Easy Cash & Mergers

Many companies support the introduction of protection against a renewed recession. Central Banks are leading this movement by keeping interest rates low. Excessive risk taking is much to blame for the economy’s crash; yet low interest rates are a strong incentive for opportunists to prioritize risky investments over cash.

Easy money from low interest rates is boosting hubris actions. After months of planning bitter survival strategies, the idea of growth is sweet; especially with mergers. This optimistic trend is a sign of a growing economy. However, early warnings on low interest rates are emerging with attention flags on the risks of causing distorted allocation of capital and personnel, excessive risk taking, lopsided balance sheets and destabilising surges in capital flow. Another threat is that cheap money may hinder the necessary elimination of bad debt from the banking system.

The positive or negative consequences of the low interest rates are balanced on a needle. However as the IMF said that interest rates should stay low “for the foreseeable future”; companies can continue to maximise the benefits of low rates without many restrictions.

John Kay - Finance System & Regulations

On Wednesday 12th (May 2010), John Kay gave a lecture on the finance system and regulations. One question from the audience was: If we went back in time with all our knowledge to 2006/2007, would we be able to prevent Lehman Brothers from declaring chapter 11? The answer was: “We don’t want to prevent Lehman Brothers to go bust, this is capitalism! We want the regulators to allow them to go bust without taking the entire system with them.”

This led to many questions on how to regulate such conglomerates? John Kay has the answer in favouring structural regulations. In conglomerates, different sectors as asset management, securities selling, market creation, etc... all have conflicts of interest. The new structural regulation will help to create non-interdependent small robust resilient networks which will form a big system. This will enable to regulate capital by removing the arbitrage element of spreading capital in different sectors that fall under different regulations. Furthermore, this will make it possible to increase accountability of the chiefs in big organisations.

A second question was regarding the stakeholder’s society growing stronger, and what impact would that have on the new regulations? John Kay talked about an un-focused public anger which creates the need to break the political influence on the financial market and vice-versa. Once more, the resolution is in separating and compartmenting the structure of conglomerates. An example would be to put in place narrow banking through segmentation: on one side, small individual investors, and on the other, ‘casino game floor’ for conglomerates.

A third question was how to solve regulation’s own problems of asymmetry and capture? The answer was once more in structural regulations: regulators would be experts in organisation’s structure rather than behaviour, they will be un-bias and consistent within different sectors.

Prudential caring for Asia

The success on the Prudential bid for AIA relies on more than finance.

AIG founded in Shanghai in 1919, is the only foreign insurance firm to have the privilege to operate independently, with not local joint-venture. Prudential on the other hand, in January 2005 acquired a 50:50 joint-venture with China CITIC.

With talks with China Regulatory Commission (CIRC), Thiam said he intends to keep its stakes in the joint-venture with China’s CITIC group. However, as both Prudential and AIA have separated JVs in India, the regulators made it clear that the company cannot have two licences.

The intention of Thiam to keep its stake with CITIC is well approved by China. This single, yet, important decision shows the understanding of Prudential towards China main goal: China’s local growth.

The successful story of L’Oréal is one of a few examples. L’Oréal professionally cherished and excelled at respecting China’s will: After moving to China, the French cosmetic company waited nine years before making local profit. Now it is one of the most successful brands in its type in China.

As numbers show, the Asian insurance market is about double digits growth through development and education. To maximise one future profit, it is vital for Prudential to work hand in hand with China’s government.

Bank of Communications - CSR report

In most conversations in the West regarding CSR, the same question is frequently asked: Is it really to do good actions, or simply to increase profits by pleasing ‘us’? In the end, the reason doesn’t really matter as there is nothing wrong in increasing profit, by for example, saving the environment.

In China, CSR doesn’t have that ambiguity. Bank of Communications’ (BOCOM) CSR report is fantastic for one reason; it sticks with its mission statement. Two quotes that stand out are: “First class public sharing bank” and “Best wealth management bank in China”. There is no notion of profit, higher dividends, attractive investment, etc...

The CSR report nicely follows the mission statement with 6 headings: Shanghai Expo 2010, Community Contributions, Education, Philanthropy & Charity, Environmental Protection and Culture.

The community section stands out with “Supporting national strategic projects” as one its socially responsible task. The sense of community in this instance is very aligned with the People’s Republic of China reform. It follows the logic of: by offering loans to national projects, BOCOM is directly benefiting the community.

This highlights the crucial importance of cultural differences. In the previous blog post, Investor Relation – China, this community responsibility comes out as a limitation. From an investor’s point of view, this created doubts of credibility.

George Bush’s ambition to imprint capitalism in China now seems foolish and perhaps embarrassing. It is strongly argued that the power is soon shifting away from the U.S. towards China. Therefore limitations such as above would have to be accepted and respected from the West.

Investor Relations - China

In the midst of volatile markets, Chinese share prices have remained remarkably resilient, attracting strong inward funds flow. However the prospect of major fund-raising by the large Chinese banks is re-focusing investor attention on the balance between independent shareholder and government ownership in China. The rumour that China Mobile, the largest telecom operator, may take a significant stake in Shanghai Pudong bank, a deal which has no evident commercial logic, merely reminds investors that majority owned government companies can be expected to do 'national service' from time to time. While the fund-raisings are designed to maintain prudent regulatory ratios, fund raising on this scale (Y44bn for Bank of Communications) prompts investors to review holdings.

The concerns are also focused on the micro-level of operations, in particular that risk that banks may be subject to political pressure to offer un-commercial loans. However recent anecdotal research by BAML, based on interviews with loan officers in rural and city bank offices, seems to offer comfort that the incentives at a local level offer a reasonable balance of risk and reward. At a time when even European country risk cannot be taken for granted, perhaps the Chinese banks remain an attractive proposition in 'interesting times'.

Google Vs Baidu Part II

Earlier this month, Google relocated its Chinese business to Hong Kong. An error this big by the U.S. giant was unexpected. This decision upset the Mainland; China is now implementing the consequences on Google.com.hk
In the eyes of the government, Chinese are very nationalistic and proud citizens. It has been obvious that Baidu is by far more appreciated than Google for two main reasons. First it is Chinese, and secondly, it is more practical.
As said in many articles regarding Google’s removal; Google will be the biggest looser, giving way to Baidu with 389m exclusive local internet users.
Google is also loosing human resources to Baidu. Wang Jing, Baidu’s new Vice-President in charge of engineering was a former Google engineering director. This switch is the first between Google and Baidu high level employees.

Google seem to have adopted a laissez-faire mood. It is hard to believe that such a world giant is loosing towards China. This can mean two things: Google is preparing a counter-attack which is still far away, or China has grown tremendously in power and is now capable of playing with its own rules. The more likely option is the second one, which made of Google an example for the rest of foreign companies.

"Chindia" New Paradigm

Some say a new management paradigm is growing in the East. China and India nurture this new business era, and so far, has shown very rewarding. In short the new paradigm is explained by three elements:
1) The consumer is King; entrepreneurs scale out their businesses to reach non-consumers and create products and services personally tailored to the needs and limitation of the poorest.
2) Employs lean and mass production for high end services (e.g. healthcare: Devi Shetty)
3) Use frugal production by cutting cost until you reach the bone.

This new paradigm is cherisher by some as being innovative and mocked by others by being a mere alteration to previous management models as T Ford (Offered in any colour so long as it is black).

This is a debate and people agree to disagree. However, leaving the academia aside, it is facts that show the success of the new paradigm.

“Multinationals expect 70% of the world’s growth over the next few years to come from emerging market, with 40% coming from just two countries, China and India.” The notion of growth is well associated with the East. But the notion of innovation and high class is more distant.

This is where China and India are putting things on their ears. Tata Consultancy Services, an Indian company ranked top 10 in a US based Global Service IT ranking. Lenovo, a Chinese computer company, new in the 90’s, bought IBM personal computer business less than 5 years ago. Today it ranks fourth PC maker in the world.

Many similar cases happened and are happening as we speak. Back to academia, the new paradigm will inevitably change management in the West due to globalisation. The question is: When will the East influence the Rest?

The Iceberg: China

This blog’s main purpose is to witness and offer insightful comments on the rise of China. Each article written is based on extensive primary and secondary research; the sources being news based.

Being a PR student, I was curious to understand the communication element of China, both internal and external. China Shakes The World: The Rise of a Hungry Nation by James Kynge is an extremely insightful book on the real rise of China.

The review from the South China Morning Post, an English newspaper in Hong Kong, sets the book apart from others: “Kynge’s work ranks among the finest reportage on China’s rise, free of the hyperbole and fear-mongering that tends to characterise such books.”

Aside from the admiration of the book, the review states a strong limitation: the fear of China from others. This fear leads to a lack of communication and understanding between China and the world, mainly U.S. and Europe.

Ironically, One World, One Dream, the slogan of the Beijing Olympics 2008 is paradoxical. On one hand, the notion of unity within the world is pasted on every poster, advertisement, magazine, platform related to the Olympics. On the other hand, the Games in Beijing were a show-off of China’s national power.

Many other examples can illustrate so clearly the ‘issues’ some have with China. However, being foreigners, the label cemented on China, is only the result of a few events. It is common to hear Chinese say that foreigners cannot understand Confucian thinking which is the base of the Chinese culture.

Both sides of this relation are limited by the lack of willingness of communication followed by the destructive habit to judge a book by its cover.

Finger-Pointing

“I think the doctrine of free trade is an outstanding one. The free trade doctrine has propelled the economies of Europe and the US to a soaring path of development over the past 200 years. It has also been a doctrine that Europe and America have propagated as a glorious doctrine. They have brandished the banner of free trade and gone around the world doing commerce and making money, and becoming developed countries. But now that a developing country that is quiet poor and has a GDP per capita of only one-thirtieth of theirs has found a few textile companies that can finally compete with the Europeans counterparts, they want to close their doors and engage in protectionism. This, in fact, is a double standard. When they had a comparative advantage, they encourages the whole world to open their doors, but when they discover that one developing country is becoming more competitive, they say ‘OK, enough. Let’s close the door now.’”

May 2005, Bo Xilai, Chinese Minister of Commerce interview with BBC Beijing.

The current recession excited high tensions between China and America. Since 2008, they each dragged the other to the WTO thrice. The year 2009 has seen numerous demands from America against China of anti-dumping investigations, followed by accusation of unfair protectionism.
Chinese exporters have government base support, which America does not provide for their exporters. This creates an advantage despised by Americans; Chevron Vice-President Peter Robertson spoke for many: “We are not competing with a company. We are competing with the Chinese government. I think it is wrong.”

Both countries created a strong venomous snake with a hobby of tail-catching.

Rise of the Dragon

The currency struggle between China and the US went way over its head. The decision of Tim Geithner, America’s Treasury secretary to postpone the potential Chinese label of a currency manipulator was a wise call. An ancient Chinese proverb says: “to fight with people face to face over advantages is the hardest thing in the world”. The decision of Tim Geithner is strategic; this bilateral currency row will now be on the agenda of future multilateral meetings, which will ease the tension between both parties.



The sought after advantages from China of keeping a low Yuan are to maximise exports employment and offer a competitive production cost.

The latter advantage for China is one reason why the US requires the revaluation of the Yuan; Chinese exports are being unfairly subsidised.

China argues that this demand is for self American protectionism. They also threat that the revaluation of the Yuan will compromise its competitive edge with other Asian countries.

The US is trying to spread its optimistic vision and show the silver lining to China: if the Yuan is stronger, China’s local consumer spending will rise, thus the country can grow its domestic market.

This currency row has an impact on the crucial recession recovery, it is important for both parties to look beyond a single short term advantage.

Conflict with the Google Epidemic

One strategy to resolve a conflict is adaptation. Zhang Yu, two thousand years ago said: “Adaptation means not clinging to fixed methods, but changing appropriately according to events, acting as it suitable”.
China and Google seem to have it all wrong. The Middle Kingdom is fighting to protect its society from American values imposed by Google. The giant search engine is in a battle to shield its integrity: freedom of information.
Google threatened to pull out of the world’s largest Internet market with an estimated 384 million users, if China was incapable to adapt. The answer was from Minister Chen Deming: “You’re not going to get 1.3 billion Chinese to change by insulting them” followed by “In the end; America is the one that needs to adjust”.
The West decided to close down Google.com.cn by transferring all data onto Google.com.hk, managed in Hong Kong. This short term solution hardly resolves the conflict as China can block Google.hk at any given time. America is simply targeting the symptom of the conflict rather than the cause.

The Robin Hood Tax

David Hillman, the Coordinator of Stamp Out Poverty presented The Robin Hood Campaign, at the European Business School of London (10/03/10). The concept is to apply a tax of 0.005% on all international currency banking transactions. This tax is estimated to raise around $400 billion (£263bn) globally every year.

As this project is still in its campaigning stage, support is crucial. Most of the public seem to be in favour of this tax for two reasons: It is for the better good; and as the crisis is the fault of the bankers, they need to pay. This project aims to reach the G20 summit in Canada (June 2010). David Hillman said: “This project is from bottom to top; UK is the starting point, followed by the world.”

The Robin Hood Tax campaign is very strategic in targeting its

public at their most vulnerable time; there is a strong common anger against banks, and this is the only option that does not tax ‘them’.

This campaign is based on strong pathos and on situational logos. The main economies have recently, due to the crisis, switch from a shareholder to a stakeholder society. However, numerous crises have happened and showed this society switch is easily reversible. If we fall back into a stakeholder’s society, the Robin Hood Tax will be forgotten effortlessly.

Around the Bonus Tax

Adam Smith said on the subject of capitalism: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Replace butcher, brewer and baker by banker, and dinner by growth. Is the media fooling the mass by taking a socialist stand on this matter? Yes and purely because the “Anglo-Saxon” capitalism weighted to the left.

As Joseph Conrad said, work makes us sane. Thus through decades, our civilization has adopted the carrot and stick philosophy.

The issue of the bonus incentives makes head news in most media platforms. The common thought is that the easy cash the banks were offered as huge subsidies were to enhance bank’s lending and capital growth, not to pay staff. This is a fact, not a point of view. Some strong headed banks stuck to their traditions and offered the bonuses. The result of this macho behaviour is the 50% tax on high earners.
London used to be a top financial hub, attracting foreign and local investments. It is now in great danger. The high levy on bank bonuses is a warning sign that London is running short of carrots.