Gregarius » The Economist: Finance and economics » February 25, 2010

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  The balance of economic power: East or famine

  Posted: February 25th, 2010, 4:16am MST

  Asia’s economic weight in the world has risen, but by less than commonly assumed

  THE idea that the world’s economic centre of gravity is moving eastward is not new. But the global financial crisis, many argue, has given the shift in economic power from America and western Europe to Asia a big shove. Emerging Asia rebounded from recession much faster than the developed world; its banking systems and debt dynamics (see article) are much healthier. In 2009 China overtook Germany to become the world’s biggest exporter. On one measure it now looks likely to become the world’s biggest economy within ten years. But just how far has power really tilted towards Asia?

  The region has certainly become more important to bankers and businessmen, accounting for a record share of many companies’ profits last year. Several senior executives have relocated to Asia, the latest being HSBC’s chief executive, Michael Geoghegan, who officially moved from London to Hong Kong on February 1st. Since 1995 Asia’s real GDP (even including less sprightly Japan) has grown more than twice as fast as that of America or western Europe. Morgan Stanley forecasts that it will grow by an average of 7% this year and next, compared with 3% for America and 1.2% for western Europe. ...

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  Correction: Financial risk

  Posted: February 25th, 2010, 4:16am MST

  The default rates in chart 3 of our special report on financial risk (“The gods strike back”, February 13th) were for asset-backed securities, not CDOs made up of those instruments. Sorry.

  ...

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  Short-selling rules: Shackling the scapegoats

  Posted: February 25th, 2010, 4:16am MST

  American regulators approve long-awaited restrictions on short-selling

  THE main cause of the financial crisis may have been reckless optimism, but the pessimists are hardly being hailed as heroes. When stockmarkets tumbled in 2008, short-sellers—those who borrow shares and sell them in the hope of buying them back later at a lower price, thereby profiting from a fall in their value—were cast as villains. Politicians have wanted to clip their wings ever since. On February 24th, after a year-long debate, America’s Securities and Exchange Commission (SEC) responded with fresh curbs on shorting.

  The restrictions will be triggered when a stock has fallen by 10% or more in one day. At that point, short-selling would be allowed only if the sale price is above the best available “bid” in the market. This provision could affect a fair number of shares—4% of the market on an average day, and much more in turbulent times, the commission calculates. ...

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  Chinese banks: Hole sale

  Posted: February 25th, 2010, 4:16am MST

  Capital calls by Chinese financial institutions elicit questions

  THE bill for China’s bank-lending spree is coming due. An announcement on February 23rd by China’s fifth-largest lender, the Bank of Communications (BoCom), of a 42 billion yuan ($6.15 billion) rights offering, created a stir in Asian financial markets—not because it was unexpected, but because it represents the biggest fund-raising effort by a mainland company since the heady days of 2007.

  The move follows similar announcements by two other Chinese financial institutions, the Bank of China and China Merchants Bank. Smaller institutions have also been busily raising money, either through initial public offerings or direct placements to state-owned industrial companies. All told, some 200 billion-250 billion yuan has been raised in the past six months, according to Bill Stacey, an analyst with Aviate Global, a Hong Kong brokerage firm. ...

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  Interest-rate risk: Surf's up

  Posted: February 25th, 2010, 4:16am MST

  Banks’ next big problem appears on the horizon

  HOWARD ATKINS, the chief financial officer of Wells Fargo, a big American bank, recently said that he does not lose sleep worrying about interest-rate risk. But then, he joked, his job is so tough that it leaves him only one hour a night to nap.

  Regulators, too, are getting restless. Last month a group of American agencies warned that banks need to sharpen up their management of interest-rate risk in readiness for a rise in short-term rates, which were cut to close to zero at the height of the crisis and remain there. They urged banks to plug a sudden rise of up to four percentage points into their stress tests. ...

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  Buttonwood: The very long view

  Posted: February 25th, 2010, 4:16am MST

  For investors, much depends on when you put your money in

  IT IS all too easy, given today’s 24-hour news cycle, to become obsessed with short-term movements in financial markets. But investors must learn to focus on the long term.

  The final return of an equity investor is highly dependent on when he starts to put money in. In real (inflation-adjusted) terms, British equity prices reached peaks in 1906, 1936, 1968 and 1999, according to the Barclays Capital Equity-Gilt study. The regularity of the intervals between these summits is remarkable and will undoubtedly encourage believers in “long wave” theories (Wall Street’s peaks, in real terms, occurred in 1928, 1968 and 1999). The patterns suggest that each generation discovers a passion for equity investment that is followed by disappointment. ...

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  Secondary buy-outs: Circular logic

  Posted: February 25th, 2010, 4:16am MST

  Private-equity companies look to each other to solve their problems

  IF YOU are looking for a way out, don’t forget the way you came in. For private-equity firms that want to sell portfolio companies, there are three big exit routes: an initial public offering (IPO), a sale to a trade buyer, or a sale to another private-equity firm (also known as a “secondary buy-out”). Market volatility has led private-equity firms to cancel several IPOs this year, among them New Look and Matalan, two British retailers, and Travelport, an American travel company. Sales to trade buyers continue to tick over. But the real activity has been in the secondary market.

  According to Preqin, a research firm, there have been $3.9 billion-worth of secondary buy-outs so far in 2010, compared with $5.9 billion in all of 2009. To date, the biggest deal of 2010 is a secondary buy-out, Bridgepoint’s sale of Pets at Home, a British pet-shop chain, to Kohlberg Kravis Roberts for GBP955m ($1.5 billion). On February 23rd 3i added to the list by agreeing to sell Ambea, a Scandinavian health-care firm, to Triton for €850m ($1.2 billion). ...

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  Emerging-market sovereign debt: Risk redefined

  Posted: February 25th, 2010, 4:16am MST

  The new problem with Asian sovereign debt—scarcity

  ELEVEN months ago Indonesia’s government paid almost 12% to raise long-term money on the international capital markets, while America was financing its own debt for less than 3%. By early January the rate on America’s debt had climbed a bit, but Indonesia’s financing costs had plunged to a shade under 6%.

  This remarkable shift in financing costs is not unique to Indonesia. The Philippine government issued a dollar-based bond in January carrying an interest rate of 5.7%. A year earlier, its outstanding bonds carried an effective rate of 8.4%. Malaysia and South Korea are also rumoured to be in the market for debt, and in sharp contrast to some rich-world issues, the buyers are likely to be at least as eager as the sellers. ...

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  Economics focus: Low definition

  Posted: February 25th, 2010, 4:16am MST

  Trustbusters want to put less emphasis on market definition when assessing mergers

  WHAT line of business are you in? It is hard for a lot of people to answer this question with a straight face. As tasks become more specialised and firms occupy ever-smaller market niches, job titles and business categories can sound comically obscure. It is a source of embarrassment for antitrust agencies, too. To assess whether there is a enough competition in a market, trustbusters must first decide what the market is. The results can be risible. For instance, Britain’s Office of Fair Trading (OFT) said this month that the purchase of a job-lot of theatres by the Ambassador Theatre Group did not raise competition concerns. The OFT’s definition of the relevant market in this case (the “provision of regional theatres for medium-scale national touring productions”) is unlikely to be found on anyone’s business card.

  Some economists doubt whether defining a market is useful at all when judging marriages between very specialist firms. The issue has a growing saliency because America’s trustbusters are currently rewriting the guidelines for “horizontal” mergers (tie-ups between firms that offer the same sorts of products). The update is partly an exercise in good housekeeping: the current guidelines were written in 1992 and do not reflect advances in economic theory and changes to actual practice since then. It is also an opportunity for American policymakers to shift the analysis of mergers away from an obsession with “structure”—the size of the combined market share of merging firms—to focus instead on how big a constraint each firm is on the other’s pricing. ...