Author Archives: Susan_Hall

How Should the Yuan Be Valued?

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What does putting the yuan in the basket mean?   Very little except a recognition of the importance of China’s economy on the world scene.

Most things are not priced in SDRs, the Special Drawing Rights basket of currencies used by the International Monetary Fund as its units of account.

Yet because its been put in the basket, there is an expectation that China will let the market decies the yuan’s exchange rate.  If China maintains a rate that is in fact pegged to the dollar, it will boost the dollar’s weight in the basket, which is not the point of the inclusion.

The Federal Reserve has begun to raise interest rates, which will put pressure on the yuan in any case.  It’s unlikely that China will give the market free rein, but China has to be aware of its new responsibilities as part of the SDR.

Pressure on the Yuan

Banks’ Performance in Emerging Countries

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More than a third of the world’s largest banks have their headquarters in emerging markets.

Emerging market banks have little trouble funding themselves.  Many emerging countries, especially i Asia, have high savings rates.  This leaves lenders with more deposits than loans.

Unlike their Western counterparts, emerging-country banks o not have risky investment banking arms.  Yet profits can be wiped out by bad loans, which are increasingly being extended by “extend and pretend”, which gives companies which have little prospect of re-paying a loan years of forebearance.

Chinese banks report non-performing loans at 1.6% of assets, but share prices in these banks suggest that the market thinks dud loans represent closer to 8% of assets   How quickly these banks admit their failings will determine their future health.

Non-Performing Loans.

 

Are China’s State-Owned Firms Credit-Worthy?

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Are China’s Big State Owned Firms Credit Worthy?  There was a time when China’s biggest state-owned enterprises were seen as the country’s crown jewels. The government cleaned up the balance-sheets of the best of the firms, and listed their shares on stockmarkets at home and abroad. The firms were dubbed “red chips”, the supposed blue chips of state capitalism, by fawning analysts.

In fact, China’s big state firms were largely a bloated, inefficient and cosseted lot. The real dynamism in the Chinese economy has long come from its entrepreneurial private firms, which now account for perhaps two-thirds of the country’s entire economic output.

Thanks to weak commodity prices, a troubled property market and slowing economic growth, the outlook for all Chinese corporations is dimmer than it was a few years ago. But debt is a much bigger problem at the largest state firms. A report released on November 30th by Standard & Poor’s, a credit-rating agency, looks at 200 public and private Chinese firms in 18 industries and warns that the creditworthiness of many big state firms has worsened significantly. S&P found that the average ratio of gross debt to earnings (before interest, tax, depreciation and amortisation, or EBITDA) at state firms rose from roughly 3 in 2008 to over 5 last year.

The worries are most acute among metals firms, such as Hebei Iron & Steel, and transport companies, such as China COSCO, a shipping line. The agency gives both of those companies a maximum financial-risk rating of 6. The main exceptions to the trend, the report notes, are state firms in industries such as telecoms and energy, which the government protects from serious competition.

Private firms are not without their problems, although the ratio of gross debt to EBITDA at such firms remains below 4 on average. The property sector and “bricks-and-mortar” retailers have been hit hard of late, and private firms with exposure to them—such as Fosun, one of China’s largest private conglomerates—are also seeing a deterioration in their creditworthiness. But most private firms are in e-commerce, consumer businesses and technology services, which are less politicised industries that are still doing well.

The conventional wisdom has long been that China’s biggest and best-known state firms will never be allowed to default, no matter how weak their finances. But doubts are now creeping in. Christopher Lee of S&P, an author of the agency’s report, says, “there is a growing sense that the weakest are not default-free.” The question for officials now, he reckons, is “how to let them go without sparking a systemic meltdown.”

China's SOEs

 

Entrepreneur Alert: Makeup for Men

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Women’s Makeup is a Very Good Business.  Kiko is having success with its men’s line.  Is there an opportunity here?

It’s a trend that clashes with Western ideas about masculinity and gender, but Korean men are spending a ton of money on cosmetics products in order to improve their skin and appearance.

South Korean men are the world’s top per-capita consumers of skincare products, with four times the purchases of runner-up Denmark, according to Euromonitor. The grooming industry is worth more than $1 billion, with projected growth of nearly 50% over the next five years.

Korean men are not just buying aftershave and lotion, either. Demand is increasing for anti-aging products, masks and mists.

Alex Taek-Gwang Lee, a cultural analyst at Kyunghee University, said that men are using more cosmetics because in South Korea, appearance is everything.

“We have a proverb,” Lee said. “If you buy something, you must choose the one which has a good appearance.”

In South Korea’s ultra-competitive society, he said that kind of decision-making also applies to people. When employers are looking to hire, for example, many of the candidates will have come from excellent universities and have similar qualifications.

One thing that can set a candidate apart is their appearance.

“If you want to have a higher salary, you must do the best for your human capital,” he explained.

Chris Hong, an business executive about to hit the big 4-0 this year, is the industry’s ideal customer. His regimen includes twice-yearly Botox injections, as well as laser treatments to smooth out imperfections on his face.

Hong freely admits that he spends more time, money and effort on beauty than his wife.

“Whenever you do more grooming you feel better,” Hong said. “I don’t want to be looked at as older.”

 

Entrepreneur Alert: Women’s Inventions Part I

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Giving credit where credit is due.

1.  The Car Heater

The Car Heater

We all owe our thanks to Margaret A Wilcox who invented the car heater in 1893!

2.  Monopoly

This popular board game was designed by Elizabeth Magie in 1904, originally called the Landlord’s Game. The purpose of this game was to expose the injustices of unchecked capitalism.  Her game was ripped off by Charles Darrow who sold it to Parker Brother’s 30 years later.  However Parker Brothers later paid Elizabeth $500 for her game. Gee Thanks!

3. The Fire Escape

The fire escape was invented by Anna Connelly in 1887

4. The Life Raft

The life saving Life Raft was invented by Maria Beasely  in 1882. (Maria also invented a machine that makes barrels)

5. Residential Solar Heating

Solar heating for residential housing was invented by Dr Maria Telkes in 1947.  Dr. Telkes was a Psychiatrist in addition to being a  Solar-Power Pioneer

6.  The Medical Syringe

The medical syringe which could be operated with only one hand was invented by a woman by the name of Letitia Geer in 1899

7. The Modern Electric Refrigerator

The electric refrigerator was invented by Florence Parpart in 1914 (Florence also invented an improved street cleaning machine in addition to the refrigerator)

8. The Ice Cream Maker

The ice cream maker was invented by a woman named Nancy Johnson in 1843. Her patented design is still used today!

9. The Computer Algorithm

Ada Lovelace is essentially the first computer programmer due to her work with Charles Babbage at the University of London in 1842. In fact her notes was an essential key to helping Alan Turing’s work on the first modern computers in the 1940s.

10. Telecommunications Technology

Some of the Telecommunication Technology developed by Dr Shirley Jackson include portable fax, touch tone telephone, solar cells, fibre optic cables, and the technology behind caller ID and call waiting.

 

Toshiba: Reinventing a Company

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Pavel Alpeyev and Grace Huang write:  Toshiba Corp. is embarking on a revamp that will leave the one-time technology pioneer a shadow of its former self. An accounting scandal has left the conglomerate in tatters, facing record losses, thousands of job cuts and potential spinoffs that may include the consumer electronics unit that made it a global player.

President Masashi Muromachi is being forced to make tough decisions after the company projected a loss of ¥550 billion for this fiscal year. Toshiba’s bond ratings were cut to junk, with restructuring costs seen outpacing previous estimates and dragging on earnings.

A household name known for making the first DVD player and the first popular laptop computer, Toshiba has clung to legacy consumer-electronics businesses that are wilting under pressure from Samsung Electronics Co. and Chinese manufacturers. As Panasonic Corp., Mitsubishi Electric Corp. and other Japan-based competitors shift away from domestic products, Toshiba has lagged behind, relying on profit from semiconductors and power generation to subsidize its TV and computer units.

Muromachi, who took over in July after the accounting irregularities were revealed, plans to announce by the end of the year far-reaching changes that may include the sale of one or more consumer-products businesses. The company said Monday it will seek a buyer for its health care unit, which makes diagnostic imaging systems such as MRI and X-ray equipment. And Toshiba is considering combining its PC operations with those of Fujitsu Ltd. and Sony Corp. spinoff Vaio, Muromachi said this month.

While such a restructuring will leave the Tokyo-based electronics manufacturer much smaller, it will give Toshiba enough breathing room to funnel more money into its mainstay memory chip division.

The chip business has been Toshiba’s most profitable, accounting for more than 100 percent of operating income in the year ended March 2015. Its lifestyle segment, which includes PCs, televisions and home appliances, yielded an operating loss of about ¥110 billion that year.

The company is also considering the sale of property and investments after earlier selling its holding in elevator-maker Kone Oyj. Other plans include accounting training, corporate governance reviews, management seminars and an evaluation system for the president and chief executive officer.

The company’s weaknesses are greater than Moody’s Investor Service and Standard & Poor’s had anticipated and may deepen in the coming months, the agencies said.

Toshiba’s earnings announcement “reflects a deterioration of business results not only in weak businesses” — including digital and white goods and home appliances and also semiconductors — “but also in the company’s core businesses,” Standard & Poor’s wrote in a statement. As a result it expects Toshiba’s earnings margin before interest, taxes, depreciation and amortization for fiscal

Still, shedding its consumer electronics unit and spinning off the power and real estate businesses could help make Toshiba an attractive chipmaker. With some ¥1.68 trillion of revenue in the latest fiscal year, the semiconductor arm as a standalone company would be a top-10 global chipmaker, data show.

Toshiba’s semiconductor business is a major player in flash memory — increasingly popular as fast, energy-efficient storage in phones, tablets and laptops.

Chipmakers

Impact of Automation on Jobs in US

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US employment by hourly wage and potential for automation based on current technology, bubble size = number of workers
 McKinsey analyzed the detailed work activities for 750+ occupations in the US to estimate the percentage of time that could be automated by adapting
currently demonstrated technology.
Automation of US Jobs

 

Getting Hold of Escalating Drug Overdoses in the US

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Marisa Taylor writes:  A state government crackdown in 2010 on Florida’s notorious “pill mills” — which had been dispensing some of the country’s highest volumes of prescription painkillers, often without medical exams — saved more than a thousand lives in the three-year period that followed, according to researchers’ estimates released Monday.

The researchers said their findings imply that restricting doctors and clinics that have been overprescribing addictive oxycodone drugs like OxyContin not only helps prevent painkiller overdose deaths, but may reduce heroin overdose fatalities as well.

There wasn’t as big of a substitution to heroin that we might have feared among the people who were getting access to these medications at pill mills after Florida changed its laws.

Kennedy-Hendricks and her team sought to find out whether tougher laws regulating doctors and clinics that had freely dispensed oxycodone to customers who paid them in cash would cut down on overdose deaths from prescription painkillers — or whether addicts might just switch over to heroin and continue to overdose, a pattern that law enforcement and public health officials have observed.

Scientists chose to look at Florida, which starting in 2003 saw an explosion of so-called pill mills, defined as clinics or doctors writing numerous prescriptions for opioids beyond the scope of standard medical practice. They often dispensed the pills on-site, rather than requiring a pharmacy visit, and sometimes didn’t even perform exams.

Florida passed a law in 2010 limiting doctors to prescribing 72-hour oxycodone supplies and barred any advertising of such medications. In 2011, the state also toughened criminal penalties for the doctors and clinics involved in illegal painkiller subscriptions and banned dispensing the drugs on-site.

Looking at the rates at which overdose deaths had been increasing in Florida, and comparing them with continuing increases in North Carolina, the researchers determined that 1,029 overdose deaths were prevented in Florida from the start of the legal crackdown until the end of 2012.

While North Carolina’s opioid overdose death rates still rose — increasing fourfold from early 2011 to late 2012 — Florida’s slowed. Between March 2010 and December 2010, for example, the death rate was 7.4 percent lower than it would have been without Florida’s new laws, the researchers said. They calculated that the rate was 20 percent lower in 2011 and 34.5 percent lower in 2012 than it would have been without the crackdown.

And while heroin overdose death rates grew in both states at the beginning of 2011, North Carolina’s continued to increase by an average of 18 percent per month, the scientists said. Florida’s increased more slowly, by 8 percent per month during the first half of the year. By the end of 2012 heroin overdose deaths were increasing by 10 percent per month in North Carolina, but only by 6 percent per month in Florida.

The researchers did see an initial “substitution” effect in which Florida prescription opioid addicts switched over to heroin in 2010 as the stricter laws made prescription drugs tougher to come by, but that substitution appeared to taper off as time passed.

 

Incremental Interest Rate Hikes?

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Steve Matthews writes:  Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank’s commitment to a “gradual” tightening suggests interest rates could be raised at every other meeting of the policy-setting Federal Open Market Committee, though the actual pace will depend on incoming economic data.

The Fed said it expected the pace of future tightening to be gradual. Lockhart voted in favor of the statement that announced the quarter percentage point increase in the target range for its benchmark federal funds rate to 0.25 percent to 0.5 percent.

Policy makers separately forecast an appropriate rate of 1.375 percent for the rate at the end of 2016, implying four quarter-point increases in the target range next year, based on the median projection from 17 officials.

The ”important point” is the pace will depend on “how the economy performs,” Lockhart said. “It will be gradually, but data dependent.”

‘Solid’ Economy

The rate hike reflects a ”solid” outlook for the economy, with inflation likely to move toward the Fed’s 2 percent goal after the temporary drags from lower oil prices and a stronger dollar end, Lockhart said.

Last week’s move ended a seven-year era of ultra-easy Fed monetary policy after officials reduced rates to nearly zero in December 2008 to help the economy recover from the worst recession since the Great Depression.

Manufacturing could benefit as global conditions improve, he said, adding that growth in China has stabilized and Europe seems to be picking up.
US Fed Interest Rate Hikes?