exchange by early next year.
King of coal
Indonesia has coal deposits of about 38.9 billion tonnes and, thanks to Adaro's output, has overtaken Australia as the world's largest exporter of thermal coal, the type used in power stations. Regional thermal-coal prices have almost doubled since 2004, and hit a record high of $72.37 a tonne last month, up almost 50% at the same time last year, and pushed up because of supply constraints after certain Indonesian mines said for undisclosed reasons they would miss some contracted shipments.
Domestic demand is also rising fast, expected to increase to 58 million tonnes in 2008 from about 49 million tonnes this year, to fuel several more coal-fired power plants expected to come on line early next year as part of the government's drive to slash its consumption of expensive crude oil. State-owned electricity utility PLN is building several coal-fired plants to meet spiking domestic electricity demand, which is growing by some 7% a year.
These should add an extra 10,000 megawatts to the national grid by the end of 2009. While PLN still uses petroleum-based fuels in about a quarter of its power plants, the lower production costs associated with new coal-fired plants in 2006 helped PLN cut losses to just over Rp1 trillion ($95 million) from Rp4.92 trillion in 2005.
Meanwhile, exports are expected to reach 160 million tonnes in 2008, up slightly from an expected 156 million tonnes this year, amid surging demand from China and India. Both energy-starved economic giants continue to seek out regionally long-term secure coal supplies. Analysts at UBG Investment Research predict that
up to 73% of China's new power capacity built between now and 2020 will be coal-fired; southern China's Guangdong province imported 4.5 million tonnes of Indonesian coal in the first half of 2007, almost two and a half times the amount in the same period last year.
Coal prices are expected to remain strong as production continues to lag behind demand, creating lucrative investment incentives for foreign acquisitions or minority share purchases of local mining companies. China's largest coal miner Shenhua Energy reportedly plans to buy Indonesian coal operations and India's Tata Power has bought 30% stakes in both PT Kaltim Prima Coal and PT Arutmin.
They paid $1.3 billion in April to Bumi Resources (Bumi) for shares in the two mines that have made Bumi the country's top coal producer. It is controlled by the Bakrie family, including holdings by the country's coordinating minister for people's welfare Aburizal Bakrie.
In March 2006, Bumi announced an agreement to sell the lucrative mines for $3.2 billion to a consortium headed by Borneo Lumbung Energi, an affiliate of Jakarta-based investment bank Renaissance Capital, and the Marubeni Corp, Japan's fifth-largest trading company. Marubeni was expected to fund up to 50% of the purchase, rationalizing that it needed more coal to boost existing supplies from its own mines in Australia and Canada to meet increased demand for coal at power plants in both Japan and China.
Bumi's total outlay for the two mines had been just under $251 million, so the sale would have earned it a net profit of just under $3 billion. Renaissance Capital could not close the deal, which was officially canceled a few weeks later. Another recent Bumi deal was the joint-venture agreement struck with Australia's coal-seam gas company Westside Corp Ltd to develop these types of projects in Kalimantan along with PT Arutmin.
Thailand's biggest coal miner, Banpu, is also planning an initial public offering of its 95%-owned local unit PT Indo Tambangraya Megah, which operates four coal-mining concessions in Indonesia. The IPO, expected during the first quarter of next year, will still leave Banpu owning 80% of its Indonesian unit.
Surging regional demand and skyrocketing prices for coal mean the recent Singaporean court decision against Tanoto represents a big loss to his company's future profitability. A spokesman for Beckkett has said it is too early for the company to make a decision on whether it will move to appeal the verdict to Singapore's Supreme Court, although the option is not being ruled out and the company is also still considering filing a counter-lawsuit in Indonesia.
A Deutsche Bank statement in Hong Kong suggested that the verdict fully vindicated the bank's legal position and actions in recovering a long overdue debt. "In confirming the lender's rights, it will be welcomed by the broader banking community," spokesman Mike West said in the statement. Whether it will be welcomed by the broader borrowing community is still open to debate, however.
Beckkett noted in its written statement that the verdict had actually affirmed the claims it had made all along: that Deutsche Bank did not undertake the share sale in a proper manner. For its part, RGM International is forging ahead with a $4 billion expansion of its pulp-and-paper, palm-oil, energy, and other interests toward the aim of increasing its asset base by 70% by 2009, Tanoto told Reuters in an interview in May.
Meanwhile, Indonesian mining firm PT Darma Henwa shares soared nearly 70% in their stock-market debut on Wednesday, making it one of Jakarta's best-performing first-day issues this year. The shares opened at Rp550 and then quickly rose to Rp565, well above the offer price of Rp335. The firm's businesses include mining, infrastructure services, coal marketing and power generation. Darma Henwa, owned by British Virgin Islands-based Zurich Assets International and local company PT Indotambang Perkasa, raised $117.25 million from the IPO for its working capital.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
China rates a cut above the US
By Zhou Jiangong
SHANGHAI - China, the world's fastest-developing economy, and the United States, the world's largest economy, are now going in opposite directions in regard to their monetary policy. Interest rates are expected to continue going down in the US but up in China, in at least the coming 12 months.
This trend will worsen the structural problems facing the Chinese economy, making it more difficult for Beijing to rein in the country's overheating economy and inflation with its so-called macroeconomic control policies.
In an unprecedented move, the People's Bank of China (PBoC) - the country's central bank - raised the benchmark interest rates twice in 25 days, with the one-year deposit rate and loan interest rate going up 0.27 percentage point respectively each time. It is almost a knee-jerk response to the looming inflation for August: the year-on-year 6.5% increase in the Consumer Price Index is the highest in a decade.
What will complicate the Chinese government's headache on its breathtaking growth is that the Federal Reserve of the United States cut the Federal Funds rate by half a percentage point from 5.25% to 4.75%, a move that surprised the market. A deep concern for a spreading credit crunch due to the subprime-mortgage crisis caused the aggressive turnaround of the monetary policy by Fed chairman Ben Bernanke. It is widely expected the Fed will cut the rates again next month.
Under the accumulating pressure of inflation, the PBoC is widely expected to be on the track of faster rate hikes. The rates are likely to be raised several times in the coming months. Currently, the one-year deposit rate is 3.87% and one-year loan rate 7.29%.
A slowdown or even a recession in the US economy would help China cool down its white-hot growth. Declining housing prices, together with interest-rate hikes, in the US and other Western countries have triggered the subprime-mortgage crisis that entails a credit crunch and increases the possibility of recession.
Theoretically, a recession in one of the largest markets for China's exports would be a healthy development for its economy: slowing down growth in exports and trade surplus, and slowing down growth of the country's foreign-exchange reserves to enable a slowdown in money supply and reduce excessive liquidity - the "original sin" of all of the current economic problems facing China.
Now the US economy seems to be refueled by the aggressive rate cut. If the cut will prolong (or even boost) US economic expansion, it will continue to fuel China's gigantic exporting engine. And the trend of hiking China's interest rates as well as the lowering of US interest rates will strengthen the expectation of accelerated yuan appreciation, which could lead to more money pouring into China's market chasing after investment-worthy assets.
If the half-percentage-point cut in the US is a strong signal of a turn toward more rate-cutting, the PBoC's rate-raising policy, considering the current rigid currency-exchange regime, will be self-defeating. The higher interest rate for the yuan compared with the US dollar's and the higher expectation of more yuan appreciation and of more money pouring into China resulting in more excessive liquidity will put more upward pressure on prices.
So far, Beijing's macroeconomic adjustment and control measures have largely been nullified by diehard structural problems. The government has used every weapon available: monetary policies, fiscal policies, administrative means, and environmental protection measures. Still, inflation is looming.
The situation casts more doubts on the effectiveness of Beijing's macroeconomic control policy that has been put into effect over past more than four years. In fact, the strong impulse to overheat the economy is deeply embedded in the structure of the China's politico-economic structure, and the current tightening policies from monetary, fiscal, and industrial fronts do no more than deal with short-term issues.
The National People's Congress has become impatient with the ineffectiveness of the four-year belt-tightening policies. During a meeting aimed at reviewing the macro-regulation policy held by the NPC Standing Committee, a member said: "This round of macroeconomic control has continued for four years, and while a number of policies have been carried out by a relevant departments of the central government, the effect is not evident."
The legislators also suggested that the State Council evaluate the effectiveness and the role of the policies and measures. The idiom of only treating the symptoms of the disease rather than tackling the disease itself has been used to criticize the current policy as passive, only focusing on short-term issues and then doing so in a haphazard way.
What worries the legislators is that the growth is unsustainable but virtually unstoppable. The myth of China's robust growth has recently been decoded by more and more economists inside and outside China. Pieter Bottelier, professor of China economy at Johns Hopkins University, points out that China's economy can be described as four imbalances: investment-consumption imbalance, energy-demand imbalance, social imbalances, and growth-environment imbalance.
But the Chinese government seems likely to give priority to popular issues, such as housing prices. In fact, the government failed to contain soaring housing prices in cities from the coastal area to inland China simply because it implemented policies that gave the market a strong signal that the prices will continue to rise. In China, housing prices can be more of a social issue or a political issue than an economic one.
In fact, local governments have been making use of local economic development and urban sprawl as means to boost their revenues (and to enrich local officials in some cases). Collusion between property developers and local-government officials has often occurred, with profits in housing projects shared among them. No local officials are really keen on in providing affordable housing to residents.
Both the central and local governments appear to be awash in cash. But the overhaul of China's social programs - pillars for the "harmonious society" - is long overdue and the programs are poorly funded. Beijing policymakers think a sound social-security system would help people reduce precautionary savings and boost consumption. But that good intention has been distorted as social-security funds are easily embezzled by local-government officials to pursue local growth in gross domestic product.
The NPC Standing Committee suggested that the central government allocate "sufficient funds and precious resources" for the weak links in China's society and economy: education, health care, social security, affordable housing, and rural development.
The short-term complication of China's economic environment and the long-term politico-economy structural issues will be put to a test at the 17th National Congress of the Chinese Communist Party in mid-October. Although the guidelines of "scientific development and harmonious society" are in the right direction, how to implement them remains a big challenge for the party.
Zhou Jiangong is a Shanghai-based analyst on China's economic, political and foreign affairs.
(Copyright 2007 Asia Times Online Ltd. All rights reserved. )
SHANGHAI - China, the world's fastest-developing economy, and the United States, the world's largest economy, are now going in opposite directions in regard to their monetary policy. Interest rates are expected to continue going down in the US but up in China, in at least the coming 12 months.
This trend will worsen the structural problems facing the Chinese economy, making it more difficult for Beijing to rein in the country's overheating economy and inflation with its so-called macroeconomic control policies.
In an unprecedented move, the People's Bank of China (PBoC) - the country's central bank - raised the benchmark interest rates twice in 25 days, with the one-year deposit rate and loan interest rate going up 0.27 percentage point respectively each time. It is almost a knee-jerk response to the looming inflation for August: the year-on-year 6.5% increase in the Consumer Price Index is the highest in a decade.
What will complicate the Chinese government's headache on its breathtaking growth is that the Federal Reserve of the United States cut the Federal Funds rate by half a percentage point from 5.25% to 4.75%, a move that surprised the market. A deep concern for a spreading credit crunch due to the subprime-mortgage crisis caused the aggressive turnaround of the monetary policy by Fed chairman Ben Bernanke. It is widely expected the Fed will cut the rates again next month.
Under the accumulating pressure of inflation, the PBoC is widely expected to be on the track of faster rate hikes. The rates are likely to be raised several times in the coming months. Currently, the one-year deposit rate is 3.87% and one-year loan rate 7.29%.
A slowdown or even a recession in the US economy would help China cool down its white-hot growth. Declining housing prices, together with interest-rate hikes, in the US and other Western countries have triggered the subprime-mortgage crisis that entails a credit crunch and increases the possibility of recession.
Theoretically, a recession in one of the largest markets for China's exports would be a healthy development for its economy: slowing down growth in exports and trade surplus, and slowing down growth of the country's foreign-exchange reserves to enable a slowdown in money supply and reduce excessive liquidity - the "original sin" of all of the current economic problems facing China.
Now the US economy seems to be refueled by the aggressive rate cut. If the cut will prolong (or even boost) US economic expansion, it will continue to fuel China's gigantic exporting engine. And the trend of hiking China's interest rates as well as the lowering of US interest rates will strengthen the expectation of accelerated yuan appreciation, which could lead to more money pouring into China's market chasing after investment-worthy assets.
If the half-percentage-point cut in the US is a strong signal of a turn toward more rate-cutting, the PBoC's rate-raising policy, considering the current rigid currency-exchange regime, will be self-defeating. The higher interest rate for the yuan compared with the US dollar's and the higher expectation of more yuan appreciation and of more money pouring into China resulting in more excessive liquidity will put more upward pressure on prices.
So far, Beijing's macroeconomic adjustment and control measures have largely been nullified by diehard structural problems. The government has used every weapon available: monetary policies, fiscal policies, administrative means, and environmental protection measures. Still, inflation is looming.
The situation casts more doubts on the effectiveness of Beijing's macroeconomic control policy that has been put into effect over past more than four years. In fact, the strong impulse to overheat the economy is deeply embedded in the structure of the China's politico-economic structure, and the current tightening policies from monetary, fiscal, and industrial fronts do no more than deal with short-term issues.
The National People's Congress has become impatient with the ineffectiveness of the four-year belt-tightening policies. During a meeting aimed at reviewing the macro-regulation policy held by the NPC Standing Committee, a member said: "This round of macroeconomic control has continued for four years, and while a number of policies have been carried out by a relevant departments of the central government, the effect is not evident."
The legislators also suggested that the State Council evaluate the effectiveness and the role of the policies and measures. The idiom of only treating the symptoms of the disease rather than tackling the disease itself has been used to criticize the current policy as passive, only focusing on short-term issues and then doing so in a haphazard way.
What worries the legislators is that the growth is unsustainable but virtually unstoppable. The myth of China's robust growth has recently been decoded by more and more economists inside and outside China. Pieter Bottelier, professor of China economy at Johns Hopkins University, points out that China's economy can be described as four imbalances: investment-consumption imbalance, energy-demand imbalance, social imbalances, and growth-environment imbalance.
But the Chinese government seems likely to give priority to popular issues, such as housing prices. In fact, the government failed to contain soaring housing prices in cities from the coastal area to inland China simply because it implemented policies that gave the market a strong signal that the prices will continue to rise. In China, housing prices can be more of a social issue or a political issue than an economic one.
In fact, local governments have been making use of local economic development and urban sprawl as means to boost their revenues (and to enrich local officials in some cases). Collusion between property developers and local-government officials has often occurred, with profits in housing projects shared among them. No local officials are really keen on in providing affordable housing to residents.
Both the central and local governments appear to be awash in cash. But the overhaul of China's social programs - pillars for the "harmonious society" - is long overdue and the programs are poorly funded. Beijing policymakers think a sound social-security system would help people reduce precautionary savings and boost consumption. But that good intention has been distorted as social-security funds are easily embezzled by local-government officials to pursue local growth in gross domestic product.
The NPC Standing Committee suggested that the central government allocate "sufficient funds and precious resources" for the weak links in China's society and economy: education, health care, social security, affordable housing, and rural development.
The short-term complication of China's economic environment and the long-term politico-economy structural issues will be put to a test at the 17th National Congress of the Chinese Communist Party in mid-October. Although the guidelines of "scientific development and harmonious society" are in the right direction, how to implement them remains a big challenge for the party.
Zhou Jiangong is a Shanghai-based analyst on China's economic, political and foreign affairs.
(Copyright 2007 Asia Times Online Ltd. All rights reserved. )
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