Untitled

News Summary
Chinese news this week caused ripple effects around Asia,

especially on the Malaysian Ringgit. The Ringgit has fallen to
multi-year low hit 4.15 on Friday. Meanwhile, weekend
news covered China and Greece.
Financial Times on Saturday wrote that Chinas devaluation
was IMFs doing. The article said IMF had warned the Chinese
authorities in May that it was becoming increasingly critical
for Beijing to allow its currency to trade more freely. Well,
IMF did welcome the move and said the Chinese Yuan isnt
undervalued despite the decline. In The Sunday Times, the
paper said Chinas shock devaluation could set off a wider
economic conflict. Slashing its value sent shock waves around
the world. Stock, bond and commodity markets tumbled amid
fears of a new wave of tit-for-tat currency wars. In
Washington, outraged politicians accused the Chinese of
manipulating their currency in an effort to destroy American
jobs, and accused the Obama administration of failing to
stand up to Beijing. In The Sunday Observer, Paul Krugman
described the Chinese decision as the first bite of the cherry,
suggesting more could follow. The Observer also warned that
if the Chinese economy really is much weaker than Beijing has
let on, it would be alarming for any company hoping to export
to China (see pages 2-9).
So the Eurogroup Finance Ministers agreed to Greece third
bailout. The official statement said, Eurogroup considers that
the necessary elements are now in place to launch the relevant
national procedures required for the approval of the ESM
financial assistance." Thus an initial tranche of Eur26bn
would be approved by the European Stability Mechanism next
Wednesday. Of this Eur26bn, Eur10bn would be reserved to
recapitalise Greek banks and Eur13bn would be in Athens on
Thursday to meet pressing debt payment obligations.
However Finnish Finance Minister Alexander Stubb pointed
out that the bailout needs participation from IMF but
Eurogroup does not want a debt relief. Lets see what happens
when German lawmakers vote on the bailout package for
Greece on Wednesday. Benoit Coeur, an executive board
member at the ECB, said the rules that prohibit it from buying
Greek bonds could be scrapped. However, Athens must
adhere to the conditions of its latest bailout agreement (see
pages 9-12).
Sunday Times published a report that BOE Governor Mark
Carney has told fund managers to prepare for a mass sell-off
in stocks and bonds that could be triggered by a Bank rate
rise. Carney has privately asked 135 of Britains biggest fund
managers how they plan to cope with customers demanding
their money at short notice (see page 13).
The Federal Reserve releases the minutes from its July policy
meeting on Wednesday. The minutes are likely to give more
details about the timing and path of interest rates. The Fed
last month offered subtle hints that it is getting closer to its
first increase in nearly a decade, though Chairwoman Janet
Yellen has emphasized the date is not yet certain.
Australian Treasurer Joe Hockey has pushed back against
Reserve Bank of Australia governor Glenn Stevens' warning
the economy's longer-run potential growth rate may have
slumped on weak productivity and population growth. The
downgrade has major implications for the government's May
projections that the budget deficit will swing back to surplus
by early next decade (page 16).
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Looking At China
---
IMF set stage for China currency shift
Zhou Xiaochuan, Beijings central radical

banker
The International Monetary Fund set the stage for Beijings

dramatic currency policy shift this week by warning Chinese
authorities in May that it was becoming increasingly critical
for Beijing to allow its currency to trade more freely, according
to an IMF report.
The warning presaged this weeks move by the Peoples Bank
of China to allow a greater role for markets in setting the
exchange rate of the renminbi and what turned out to be the
two biggest daily depreciations of the currency in more than
20 years.
In what the IMF has called a welcome step, the PBOC this
week caught markets by surprise when it abruptly altered the
way it sets the daily midpoint for the narrow band in which
China has allowed the currency to trade against the US dollar
since 2005.
The IMF has for years called for China to allow a greater role
for the markets in all of its economic policies. But in their
annual assessment of Chinas economy released on Friday, the
IMFs staff wrote that during discussions with Chinese
authorities in May they had stressed that it was becoming
increasingly urgent for Beijing to act on the exchange rate,
which is now to move only in a 2 per cent band around the
daily midpoint.
More flexibility is becoming increasingly critical to move to
an effectively floating exchange rate, the IMF economists
wrote in a summary of their discussions with Chinese
authorities presented to the board last month but only
released publicly on Friday.
Because of sizeable and growing capital flows, the IMF said
Chinas monetary policy risked becoming less effective, they
said. The impossible trinity of a closed capital account,
independent monetary policy and a tightly managed exchange
rate was set to become increasingly binding, IMF staff
wrote.
China needs to move to something akin to a floating exchange
rate within two to three years, they said. But steps over the
next few months could include a further widening of the band
and changes to how the central parity is set, the IMF
economists wrote. The latter is what the PBOC opted to
announce on Tuesday.
Markus Rodlauer, the IMFs mission chief for China, declined
to reveal the details of the funds discussions regarding the
exchange rate with Chinese authorities in May. But he said
there had been a meeting of the minds on the need for
markets to play a greater role in setting the value of the
renminbi.
This weeks step and the subsequent falls in the value of
Chinas currency had not altered the IMFs view announced at
the close of the mission in May that the renminbi was no
longer undervalued, said Mr Rodlauer, although he declined
to call it fairly valued. Since 2005 the renminbi has
appreciated more than 30 per cent against the US dollar,
according to the IMF, while this weeks falls amounted to less
than 3 per cent.
But they had marked a significant step towards a freer
exchange rate, he said. Under the new rules the PBOCs daily
midpoint, around which the 2 per cent trading band is set, will
be linked to the previous days closing value. Theoretically that
means the renminbi could trade up or down as much a 10 per
cent in any given week, Mr Rodlauer said.
That does bring us quite close to a float, he said. Moreover,
he said he expected the band to widen in the coming years as
China continues to move towards a freely floating exchange
rate.
(Full article click - FT)
In the early 1980s, a promising PhD student from a prominent

political family caught the eye of Chinas most senior
Communist leaders by urging them to lift price controls and
allow imports of televisions.
Three decades later Zhou Xiaochuan, Chinas longest-serving
central bank governor, is still convincing the countrys
authoritarian leaders of the merits of economic reform. In
persuading them this week to devalue the currency, he may
have pulled off the crowning achievement of his long career
by preparing the way for a free-floating renminbi that can
challenge the US dollar as the worlds reserve currency.
The Peoples Bank of Chinas announcement on Tuesday that
it had devalued the renminbi against the dollar by nearly 2 per
cent overnight the biggest fall since 1994 caught markets
by surprise and raised the prospect of a so-called currency
war. Mr Zhou presented the move internally to President Xi
Jinping as a matter of national interest, necessary to boost the
economy at a time when growth is slowing sharply. To the
outside world, the PBOC portrayed the devaluation as a step
toward a more market-oriented and freely tradable Chinese
currency. He hoped this would prevent competitive
devaluations while also convincing the International
Monetary Fund to include the renminbi in a basket of reserve
currencies.
The ability to make his reforms palatable to both global
markets and Communist party stalwarts marks him as a
brilliant technocrat at the height of his political powers, even
as he prepares to retire. Although he is often referred to as
Chinas Alan Greenspan, the position of central bank governor
is far less influential in the Peoples Republic than in the US.
Big decisions such as raising or lowering interest rates are
decided by party leaders. But, as with most posts, it is the
person who bestows power on the position rather than the
other way round.
Mr Zhou, like Mr Xi and many other senior leaders, is a
princeling, as the children of senior party members are
known, and this gives him influence that goes well beyond his
official title. He was born in 1948, one year before the
establishment of the Peoples Republic. His father was an
early member of the Communist party and its secret service in
the second world war, and later vice-minister of machinery.
Beyond official biographies, the personal details of senior
Chinese leaders are considered state secrets and, apart from
the fact that he is married to a senior former official in the
ministry of commerce legal department, little of his private life
is known publicly.
The younger Zhou graduated from an elite Beijing high school
in 1966; and, when the Cultural Revolution began that year,
he was a leader in one of the vicious Red Guard groups that
persecuted teachers, bad elements and capitalist roaders,
according to two people familiar with the matter. Any-one
who has met him in the past few decades finds it hard to
believe this avuncular, urbane and scrupulously polite man
could have been involved in the violent excesses of that
period.
In 1968, like millions of other rebellious youngsters, Mr Zhou
was sent to a state farm in the frigid far northeast, where he
kept his spirits up in four years of exile by listening to banned
classical music records. When his father was rehabilitated in
1973 he was allowed to return to Beijing and embark on a life
in academia. In the 1980s he studied briefly in the US and, on
his return, joined a group of young technocrats in Beijing
pushing to open up to the west.
Mr Zhous political star really began to rise when President
Jiang Zemin, a former protg of his father, came to power in
Taken from the FT Saturday, 15 August 2015
1989. He served as head of a string of organisations, including

the China Securities Regulatory Commission, where he was
known as Zhou Bapi the Flayer because of attempts to
crack down on corruption in nascent capital markets. Again,
his titles did not reveal his true influence. He has been
instrumental in establishing Chinas equities markets in the
early 1990s, in bailing out and restructuring banks in the late
1990s, overhauling equity markets in the early 2000s and
nurturing the bond market since then.
A regular at meetings of the IMF, he charms westerners with
his coruscating intelligence, fluent English, sense of humour
and mean tennis game. Hank Paulson, former US Treasury
secretary, credits Mr Zhou with convincing him to take the job
in 2006 after he had already turned it down. But the traits
that make him palatable to western elites have often worked
against him at home, where he is accused of being too liberal,
too foreign and too close to the US.
His imminent political demise has been wrongly reported
multiple times at least twice by the Financial Times since
he became central bank governor in 2002, and he has been
the subject of campaigns by overseas Chinese-language media
alleging everything from insider trading to selling Chinas
banks to foreigners on the cheap. In 2010, the PBOC was
forced to publish pictures of Mr Zhou meeting foreign
dignitaries in Beijing in the wake of rumours he had defected
to America to avoid punishment for losses on US Treasury
bonds.
It is clear he sometimes pisses people off, including President
Xi, says Christopher Johnson, a former senior China analyst
at the CIA now at the Center for Strategic and International
Studies in Washington. But he has never been so important
or so powerful. He is going to retire soon so has nothing to
lose and he is absolutely determined to achieve the market
reforms he has committed most of his life to.
---
Devaluation with Chinese characteristics

Taken from the FT Comment Saturday, 15 August 2015
Renminbi move is bad news for investors, but so far not too
bad
After many months of market pressure an Asian country
devalues, resulting in the biggest crash in its currency in two
decades, with a domino effect across the region. Speculators
record handsome profits, while emerging markets from Russia
to Latin America reel.
Chinas devaluation this week drew comparisons to the 199798 Asian crisis sparked by Thailand and fears that a repeat is
imminent, with disastrous consequences for investors
everywhere. The worries should not be dismissed lightly.
China says it has moved to a more freely traded currency, not
joined the currency wars. But even if it is sincere, a freely
traded renminbi would surely fall much further than the 3 per
cent drop this week itself the biggest weekly fall since 1994.
A big depreciation by Asias biggest economy would export the
deflationary woes of Chinas manufacturers. With factory gate
prices down for 41 straight months and spare capacity rife, a
serious devaluation would threaten the wests and Japans
attempts to escape falling prices.
By the standards of emerging market devaluations, Chinas is,
so far, not big. Even the drops in neighbouring currencies
were not that great, aside from Malaysia, where political
issues have damaged investor confidence. Take the
Indonesian rupiah, often a currency market victim. The
rupiah tumbled 3.6 per cent in two days at its worst, which is
nasty for importers and Indonesian companies with dollardenominated debt. But in the taper tantrum of 2013 the
rupiah moved more than that each day for eight days in a row.
Investors calmed down after the Peoples Bank of China
intervened to prop up the renminbi, and set its daily fix
slightly stronger on Friday. Still, the currency could justifiably

fall against the dollar, as every other major currency has over
the past year.
The world should be able to cope with a managed decline in
the renminbi, and the Chinese have sufficient foreign
exchange reserves to avoid panic: $3.65tn even after using
$315bn in the past 12 months of capital flight.
The true danger for investors comes not from the devaluation
itself as from the implication that Chinas economy is in such
deep trouble it needs help from a lower exchange rate. Official
data offer little to be concerned about, but measures of heavy
industry and finance suggest growth is so slow as to qualify as
a hard landing. No one knows how bad things are, so investors
can do little more than guess; but after this week fear has the
edge over greed.
Still, those who want to look on the bright side can find much
to celebrate. Moving away from mercantilist currency
manipulation should, over time, eliminate Chinas
contribution to the global savings glut, one of the causes of the
2008 crash. Giving market forces a greater role will affect the
domestic economy too, helping reform efforts.
But as with so much else since the credit crunch, China would
not want to be starting from here.
The short-term dangers of devaluation are genuine. Capital
cannot flee easily, but the more the renminbi weakens, the
more wealthy individuals will sneak money out; this may be
good news for Sydney or Vancouver property prices but will
deplete the pile of reserves. Julys drop, if continued for a year,
would use up $510bn of the $3.65tn. Those reserves may be
needed to support Chinas indebted businesses, which have a
$1tn or so of dollar-denominated debt, according to the Bank
for International Settlements.
One certainty is that relaxing exchange controls means greater
volatility. In the near term, that justifies lower asset prices, as
companies and investors adjust to the new regime.
---
IMF Says Chinas Yuan Isnt Undervalued,

Despite Decline
Taken from the WSJ Saturday, 15 August 2015
Bank welcomes more market-driven currency trading, calls for

quick reversals of moves after stock-market drop
Chinas currency isnt undervalued despite this weeks decline
against the U.S. dollar, but the worlds second-largest
economy still needs to adopt a fully market-based exchangerate system within three years, the International Monetary
Fund said Friday.
This week, China introduced changes to make trading in the
yuan more market-driven. Economists and currency traders
said it is an improvement over the previous system since
opening rates are more explicitly linked to the prior days
closing level.
But the system still leaves authorities with significant
discretion in setting rates, they added. The yuan fell 2.9%
against the U.S. dollar, its largest drop in years, during the
week.
The IMF said it welcomed the new approach, which follows
the yuans recent double-digit appreciation against the dollar,
but added that China needs to do more. Officials said the new
trading system would have no direct effect on Chinas bid to
have its currency included in the IMFs special drawing rights
basket of currencies but said that, in general, a more marketbased approach would help.
As China integrates more and more into the global financial
system, it will be increasingly important for China to have a
freely floating exchange rate, Markus Rodlauer, the IMFs
mission chief for China, told reporters in a briefing.
On Friday, the multilateral bank also called on Beijing to
reverse in a timely manner recent interventionist steps
taken after Chinas stock market fell sharply, while working to

maintain liquidity and improve crisis management and
oversight of equity markets.
Chinese authorities suspended initial public offerings, pushed
state institutions to buy shares and blocked large shareholders
from selling after the Shanghai Composite Index fell sharply
from a high of 5166.35 on June 12.
Our view is that [the moves] should be unwound as soon as
possible, Mr. Rodlauer said.
Economists criticized as heavy-handed Beijings efforts to
intervene in the stock market, given that the index was still up
for the year and the declines appeared to have a limited
spillover effect on the real economy.
On Friday, Chinas stock regulator said on its website that
government entities would hold shares for years if needed to
stabilize the market.
The multilateral bank also called on China to reduce its
financial vulnerabilities by paring real-estate investment and
debt levels, fully liberalizing interest rates, reforming the
state-owned sector and strengthening the fiscal system. The
recommendations are part of a periodic review the IMF
conducts with member countries known as the Article IV
consultation.
While China reduced its current account surplus to 2.1% of
gross domestic product in 2014, down from the 10% level in
2007 at its peak, it still needs to pare excess savings, the IMF
said. Credit has risen to excessive levels and deleveraging
could unearth more problems with credit quality, particularly
among state-owned companies, it added.
It said China also needs to implement reforms that will boost
longer-term growth, including cuts in government and
corporate debt and better investment efficiency, without
letting its economy slow down too quickly.
Chinas economy grew by 7% in the second quarter and
momentum has continued to slow into the second half of
2015. China has set an annual target of about 7% growth while
the IMF projects annual growth of 6.8%
On Wednesday, China said growth in industrial production,
fixed asset investment and retail sales all fell a few days after
reporting that exports dropped sharply.
(Full article click - WSJ)
---
China Declares Currency Independence

Taken from the WSJ Saturday, 15 August 2015
On Tuesday China stopped supporting the yuans tight link to

the strong dollar, allowing its currency to weaken by 3%
through Friday. Thats not large by foreign-exchange
standardsJapans yen has fallen by 35% since 2012. Yet the
yuan devaluation unsettled global financial markets that are
worried about weak global growth and deflation pressures.
The depreciation of the yuan follows the spectacular boom
and bust in Chinas stock market: The Shanghai index, up
60% year-to-date at its June 12 peak and is now up only 23%.
The two shocks gave new life, probably short-lived, to decadelong predictions of a China hard landing. Some in Washington
may interpret Beijings latest move as part of a currency war,
or an indication of Chinas greater ambitionsin the South
China Sea, Africa, the global financial system, and toward a
yuan bloc through its new Asian Infrastructure Investment
Bank (AIIB).
For China, however, the problem was more about the global
slowdown and the strengthening dollar. Under current U.S.
policies, the dollar has no reliable valueit weakened
massively in the 1970s, strengthened in the 1980s and 1990s,
weakened in the 2000s, and has been soaring in recent years.
This instability makes the dollar an unsuitable long-term link
for Beijing and its aspirations for fast economic growth.
Since 1993 Chinas leaders have been committed to providing
a strong and stable yuan throughout the business cycle and,
as a result, median income has risen rapidly. That

commitment to stability is in marked contrast to the U.S.
which lets markets change the value of the dollar based on
their perception of economic conditions. This turns oftenarbitrary currency trends into a dominant self-reinforcing part
of our economic fundamentals, creating momentum-driven
boom-bust cycles in the strong-dollar 1990s and the weakdollar 2000s.
By opting out of this, China is in effect taking a big step
toward currency independence. The yuans link to the dollar,
whose value has been surging, caused the yuan to rise too high
in value to meet Beijings goal of price stability, and its goal of
fostering commerce with its other trading partners, many of
which have devalued. The dollar has been rising against gold
and, lately, even against the normally strong Singapore dollar
and Swiss franc, so the dollar cant be considered stable.
China decided that a gradual delinkage from the dollar would
help maintain the stability of its own currency. The
International Monetary Fund immediately welcomed the new
policy of flexibility, which allows the dollar to weaken or
strengthen by 2% a day against the yuan. China hopes this
float will prepare the yuan to become a reserve currency
alongside the dollar, pound, euro and yen, which has been one
of Chinas highest economic priorities.
Those who are bearish on China keep asserting that China is
acting out of panic or weakness. Not so: Beijing is
methodically pursuing financial liberalization while
responding to the external problems of slower global growth,
excessive dollar strength, and the reverberations in China
from the U.S. Federal Reserves inexplicable policy of setting
interest rates near zero six years after the recession. Chinas
move is another step in the gradual shift away from the dollar
bloc and U.S. economic leadership that dominated Asia since
World War II. China hopes to replace this with an anchor to
the yuan, and China-based institutions like the AIIB.
It remains to be seen whether Beijings change in currency
policy will provide any near-term boost to the countrys
economic slowdown. Monetary conditions in the global
economy are bordering on deflation, and Chinas move wont
help with that. The yuan devaluation already seems to have
worsened the plunge in commodity indexes. Pressure on
dollar debtors both in China and elsewhere will increase as
Chinas devaluation puts downward pressure on dollar prices
world-wide.
The magnitude of dollar and yuan strength is reflected in
golds recent price break below its 10-year average. Thats the
same deflation signal that preceded the disastrous Asian
devaluation crisis of 1997-98, during which world dollar GDP
and corporate earnings shrank as they are doing now.
Asia is in a better position this time to withstand an openended strong-dollar policy because less of its private and
public debt is denominated in dollars. But the world monetary
system is in a worse position.
Central banks in the U.S., Japan and Europe already have
used their preferred tools, expanding balance sheets and
setting interest rates near zero. Despite that (because of it, in
my view), growth remains anemic and inflation in the U.S.,
rather than moving toward the Federal Reserves 2% target, is
likely to turn negative given the latest plunge in oil and
gasoline prices.
Yet theres no plan to change the Feds top-down, marketdistorting misallocation of credit as the first interest-rate hike
approaches. This is one factor in Chinas decision to create
distance between the yuan and the dollar.
Making matters worse for global growth, the reliance on
monetary policy has diverted attention from the urgent need
for structural reforms in the developed countries, including
Europes antigrowth labor, tax and spending policies, and the
byzantine U.S. tax code and escalating federal regulatory

chokehold.
The result has been a huge downgrade in global GDP that
adds to Chinas economic slowdown. A year ago the IMF
looked for a world gross domestic product of $81.6 trillion in
2015. The IMF lowered its projection to $74.6 trillion in April.
Its likely the IMFs projection will fall below $72 trillion in its
October update, to take into account Chinas devaluation and
the spreading recessions in many emerging markets.
China may have loosened its tie to the unstable dollar, but this
wont suddenly stop the slide in its exports that is the result of
the global slowdown. Nor can exchange-rate policy cause
businesses to invest more effectively or consumers to open
their pocket books.
The urgency for China is to create a framework of effective
regulations and rule of law that assures freedom and lets
markets rather than the government sort out more of the
mistakessuch as the wild April-May Shanghai stock-market
bubble. Many parts of Chinas system are too big to fail, which
is a recipe for being doomed to live in interesting times.
(Full article click - WSJ)
---
Currency war
Taken from the Sunday Times 16 August 2015
Chinas shock devaluation could set off a wider economic

conflict
THE black limousines disappeared through a gate into a
walled compound in the heart of Beijing. There, the leaders of
1.3bn people had assembled to take a decision that would
shake financial markets around the world.
In the end, it came down to the judgment of just seven men.
Only three were economists and one of those was trained in
North Korea. The others were, by education, a chemical
engineer, a historian, a teacher and a missile designer.
The seven men made up the standing committee of the
politburo of the Chinese Communist party. It is the supreme
ruling body of the worlds second-largest economy, ranking
above the cabinet and far above the technocrats at the finance
ministry and the central bank.
None of the decision-makers was a banker and none of them
had ever run a business. Yet they achieved the holy grail of all
central bankers: market surprise.
Last Tuesday, at their command, the Peoples Bank of China
announced the first major devaluation of the Chinese currency
since 1994.
The move was dramatic. The yuan officially known as the
renminbi, or peoples money is a growing presence in the
global financial market, mirroring Chinas ascent into an
economic powerhouse.
Slashing its value sent shock waves around the world. Stock,
bond and commodity markets tumbled amid fears of a new
wave of tit-for-tat currency wars. Those concerns looked
well founded. Almost immediately after the Peoples Bank
made its move, Vietnam devalued its currency.
In geopolitical terms, the banks intervention was no less
seismic. In America, there was talk that the Federal Reserve
might delay plans for a rise in interest rates.
Chinese exporters may have breathed a sigh of relief, but
economists interpreted the devaluation as an act of
desperation from the regime, which is fighting to preserve a
target of 7% economic growth this year.
The intervention shook investors out of their long-held sense
of security about the yuan. Unlike the pound and dollar, the
Chinese currencys external value is largely controlled by the
countrys central bank. For the past few months, the yuan had
bumbled along within narrow bands against the dollar. Since
2005, it had appreciated some 25% against the greenback and
then stabilised. The authorities did not react as the dollars
recent climb dragged their currency in its wake. The yuan was,
in effect, pegged to the dollar.
All that changed in a matter of minutes when the central bank
changed its daily currency fixing regime to allow the yuan
more flexibility. It portrayed the change as a move towards
handing the market a greater role in setting the value. The
market took it as a signal to sell a desperate move to revive
Chinas flagging economy.
On Tuesday, the yuan fell 1.6%. The next day it slumped 1.9%.
It was a similar story on Thursday.
In Washington, outraged politicians accused the Chinese of
manipulating their currency in an effort to destroy American
jobs, and accused the Obama administration of failing to
stand up to Beijing.
Alarmed, the Peoples Bank issued a statement affirming its
wish for a consistent, stable exchange rate, and it called a
rare press conference.
Trust the market, respect the market, fear the market and
follow the market, said the deputy governor, Yi Gang, who is
in charge of foreign exchange. There is no reason for the
depreciation to persist. A managed floating exchange rate is
appropriate for China and the current rate is in line with the
economic fundamentals.
Yi defended the new method for determining the valueof the
yuan. It is designed to help China meet the conditions set by
the International Monetary Fund for the yuan to join its
prestigious basket of reserve currencies alongside the dollar,
the pound, the euro and the yen.
In theory, the change should allow market forces a bigger role,
but the Peoples Bank did not say what part it would play in
deciding the rate.
Reporters asked Yi if it was true that the central bank secretly
wanted to see a 10% fall in the value. Nonsense, he replied.
The following day saw frantic trading in Shanghai under
Chinas unique socialist market conditions. The yuan fell
sharply. Then the central bank intervened directly, and
ordered banks to limit dollar buying by corporate clients.
It was a wild week and there may be worse to come.
SO WHO were the winners and losers? Inside China, those
with the most to gain were exporters, which have seen
manufacturing orders migrate to lower-cost rivals in Vietnam,
Cambodia and Indonesia.
A weaker currency makes it cheaper for China to ship
electronics, plastics and clothes to Britain, and makes Chinese
products more affordable for high street consumers.
Once the king of the mass market, China has seen its
competitive advantage eroded in recent years. Workers wages
rose sharply in a sequence of government- ordered increases
started under the left-leaning administration of President Hu
Jintao, who stepped down in 2012.
In theory, putting more money in workers pockets should
have helped the new governments drive to rebalance the
economy away from low-cost manufacturing and towards
consumption. But in the short term the pain for exporters has
been intense. Shrinking margins, an appreciating currency
and intense competition ate into profits and taxes for local
provinces.
The ministry of commerce, a powerful lobby, has been vocal in
its support for the sector. When July trade figures showed an
8% drop in exports, the political pressure grew.
The losers are many. In Hong Kong, Chinese airline stocks fell
by up to 18% as investors priced in higher costs to buy fuel
and to service debt denominated in dollars.
British names, from Rolls- Royce Motor Cars to Burberry, are
among companies that could suffer as a weaker yuan hits sales
in China.
In Europe, BMW shares fell. The car maker has seen sales to
aspirational motorists in China grow to almost 20% of its
global revenues. Daimler counts on the country for 10% of its

sales.
Shares in Apple, which makes the iPhone in China and sells
more goods there than anywhere outside America, also fell.
On the currency markets, most Asian currencies followed the
yuan lower. The Thai baht broke years-old limits against the
dollar, while the Malaysian ringgit hit a record low and the
Singapore dollar saw its biggest decline in four years.
Make no mistake, tit-for- tat devaluations are here to stay,
said a banker in Thailand.
POLITICS is at the heart of the new exchange-rate policy. The
Chinese government faces a battle to achieve its goal of
restructuring the economy while keeping growth high enough
to deliver prosperity, jobs and social stability.
It is already coping with slowing growth analysts think it
may be less than 6% as well as the fallout from a stock
market rout and a shudder in the property market.
A surge in the Shanghai and Shenzhen stock markets over the
past year came to a sudden end early this summer. While the
main indexes are still showing strong gains on the year, they
are some 25% below their peaks. Millions of small investors
who piled in are nursing losses. State-owned enterprises,
which also reaped financial benefits from rising share prices,
have seen some of that evaporate.
In 2008, China staved off the global financial crisis with a
huge infrastructure investment programme. Most of the
money went into property, fuelling a building boom that was
financed with debt.
Today the property market is patchy. Output of cement, glass
and steel has fallen. While confidence seems to have returned
in Beijing and other big cities, the nationwide picture is bleak.
In short, the Chinese consumer has not stepped in to drive
growth forward, as policymakers had hoped.
Chinese economic downside risks are increasing, said
Huang Wentao, a researcher at the state-owned conglomerate
CITIC Securities, so China has paid a big cost and sacrificed
exports for currency stability. But if the central bank cannot
control devaluation expectations, there could be capital
outflows and burst asset bubbles.
Ge Wenwei, an economic analyst, said the devaluation was a
test of American, not Chinese, resolve. If Americas response
is weak, China will accelerate the depreciation at will. If its
response is tough, the exchange rate will go back to its starting
point, he said.
The markets will open again tomorrow and the test will be on.
So far none of the seven men has broken his silence.
America reacts angrily
Next month Chinese president Xi Jinping will visit the US.
Reviving trade talks will be near the top of the agenda for
President Barack Obama. But a furious reaction on Capitol
Hill to the devaluation will complicate his aim to spur more
trade between the two giants.
The move provoked rage, with lawmakers complaining that a
weaker yuan would make Chinese goods more competitive,
leading to job losses at American firms.
For years, China has rigged the rules and played games with
its currency, said Senator Chuck Schumer, a New York
Democrat. Rather than changing their ways, the Chinese
government seems to be doubling down.
Michael Wessel, a member of the US-China Economic and
Security Review Commission, said China had electrified the
currency manipulation issue at the worst possible time for
Obama.
(Full article click - Times)
---
Liam Halligan
Beware a China crisis that could crash
down on us all
Taken from the Sunday Telegraph 16 August 2015
If the yuan dropped very sharply, inflation could soar, leading

Beijing to raise interest rates, which would slow the countrys
economy which at the moment seems unthinkable
What are we to make of Beijings shock devaluation? With the
British media classes fixated on Jeremy Corbyn, a potential
Labour leader who even his supporters acknowledge wont
ever be prime minister, you may not have clocked recent
events in the Peoples Republic.
The actions of the Central Bank of China, though, and the
near-term path of the yuan, could have a big impact on British
living standards.
Having grown 9.8pc a year since the late-Seventies, the
Chinese economy now outstrips America on a purchasing
power parity basis (adjusted for living standards). With the
big Western economies still shaky, if this Eastern giant stalls,
the UKs nascent recovery could easily reverse. And if Chinese
stocks and bonds crash, with contagion spreading to
financial markets elsewhere, that would upend British politics.
The danger of such a crisis came into sharp focus on Tuesday,
when Beijing took the radical step of announcing a
devaluation, which saw the yuan drop 2pc against both the
dollar and the euro, the largest one-day adjustment in more
than a decade.
The following day, as the weight of money in the market got
behind the fall, the Chinese currency lost another 2pc,
appearing to take policymakers by surprise.
At the time of writing, Chinas usually highly secretive
monetary authorities are heavily intervening selling dollars
and buying yuan to stop it falling much further. Or, at least,
thats what were told.
Having been explicitly pegged to the dollar until 2005, the
Chinese currency has for 10 years remained closely controlled
under a managed float. The central bank, in other words,
has used its vast $3,700bn (2,360bn) haul of foreignexchange reserves, as well as capital controls, to keep the yuan
within a strict trading band. Until last week, the largest singleday move against the dollar this year had been just 0.15pc. So
a 4pc drop in just a few days is huge the biggest shift since
the mid-Nineties. Whats alarming is that, were this
depreciation to get out of hand, with the Chinese currency
dropping very sharply, import prices and inflation would
spike.
That could force Beijing to reverse recent interest rate cuts,
potentially bursting Chinas property bubble and, at the very
least, undermining the broader economy which, for some
years now, has acted as a locomotive, pulling along the rest of
the world.
Annual Chinese GDP growth recently dropped below 7pc on
official data for the first time in a quarter of a century, among
suspicions the true figure is much lower.
In response, Beijing has cut rates four times in seven months,
while easing reserve requirements to boost bank lending.
Sluggish Western growth is now hitting Chinese exports,
which plunged 8.3pc last month. That rattled the authorities,
causing them to whack the panic button, lowering the yuan to
give the all-important export sector a boost.
By signalling its openness to a weaker currency, though,
Beijing may have provoked a rout. Certainly, the central bank
on Thursday staged an extremely rare public defence of its
actions.
In the long run, the yuan remains a strong currency, said
Zhang Xiaohui, assistant governor of the Peoples Bank of
China. A fixed exchange rate looks stable, but it hides
accumulated problems.
Such accumulated problems refer to the fact that since the

2008 financial crisis, the yuan has appreciated by no less than
39pc on a trade-weighted basis. Over the past year alone, the
Chinese currency is up 13pc against the countys main trading
partners, according to data from the Bank of International
Settlements.
The Beijing government attributes much of this rise to
currency wars instigated by the West as the likes of the US
and UK and now the eurozone have undertaken
quantitative easing on a vast scale.
While many in the US Congress have long accused China of
currency manipulation, Beijing views the world differently,
arguing that QE is designed in part to keep Western
currencies weak which, in turn pushes up the yuan. That not
only gives Western goods an advantage on global markets, but
also lowers the value of the hard-currency loans that China
has extended to the West, not least the US.
The generous interpretation of Beijings attempts to lower the
yuan last week is that the Chinese central bank is, in its own
words, moving towards a more market-based foreignexchange regime.
This is what the West has called for over many years.
Certainly, Tuesdays announcement led to speculation that
China wants to convince the International Monetary Fund to
classify the yuan as an official reserve currency, along with the
dollar, yen, euro and sterling.
This autumn, the IMF publishes its review of the Special
Drawing Rights (SDRs), the official currency basket used by
central banks everywhere to denominate their reserves.
Inclusion of the yuan, if matched by a loosening of capital
controls by Beijing, would mark Chinas full integration into
the global financial system. But that will happen only if, as the
IMF prescribed, the yuan becomes more flexible.
More hard-nosed observers, myself included, will judge that
Beijing, while it has an eye on the IMFs decision on SDRs, is
firing back a currency war salvo.
While remarking that the yuan had become too volatile, and
issuing warm words to reassure Western nations fearing a
meltdown, the Chinese authorities still cut their announced
yuan reference rate on successive days last week, intervening
to make sure their currency slide didnt get out of control but
doing very little to actually reverse it.
It seems to me, in fact, that Beijing has rather astutely picked
its moment. The West has long insisted on a more marketbased Chinese currency. What better time to introduce it
than when the economy is weak and the yuan is pumped up by
Western QE? Currency flexibility then amounts to a weaker
yuan that helps Chinese exporters, rather than a stronger
Chinese currency that better suits the West.
UK trade with mainland China is growing quickly. The
country accounts for 8.7pc of our imports of goods, up from
4.6pc 10 years ago. Exports to China are 4.8pc of all UK goods
sold abroad, up from just 1.4pc in 2005. Include Hong Kong,
and the related trade in financial services, and those import
and export shares rise to 10.3pc and 7pc respectively.
As such, a weaker yuan will make the UKs sizable imports
from China cheaper, pushing down inflation. Beijings action
could even delay the Bank of Englands first interest rate rise
since 2007, now not expected until mid-2016.
While thats good news for indebted British households, if the
rope slips in the Chinese central bank, and the yuan crashes,
the subsequent Chinese slowdown will affect our economy
very badly.
For now, the Chinese authorities probably have enough
reserves and common sense to avoid a currency collapse. They
want a much weaker yuan and thats what theyll get, however
much Congress huffs and puffs not least because Beijing, if
it wants to, can play havoc with American interest rates by
signalling it may start dumping part of its vast stock of US

Treasury bills.
My broader concern is that weve become so complacent about
fast Chinese growth, just as we did with Japan in the Eighties,
that its hard to envisage it will end.
The reality is, though, that China has massively over-invested,
the banking sector is full of non-performing loans, stock
valuations remain bloated and many companies have
borrowed heavily overseas.
If the Chinese central bank is concerned enough to yank down
the currency, making those foreign loans even bigger, maybe it
is time for us to worry.Thats why the decision to raise rates,
on both sides of the Atlantic, is now less about the educated
analysis of wage data and oil prices than about picking a
moment and hoping for the best.
(Full article click - Telegraph)
---
Eight reasons why Chinas currency crisis

matters to us all
Taken from the Sunday Observer 16 August 2015
The Chinese leaderships devaluation of the yuan delivered a

temporary shock to financial markets, but its longer-term
effects may be felt around the globe
After China unexpectedly devalued its currency last week, one
City economist shrugged despairingly and said: Its August.
While its meant to be a time for heading for the beach or
kicking back in the sunshine with the kids, August has often
witnessed the first cracks that presaged what later became
profound shifts in the tectonic plates of the global economy
from the Russian debt default in 1998, to what Northern Rock
boss Adam Applegarth called the day the world changed,
when the first ripples of the credit crunch were felt in 2007; to
August 2011, when ratings agency Standard and Poors sent
shockwaves through financial markets by stripping America of
its triple-AAA credit rating.
Taking the long view, last weeks devaluation by China, which
left the yuan about 3% weaker against the dollar, was
relatively modest sterling had lost 16% of its value in 1967
when Harold Wilson sought to reassure the British public
about the pound in your pocket.
But Chinas decision represented the largest yuan depreciation
for 20 years; and the ripples may yet be felt thousands of
miles away. So what difference will it make to the rest of the
world?
1. It could be serious
Chinas devaluation may be best seen as a distress signal from
Beijing policymakers in which case the worlds secondlargest economy may be far weaker than the 7% a year growth
that official figures suggests. China has been trying to
engineer a shift from export-led growth to an expansion based
on consumer spending while simultaneously trying to
deflate a property bubble. Last weeks move, which loosened
the yuans link to the value of the dollar, suggested some
policymakers may be losing patience with that strategy, and
reaching for the familiar prop of a cheap currency. Nobel
prize-winning economist Paul Krugman described the
decision as the first bite of the cherry, suggesting more could
follow, and in a reference to Chinese premier Xi Jinping,
warned that such a modest move gave the impression that,
when it comes to economic policy Xi-who-must-be-obeyed
has no idea what hes doing.
If its economy really is much weaker than Beijing has let on, it
would be alarming for any company hoping to export to China
something firms in Britain have been encouraged to do in
recent years, to lessen reliance on the stodgy European
economies. China was the sixth-largest destination for British
exports last year. China will remain a vast market; but it may
not be quite such a one-way bet as some analysts have
suggested. And when it comes to the challenges facing Chinese
policymakers, Russell Jones, of consultancy Llewellyn

Consulting says: The potential for getting this wrong is quite
high.
2. A less costly Christmas
China has been trying to shift from being a vast factory
producing cut-price consumer goods for the rest of the world.
Yet glance at the label on almost any T-shirt or toy let alone
consumer gadget and its still likely to read Made in China.
A countrys currency is not the only determinant of how much
its goods will cost when they reach the high street: Chinese
wages have been rising, making its products less competitive,
and the price of raw materials and shipping is also important.
However, the devalued yuan will force Chinas Asian rivals,
such as Indonesia and South Korea, to compete even harder in
response; and the result may be a few pence off the price of
Chinese-made Christmas presents. Martin Beck, of
consultancy Oxford Economics, says, Almost 9% of the UKs
goods imports come from China, a share that has doubled
over the last decade. So there will be a direct disinflationary
effect from cheaper imports.
3. Cheaper petrol at the pump
Chinas apparently insatiable demand for natural resources
has been a key factors supporting the price of oil in recent
years. So fears that Chinas economy is in trouble tend to
undermine oil prices and that probably means cheaper
petrol in Britain. Of course, there are other factors, including
strong oil production in the US; but global oil prices resumed
their decline last week following Chinas move, dipping back
below $50 a barrel. In coming months, weak Chinese demand
could force down the cost of many commodities, from oil to
iron ore.
4. Delayed rate rises
Central bankers in the US and the UK have been issuing
warnings for months that, with growth strengthening, they are
preparing to start pushing up interest rates reversing the
emergency cuts made in the global credit crunch. Mark
Carney, the Bank of England governor, has suggested the
turn of the year might be the moment to consider tightening
monetary policy (ie raising rates); Janet Yellen at the US
Federal Reserve has signalled that an increase could come as
early as September. However, if the cheaper yuan cuts the
price of imports, this will undermine inflation, which is
already at zero in the UK; and could delay a rate rise. A
renewed bout of market turbulence as global investors assess
the implications of Chinas decision could have the same
effect.
5. Deflation, deflation, deflation
In the short term, lower-than-expected borrowing costs will
benefit indebted consumers in the west including Britains
mortgage-holders. But some analysts believe Chinas decision
is the latest evidence of a deep-seated lack of demand in the
global economy, which will unleash deflation. Brief periods of
falling prices particularly if concentrated among one or two
commodities can be good news; but economists fret about
periods of persistently falling prices, which can undermine
spending and investment and feed through to wages, as
consumers and businesses delay spending, expecting goods to
be even cheaper in future. And if a fresh downturn does come,
central bankers have little ammunition left to tackle it, since
interest rates in the US, the UK and Europe are already on the
floor. Economist Ann Pettifor, of thinktank Prime, who
foreshadowed the credit crunch in her 2006 book, The
Coming First World Debt Crisis, believes the developed
economies face some of the challenges felt by Japan during its
lost decade, when it suffered both deflation and weak
demand but unlike Japan, many developed economies, not
least the UK, would enter any new crisis under a heavy burden
of borrowing. Its the pressure of debt on consumers,
corporates, municipalities, Pettifor says, raising the spectre
of the kind of debt trap identified by the US economist Irving

Fisher in the wake of the Great Depression. Not everyone is so
pessimistic, and Carney has shrugged off the idea that
deflation is a threat in the UK; but as Neil Mellor, of BNY
Mellon, put it in a research note on Friday, as we watch and
wait, the market will be anxiously aware that a sustained
depreciation could have ramifications across the globe by
shifting the inflation dynamic at a most inopportune time.
6. Tough times for Oz
Australia has experienced an impressive economic boom in
recent years on the back of selling natural resources, including
coal and iron ore, to its Asian neighbours, and China accounts
for more than a quarter of its exports. So weakness in the
Chinese economy is bad news for Australia. Research by
consultancy Oxford Economics last week, which modelled the
impact of a 10% Chinese devaluation, accompanied by a sharp
slowdown, suggested other hard-hit countries could include
Brazil, Russia, Chile and Korea.
7. Even more pain for Greece
If the Chinese devaluation does bring what one City analyst,
Albert Edwards, last week called a tidal wave of deflation to
the global economy, the most vulnerable countries will be
those that are heavily in debt because while wages and
profits fall in a deflationary period, the value of debts remains
fixed, making them harder to service (to pay interest on). And
economies where consumer demand and confidence is already
weak tend to be hit harder by the reduced spending that
deflation can bring. As economists at consultancy Fathom said
last week, peripheral European economies, not least crisishit Greece, fit that definition. Greece is already suffering
deflation after repeated cuts in wages and benefits as the
government tries to balance the books, and if it worsens, that
will only make its gargantuan debts worth more than 170%
of the size of the economy harder to service.
8. Currency wars
Beijings move was ostensibly offered as part of measures to
open up its financial system, and allow foreign exchange
markets more say over the value of the yuan something
America has long demanded as evidence that China is
genuinely open to financial reform. The International
Monetary Fund described the move as welcome. But the
devaluation was nevertheless greeted angrily in Washington.
New York senator Chuck Schumer said: For years, China has
rigged the rules and played games with its currency, leaving
American workers out to dry. Rather than changing their
ways, the Chinese government seems to be doubling down.
Republican senator and former US trade representative Rob
Portman accused China of trying to gain an unfair trade
advantage over America though currency manipulation
just as the US is negotiating an important trade agreement,
the Trans-Pacific Partnership, with a number of Chinas rivals,
including Japan.
If Beijing allows the yuan to decline further in coming months,
it could increase trade tensions, or even a currency war, in
which the worlds big trading blocs face off in a beggar-thyneighbour battle to seize the largest possible share of global
consumer demand. For now, a 4% devaluation in the yuan is
more of a hairline crack in the world economic order than a
seismic shift; but policymakers will be weighing up its
consequences long after they return from their summer break.
(Full article click - Observer)
---
The truth about the yuan devaluation

Taken from the Nikkei Sunday, 16 August 2015
Uncertainty over the Chinese economy is deepening, with a

string of economic figures, including those for investment,
production, consumption and trade, all deteriorating.
This has prompted the People's Bank of China, the central

bank, to devalue the Chinese currency, the yuan, against the
dollar, sending shock waves through global markets.
The big question now is: What is actually happening to the
Chinese economy?
Beijing has set a target of keeping the economy growing by
around 7% on an inflation-adjusted basis. But changes in the
real growth rate do not clearly reflect a turning point in the
economy.
In the April-June quarter, China's economy grew 7% on the
year in real terms -- exactly the same as the target growth rate.
In the same period of 2014, growth was 7.5%.
The growth figure for April-June 2015 makes it appear that
the economy has been slowing only gradually in the past year
or so. But changes in the nominal growth rate paint a
completely different picture.
Nominal growth, or growth before adjusting for inflation,
reflects economic conditions facing businesses and consumers
more vividly than real growth.
After standing at 11.2% in the July-September quarter of 2013,
China's nominal growth rate started tumbling. It slowed to
just 5.8% in the January-March quarter of 2015, well below
the real growth rate of 7% for the same period.
It was the first time in six years that real growth exceeded
nominal growth. If such a situation persists, it could raise
concerns over possible deflation in the world's second-largest
economy.
China's currency policy also reached a key milestone this past
spring.
The central bank puts emphasis on the yuan's effective
exchange rate, which shows the currency's total power.
According to estimates by the Bank for International
Settlements, the yuan's real effective exchange rate surged by
about 18 percentage points between May in 2014 and March
this year.
But the sharp rise in the yuan's real effective exchange rate
stopped and the rate began to drop in April.
China's surprise devaluation of the yuan against the dollar on
Aug. 11 is in line with the central bank's currency policy since
spring. It is apparently aimed at sending a clear message at
home and abroad that China has reversed the yuan's rising
trend.
Nominal growth exceeded real growth again in the April-June
quarter due to such government measures as increasing
permits for public works projects.
But the weakening of the Chinese economy shows no sign of
stopping, with economic figures for July showing
consumption growth losing steam and auto production
slumping.
Mihoko Hosokawa, a researcher at Mizuho Bank (China),
predicted that China "will do everything in its power to
prevent any further economic slowdown" because it fears a
possible rise in social unrest.
China will likely continue to pursue conventional stimulus
measures, such as more lending by major banks and increased
investment in railway, airport and other infrastructure
projects -- at least for a while.
Meanwhile, the pace of China's economic reforms could
slacken. The country faces the daunting challenge of
consolidating industries larded with uncompetitive companies
and excess facilities.
To be sure, such a winnowing process could make the
employment situation worse. But shying away from doing so
would delay progress in efforts to make the economy more
efficient.
Beijing is under growing pressure to perform a delicate
balancing act between shoring up the sluggish economy in the
near term and ensuring stable economic growth in the
medium- and long-term.
(Full article click - Nikkei)
Looking At Greece
Eurozone approves 86bn Greek bailout
Eurozone finance ministers have approved an 86bn bailout

for Greece, even though the International Monetary Funds
financial participation in the programme is in question,
setting the scene for tough talks between Brussels, Berlin and
the fund.
Doubts over IMF involvement in the deal which was
demanded by Germany and other hawkish states centre on
the funds fears that Greeces debt is unsustainable without
some relief.
Speaking after a six-hour meeting of eurozone finance
ministers in Brussels, Christine Lagarde, the IMF managing
director, said: I remain firmly of the view that Greeces debt
has become unsustainable and that Greece cannot restore
debt sustainability solely through actions on its own.
The lack of a firm commitment from the IMF will make it
harder for countries such as Germany and the Netherlands to
win over sceptics in national parliaments, who must approve
any deal.
Wolfgang Schuble, the German finance minister, put a brave
face on the lack of a guarantee from the IMF. He said the
eurogroup ministers were assuming that the fund would
decide in October to make a financial contribution
something the fund has previously said it would consider.
This assumption is seemingly weaker than the if possible
binding commitment that the German finance minister said
was needed just before the eurogroup meeting.
In an effort to win over the IMF, the finance ministers agreed
to consider debt relief at a later date if necessary. Such relief
would potentially include a longer grace period and longer
maturities, although would not involve a nominal reduction in
the level of Greek debt.
We stand ready if necessary to consider more debt-related
measures, said Jeroen Dijsselbloem, the president of the
eurogroup. We will have that debate, whether more needs to
be done now or later, in October.
Greece will receive 26bn in a first tranche of the bailout
almost all of which will be sent next week. Of this, 16bn will
be used to pay back the IMF and European institutions, while
the rest will be put towards recapitalising the countrys ailing
banks.
As part of the deal, a contentious 50bn privatisation fund
will be launched by the end of this year at the latest, rather
than at the start of 2016 as previously envisaged, in a move
demanded by Germany and the Netherlands.
A planned bail-in of the countrys banking sector will include
holders of senior bonds, but will not involve depositors. The
European institutions had argued that a bail-in of depositors
even at high levels of deposits would have hit small
businesses and hurt the recession-ridden Greek economy even
more.
Greece will receive 13bn in next weeks transfer along with
10bn for the bank recapitalisation as long as the deal is
approved by national parliaments, marking a huge reversal of
fortune from last month when Greece stood on the brink of
leaving the eurozone.
Since the departure of Greeces charismatic but controversial
finance minister Yanis Varoufakis, relations between Athens
and its creditors have improved. Klaus Regling, who heads the
European Stability Mechanism, said: This [deal] was only
possible because there was a marked shift in the Greece
governments stance.
Jean-Claude Juncker, president of the European Commission,
said that while negotiations over the past six months had
been difficult, testing the patience of policymakers, all sides
had respected their commitments.
The message of todays eurogroup is loud and clear, he said.

On this basis, Greece is and will irreversibly remain a
member of the euro area, and the European Commission will
support Greece in developing a new and fair growth, jobs and
investment perspective for its citizens.
---
Greek bailout vote widens bitter Syriza rift

Alexis Tsipras said the vote was a 'decision to remain alive

instead of committing suicide and complaining how unfair it
was'
Once they were comrades in the small, close-knit Greek
communist party, fighting against the rise of soft socialism
following the collapse of the Soviet Union.
Now Alexis Tsipras and Panagiotis Lafazanis hold each other
responsible for a looming split in Syriza only six months after
it became the first radical leftwing party in Europe to win a
general election.
The youthful premier at first seemed to defer to Mr Lafazanis,
a veteran of leftwing Greek politics whom he appointed to the
powerful post of energy, industry and environment minister, a
newly created portfolio.
Earlier this year the two politicians travelled together to
Moscow in an ultimately fruitless attempt to persuade Russia
to provide a loan of up to 10bn. Mr Tsipras also allowed Mr
Lafazanis to derail two big foreign investment projects,
destroying what little confidence the business community had
in Syrizas ability to run the economy.
But that was before Mr Tsipras capitulated at an EU summit
on July 12 when he was confronted with a German proposal
for a temporary Greek exit from the euro. In a swift reversal of
his opposition to a third bailout, the premier signed up to fasttrack negotiations on a new package which were completed on
schedule this week.
The feud between Syrizas two most popular politicians now
threatens to bring down the government and trigger a fresh
election at a time when Greece is in dire need of a period of
political stability to implement the new bailout programme.
Mr Lafazaniss supporters speak of an ideological betrayal
and treachery by Mr Tsiprass faction, while the premiers
camp accuses the Left Platform of planning to set up a
breakaway anti-austerity party committed to overturning the
latest bailout and readopting the drachma.
Before a bad-tempered parliamentary debate on a new 85bn
rescue package on Thursday night, Mr Lafazanis said he felt
ashamed by Mr Tsiprass retreat.
We took the decision to remain alive instead of committing
suicide and complaining how unfair it was, retorted the
prime minister.
A roll-call parliamentary vote on Friday showed that a
rebellion by members of Mr Lafazaniss hardline Left
Platform, Syrizas official internal opposition, is rapidly
spreading.
Out of 149 Syriza MPs, 31 voted against the package while
another 11 abstained even after intense lobbying by Mr
Tsipras and his team, compared with 35 defections at a
previous vote in July on tough economic reforms demanded
by Greeces creditors.
The result left Syriza and its coalition partner, the small
rightwing Independent Greeks party, shorn of their
parliamentary majority and dependent on three pro-European
opposition parties to push through in October another set of
reforms required under the terms of the bailout.
A confrontation is close, say supporters of both factions, yet
neither the prime minister nor Mr Lafazanis seems willing to
strike a blow before an emergency Syriza party congress due
to take place early in September.
Mr Tsipras sacked Mr Lafazanis from the cabinet in a partial

reshuffle of his government last month but has so far made no
move to expel the defectors from Syrizas parliamentary
group.
Instead, the premiers advisers were briefing on Friday that he
will throw down a challenge to Mr Lafazanis by seeking a
parliamentary vote of confidence this month.
By calling a confidence vote Tsipras is daring the Left
Platform to topple the government so he can blame them for
the mess that follows, said Mujtaba Rahman, head of
European analysis at the risk consultancy Eurasia Group.
But Lafazanis is unlikely to take the bait and is instead only
likely to formally break ranks with Tsipras at Septembers
Syriza party congress.
Some observers have suggested that Syriza will continue to be
supported by the pro-European opposition parties in an
informal alliance aimed at completing structural reforms that
were only partially implemented by the previous socialist and
centre-right governments in charge of the first and second
bailouts respectively.
But that would be a stretch for Greeces fractious parties, even
though Syriza holds a 20-point lead in opinion polls over the
centre right New Democracy while Mr Tsiprass high approval
rating has not so far been dented by his policy switch.
Theres no way were going to back Syriza in a vote of
confidence, said Makis Vorides, a prominent New Democracy
legislator.
Several legislators in Mr Tsiprass faction say a snap election a
few weeks after the Syriza congress is the most likely outcome.
A contest then would give the party an opportunity to attract
enough new centre-left voters to win an outright majority,
offsetting potential losses to a party Mr Lafazanis is likely to
found.
This [an election] will allow Mr Tsipras to capitalise on his
growing popularity following the conclusion of this deal but
before any of the bailouts harsh measures have been
implemented, said Mr Rahman.
---
IMF calls for Greek debt relief after bailout

approved
Taken from the BBC News Sunday, 16 August 2015
The International Monetary Fund has called on eurozone

ministers to offer Greece debt relief, following the approval of
a new bailout deal.
Greece will receive up to 86bn (61bn) in loans over the next
three years, in return for tax rises and spending cuts.
IMF chief Christine Lagarde welcomed the agreement, but
warned Greek debt had become unsustainable.
She said the country needed significant relief "well beyond
what has been considered so far".
"Greece cannot restore debt sustainability solely through
actions on its own," she added.
The BBC's Adam Fleming in Brussels says finance ministers
will consider possibly writing off some of the country's debts
in the autumn.
The first tranche of loans will be for 26bn.
This will include 10bn to recapitalise Greek banks and 16bn
in several instalments - the first of which will be for 13bn and
will be delivered in time for Greece to repay about 3.2bn to
the European Central Bank (ECB) by 20 August.
European Commission President Jean-Claude Juncker said
the deal sent a message "loud and clear" that Greece will stay
in the eurozone.
It comes at a political cost for Greek Prime Minister Alexis
Tsipras, who has faced a rebellion in his left-wing Syriza party.
More than 40 MPs voted against him when parliament
decided on the bailout agreement on Friday, after all-night
talks. He managed to push it through with the help of

members of the opposition.
Dutch Finance Minister Jeroen Dijsselbloem, who chaired the
Eurogoup meeting where the deal was hammered out, said he
was confident it would "address the main challenges facing
the Greek economy".
He acknowledged that dealing with debt was an important
issue, especially for the IMF, but Germany has so far been
vehemently against any debt "haircut" that would cost
creditors billions of euros.
German Finance Minister Wolfgang Schaeuble told Deutsche
Welle radio: "Outright debt forgiveness doesn't work at all
under European law."
Mr Schaeuble added that there was "a certain amount of room
to extend maturities further", but cautioned: "His room is not
very big."
Germany's parliament is to hold a special session on
Wednesday to decide on whether to approve the Greek
bailout.
(Full article click - BBC)
---
Europe to buy Greek debt after bailout

GREECE is set to receive a much-needed economic fillip from

the European Central Bank (ECB), which has signalled it
could begin buying up the countrys debt as soon as next
month.
Benoit Coeur, an executive board member at the ECB, said
the rules that prohibit it from buying Greek bonds could be
scrapped. However, Athens must adhere to the conditions of
its latest bailout agreement, he said.
Greeces new programme contains a large number of prior
actions. The question for the governing council will be
whether these preliminary measures are sufficient to meet our
criteria, Coeur said.
The ECB councils next policy meeting is on September 3,
which is the first date the waiver could be reinstated.
Lifting the bar on buying debt would mark a turning point for
Greece, which agreed an 86bn (61bn) bailout with creditors
late last week. Athens has been unable to access the
international bond market for more than a year amid concerns
over its colossal debts.
Once the ECB begins buying Greek bonds, trading experts
expect other institutional investors to follow, lowering the
countrys funding costs and eventually allowing it to borrow
enough money to leave its bailout programmes.
As a result of the ECBs quantitative easing for the eurozone,
borrowing costs for the other bailed-out nations Ireland,
Portugal and Spain have plummeted to the low single digits.
By contrast, the interest rates on Greek debt have soared to
nearly 30% amid investors concerns about the country
leaving the eurozone.
Last week Greek legislators approved the bailout package after
an all-night session, and Athens is expected to receive the first
tranche of the rescue money, 26bn, this week.
The latest agreement between the country and its
international lenders requires Greece to enact painful
austerity measures spending cuts and tax increases.
Coeur added that Greeces banks would need to be
recapitalised. The new rescue programme includes as much as
25bn of fresh aid for the financial institutions. That money,
however, is unlikely to be distributed until ECB officials have
completed a health check on the lenders.
---
After Eurogroup approval, Athens faces

milestones amid election rumors
Taken from the Kathimerini Sunday, 16 August 2015
The approval by eurozone finance ministers of a third bailout

for Greece paves the way for the disbursement of crucial
rescue loans this week but also heralds a new period of
political upheaval for Prime Minister Alexis Tsipras due to a
widening rift in leftist SYRIZA.
The European Stability Mechanism is expected to approve the
first tranche of the 86-billion-euro bailout on Wednesday.
Some 26 billion euros will be disbursed in the first instance:
10 billion for Greeces cash-strapped banks, with most of the
rest to go toward paying off a 7.2-billion-euro bridge loan and
covering a 3.2-billion-euro repayment to the European
Central Bank on Thursday. As with previous bailouts, the
loans come at a heavy price.
The bailout foresees new spending cuts and tax increases,
which has prompted vehement reactions in the far-left of
SYRIZA, as well as sweeping structural reforms that previous
governments have failed to implement. These include an
overhaul of the pension system, the opening of closed
professions and the liberalization of markets.
Greeces lenders secured the backing of creditor states, many
of which were extremely skeptical of giving Greece another
chance, by linking the disbursement of aid to strict
conditionality and budget targets.
Another key commitment by Greece is the establishment of a
privatization fund, which must be operational by the end of
this year and into which some 50 billion euros in state assets
are to be transferred over the duration of the new three-year
program.
The question of relieving Greeces huge debt burden is to be
addressed after the programs first review in late October.
On the domestic front, Tsipras is expected to ask soon for a
vote of confidence in Parliament after seeing 43 of his MPs
decide not to support the third bailout deal in a ballot that
took place on Friday morning.
The defections meant that just 118 coalition lawmakers voted
for the agreement, which is just below the absolute minimum
of 120 that the government would need to survive a
confidence motion.
However, sources close to the prime minister told Kathimerini
that Tsipras would aim to secure a minimum of 151 votes in
the ballot of 300 MPs. If he fails to meet this target then early
elections will be called.
(Full article click - Kathimerini)
---
German Deputy Finance Minister Jens Spahn said Saturday in

a text message.
Every last person in Europe must have understood that
membership in the euro isnt possible without making efforts
of your own, Spahn said.
In a statement after their meeting, the euro-region finance
ministers said 26 billion euros will be made available in the
first disbursement, including 10 billion euros for a fund to
recapitalize Greek banks.
Debt Haircut?
While ministers rejected applying a haircut to Greek debt,
they will consider longer repayment periods though this is
conditional on Greeces government meeting the conditions of
the bailout.
Euro membership isnt unconditional, it requires major
efforts from Greece, German Finance Minister Wolfgang
Schaeuble said late Friday in Brussels. Despite all the
difficulties, all of us in the Eurogroup agreed that we wanted
to seize this opportunity.
As Tsipras awaits the new cash injection for his ailing
economy and crippled banks, hes facing political pressure at
home. The prime minister has suffered multiple defections
from his Syriza-led coalition over the new bailout terms, and
only won parliament approval for the reforms by relying on
the opposition. He may request a confidence vote later this
month, which could in turn trigger new elections.
(Full article click - Bloomberg)
German Lawmakers to Hold Greek Vote on

Wednesday
Taken from the Bloomberg News Sunday, 16 August 2015
German lawmakers will vote Wednesday on a new aid package

for Greece, which needs approval to meet a debt payment
deadline a day later.
The vote in the Bundestag will follow euro-area finance
ministers decision Friday to endorse the 86 billion-euro ($96
billion) loan program. Chancellor Angela Merkel, whose
coalition has a parliament majority, moved a planned visit to
Milan up a day to Monday to allow time to attend caucus
meetings the night before to argue against opponents in her
own parliamentary group.
The new Greek program will see funds disbursed over three
years as the government enacts economic reforms, though
Prime Minister Alexis Tsipras will get a portion immediately
to cover looming bills. One of those, a 3.2 billion-euro
payment to the European Central Bank, is due Thursday.
There has been enormous progress in movement toward a
Greek deal, and the International Monetary Fund has made it
remarkably clear that it will join in a third bailout in the fall,
European News
Shire told to raise bid by $5bn
Glencore profits plummet as commodities

rout escalates
SHIRE PHARMACEUTICALS will have to offer $35bn

(22.4bn) to entice American rival Baxalta into takeover talks.
The Dublin-based drug giant last month offered about $30bn,
or $45.23 a share. It will have to go to $50 to interest Baxaltas
board, said people working on the deal and even that would
only be a starting point for negotiations.
The deal is shaping up to be one of the largest ever involving a
British company and would catapult Shire into the big league
of global phar- maceutical groups.
The haemophilia specialist Baxalta has so far spurned the
advances of Shires chief executive, Flemming Ornskov, while
publicly downplaying the strategic logic of a deal. But this
latest development suggests the two sides are edging closer to
an agreement. The ball is in Flemmings court, said a source
working on the Baxalta defence.
Ornskov is understood to be willing to raise the bid if he is
given access to Baxaltas books. However, it is thought he and
chairwoman Susan Kilsby, a former Wall Street dealmaker,
may struggle to convince Shires shareholders to back a much
higher offer.
As with the first approach to Baxalta, any raised bid will be
made in exchange for Shire shares, rather than in cash. That
would mean existing Shire shareholders have their
investments diluted. In the past week, Ornskov and Kilsby
have continued crossing the Atlantic to meet Shire and
Baxalta investors.
Relations between the companies have been tested since Shire
made its initial, private, offer last month just days after
Baxalta started trading as a public company.
Even though Ornskov and Baxalta boss Ludwig Hantson used
to be colleagues at Swiss drug company Novartis, accusations
have been flying.
Shire executives were aghast that Baxalta issued improved
profit guidance and initiated a share buyback after receiving
the offer actions that sources close to Shire say forced it into
going public.
Baxalta has been taken aback by Ornskovs eagerness to do a
deal. In Britain, takeover proceedings are fast-tracked by a 28day put up or shut up period. No such stipulation exists in
America and Ornskov was at first frustrated by the slow pace
of the deal.
He is now understood to be willing to bide his time, especially
as many bankers and executives are on holiday. Shire and
Baxalta declined to comment.
---
GLENCORE is set to reveal a calamitous plunge in profits as

the worlds largest commodity trader comes under
unprecedented pressure from the price rout in raw materials.
Shares in the company plunged 15% to a record low last week
after chief executive Ivan Glasenberg revealed asset sales and
$800m (500m) of fresh spending cuts in a desperate effort
to protect the balance sheet. The stock closed on Friday at
172p, capping a 42% drop since the start of the year
making it the worst performer in the FTSE 100 index of top
public companies.
The fall highlights the stark loss of investor confidence in the
22.8bn company, which has had a devoted following since
pulling off the biggest ever float on the London market in
2011. Its shares are worth just a third of the 530p float price.
Glencore has been hit hard by the slide in prices of its main
products copper, coal and oil. Ill-timed acquisitions and a
$30bn net debt load have also unnerved investors.
On Wednesday, Glasenberg will disclose the financial results
for the first half of the year. Analysts expect the company to
reveal net income of $780m, down nearly two-thirds on the
$2bn it made in the same period last year.
The City will be most interested, however, in the performance
of the trading arm, which last year brought in 42% of net
earnings.
Glencore differs from other big miners because of this trading
operation, which buys and sells everything from wheat to zinc
as well as oil and takes a cut from each deal. The division is
able to make money regardless of price swings.
Yet the City is betting on a serious stumble, which could
undermine the theory that Glencore is more insulated from
commodity price falls than its rivals. Glasenberg had
promised that trading would generate at least $2.7bn of
earnings for the year, before expenses. Analysts, however,
expect it to have brought in just $1.1bn during the first six
months, putting it on track to fall well short of the chiefs
prediction.
Glencore is the worlds biggest supplier of seaborne thermal
coal, which has been hit by a price drop of nearly 50% since
2012. Copper, which last year accounted for a third of the
companys earnings, has fallen 20% this year and the price of
crude oil has halved since last summer.
At the same time, the economy of China, Glencores biggest
customer, appears to be slowing more rapidly than expected.
Dominic OKane, an analyst at the investment bank JP
Morgan Cazenove, said that without a commodities rally
Glencore would be loss making in 2017.
He suggested that Glasenberg could slash the companys
$2.4bn annual dividend to protect its credit rating, which is
vital to the debt- dependent trading arm.
Glasenberg will attempt to assuage investors fears when he
presents the half-year results this week. City sources said the
shares could rebound after last weeks precipitous fall. The
company declined to comment.
---
Petrol price falls could drive return to

deflation
Bank of England policymaker says pressure is building for rate

hike despite tumbling energy costs
A SENIOR Bank of England policymaker has warned that the
case for a rise in interest rates is strengthening even though
new official data is forecast to show that Britain is flirting with
deflation.
The City expects figures released on Tuesday to reveal
consumer price inflation stuck at zero for a second successive
month, though some economists predict that a drop in petrol
and diesel prices could produce a negative reading for the
second time this year. In April, Britain slipped into deflation
for the first time in more than 50 years on the consumer
prices measure.
There will be more downward pressure in coming months
from falling oil prices, reductions in domestic gas bills and the
weakening of the yuan, which could lower the cost of Chinese
imports.
The Bank has said that a second temporary dip into deflation
is likely in coming months but also that inflation will be rising
again as Britain moves into 2016.
In an interview with The Sunday Times, David Miles, who
steps down from the Banks monetary policy committee
(MPC) this month, said that the case was building for a rise in
Bank rate despite current low inflation.
He said that he came the closest in his six years on the MPC to
voting for a rate increase this month, but had been deterred by
falling commodity prices and ambiguous signals from the
labour market. Large parts of the economy were operating in
a fairly normal way, Miles said, suggesting that there was a
possibility interest rates could begin to rise at the back end of
this year.
There is always a reason to delay but Im wary about that, he
said. The stock of uncertainty is constantly being
replenished.
Miles also expressed scepticism about suggestions that the
Bank should change its approach to quantitative easing (QE),
which he said had been successful.
Some have suggested a helicopter drop of money by the
Bank, or cancelling the gilts bought by the Bank under QE.
The Labour leadership candidate Jeremy Corbyn has called
for a peoples QE, in which the Bank would forced to buy
bonds issued by a new national infrastructure bank.
Miles said the MPC had often considered whether the assets,
overwhelmingly gilts, bought under QE were appropriate. He
added: When people talk about ripping up the gilts, it doesnt
make sense . . . When people say helicopter drop, what they
mean is, why doesnt the government run a bigger fiscal
deficit?
The Bank is sitting on a 53bn profit from QE, and has made
capital gains of tens of billions of pounds on a mark to
market basis, said Miles.
---
unreasonable to expect they will be about half as high when

they start to normalise.
Carney warns fund giants of rate rise chaos

MARK CARNEY has told fund managers to prepare for a mass

sell-off in stocks and bonds that could be triggered by a Bank
rate rise.
The benchmark figure has been frozen at a record low of 0.5%
since March 2009 the longest period of unchanged rates
since the Second World War. Economists expect the Bank of
England to start lifting the level as early as the new year.
The governor of the Bank is concerned the increases could
leave homeowners scrambling to liquidate investments to
cover their higher mortgage repayments.
Carney has privately asked 135 of Britains biggest fund
managers how they plan to cope with customers demanding
their money at short notice.
The Bank wants to make sure we can support the daily prices
we offer to investors, said a senior fund manager. They have
been asking for a lot of information about liquidity in recent
months.
I think their fear is that even small investors who have really
large mortgages may have to sell their stock and bond
portfolios so they can manage their debt.
The Banks financial policy committee has already sounded
the alarm about market liquidity the ease with which
assets such as bonds and shares can be bought and sold.
However, fund managers say this is the first time they have
been asked to look specifically at the impact of an interest rate
rise.
The Bank believes liquidity has become more fragile as a
result of tougher restrictions on lenders. The last time rates
went up was in July 2007.
Last month Carney warned that interest rates had historically
averaged about 4.5% and said it would not seem
News Americas
Irwin Stelzer
American Account: Transformers - the
giants gearing up to live with 2% growth
Taken from the
GOOGLE wants a management structure more like Berkshire

Hathaways. Berkshire Hathaway wants growth more like
Googles. Monsanto and Terex want to be more like Apple and
other companies that minimise their tax burdens. And China
wants to be more like America, or at least its central bank
wants to follow the Yellen brick road to prosperity. All of them
are seeking the 2% solution.
There is a growing consensus in America that the new normal
is an annual growth rate of about 2%. Some Republican
presidential candidates say they have plans to double that, but
until they answer the key question how? doubters will
outnumber believers by a substantial margin. Yes, the car,
housing and office markets are providing a significant uplift to
the modest recovery. But the coming increase in interest rates
will create a new headwind for those industries, there is talk of
an office market bubble, and analysts are increasingly worried
about the quality of the loans taken out by consumers to pay
for their top-of-the-line vehicles.
There are other problems. The strengthening dollar and the
entry of China into the currency devaluation race, which will
stifle American exports; the billions in student loan debt;
Hillary Clintons call for higher taxes on the rich; the Obama
administrations assault on the coal, oil and gas industries
2,600 pages of new regulations in an effort to lead from the
front at the UN climate change conference in December. This
all lends support to those economists who see 2% growth in
Americas long-term future. Or enough support to have many
companies hunting for ways to keep on growing in a 2%
economy in which in the second quarter Standard & Poors
500 companies saw what Reuters calls the worst sales fall in
nearly six years and a first year-on-year quarterly profit
decline (of 1%) since 2012, after first-quarter profits for all US
companies fell by almost 9% compared with the fourth quarter
of 2014.
So whats a corporation to do? Take steps to beat that growth
rate. For Google it means trying to accelerate the growth of
what are now peripheral businesses by following Warren
Buffetts lead and making them independently operated
entities, each controlled by its own chief executive. Cofounders Larry Page and Sergey Brin will head a new holding
company, for some reason named Alphabet, with Google and
the so-called moonshot companies self-driving cars, robots,
live-forever-or-almost heathcare as separate subsidiaries.
Fundamentally, we believe this allows us more management
scale, as we can run things independently that arent very
related, said Page. Page and Brin, or Larry and Sergey as they
now refer to each other in shareholder communications that
mimic the Berkshire Hathaway style of Warren and Charlie
(Munger), will concentrate on allocating capital to what they
see as the most attractive businesses.
The organisational structure may copy that of Berkshire
Hathaway, but the vision of the future couldnt be more
different. No moonshots for Buffett. He has dipped into his
$67bn cash hoard for $37bn to finance the largest acquisition
in the 50 years since he took Berkshire from a small textile
company to the worlds largest conglomerate. Precision
Castparts is no shoot-for-the-moon operation: it is a
manufacturer of equipment used by the aerospace, power and
other industries about which Page and Brin know little and
care less. It is what Buffett calls an elephant, a company of
sufficient size to increase Berkshires earnings, assuming
Precision can reverse its recent sales declines. Add that to a
railroad, the insurer Geico, ketchup and mustard, Dairy

Queen and other stalwarts, and you have a company hoping to
achieve growth in a slowing economy in a manner different
from Alphabets, but run on the same principle of
independence for the operating entities combined with
centralised capital allocation.
Page and Brin are looking to grow little acorns into forests of
oaks replacing accident-prone drivers with super-safe
driverless cars, extending life, and turning every home into a
living area controlled from a mobile phone are just some of
their modest goals. If Geico gets to write the motor and home
insurance, should they still be needed, thats fine with Page
and Brin. Buffett and Munger, on the other hand, are buying
mature forests still capable of growth, and in the process using
idle funds that some investors said should be distributed to
them. Each company has its own plan for maintaining growth
in a 2% growth economy.
For those who dont happen to have $67bn in cash, or the
intellectual capital and the gleams in the eyes of the Page-Brin
team, there is another way to keep earnings rising in a slowgrowing economy: cut the governments tax take. Tax
inversions are back in style. The process is simple: a US
company buys a foreign company and adopts its country as its
home base it redomiciles. Since Americas corporate tax
rate is among the highest in the industrial world, an inversion
reduces the tax burden on the formerly American company,
increasing after-tax earnings even if the merger does not
increase pre-tax profits.
Last week the Illinois fertiliser maker CF Industries came
under fire after it acquired a Dutch company and moved
headquarters to the tax-friendlier UK. Illinois senator Dick
Durbin accused its executives of walk[ing] away from our
nation for a tax break . . . after benefiting from investments by
US taxpayers, presumably in infrastructure. Throw in the
decision by Coca-Cola Enterprises to merge with two
European bottlers and take the lot to Britain, allowing George
Osborne a decorous chuckle.
In the latest deal, Connecticut crane-maker Terex agreed to
merge with Finlands Konecranes and base the merged
company in Finland, which will cut its effective tax rate to
20%. More inversions are in active discussion, the most
significant being Monsantos $45bn billion pursuit of Swiss
rival Syngenta.
Then there is Chinas 2% solution to slowing growth a
currency devaluation of almost that magnitude (1.9%), swiftly
followed by two more cuts. But that story is well covered
elsewhere in todays paper.
News - Asia
Joe Hockey rejects RBA's potential growth
downgrade
Taken from the AFR Saturday, 15 August 2015
Treasurer Joe Hockey has pushed back against Reserve Bank

of Australia governor Glenn Stevens' warning the economy's
longer-run potential growth rate may have slumped on weak
productivity and population growth.
With a major debate now under way in the top echelons of
Australia's economic policymaking elite, Mr Hockey
emphatically rejected Mr Stevens' speculation that the
economy's normal speed has fallen to around 2.8 per cent
from the long-assumed pace of just over 3 per cent.
If true, the deterioration in the nation's future economic
performance could derail the Abbott government's hopes of
restoring the budget surplus by early next decade.
"I'm not as pessimistic in that regard because the Australian
economy is going through some significant restructuring at
the moment," Mr Hockey told AFR Weekend in an interview.
"I think we can get back up to 3.25 per cent, 3.5 per cent."
Mr Hockey's view has been questioned by the International
Monetary Fund and several high-profile economists, including
at Commonwealth Bank of Australia, who recently cut their
estimate for "potential" growth to a little under 3 per cent.
DOWNGRADE AFFECTS BUDGET PROJECTIONS
The downgrade has major implications for the government's
May projections that the budget deficit will swing back to
surplus by early next decade. Much of that is based on an
assumption that economic growth will average an annual 3.5
per cent for five straight years from 2017-18, which would be
an almost unprecedented run of growth.
Mr Stevens effectively cast those assumptions into doubt last
month when he said trend output may be lower than 3 per
cent.
"Perhaps the growth we have seen is in fact closer to trend
growth than we thought."
Gross domestic product rose 2.3 per cent in the March
quarter, meaning the economy has been below trend for all
but three of the past 27 per quarters.
Mr Hockey told AFR Weekend that his May budget forecasts
were firmly "on track" and were not going to be revisited.
"In some areas, we are exceeding expectations."
The Treasurer hinted that he has clashed with Treasury
forecasters over their view that the jobless rate would rise to
around 6.5 per cent. So far, the rate has held well below that,
but bounced to 6.3 per cent last month after a rise in
participation rates.
FORECASTS ON UNEMPLOYMENT
Asked whether his budget assumptions are too heroic, Mr
Hockey said: "I don't accept that because forecasters naturally
get it wrong they inevitably do and usually have a number
of different positions.
"The RBA, for example, is lowering its expectations of
unemployment and one of the most robust discussions I've
had with Treasury was about forecasts on unemployment," Mr
Hockey said.
Mr Hockey listed as reasons for his optimism the rebound in
non-mining construction and improving services exports, and
"a massive roll-out in new infrastructure".
In a speech in Brisbane on Friday, Reserve Bank assistant
governor Christopher Kent said federal and state governments
would have to react quickly to the consequences of lower
economic growth, which could get worse before it gets better.
Dr Kent stood by the RBA's prediction about lower economic
growth over the next few years, saying it was based around the
most recent data including population growth falling from 1.8
per cent to 1.4 per cent.
"We have made the best-guess assumption on population

growth on the most recent data we've seen. It's
understandable population growth has eased back a bit from
quite strong levels and it's not quite as strong," Mr Kent told
an Economic Society of Australia lunch in Brisbane on Friday.
"But that could turn. It make sense it's a bit low if our labour
market conditions have weakened but they have improved
elsewhere in the world.
"But market conditions could change here and elsewhere, and
that could turn around. It's not a prediction you could count
on for a long period of time. We've just made the best
assumption we can."
POPULATION GROWTH
Mr Kent said governments would have to be nimble to react to
changes in population growth, which would impact on
economic growth. But he said it wasn't all downside with less
revenue flowing into government coffers because a slower
population growth would mean less spending on services.
"It affects both revenue and expenditure as well over time
just like it affects the growth of the aggregate demand and
aggregate supply in the economy," he said. "In terms of the
balance it doesn't necessarily have any strong implications
because it's going to be affecting both sides of that," he said.
But he said Australia was better placed to deal with lower
economic growth because of lower levels of public debt. "If
you're an economy in Europe or in Japan which has very high
public debt, and less growth in the population to generate
revenue to service the debt, that makes life harder," Mr Kent
said. "But we don't have especially high public debt as a share
of GDP at state or federal levels."
(Full article click - AFR)
---
Fonterra fights flak over $430 million of

interest free loans to farmers
Taken from the Stuff News Saturday, 15 August 2015
Fonterra has been accused of treating its unitholders "like

scum" by independent economist Shamubeel Eaqub.
Eaqub said the dairy giant's offering of $430 million of
interest free loans to dairy farmers was terrible for
unitholders. The huge amount of money was earning nothing
for two years.
"That's a terrible deal for any equity holders in Fonterra essentially for all the people in the shareholders' fund. It's
ridiculous"
Investors who want to invest in Fonterra can only do so
through buying units in the Fonterra Shareholders' Fund
(FSF). The units are entitled to the economic rightsdividends attached to Fonterra shares - which farmers can sell
to unitholders. The units have no voting rights.
"It's an outrage," Eaqub said,"because it essentially says you
guys don't matter. Your equity is not worth anything and they
are treating them like scum."
"Fundamentally my big issue is how can you tell your
investors that the return on their capital is going to be zero per
cent on however many hundreds of millions of dollars it is."
"It's also the unequal treatment of the two types of owners,"
Eaqub said.
Fonterra's decision on the loans would ultimately lead to
questions about the governance and structure of Fonterra, he
said.
Fonterra chief financial officer Lukas Paravicini said he totally
rejected Eaqub's comments.
The cooperative looked at the totality of shareholders and
unitholders and had an obligation to both.
Management pursued a clear strategy to maximise returns
and the milk price.
"And we will only do what is in the best interests of pursuing
those two targets."
He said the tenor of a conference call with investors and

analysts after last Friday's announcement lowering the
forecast milk payout and announcing the interest free loans,
was very different from the comments Eaqub made.
Investors in the units understood why Fonterra made the
decision and appreciated the funding for the loans was coming
from Fonterra's efforts to reduce working capital through
changes to the business.
While the investors would rather see the money used
elsewhere they understood the cooperative wanted to deliver
strong earnings and needed a strong farmer base for that.
He said that was the opinion also of investors on the call.
"I had no comment not even close to the comments that you
have," Paravicini said.
"We don't look at one or the other constituency. We look at
the totality. We do what is best for the interests of the
cooperative and their shareholders."
Paravicini said Fonterra had thousands of investors. "You
cannot base your judgment on one investor who has not
talked to me."
The biggest New Zealand unitholder is ACC with almost 4 per
cent of the FSF, according to the latest annual report, but its
investment team was not willing to comment on the loans
issue. Paravicini said ACC would tell Fonterra what it thought.
New Zealand Superfund is also a shareholder in FSF but
would not comment either.
One large investment manager Paul Glass of Devon Funds
Management said the loans decision was political and not
commercial. Devon is not a shareholder in FSF.
Glass said the decision raised governance concerns about
Fonterra, already quite heavily indebted.
"I'm not convinced as yet that this is a particularly prudent
course of action," Glass said.
"Even if you look at where Fonterra's forecasts sit, they appear
to us to be consistently wildly optimistic and is something that
possibly is irresponsible," Glass said.
Inherent in Fonterra's forecast milk payout last Friday of
$3.85 a kilogram of milk solids was a very strong bounce in
commodity prices, Glass said.
"I think it is a very aggressive thing to do to forecast a bounce
in a commodity that the market has not seen," Glass said.
It was dangerous because a lot of people would be working out
their budgets on the basis that Fonterra had greater insight
into commodity prices, Glass said.
In his opinion the fortunes of other commodity businesses like
iron ore and coal business such as Solid Energy showed the
board of a company had no greater insight on where the
commodity price was going than anyone else.
Paravicini said it was dangerous for commentators to
comment on Fonterra's forecasting when they did not take the
time to understand how Fonterra did them.
Fonterra made forecasts on best estimates and information
available to them at that point.and had an obligation to
forecast for the whole season, he said.
He invited critics to look at their last two or three seasons
announcements, and on the claims of wildly optimistic
forecasts he wondered if Fonterra and the critic were looking
at the same figures.
Fonterra was transparent on what information it based its
forecasts and there was a range around its forecast. It gave
clear information on what had to happen in the world market
to achieve the forecast. The international milk market
nowadays reacted immediately to new information and that
was different from years ago and made forecasting difficult,
Paravicini said.
Fonterra knew that there were events in the world that might
change and have a material impact on the milk price. Those
were mentioned in the announcement such as the current
exchange rate, a weather event, a pick up of in Chinese

demand and geopolitical elements.
Fonterra gave as much information as possible around how
they reached the forecast so farmers were informed to take
positions on their budgets in a cautious way.
Agriculture academic Professor Keith Woodford said
unitholders were frustrated anyway because they thought
when the milk price fell their investment would fare better
than it was.
But he reckoned they would not object too much to the
interest free loans.
"I don't think they will feel too badly about that in the greater
scheme of things."
"I think they will forgive Fonterra for giving an interest free
loan because they will agree largely themselves that they don't
want to see the farmers in too much difficulty or they don't get
product at the end to make a profit themselves."
Sharebroker James Smalley of Hamilton Hindin Greene said
he did not think the $430m of interest free loans was a big
deal.
If Fonterra did not help its farmers some would fail and their
Fonterra shares could be sold to other farmers who might
decide not to supply Fonterra. That was the alternative..
Because interest rates were low and falling the cost to
Fonterra of no return on that money was less than it might
have been.
Smalley said it seemed reasonably prudent and would not
have a significant impact on dividends to unitholders.
He noted that the price of the FSF units, $4.70 last Friday
before Fonterra's announcement, rose after the news and that
was indicative of how investors regarded the announcement
which included the free loans to farmers.
Dairy analyst Susan Kilsby said the "scum" comment was
harsh and a bit unfair because Fonterra was a
cooperative.Supporting its farmer suppliers was what a
cooperative like Fonterra would do.
She knew analysts who applied a discount to the valuation of
the FSF units because Fonterra was a co-operative and
different from a straight corporate model of business.
(Full article click - Stuff)
---
Thai plan to buy China subs has US on edge

Taken from the Nikkei Sunday, 16 August 2015
For any nation, deciding which country to purchase military

weapons from is no insignificant matter. In fact, it can greatly
affect national strategy.
Thailand recently unveiled a plan that underscores this and
which has stirred concerns in the U.S. and Japan.
In early July, the Royal Thai Navy said it planned to buy three
submarines from China for a total of 36 billion baht ($1.02
billion). The Southeast Asian country has been shopping
around for submarines in recent years as it has exactly zero
such vessels in its fleet.
Initially, the Thai government considered buying subs from
U.S. allies, such as South Korea or Germany. So its decision to
change tack and buy from China caught the U.S. off guard.
Washington regards Thailand as a strategically important
player in Southeast Asia and has therefore been keen to carry
out exchanges with the Thai military. That is reflected in the
annual Cobra Gold multilateral exercise, in which the two
countries have played a leading role since 1982. Cobra Gold
now involves more than 20 countries and has become one of
the largest military exercises in the region.
Sounding the alarm
A nervous U.S. has warned that purchasing China-made subs
would significantly increase the influence of the Chinese
military on its Thai counterpart. Critics in Thailand have also
questioned the deal. In the face of such doubts, Deputy Prime
Minister Prawit Wongsuwan, who doubles as defense
minister, indicated on July 15 that the government was

putting the decision temporarily on hold. That does not mean,
however, that Bangkok has canceled the plan.
There has, in fact, been a certain amount of cooperation
between the Thai and Chinese militaries. The Thai military
has traditionally poured more resources into the army, which
is why it is has been rushing to bolster its underdeveloped
navy. That includes buying six warships from China in the
1990s.
But purchasing submarines is a different matter. The U.S.
regards the vessels as valuable leverage against China. A
former senior U.S. government official said submarines, not
aircraft carriers or other vessels that can easily succumb to
missile attacks, will play a greater role in U.S. strategy toward
China. "Submarine strength will significantly impact the
balance of military power between the U.S. and China in
Asia," the official said.
If Thailand procures subs from China, the countries' military
relationship could go far beyond short-term cooperation.
A Japanese Defense Ministry official noted that submarine
deals tend to lead to deeper military ties between the buyer
and seller. "The buyer will receive instructions for several
years about the technology and know-how needed to operate
the submarines, as well as receive hands-on training," the
official said. "Moreover, the buyer needs to ask for
cooperation from the producer in parts replacement and
collection, as well as maintenance."
Expanding its options
Why, then, is Thailand poised to buy Chinese submarines
despite being fully aware that doing so would upset the U.S.?
Kavi Chongkittavorn, senior fellow at the Institute of Security
and International Studies at Bangkok's Chulalongkorn
University, offers some explanations.
"Thailand needs to expand its naval capability because it has
huge natural resources in its EEZ (exclusive economic zone),"
Chongkittavorn said. "In 2011, Thailand was set to buy
German submarines, but the deal was suspended after a
leadership change in Thailand. One of the reasons it decided
to buy Chinese submarines is that China offered a very
favorable price compared with European countries."
Chongkittavorn added: "The Thai-U.S. relationship has cooled
since the military coup, which limits Thailand's options. That
doesn't mean Thailand will shift toward China, but it will try
to gain a freer hand by cooperating more closely with China
while maintaining its traditional security partnership with the
U.S."
Washington condemned Thailand's 2014 military coup and
has since imposed sanctions on the country. The strained
relationship with the U.S. has the Thai military looking to
China for weapons and military technology. Beijing sees this
as a prime opportunity to strengthen its ties with Bangkok.
According to U.S. media reports, the U.S. military has
refrained from commenting on the situation for fear that
openly criticizing the Thai military could backfire.
Japan is directly impacted by these events. Over the years, the
Japanese government has built up its ties with Thailand
mainly through economic cooperation. A stronger Thai
relationship with China would weaken Tokyo's influence in
the Southeast Asian country, an integral member of the
Association of Southeast Asian Nations.
A submarine deal between Bangkok and Beijing would likely
further shift the already changing power dynamics in the
region.
(Full article click - Nikkei)

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News Summary

Chinese news this week caused ripple effects around Asia,

IMF set stage for China currency shift

Zhou Xiaochuan, Beijings central radical

The International Monetary Fund set the stage for Beijings

In the early 1980s, a promising PhD student from a prominent

Taken from the FT Saturday, 15 August 2015

Taken from the FT Saturday, 15 August 2015

1989. He served as head of a string of organisations, including

Devaluation with Chinese characteristics

slightly stronger on Friday. Still, the currency could justifiably

IMF Says Chinas Yuan Isnt Undervalued,

Bank welcomes more market-driven currency trading, calls for

taken after Chinas stock market fell sharply, while working to

China Declares Currency Independence

On Tuesday China stopped supporting the yuans tight link to

as a result, median income has risen rapidly. That

byzantine U.S. tax code and escalating federal regulatory

Taken from the Sunday Times 16 August 2015

Chinas shock devaluation could set off a wider economic

global revenues. Daimler counts on the country for 10% of its

If the yuan dropped very sharply, inflation could soar, leading

Such accumulated problems refer to the fact that since the

signalling it may start dumping part of its vast stock of US

Eight reasons why Chinas currency crisis

The Chinese leaderships devaluation of the yuan delivered a

policymakers, Russell Jones, of consultancy Llewellyn

of the kind of debt trap identified by the US economist Irving

The truth about the yuan devaluation

Uncertainty over the Chinese economy is deepening, with a

This has prompted the People's Bank of China, the central

(Full article click - Nikkei)

Eurozone finance ministers have approved an 86bn bailout

The message of todays eurogroup is loud and clear, he said.

Greek bailout vote widens bitter Syriza rift

Alexis Tsipras said the vote was a 'decision to remain alive

Mr Tsipras sacked Mr Lafazanis from the cabinet in a partial

IMF calls for Greek debt relief after bailout

The International Monetary Fund has called on eurozone

talks. He managed to push it through with the help of

Europe to buy Greek debt after bailout

GREECE is set to receive a much-needed economic fillip from

After Eurogroup approval, Athens faces

The approval by eurozone finance ministers of a third bailout

German Deputy Finance Minister Jens Spahn said Saturday in

German Lawmakers to Hold Greek Vote on

German lawmakers will vote Wednesday on a new aid package

Shire told to raise bid by $5bn

Glencore profits plummet as commodities

SHIRE PHARMACEUTICALS will have to offer $35bn

Taken from the Sunday Times 16 August 2015

GLENCORE is set to reveal a calamitous plunge in profits as

Taken from the Sunday Times 16 August 2015

Petrol price falls could drive return to

Bank of England policymaker says pressure is building for rate

unreasonable to expect they will be about half as high when

Carney warns fund giants of rate rise chaos

MARK CARNEY has told fund managers to prepare for a mass

GOOGLE wants a management structure more like Berkshire

railroad, the insurer Geico, ketchup and mustard, Dairy

Treasurer Joe Hockey has pushed back against Reserve Bank

"We have made the best-guess assumption on population

Fonterra fights flak over $430 million of