By Chalmers Johnson
The military adventurers of the George W Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups of men thought that they were the "smartest guys in the room", the title of Alex Gibney's prize-winning film on what went wrong at Enron. The neo-conservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.
As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries.
Instead, the Bush administration puts off these costs for future generations to pay - or repudiate. This utter fiscal irresponsibility has been disguised through many manipulative financial schemes (such as causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.
There are three broad aspects to our debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on "defense" projects that bear no relationship to the national security of the United States. Simultaneously, we are keeping the income tax burdens on the richest segments of the American population at strikingly low levels.
Second, we continue to believe that we can compensate for the accelerating erosion of our manufacturing base and our loss of jobs to foreign countries through massive military expenditures - so-called "military Keynesianism", which I discuss in detail in my book Nemesis: The Last Days of the American Republic. By military Keynesianism, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.
Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of our country. These are what economists call "opportunity costs", things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world's number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs - an infinitely more efficient use of scarce resources than arms manufacturing. Let me discuss each of these.
The current fiscal disaster
It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense's planned expenditures for fiscal year 2008 are larger than all other nations' military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China. Defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. The United States has become the largest single salesman of arms and munitions to other nations on Earth. Leaving out of account Bush's two on-going wars, defense spending has doubled since the mid-1990s. The defense budget for fiscal 2008 is the largest since World War II.
Before we try to break down and analyze this gargantuan sum, there is one important caveat. Figures on defense spending are notoriously unreliable. The numbers released by the Congressional Reference Service and the Congressional Budget Office do not agree with each other. Robert Higgs, senior fellow for political economy at the Independent Institute, says, "A well-founded rule of thumb is to take the Pentagon's (always well publicized) basic budget total and double it."
Even a cursory reading of newspaper articles about the Department of Defense will turn up major differences in statistics about its expenses. Some 30-40% of the defense budget is "black", meaning that these sections contain hidden expenditures for classified projects. There is no possible way to know what they include or whether their total amounts are accurate.
There are many reasons for this budgetary sleight-of-hand - including a desire for secrecy on the part of the president, the secretary of defense and the military-industrial complex - but the chief one is that members of Congress, who profit enormously from defense jobs and pork-barrel projects in their districts, have a political interest in supporting the Department of Defense.
In 1996, in an attempt to bring accounting standards within the executive branch somewhat closer to those of the civilian economy, Congress passed the Federal Financial Management Improvement Act. It required all federal agencies to hire outside auditors to review their books and release the results to the public. Neither the Department of Defense, nor the Department of Homeland Security, has ever complied. Congress has complained, but not penalized either department for ignoring the law. The result is that all numbers released by the Pentagon should be regarded as suspect.
In discussing the fiscal 2008 defense budget, as released to the press on February 7, 2007, I have been guided by two experienced and reliable analysts: William D Hartung of the New America Foundation's Arms and Security Initiative and Fred Kaplan, defense correspondent for Slate.org. They agree that the Department of Defense requested $481.4 billion for salaries, operations (except in Iraq and Afghanistan), and equipment.
They also agree on a figure of $141.7 billion for the "supplemental" budget to fight the global "war on terror" - that is, the two on-going wars that the general public may think are actually covered by the basic Pentagon budget. The Department of Defense also asked for an extra $93.4 billion to pay for hitherto unmentioned war costs in the remainder of 2007 and, most creatively, an additional "allowance" (a new term in defense budget documents) of $50 billion to be charged to fiscal year 2009. This comes to a total spending request by the Department of Defense of $766.5 billion.
But there is much more. In an attempt to disguise the true size of the American military empire, the government has long hidden major military-related expenditures in departments other than Defense. For example, $23.4 billion for the Department of Energy goes toward developing and maintaining nuclear warheads; and $25.3 billion in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt, and Pakistan).
Another $1.03 billion outside the official Department of Defense budget is now needed for recruitment and reenlistment incentives for the overstretched US military itself, up from a mere $174 million in 2003, the year the war in Iraq began. The Department of Veterans Affairs currently gets at least $75.7 billion, 50% of which goes for the long-term care of the grievously injured among the at least 28,870 soldiers so far wounded in Iraq and another 1,708 in Afghanistan. The amount is universally derided as inadequate. Another $46.4 billion goes to the Department of Homeland Security.
Missing as well from this compilation is $1.9 billion to the Department of Justice for the paramilitary activities of the Federal Bureau of Investigation; $38.5 billion to the Department of the Treasury for the Military Retirement Fund; $7.6 billion for the military-related activities of the National Aeronautics and Space Administration; and well over $200 billion in interest for past debt-financed defense outlays. This brings US spending for its military establishment during the current fiscal year (2008), conservatively calculated, to at least $1.1 trillion.
Military Keynesianism
Such expenditures are not only morally obscene, they are fiscally unsustainable. Many neo-conservatives and poorly informed patriotic Americans believe that, even though our defense budget is huge, we can afford it because we are the richest country on Earth.
Unfortunately, that statement is no longer true. The world's richest political entity, according to the Central Intelligence Agency's World Factbook, is the European Union. The EU's 2006 GDP (gross domestic product - all goods and services produced domestically) was estimated to be slightly larger than that of the US However, China's 2006 GDP was only slightly smaller than that of the US, and Japan was the world's fourth-richest nation.
A more telling comparison that reveals just how much worse we're doing can be found among the "current accounts" of various nations. The current account measures the net trade surplus or deficit of a country plus cross-border payments of interest, royalties, dividends, capital gains, foreign aid, and other income.
For example, for Japan to manufacture anything, it must import all required raw materials. Even after this incredible expense is met, it still has an $88 billion per year trade surplus with the United States and enjoys the world's second-highest current account balance. (China is number one.) The United States, by contrast, is number 163 - dead last on the list, worse than countries like Australia and the United Kingdom that also have large trade deficits. Its 2006 current account deficit was $811.5 billion; second worst was Spain at $106.4 billion. This is what is unsustainable.
It's not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing. On November 7, 2007, the US Treasury announced that the national debt had breached $9 trillion for the first time ever. This was just five weeks after Congress raised the so-called debt ceiling to $9.815 trillion. If you begin in 1789, at the moment the constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defense expenditures in comparison with the rest of the world.
The world's top 10 military spenders and the approximate amounts each country currently budgets for its military establishment are:
1. United States (FY08 budget), $623 billion
2. China (2004), $65 billion
3. Russia, $50 billion
4. France (2005), $45 billion
5. Japan (2007), $41.75 billion
6. Germany (2003), $35.1 billion
7. Italy (2003), $28.2 billion
8. South Korea (2003), $21.1 billion
9. India (2005 est.), $19 billion
10. Saudi Arabia (2005 est.), $18 billion
World total military expenditures (2004 est.), $1,100 billion
World total (minus the United States), $500 billion.
Our excessive military expenditures did not occur over just a few short years or simply because of the Bush administration's policies. They have been going on for a very long time in accordance with a superficially plausible ideology and have now become entrenched in our democratic political system where they are starting to wreak havoc. This ideology I call "military Keynesianism" - the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.
This ideology goes back to the first years of the Cold War. During the late 1940s, the US was haunted by economic anxieties. The Great Depression of the 1930s had been overcome only by the war production boom of World War II. With peace and demobilization, there was a pervasive fear that the Depression would return.
During 1949, alarmed by the Soviet Union's detonation of an atomic bomb, the looming communist victory in the Chinese civil war, a domestic recession, and the lowering of the Iron Curtain around the USSR's European satellites, the US sought to draft basic strategy for the emerging Cold War. The result was the militaristic National Security Council Report 68 (NSC-68) drafted under the supervision of Paul Nitze, then head of the Policy Planning Staff in the State Department. Dated April 14, 1950, and signed by president Harry S Truman on September 30, 1950, it laid out the basic public economic policies that the United States pursues to the present day.
In its conclusions, NSC-68 asserted: "One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living."
With this understanding, American strategists began to build up a massive munitions industry, both to counter the military might of the Soviet Union (which they consistently overstated) and also to maintain full employment as well as ward off a possible return of the Depression. The result was that, under Pentagon leadership, entire new industries were created to manufacture large aircraft, nuclear-powered submarines, nuclear warheads, intercontinental ballistic missiles, and surveillance and communications satellites. This led to what president Dwight D Eisenhower warned against in his farewell address of February 6, 1961: "The conjunction of an immense military establishment and a large arms industry is new in the American experience." That is, the military-industrial complex.
By 1990, the value of the weapons, equipment, and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in American manufacturing. From 1947 to 1990, the combined US military budgets amounted to $8.7 trillion. Even though the Soviet Union no longer exists, US reliance on military Keynesianism has, if anything, ratcheted up, thanks to the massive vested interests that have become entrenched around the military establishment. Over time, a commitment to both guns and butter has proven an unstable configuration. Military industries crowd out the civilian economy and lead to severe economic weaknesses. Devotion to military Keynesianism is, in fact, a form of slow economic suicide.
On May 1, 2007, the Center for Economic and Policy Research of Washington, DC, released a study prepared by the global forecasting company Global Insight on the long-term economic impact of increased military spending. Guided by economist Dean Baker, this research showed that, after an initial demand stimulus, by about the sixth year the effect of increased military spending turns negative. Needless to say, the US economy has had to cope with growing defense spending for more than 60 years. He found that, after 10 years of higher defense spending, there would be 464,000 fewer jobs than in a baseline scenario that involved lower defense spending.
Baker concluded:
It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.
These are only some of the many deleterious effects of military Keynesianism.
Hollowing out the American economy
It was believed that the US could afford both a massive military establishment and a high standard of living, and that it needed both to maintain full employment. But it did not work out that way. By the 1960s, it was becoming apparent that turning over the nation's largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities.
Historian Thomas E Woods Jr observes that, during the 1950s and 1960s, between one-third and two-thirds of all American research talent was siphoned off into the military sector. It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.
Nuclear weapons furnish a striking illustration of these anomalies. Between the 1940s and 1996, the United States spent at least $5.8 trillion on the development, testing and construction of nuclear bombs. By 1967, the peak year of its nuclear stockpile, the US possessed some 32,500 deliverable atomic and hydrogen bombs, none of which, thankfully, was ever used.
They perfectly illustrate the Keynesian principle that the government can provide make-work jobs to keep people employed. Nuclear weapons were not just America's secret weapon, but also its secret economic weapon. As of 2006, we still had 9,960 of them. There is today no sane use for them, while the trillions spent on them could have been used to solve the problems of social security and health care, quality education and access to higher education for all, not to speak of the retention of highly skilled jobs within the American economy.
The pioneer in analyzing what has been lost as a result of military Keynesianism was the late Seymour Melman (1917-2004), a professor of industrial engineering and operations research at Columbia University. His 1970 book, Pentagon Capitalism: The Political Economy of War, was a prescient analysis of the unintended consequences of the American preoccupation with its armed forces and their weaponry since the onset of the Cold War. Melman wrote (pages. 2-3):
From 1946 to 1969, the United States government spent over $1,000 billion on the military, more than half of this under the Kennedy and Johnson administrations - the period during which the [Pentagon-dominated] state management was established as a formal institution. This sum of staggering size (try to visualize a billion of something) does not express the cost of the military establishment to the nation as a whole. The true cost is measured by what has been foregone, by the accumulated deterioration in many facets of life by the inability to alleviate human wretchedness of long duration.
In an important exegesis on Melman's relevance to the current American economic situation, Thomas Woods writes:
According to the US Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation's plant and equipment, and infrastructure, at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock.
The fact that we did not modernize or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools - an industry on which Melman was an authority - are a particularly important symptom.
In November 1968, a five-year inventory disclosed (page 186) "that 64% of the metalworking machine tools used in US industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States' machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of World War II. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry.
Nothing has been done in the period since 1968 to reverse these trends and it shows today in our massive imports of equipment - from medical machines like proton accelerators for radiological therapy (made primarily in Belgium, Germany and Japan) to cars and trucks.
Our short tenure as the world's "lone superpower" has come to an end. As Harvard economics professor Benjamin Friedman has written:
Again and again it has always been the world's leading lending country that has been the premier country in terms of political influence, diplomatic influence, and cultural influence. It's no accident that we took over the role from the British at the same time that we took over ... the job of being the world's leading lending country. Today we are no longer the world's leading lending country. In fact we are now the world's biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone.
Some of the damage done can never be rectified. There are, however, some steps that this country urgently needs to take. These include reversing Bush's 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defense budget all projects that bear no relationship to the national security of the United States, and ceasing to use the defense budget as a Keynesian jobs program. If we do these things we have a chance of squeaking by. If we don't, we face probable national insolvency and a long depression.
Chalmers Johnson is the author of Nemesis: The Last Days of the American Republic, just published in paperback. It is the final volume of his Blowback Trilogy, which also includes Blowback (2000) and The Sorrows of Empire (2004).
Thursday, January 24, 2008
China sees opportunity in US recession
By Antoaneta Bezlova
BEIJING - Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China's surging economy, but some are beginning to see a silver lining in it too.
"If it was not for the subprime mortgage crisis, China could not have dreamed of pumping money into top Wall Street financial institutions," legal expert Zhu Yiwei wrote in an opinion piece in the Southern Weekend. "But now that China has acquired a 10% stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries."
Indeed, China's infusion of US$5 billion into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in US political backrooms.
The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country's new $200 billion sovereign wealth fund - the China Investment Corporation (CIC) - has completed since its inception in May. Both its creation and activities have created a buzz in global financial markets in anticipation that a sizeable sum of money will be channeled into global assets.
But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.
China's investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds at present control between $2 trillion and $3 trillion; experts predict that their assets will swell to more than $10 trillion within a decade.
Fears that such assets will be used to take over key domestic industries in the US and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called on to help design codes of conduct for them.
In China, the reaction to such fears has sometimes been unabashedly nationalistic. "The excessive interest in China Investment Corp is a reflection of the heating global competition between major world powers," said a recent editorial piece in the China Times.
"It is pointless for an investment firm from a country like China to attempt and hide its aspirations, pretending its goals are entirely market-driven. CIC is a sovereign wealth fund of a big power and should use the available market mechanisms to fulfill the country's strategic needs," the article went on. "Purchases of strategic foreign assets and much-needed natural resources should be on top of its agenda."
Ironically, these opinions have appeared at a time when Chinese leaders are at pains to emphasize the political independence of the country's new investment vehicle. "This investment company is entirely commercial," Premier Wen Jiabao said at a joint news conference with visiting British Prime Minister Gordon Brown last weekend. CIC's external activities "must not be politicized", Wen said, adding, "The government doesn't meddle."
Chinese policy-makers remember well the setback the country's third-largest state-run oil company, the Chinese National Offshore Oil Corporation, encountered in the US when it tried to acquire California's energy company Unocal in 2005. The political backlash that ensued showed the suspicions and hurdles awaiting other potential Chinese attempts to acquire large companies in major developed countries.
Nevertheless, the opportunities presented to investors by America's sinking financial fortunes have been difficult to resist. Big losses from bad loans tied to the battered US housing market have forced top investment banks such as Merrill Lynch and Citigroup Inc to look for help from overseas investors as far afield as China, South Korea, Singapore and Saudi Arabia.
After pumping money into Morgan Stanley in December, Beijing eventually decided to reject a proposed multibillion-dollar investment in Citigroup by the state-owned China Development Bank last week, inviting speculation that Chinese leaders have chosen to maintain a low profile for their investment targets. Neither China Development Bank nor Citigroup has commented on the reasons behind the last-minute rejection of a plan that had been in the works for weeks.
Some Chinese experts suggest the decision may have to do with Beijing's reluctance to clinch another high-risk deal at a time when public criticism that its previous investments in Blackstone Group LP and Barclays Plc have fared poorly is rife.
"We still haven't seen the end of the subprime crisis and this is perhaps not the best time to invest in Wall Street," says Ding Zhijie, professor of finance at the Beijing University of Foreign Trade and Economics. "The fear is that intense competition between Asian investors may push many to enter that market prematurely and pay a high price for it."
Other experts argue that China should seize the opportunity and invest in resource-rich developing countries with fewer regulatory hurdles compared to the West. "CIC should set its targets on emerging markets where there is a lack of capital and they are looking to attract strategic investors," says Zhang Ming, an economist with the Chinese Academy of Social Sciences. "It is only a matter of time before protectionist sentiments arise there too."
All seem to agree that the establishment of the sovereign wealth fund marks only the beginning of a high time for Chinese investments overseas.
Under pressure to reduce China's gaping trade surplus and ease appreciation pressure on its currency, Beijing has relaxed many rules about overseas investments and Chinese companies and individuals have been spending big on acquiring assets and stocks abroad.
Flush with cash from recent flotations on the stock markets, Chinese commercial banks have been busily acquiring stakes in foreign banks to expand their international presence. Chinese companies for their part have been encouraged to look aggressively to purchase long-term supplies of energy resources and raw materials.
If the current trend continues, overall Chinese institutional and private investments in 2008 may well exceed $250 billion, or nearly double the $134 billion China poured into overseas investment in 2006, said the Beijing Youth Daily.
(Inter Press Service)
BEIJING - Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China's surging economy, but some are beginning to see a silver lining in it too.
"If it was not for the subprime mortgage crisis, China could not have dreamed of pumping money into top Wall Street financial institutions," legal expert Zhu Yiwei wrote in an opinion piece in the Southern Weekend. "But now that China has acquired a 10% stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries."
Indeed, China's infusion of US$5 billion into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in US political backrooms.
The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country's new $200 billion sovereign wealth fund - the China Investment Corporation (CIC) - has completed since its inception in May. Both its creation and activities have created a buzz in global financial markets in anticipation that a sizeable sum of money will be channeled into global assets.
But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.
China's investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds at present control between $2 trillion and $3 trillion; experts predict that their assets will swell to more than $10 trillion within a decade.
Fears that such assets will be used to take over key domestic industries in the US and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called on to help design codes of conduct for them.
In China, the reaction to such fears has sometimes been unabashedly nationalistic. "The excessive interest in China Investment Corp is a reflection of the heating global competition between major world powers," said a recent editorial piece in the China Times.
"It is pointless for an investment firm from a country like China to attempt and hide its aspirations, pretending its goals are entirely market-driven. CIC is a sovereign wealth fund of a big power and should use the available market mechanisms to fulfill the country's strategic needs," the article went on. "Purchases of strategic foreign assets and much-needed natural resources should be on top of its agenda."
Ironically, these opinions have appeared at a time when Chinese leaders are at pains to emphasize the political independence of the country's new investment vehicle. "This investment company is entirely commercial," Premier Wen Jiabao said at a joint news conference with visiting British Prime Minister Gordon Brown last weekend. CIC's external activities "must not be politicized", Wen said, adding, "The government doesn't meddle."
Chinese policy-makers remember well the setback the country's third-largest state-run oil company, the Chinese National Offshore Oil Corporation, encountered in the US when it tried to acquire California's energy company Unocal in 2005. The political backlash that ensued showed the suspicions and hurdles awaiting other potential Chinese attempts to acquire large companies in major developed countries.
Nevertheless, the opportunities presented to investors by America's sinking financial fortunes have been difficult to resist. Big losses from bad loans tied to the battered US housing market have forced top investment banks such as Merrill Lynch and Citigroup Inc to look for help from overseas investors as far afield as China, South Korea, Singapore and Saudi Arabia.
After pumping money into Morgan Stanley in December, Beijing eventually decided to reject a proposed multibillion-dollar investment in Citigroup by the state-owned China Development Bank last week, inviting speculation that Chinese leaders have chosen to maintain a low profile for their investment targets. Neither China Development Bank nor Citigroup has commented on the reasons behind the last-minute rejection of a plan that had been in the works for weeks.
Some Chinese experts suggest the decision may have to do with Beijing's reluctance to clinch another high-risk deal at a time when public criticism that its previous investments in Blackstone Group LP and Barclays Plc have fared poorly is rife.
"We still haven't seen the end of the subprime crisis and this is perhaps not the best time to invest in Wall Street," says Ding Zhijie, professor of finance at the Beijing University of Foreign Trade and Economics. "The fear is that intense competition between Asian investors may push many to enter that market prematurely and pay a high price for it."
Other experts argue that China should seize the opportunity and invest in resource-rich developing countries with fewer regulatory hurdles compared to the West. "CIC should set its targets on emerging markets where there is a lack of capital and they are looking to attract strategic investors," says Zhang Ming, an economist with the Chinese Academy of Social Sciences. "It is only a matter of time before protectionist sentiments arise there too."
All seem to agree that the establishment of the sovereign wealth fund marks only the beginning of a high time for Chinese investments overseas.
Under pressure to reduce China's gaping trade surplus and ease appreciation pressure on its currency, Beijing has relaxed many rules about overseas investments and Chinese companies and individuals have been spending big on acquiring assets and stocks abroad.
Flush with cash from recent flotations on the stock markets, Chinese commercial banks have been busily acquiring stakes in foreign banks to expand their international presence. Chinese companies for their part have been encouraged to look aggressively to purchase long-term supplies of energy resources and raw materials.
If the current trend continues, overall Chinese institutional and private investments in 2008 may well exceed $250 billion, or nearly double the $134 billion China poured into overseas investment in 2006, said the Beijing Youth Daily.
(Inter Press Service)
China investors face taxing challenge
By Wu Zhong
HONG KONG - Chinese citizens are not the only people falling victim to rampant abuse of power by local mainland officials; foreign investors also frequently have a hard time, particularly those involved with small and medium-sized businesses from countries or regions where there is strict rule of law and who are not used to developing good guanxi or connections with local officials.
Some have to close their businesses and pull out of China as harassment of local officials become unbearable. This is particularly true in less-developed regions where officials’ abuse of power runs more rampant.
Here is a recent example.
About eight years ago, a Singaporean businessman surnamed Wang began a 100-million-yuan investment project to build a hotel in Anxi county, in eastern Fujian province. His Mingyuan Hotel, the only four-star hotel in Anxi, started business in 2003.
In a small place like Anxi, when a new hotel or restaurant opens business, the chance is that local officials will come to wine and dine. They normally don't pay, instead asking the owner to keep their bills "on record", which often means no payment should be expected. If the owner is savvy he will waive the bill to build good guanxi and for potential exchange for other benefits.
Wang apparently had no knowledge about such a practice. From time to time, he would ask his staff to visit the officials concerned and demand payment of their debts. His boldness eventually offended officials with the local taxation authority - whose offices are only a five-minute walk from Mingyuan Hotel - and Wang’s nightmare began.
In China, there are national taxes and local taxes, somewhat similar to federal taxes and state or city taxes in the United States. The local taxation authority oversees the collection of local taxes.
"Officials with the county’s local taxation authority often come here to have 'free meals'. Once three of them ate a meal worth 1,400 yuan [US$193], but they refused to pay, saying one of them was the director of the county local taxation authority,'' the manager of the hotel restaurant told the Market News, a sister publication of the People’s Daily - the flagship newspaper of the Communist Party. "But in fact he was just the head of a branch of the authority. At another time, the director, Huang Zhiyuan, himself came to eat. When the bill was presented to him, he said he would let a subordinate come to pay. In the end no one has shown up to pay the bill."
Records of the hotel in the first three months of 2007 alone showed that the Anxi county local taxation authority owed the hotel 18,289 yuan. On March 15, director Huang alone ordered shark fin and two other dishes, worth 350 yuan - or close to a month's pay for a local farmer (402 yuan) or a third of the 1,146 per capita monthly income of Fujian urban residents, according to government data.
One has to pay to eat in a restaurant, and government officials must take the lead in behaving properly well, according to Wang. "In Singapore, an official who doesn’t pay for a meal in a restaurant would be sacked," he said. He blames his current predicament on his "rigid way of thinking" and ignorance of the local environment in Anxi.
Urged by Wang, hotel staff went to demand for repayment from time to time. "A year ago, my colleagues and I went there several times to demand payment, but they always refused to pay. At one time, we were told that our prices were too high and we should lower the prices if we wanted the payment. The next time we went, we were slammed as 'insensible'," the hotel restaurant manager told the Market News.
"Our staff came back to complain. I could never understand why we were 'insensible' by demanding payment of debts? But now I fully understand, after all that has happened," Wang said.
On September 25, 2006, a van blocked the front door of the Mingyuan Hotel, 13 people got out and rushed to the reception desk, the financial department and security department of the hotel. Without showing any official credentials, the intruders claimed they were from the taxation authority and had come to check the hotel’s accounts. The check lasted about half an hour. Only when the people were about to leave did they show the hotel a notice about the taxation inspection.
The next day, the Anxi local taxation authority paid the debts, about 20,000 yuan, it owed to the hotel. Then came a notice from the Quanzhou local taxation authority, the direct superior of the Anxi taxation authority, of heavy fines imposed on the hotel. The hotel was ordered to pay Anxi local taxation authority 1.87 million yuan in taxes and fines. After a later hearing later, the total sum was reduced to 1.2 million yuan.
According to Market News and follow-up reports by other Chinese media, some of the taxes and fines listed were ungrounded and maybe illegal. For instance, the Anxi taxman demand the hotel pay 656,159 yuan of "urban real estate tax", which is against national law and thus invalid, according to Chinese law experts.
Most absurd was that Anxi taxation authority even levied a 87,380 yuan "hostess tax" on the hotel - basically equivalent to a prostitution tax. The figure was calculated as follows: based on the number of beds, the number of karaoke TV rooms and the number of sauna and massage rooms in the hotel, the authority concluded that the hotel should pay tax for 18 hostesses with 340 yuan for each per month.
According to China’s taxation system, local governments are entitled to levy certain local taxes, which however must not violate any national law or regulation. While in reality, prostitution is widespread in China, the world's oldest trade however is still illegal there. To levy a "hostess tax" would effectively give legal status to to legalize prostitution, far beyond the authority of the Anxi local taxation authority.
Hence some law experts and media reports called the Anxi authority’s action as "punitive enforcement of law''.
After the exposure of the incident, the Anxi local taxation authority insisted it had done nothing wrong and that it had acted strictly according to the books. As for the "hostess tax", it said it was a "personal income tax on high-income persons working in the hotel industry".
The explanation was partially true. If the hotel did not chase after the Anxi authority for payment of their debts, the "books" might not have been strictly followed. In exchange, some taxes might have been waived for the hotel had the local tax collectors been treated well.
Wang filed a lawsuit against the Anxi local taxation authority and is now awaiting a court ruling. Whatever the outcome, he says he has lost his confidence and plans to sell the hotel and return to Singapore.
This is by no means an isolated case, though they happen more often happen in less-developed regions. So much so that it seems a vicious cycle has been developed in China.
In developed regions, particularly in eastern costal areas where the investment environment is much better than elsewhere, officials are more open-minded, enlightened and law biding. As such, funds from home and abroad tend to flow into these regions, boosting their economies.
By contrast, in less developed regions - which more desperately need investment from outside - the environment is less attractive and officials’ abuse of power tends to run wild. Overseas and domestic investors hold back from putting money into these regions out of fear of becoming prey to local bureaucrats.
This contributes to the widening wealth gap between regions. To narrow this gap, investment funds should be channeled to less-developed regions, but to attract such money the investment environment, including the quality of local officials, must be greatly improved.
The central government of China has offered preferential policies to help less-developed regions to attract investment from outside. Nevertheless, lessons from the Anxi case and similar ones clearly show it is equally important that Beijing find more effective ways to rein in local officials, if the central government's goal is to be attained.
HONG KONG - Chinese citizens are not the only people falling victim to rampant abuse of power by local mainland officials; foreign investors also frequently have a hard time, particularly those involved with small and medium-sized businesses from countries or regions where there is strict rule of law and who are not used to developing good guanxi or connections with local officials.
Some have to close their businesses and pull out of China as harassment of local officials become unbearable. This is particularly true in less-developed regions where officials’ abuse of power runs more rampant.
Here is a recent example.
About eight years ago, a Singaporean businessman surnamed Wang began a 100-million-yuan investment project to build a hotel in Anxi county, in eastern Fujian province. His Mingyuan Hotel, the only four-star hotel in Anxi, started business in 2003.
In a small place like Anxi, when a new hotel or restaurant opens business, the chance is that local officials will come to wine and dine. They normally don't pay, instead asking the owner to keep their bills "on record", which often means no payment should be expected. If the owner is savvy he will waive the bill to build good guanxi and for potential exchange for other benefits.
Wang apparently had no knowledge about such a practice. From time to time, he would ask his staff to visit the officials concerned and demand payment of their debts. His boldness eventually offended officials with the local taxation authority - whose offices are only a five-minute walk from Mingyuan Hotel - and Wang’s nightmare began.
In China, there are national taxes and local taxes, somewhat similar to federal taxes and state or city taxes in the United States. The local taxation authority oversees the collection of local taxes.
"Officials with the county’s local taxation authority often come here to have 'free meals'. Once three of them ate a meal worth 1,400 yuan [US$193], but they refused to pay, saying one of them was the director of the county local taxation authority,'' the manager of the hotel restaurant told the Market News, a sister publication of the People’s Daily - the flagship newspaper of the Communist Party. "But in fact he was just the head of a branch of the authority. At another time, the director, Huang Zhiyuan, himself came to eat. When the bill was presented to him, he said he would let a subordinate come to pay. In the end no one has shown up to pay the bill."
Records of the hotel in the first three months of 2007 alone showed that the Anxi county local taxation authority owed the hotel 18,289 yuan. On March 15, director Huang alone ordered shark fin and two other dishes, worth 350 yuan - or close to a month's pay for a local farmer (402 yuan) or a third of the 1,146 per capita monthly income of Fujian urban residents, according to government data.
One has to pay to eat in a restaurant, and government officials must take the lead in behaving properly well, according to Wang. "In Singapore, an official who doesn’t pay for a meal in a restaurant would be sacked," he said. He blames his current predicament on his "rigid way of thinking" and ignorance of the local environment in Anxi.
Urged by Wang, hotel staff went to demand for repayment from time to time. "A year ago, my colleagues and I went there several times to demand payment, but they always refused to pay. At one time, we were told that our prices were too high and we should lower the prices if we wanted the payment. The next time we went, we were slammed as 'insensible'," the hotel restaurant manager told the Market News.
"Our staff came back to complain. I could never understand why we were 'insensible' by demanding payment of debts? But now I fully understand, after all that has happened," Wang said.
On September 25, 2006, a van blocked the front door of the Mingyuan Hotel, 13 people got out and rushed to the reception desk, the financial department and security department of the hotel. Without showing any official credentials, the intruders claimed they were from the taxation authority and had come to check the hotel’s accounts. The check lasted about half an hour. Only when the people were about to leave did they show the hotel a notice about the taxation inspection.
The next day, the Anxi local taxation authority paid the debts, about 20,000 yuan, it owed to the hotel. Then came a notice from the Quanzhou local taxation authority, the direct superior of the Anxi taxation authority, of heavy fines imposed on the hotel. The hotel was ordered to pay Anxi local taxation authority 1.87 million yuan in taxes and fines. After a later hearing later, the total sum was reduced to 1.2 million yuan.
According to Market News and follow-up reports by other Chinese media, some of the taxes and fines listed were ungrounded and maybe illegal. For instance, the Anxi taxman demand the hotel pay 656,159 yuan of "urban real estate tax", which is against national law and thus invalid, according to Chinese law experts.
Most absurd was that Anxi taxation authority even levied a 87,380 yuan "hostess tax" on the hotel - basically equivalent to a prostitution tax. The figure was calculated as follows: based on the number of beds, the number of karaoke TV rooms and the number of sauna and massage rooms in the hotel, the authority concluded that the hotel should pay tax for 18 hostesses with 340 yuan for each per month.
According to China’s taxation system, local governments are entitled to levy certain local taxes, which however must not violate any national law or regulation. While in reality, prostitution is widespread in China, the world's oldest trade however is still illegal there. To levy a "hostess tax" would effectively give legal status to to legalize prostitution, far beyond the authority of the Anxi local taxation authority.
Hence some law experts and media reports called the Anxi authority’s action as "punitive enforcement of law''.
After the exposure of the incident, the Anxi local taxation authority insisted it had done nothing wrong and that it had acted strictly according to the books. As for the "hostess tax", it said it was a "personal income tax on high-income persons working in the hotel industry".
The explanation was partially true. If the hotel did not chase after the Anxi authority for payment of their debts, the "books" might not have been strictly followed. In exchange, some taxes might have been waived for the hotel had the local tax collectors been treated well.
Wang filed a lawsuit against the Anxi local taxation authority and is now awaiting a court ruling. Whatever the outcome, he says he has lost his confidence and plans to sell the hotel and return to Singapore.
This is by no means an isolated case, though they happen more often happen in less-developed regions. So much so that it seems a vicious cycle has been developed in China.
In developed regions, particularly in eastern costal areas where the investment environment is much better than elsewhere, officials are more open-minded, enlightened and law biding. As such, funds from home and abroad tend to flow into these regions, boosting their economies.
By contrast, in less developed regions - which more desperately need investment from outside - the environment is less attractive and officials’ abuse of power tends to run wild. Overseas and domestic investors hold back from putting money into these regions out of fear of becoming prey to local bureaucrats.
This contributes to the widening wealth gap between regions. To narrow this gap, investment funds should be channeled to less-developed regions, but to attract such money the investment environment, including the quality of local officials, must be greatly improved.
The central government of China has offered preferential policies to help less-developed regions to attract investment from outside. Nevertheless, lessons from the Anxi case and similar ones clearly show it is equally important that Beijing find more effective ways to rein in local officials, if the central government's goal is to be attained.
Angel savaged by Hong Kong bears
By Olivia Chung
HONG KONG - Investors in the battered Hong Kong stock market and still with assets to sell gained a breather on Wednesday as prices rebounded after the US Federal Reserve cut its key interest rate by 75 basis points.
The respite for them could be brief, with analysts saying the upsurge may be temporary. Others, notably many of the city's retail share buyers, could watch the recover only from the sidelines, their pockets drained.
Sharp declines in the first two days of the week reminded many retail investors in Hong Kong of the 1997 Asia financial crisis.
Newcomers have learned the bitter market adage - what goes up comes down.
One such newcomer, Angel (not her real name), has been preoccupied since receiving a mobile-phone message sent by her friend and so-called "investment consultant" on Tuesday morning.
Her friend has spent the past few months speculating on stocks on Angel's behalf through margin trading, which allows an investor to buy shares or other stock market products with money borrowed from a broker after putting in some capital as leverage. When prices drop sharply, the broker has the right to sell the shares without the investor's consent to avoid losses unless the latter is willing to put in more capital.
"The market crash has come. The shares you held were just sold out with virtually nothing left,'' the message read. "I'll cover your capital loss, which totals HK$120,000 [US$15,300]. Do not close your account. Once the stock market bottoms out in a few months, I will put money into your account to stir-fry [Chinese slang for speculation] again. Surely you will get your money back. Don't worry."
The message has kept the 38-year-old office clerk from hearing her colleague's lunch-time chat. Watching a ceiling-mounted TV set in the busy restaurant, engrossed in a talk show about the stock falls in Hong Kong, she pretends the tumbling share prices have nothing to do with her, giving her colleague a shrug or a smile.
After work, Angel was more forthcoming. "Though my friend has warned me a few times that I might lose part of the profit of more than HK$130,000 I earned in October, I had never thought all my money, including HK$120,000 in capital, would vanish so fast."
Angel kept her voice low and looked frequently over her shoulder while she talked, afraid of being overheard. Her husband didn't yet know she had been losing all her savings by stir-frying high-risk warrants.
A warrant allows an investor to bet on the price movement of an underlying stock or index. They are particularly popular with Hong Kong retail investors, who can use them to gamble on the market without having to come up with the sums required to buy share board lots.
Even so, if the market moves in the wrong direction, then the holder loses all of his or her investment when the warrant matures. The buyer of a share at least hangs on to the stock and can profit from a later recovery.
"When I talked to my husband about the stock crash on the phone, he joked if I was one of the victims. I was speechless and immediately changed the subject," she said. "I was a bit afraid as I would have difficulty getting any money from him if he knew."
The interview with Angel was surprising not for the secret she revealed but for how little she knew about stock market. Worse, her chum "is not a broker, but she is my close friend who works at computers at a securities house in Sheung Wan [a district on the edge of Hong Kong's Central business district]". Between late September and early October, when stock prices were soaring, her friend turned her initial capital of HK$50,000 into HK$180,000.
Between mid-August and the end of October, Hong Kong stocks jumped by more than 60%, with the benchmark Hang Seng Index closing above 30,000 points for the first time on October 26. Prices were boosted by expectations Chinese mainland investors would pour money into the city's stocks through a so-called "through train" program being proposed by the mainland central government as part of Beijing's moves towards a more relaxed investment environment.
Angel was not alone in trying to benefit from these gains through trading in warrants. Warrants accounted for nearly 20% of the local stock market's turnover in the first nine months last year, and from January to December 14, turnover reached HK$4.49 trillion, up from HK$1.79 trillion in the full-year 2006, according to Hong Kong Exchanges and Clearing.
In late October, Angel's consultant made a bet on a warrant on China Coal at HK$1.22 each and a warrant on Angang Steel at 31.5 HK cents each.
The purchases came as subprime concerns in the US intensified along with growing worries that the US was heading for recession, resulting in the beginning of declines in stock markets around the world.
Aggravating those falls in Hong Kong, it became clear that the proposed through-train program allowing mainland residents to buy Hong Kong-listed stocks would not be initiated in the near term. Chinese Premier Wen Jiabao said on November 3 that the government needed more time to assess the risks of the program to the stability of Hong Kong's financial system.
As stock prices fell and her warrants dropped in value, Angel became a persistent loser, and her account was closely watched by the brokerage. Eventually she was asked her to put about HK$70,000 into her securities account.
Come Tuesday, her consultant dumped Angel's warrants in China Coal at 19 HK cents each and in Angang Steel at 1.3 HK cents. Angel's funds were effectively lost down the drain.
Now she is trusting in her consultant's promise to give her back her lost capital. "My friend sometimes says she will give me it back in a year or two, sometimes she says in a year."
Angel is definitely not the worst loser among the millions of retail investors and speculators in Hong Kong. The Hang Seng Index has lost almost 10,000 points from its record high close of 31,638.22 on October 30. The declines early this week removed some HK$2.5 trillion of market capitalization, taking it down to HK$16.15 trillion on Tuesday from HK$18.65 trillion last Friday.
Since October 30, market capitalization has dropped about HK$7 trillion, or a per capita loss of HK$1.03 million in face value in three months, given Hong Kong's population of about 7 million.
The 13.67% decline in the Hang Seng Index on Monday and Tuesday was its biggest drop since October 28, 1997, when Hong Kong was mired in the onset of the Asian Financial Crisis. Investors north of the border in mainland China were suffering similar pain. There the stock markets in Shanghai and Shenzhen on Tuesday posted the largest single-day drop in seven months, as about 900 of 1,630 A-share companies fell by their 10 per cent daily limit.
All looked brighter by Wednesday morning, after the US Federal Reserve cut interest rates overnight by 75 basis points - the most in more than 20 years - to 3.5%.
The Hang Seng Index opened sharply higher on Wednesday and at 11.45am, it rose about 1,200 points to 22,958. By the close it was up 10.7% at 24,090.17. Even so, the chance for retail investors such as Angel to recoup losses may be short-lived according to Andrew Wong, associate director of One China Securities Limited in Hong Kong.
"It's not a real upsurge as the index dropped by more than 2,000 points on Tuesday. It's a time for speculative investors to sell as I believe the equity market will not bottom out until April, when a real upsurge will form," he said.
"The Hong Kong market is now affected by external factors including the US subprime mortgage meltdown, weak US consumption and worries about a slowdown of China's exports," he said.
Castor Pang, a strategist with Sun Hung Kai Financial Group, warned retail investors that it's not the time for them to look for cheap stocks as the stock market in Hong Kong is in consolidation, which meant it’s still under pressure.
Olivia Chung is a senior Asia Times Online reporter.
HONG KONG - Investors in the battered Hong Kong stock market and still with assets to sell gained a breather on Wednesday as prices rebounded after the US Federal Reserve cut its key interest rate by 75 basis points.
The respite for them could be brief, with analysts saying the upsurge may be temporary. Others, notably many of the city's retail share buyers, could watch the recover only from the sidelines, their pockets drained.
Sharp declines in the first two days of the week reminded many retail investors in Hong Kong of the 1997 Asia financial crisis.
Newcomers have learned the bitter market adage - what goes up comes down.
One such newcomer, Angel (not her real name), has been preoccupied since receiving a mobile-phone message sent by her friend and so-called "investment consultant" on Tuesday morning.
Her friend has spent the past few months speculating on stocks on Angel's behalf through margin trading, which allows an investor to buy shares or other stock market products with money borrowed from a broker after putting in some capital as leverage. When prices drop sharply, the broker has the right to sell the shares without the investor's consent to avoid losses unless the latter is willing to put in more capital.
"The market crash has come. The shares you held were just sold out with virtually nothing left,'' the message read. "I'll cover your capital loss, which totals HK$120,000 [US$15,300]. Do not close your account. Once the stock market bottoms out in a few months, I will put money into your account to stir-fry [Chinese slang for speculation] again. Surely you will get your money back. Don't worry."
The message has kept the 38-year-old office clerk from hearing her colleague's lunch-time chat. Watching a ceiling-mounted TV set in the busy restaurant, engrossed in a talk show about the stock falls in Hong Kong, she pretends the tumbling share prices have nothing to do with her, giving her colleague a shrug or a smile.
After work, Angel was more forthcoming. "Though my friend has warned me a few times that I might lose part of the profit of more than HK$130,000 I earned in October, I had never thought all my money, including HK$120,000 in capital, would vanish so fast."
Angel kept her voice low and looked frequently over her shoulder while she talked, afraid of being overheard. Her husband didn't yet know she had been losing all her savings by stir-frying high-risk warrants.
A warrant allows an investor to bet on the price movement of an underlying stock or index. They are particularly popular with Hong Kong retail investors, who can use them to gamble on the market without having to come up with the sums required to buy share board lots.
Even so, if the market moves in the wrong direction, then the holder loses all of his or her investment when the warrant matures. The buyer of a share at least hangs on to the stock and can profit from a later recovery.
"When I talked to my husband about the stock crash on the phone, he joked if I was one of the victims. I was speechless and immediately changed the subject," she said. "I was a bit afraid as I would have difficulty getting any money from him if he knew."
The interview with Angel was surprising not for the secret she revealed but for how little she knew about stock market. Worse, her chum "is not a broker, but she is my close friend who works at computers at a securities house in Sheung Wan [a district on the edge of Hong Kong's Central business district]". Between late September and early October, when stock prices were soaring, her friend turned her initial capital of HK$50,000 into HK$180,000.
Between mid-August and the end of October, Hong Kong stocks jumped by more than 60%, with the benchmark Hang Seng Index closing above 30,000 points for the first time on October 26. Prices were boosted by expectations Chinese mainland investors would pour money into the city's stocks through a so-called "through train" program being proposed by the mainland central government as part of Beijing's moves towards a more relaxed investment environment.
Angel was not alone in trying to benefit from these gains through trading in warrants. Warrants accounted for nearly 20% of the local stock market's turnover in the first nine months last year, and from January to December 14, turnover reached HK$4.49 trillion, up from HK$1.79 trillion in the full-year 2006, according to Hong Kong Exchanges and Clearing.
In late October, Angel's consultant made a bet on a warrant on China Coal at HK$1.22 each and a warrant on Angang Steel at 31.5 HK cents each.
The purchases came as subprime concerns in the US intensified along with growing worries that the US was heading for recession, resulting in the beginning of declines in stock markets around the world.
Aggravating those falls in Hong Kong, it became clear that the proposed through-train program allowing mainland residents to buy Hong Kong-listed stocks would not be initiated in the near term. Chinese Premier Wen Jiabao said on November 3 that the government needed more time to assess the risks of the program to the stability of Hong Kong's financial system.
As stock prices fell and her warrants dropped in value, Angel became a persistent loser, and her account was closely watched by the brokerage. Eventually she was asked her to put about HK$70,000 into her securities account.
Come Tuesday, her consultant dumped Angel's warrants in China Coal at 19 HK cents each and in Angang Steel at 1.3 HK cents. Angel's funds were effectively lost down the drain.
Now she is trusting in her consultant's promise to give her back her lost capital. "My friend sometimes says she will give me it back in a year or two, sometimes she says in a year."
Angel is definitely not the worst loser among the millions of retail investors and speculators in Hong Kong. The Hang Seng Index has lost almost 10,000 points from its record high close of 31,638.22 on October 30. The declines early this week removed some HK$2.5 trillion of market capitalization, taking it down to HK$16.15 trillion on Tuesday from HK$18.65 trillion last Friday.
Since October 30, market capitalization has dropped about HK$7 trillion, or a per capita loss of HK$1.03 million in face value in three months, given Hong Kong's population of about 7 million.
The 13.67% decline in the Hang Seng Index on Monday and Tuesday was its biggest drop since October 28, 1997, when Hong Kong was mired in the onset of the Asian Financial Crisis. Investors north of the border in mainland China were suffering similar pain. There the stock markets in Shanghai and Shenzhen on Tuesday posted the largest single-day drop in seven months, as about 900 of 1,630 A-share companies fell by their 10 per cent daily limit.
All looked brighter by Wednesday morning, after the US Federal Reserve cut interest rates overnight by 75 basis points - the most in more than 20 years - to 3.5%.
The Hang Seng Index opened sharply higher on Wednesday and at 11.45am, it rose about 1,200 points to 22,958. By the close it was up 10.7% at 24,090.17. Even so, the chance for retail investors such as Angel to recoup losses may be short-lived according to Andrew Wong, associate director of One China Securities Limited in Hong Kong.
"It's not a real upsurge as the index dropped by more than 2,000 points on Tuesday. It's a time for speculative investors to sell as I believe the equity market will not bottom out until April, when a real upsurge will form," he said.
"The Hong Kong market is now affected by external factors including the US subprime mortgage meltdown, weak US consumption and worries about a slowdown of China's exports," he said.
Castor Pang, a strategist with Sun Hung Kai Financial Group, warned retail investors that it's not the time for them to look for cheap stocks as the stock market in Hong Kong is in consolidation, which meant it’s still under pressure.
Olivia Chung is a senior Asia Times Online reporter.
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