Default threat: Bubble behind the Chinese Wall

The real Chinese debt-GDP ratio is a staggering 230%, which has spiralled in the last five years.

ISLAMABAD: In China, a bubble is about to burst.

In early January, China Credit Trust, a major non-banking financial institution, warned its investors that it may not be able to repay when one of its wealth management products worth $469 million was about to mature.

Days before its maturity, Industrial and Commercial Bank of China (ICBC) – the largest Chinese lender – rescued the trust by announcing that the bank would be able to recoup the money investor had put in by selling to “unidentified buyers”.

This transaction might have rescued few investors at the cost of a more vibrant financial industry, which rewards good performance and penalises poor results with equal force. But this bailout is just a tip of the iceberg.

The Chinese banking system is dominated by state-owned commercial banks including Bank of China – which specialises in foreign exchange transaction and trade finance – China Construction Bank – which focuses on medium to long-term credit for long-term projects – the Agricultural Bank of China – which provides financing facilities to the agriculture sector and the ICBC.

Of these, the ICBC is the largest bank by assets, employees and customers and is the second in foreign exchange business.

The ‘Big Four’ were transformed from specialised banks into commercial entities during the 1994 banking reforms and were liberalised to the extent of floating shares on Hong Kong and Shanghai Stock Exchanges. But the state still maintained majority stakes in these banks.

Due to state control, the Big Four are a source of subsidising loans to state-owned enterprises (SOEs) and other arms of the government. For the past few years, stagnation of SOEs produced negative real returns on the capital employed, increasing non-performing loans (NPLs) for these banks. It is noteworthy that hundreds, if not thousands of SOEs, have already gone bankrupt.

Crisis triggers shadow banking

Shadow banking sector has been on the rise, particularly investment in ‘wealth-management products’ because of the official ceiling on deposit rates where savers make little return on their bank deposits.

In a recent column in The Times of India, William Pesek equates Chinese shadow banking system with Enron whose real business was not energy or commodities, but book-cooking.

The rise in shadow banking was triggered after the 2008 financial crisis when Chinese government allowed banks and other lending institutions to extend credit lines. Private domestic credit has increased from $9 trillion to $23 trillion, an increase of 2.5 times in five years.

The concern here is that credit has reached a point where it is no longer generating economic returns and the government is not allowing market forces to take their toll on poorly performed credit products. In freely functioning financial markets, the poorly performing assets should be allowed to be written off instead of being bailed out.

According to Professor Feng Xingyuan of Unirule Institute of Economics, the credit policies are decided by the National Development and Reform Commission of the State Council, together with the central bank and the China Banking Regulatory Commission, instead of commercial banks.

This has led to a significant distortion in credit market leading to reflective investors like George Soros to possibly go short on yuan. For Soros, who has amassed billions by correctly predicting various financial crises at least three times, the main risk facing the world isn’t the euro, the US Congress or a Japanese asset bubble, but a Chinese debt disaster that’s unfolding in plain sight.

Debt-GDP ratio spirals

So is the Chinese debt-to-GDP ratio going out of hands? It depends on how you define debt, as the central government is comfortable at 21.3% debt-GDP ratio as per the IMF in 2013. However, when one adds debt from local governments, SOEs and government-run banks into that mix, the situation becomes suddenly bleak.

The real Chinese debt-GDP ratio is a staggering 230%, which has spiralled in the last five years. If history is any guide, Chinese trade surplus and its forex reserves may not prove reliable defence.

Thus, the Chinese financial system faces a triple challenge: decreasing return on capital due to bloated credit distribution, swapping of commercial bank deposits with investment in shadow banks and an exponential growth in cheap private credit.

Investment flow to Pakistan

As a long-standing friend of Pakistan, Chinese investment in our country offers opportunities – but mainly for China itself. As the rate of return on credit-run capital on investment made for ghost cities and empty bridges in China dwindles, it can find greener pastures in infrastructure-hungry Pakistan, on the back of a rising middle class and its ever increasing geostrategic importance.

And to those who claim for Chinese banks that there has never been a default, the answer is “there is always a first time”.

The writers work at Policy Research Institute of Market Economy (PRIME), a public policy think tank based in Islamabad

Carefully treading trade with India

Under invoicing, mis-declaration and dumping will be carried out abundantly, especially if import is through Wagah. PHOTO: AFP/FILE

KARACHI: With talks of liberalising trade with India doing the rounds, it would be timely to review the present situation.

India gave Pakistan the Most Favoured Nation (MFN) status in 1996. Yet Pakistan’s exports to India have been pitiful, around $300 million, while Indian exports have been 5 times higher, clocking in at $1.6 billion. This has happened despite Pakistan not giving India the MFN status.

Now we want to give Non-Discriminatory Market Access (NDMA) to India and yet say that exports would rise. Not at least till India removes the non-tarrif and technical barriers to trade.

Let’s be clear that Pakistan is clearing the road for Indian imports and not, in the true sense, bilateral trade. Why should Pakistan want that? Why should the country offer its markets without having the ability to gain an entry into India’s? In the 80s and even early 90s, it would have made eminent sense as Pakistan’s per capita income was higher than India’s while per capita production was at par.

Now India is miles ahead and moving further, while Pakistan is floundering. UNCTAD’s 2008 survey states that India has a track record of being the most prolific user of anti-dumping remedies. Their overall Trade Restrictive Index is 46.7, while Pakistan’s is 22.2.

Let’s talk about the automotive industry, which has a profound impact on economy because of its backward and forward linkages, employment capability and technical prowess. India has protected it well as they, proudly, announced during a recent conference I attended. Their custom levy on new built-up vehicles is higher than Pakistan’s and even higher on used vehicles. Malaysia has included the automotive industry in its manufacturing ++ industries. It has been called the mother industry as well as the “Industry of Industries” by no less a person than Peter Drukker, the famous management guru.

India has done well to understand this and protected it in all the Free Trade Agreements signed, even the latest one with the EU. No built-up, new or used vehicles, are allowed easy access to its market.

The transport engineering department of India has 1,085 standards of which 554 pertain to auto and parts — we have none. They have a process of testing before allowing anything in, which is time consuming and is called homologation. Pakistan does not have any facilities with the Pakistan Standards and Quality Control Authority (PSQSA) to carry out any homologation in the country. India also has a robust licencing arrangement for allowing vehicle import.

They have emission standards, Bharat 3 & 4, which are unique and more challenging than Euro 3 & 4. Pakistan is still at Euro 2 only in petrol and zero in diesel. Hence, access to their market is obviously denied unless Pakistan improves its standards.

Why we are at such a low level is because our fuel is not good enough for higher levels. The refineries must invest to deliver better fuel. It is obvious that Pakistan needs to have better standards, testing equipment and regulation before we allow access to our automotive market — both National Tariff Commission & PSQSA’s capability has to be substantially enhanced. India is a member of the UN WP29 Agreement of 1998 which does not compel it to accept a third country’s testing as the Agreement of 1958 did, of which India is not a member. India, thus, does not allow mutual recognition. Their standards are unique and they would like Pakistan to adopt their standards. India has dexterously done its homework.

To top it all, Pakistan is considering opening the Wagah border for all items. Currently, only 137 products can come through. This will make Pakistan and India one market and foreign direct investment would naturally flow into India because Pakistan is besieged with insecurity. What a loss that it will be? Under invoicing, mis-declaration and dumping will be carried out abundantly, especially if import is through Wagah. Wagah must not be opened up. It will be disastrous.

The way forward

Let the automotive associations in both countries talk to each other and finalise the modality of business, leading to managed trade along the lines of Mercusor Agreement on automotive trade between Argentina and Brazil or the agreement between US and Canada.

To make ourselves competitive, raw materials, machinery, tooling and technology may be made available from India as the first step. To improve competitiveness, joint ventures in Pakistan or investment by Indian firms in Pakistan may also be allowed. With the low value of Pakistani currency and labour cost, they may make products cheaper in Pakistan.

Let India play the role of the big brother and give more leeway to Pakistan like reducing the Pakistan sensitive list to 300 for the time being, while India reduces it to 100. Allow Pakistan time to get more competitive and then remove lines progressively.

The writer is Paapam’s first  chairman and is closely  associated to the auto industry

Paul Smith shoes and cultural appropriation

Paul Smith's new design 'Robert Sandals' seems similar to our Peshawari slipper.

Paul Smith has come up with a fabulous new design for shoes, check them out. They call them the ‘Robert Sandals’ and you can buy them here online for GBP 300.

Source: Paul Smith website

Except oops, wait a second, this isn’t an original design by Paul Smith!

They are in fact Peshawari chappals (slippers) that have been made and sold in Pakistan for the last, oh, 200 years?

Here is a fine example of the Peshawari chappal from Zalmay, a Peshawar shoe store. They make these shoes to sell abroad, given the price in GBP, 27 pounds. Zalmay doesn’t have a monopoly on this design either – it is ubiquitous. But I bet all the shoemakers in Pakistan are wishing they’d applied a trademark to this design right about now…

Source: Zalmay

It’s true that fashion designers have been inspired by different cultures and traditions throughout time.  But it is important to acknowledge the source of the inspiration which Paul Smith can easily do by noting that the design of the Robert Sandal is not original but in fact worn by Pashtun men all over Pakistan. You couldn’t exactly call it intellectual property but at least credit would have been given where credit was due.

Even more ethical would be for Paul Smith to work with local shoemakers to source the shoes directly from Pakistan. It would also have boosted the local economy and could have been a great example of British-Pakistani cooperation in trade.

Still, though, when this has been done in the past, local craftspeople get paid a pittance for their work – in India, sometimes less than 100 rupees a day, where the Kohlapuri chappal has been similarly claimed by western fashion designers.

In the same vein, western companies have also patented basmati rice and turmeric in order to turn huge profits because of these items’ popularity and possible health benefits for developed nations.

There’s nothing wrong with appreciating what we produce indigenously or even wearing it out of admiration for its beauty. But we in Pakistan need to learn to protect our local customs, traditions and products from being exploited by those who claim that nothing good can come of our culture. They cannibalise the best of it in order to make money and nothing good can come of that for us at all.

You may call it a Paul Smith original or a Peshawari chappal, but you know what I call it?

Cultural appropriation.

Or, in layman’s terms, ‘stealing our cultural icons and pretending that you came up with them for huge profits without acknowledging, or renumerating, the source, or inspiration, of your design’.

Sharp gains: Rupee strengthens swiftly in sentiment-driven rally

An inflow of investment in fiscal year 2013-14 also helped shift market sentiments in favour of the rupee. PHOTO: FILE

KARACHI: 

Word on McLeod Road has it that the dollar is going to sell at Rs100 by the end of the current fiscal year in June.

If recent movement in the foreign exchange market is anything to go by, the idea of the rupee-dollar parity reaching Rs98 seems quite plausible.

After all, strengthening from Rs108.31 a dollar on November 28, the rupee-dollar parity now stands at Rs102.37 in the interbank market, which reflects a substantial 5.4% gain over just 14 weeks.

Moreover, the rupee has gained 2.78% against the greenback during the last one month alone.

So what’s causing the gains although fundamentals of the economy – such as the current account deficit, low foreign exchange reserves, etc – remain largely the same?

Speaking to The Express Tribune, Standard Chartered Bank Senior Economist Sayem Ali said the rally is driven more by sentiments, as macros remain largely weak.

“Sentiments have shifted due to positive IMF staff reviews, expectations of significant aid and investment inflows in 2014, and interventions by the State Bank of Pakistan (SBP) through the forward/swap market,” Ali said.

Foreign currency reserves held by the SBP stood at $3.92 billion on February 28, up 1.29% from the preceding week, according to latest data released by the central bank. These reserves give an import cover for only 1.1 months.

“Importantly, oil import payments, which account for roughly 40% of total imports, have now been moved out of the interbank and are instead being paid from FE25 loans,” Ali said while referring to the trade loan facility for exporters and importers, which is essentially a deferred payment.

No wonder, these measures have helped reduce the demand for the dollar in the interbank, thus bringing down the value of the greenback against the rupee.

An inflow of investment in fiscal year 2013-14 also helped shift market sentiments in favour of the rupee. According to the SBP, Pakistan received foreign direct investment (FDI) of $523 million in the first seven months of 2013-14. FDI amounted to $106.9 million in January alone.

Similarly, foreign portfolio investment (FPI) in January amounted to $31.5 million, which is 27% of the total FPI that the country has received in the first seven months of the current fiscal year.

In addition, the expected receipt of $550 million from the International Monetary Fund (IMF), along with the launch of Eurobonds amounting to $500 million likely next month, has also led to positivity in the foreign exchange market.

Ali said most exporters now prefer to book forwards at the prevailing rate in anticipation of a lower currency exchange rate three months down the line. Similarly, importers are staying away from booking forwards in anticipation of a further appreciation in the value of the rupee against the dollar in the next three months, he added.

As per the law, exporters must surrender dollars within 130 days. Typically, they hold on to foreign currency for that period hoping to sell at a higher exchange rate.

According to Exchange Companies Association of Pakistan Chairman Malik Bostan, the dollar is expected to be at Rs100 in the next few months. While appreciation of the rupee will contain inflation, a stronger currency will inevitably make exports less competitive.

“Hence, a widening trade gap will put more pressure on foreign exchange reserves, forcing the SBP to readjust the rupee to equilibrium levels,” Ali noted

Plant disease poses threat to wheat crop

USAID has launched Wheat Productivity Enhancement Project to strengthen rust surveillance and facilitate synergies. PHOTO:FILE

ISLAMABAD: 

A plant disease present in Iran may destroy 50% of wheat crop if it reaches here and the US has introduced two varieties that will resist this threat to ensure food security in Pakistan, says Ian C Winborne, Plant Health Adviser of US Department of Agriculture’s (USDA) Animal Plant Health Inspection Service.

“Ug99 (fungal disease) is a looming threat to Pakistan and may kill 50% of wheat crop leading to food crisis if it is transferred from Iran,” he said in an interview with The Express Tribune.

The disease has come from Uganda (Africa) and Middle East. “With the collaboration of US and Pakistan scientists, we have helped introduce two varieties – Narc 2011 and Pak-13 – to resist the disease attack on wheat crop,” he said.

The US has helped enhance productivity of wheat in a bid to increase production and income of small farmers to fend off the threat of food crisis. “We have brought a lot of varieties to test for high yield and resist diseases,” he said.

A new surveillance system has been put in place to monitor the disease. US Agency for International Development (USAID) has launched Wheat Productivity Enhancement Project in an effort to strengthen rust surveillance and facilitate synergies between Pakistan and international surveillance efforts.

It has also helped conduct pre-breeding to develop and test rust-resistant, high-performance wheat varieties. It has established a scientist exchange programme to create linkages between the US and Pakistan and build technical capacity.

According to Winborne, the US is helping Pakistan in spending money, allocated under the Kerry-Lugar bill, in several areas of the agriculture sector.

Dairy, cotton production

He saw great potential in the dairy sector as Pakistan was one of the top milk producing countries. “We expect to see development of a village-based dairy system in this country, which seems to be a rapidly growing market of the world,” he said, suggesting that an increase in food production was critical for food security.

Turning to cotton, Winborne said the US had launched the Cotton Productivity Enhancement Programme to mitigate the impact of Cotton Leaf Curl Virus on small farmers. The virus infection varies from year to year and annual yield loss may range from 10% to 40%. Over 3,000 cotton varieties have been imported from the US and planted here to test for virus resistance. Of these, 15 have been selected as having the potential to avert disease attack, which he termed a great success.

“We are also working with Pakistan’s agriculture institutes on different projects to demonstrate practices and technologies that can help rural farmers to more efficiently capture, store and use water for irrigation and reduce the loss of water and soil,” he added.

Insecurities: PM’s visit reignites hope in auto-industry turnaround

Prime Minister Nawaz Sharif (C) is given a tour of the Pakistan Association of Automative Parts and Accessories Manufacturers Show at the Lahore Expo Centre on Thursday. PHOTO: APP

KARACHI: 

Despite government’s apparent confusion over the upcoming auto policy, the industry has pinned its hope on Prime Minister Nawaz Sharif’s wish to see a ‘Made in Pakistan’ car, expecting to get some incentives.

The local auto industry partly succeeded in getting the attention of the prime minister, who inaugurated the Pakistan Auto Show 2014 in Lahore on Thursday. However, it failed to get any promise from him on the two biggest issues of the industry — a blanket ban on imported used cars and the issue of liberalising trade with India.

Nevertheless, the prime minister’s directive to the government officials to immediately sit with the industry officials and chalk out the future policy has given hope to the local industry. “We are hopeful of getting government support including the national car policy that the prime minister indicated in his speech at the Pakistan Auto Show 2014,” said Pakistan Association of Automotive Parts and Accessories Manufacturers (Paapam) Chairman Usman Malik.

Malik, who represents over 2,800 industrial units that produce auto parts, is confident that the prime minister’s directive to the government officials would bring some policy changes. “We’re especially looking forward for the national car policy as it will support the local manufacturing and assembling industry,” he added.

Auto assemblers say their fate hangs in the balance owing to the uncertainty in policies especially on liberal trade with India and the country’s import policy of used cars.

Automobile analysts say that the unusual delay in the announcement of the Auto Industry Development Programme II (AIDP II) suggests that the government is facing problems in dispelling the pressures of the two competitors: carmakers and car importers.

“The government seems confused over the much-awaited AIDP II, which is why it has taken several months in announcing it,” said JS Global Capital analyst Atif Zafar. “It is certainly under pressure from carmakers and car importers who have considerable influence in government circles.”

The delay in auto policy has fuelled speculations. Some say the policy will increase the age-limit for used cars from the current three years to five years, while others say the government may give some incentives to the car assemblers.

Another headache for the auto industry is its clear divisions on the issue of the trade with India. While the only representative of auto parts’ makers, Paapam, is dead set against the liberal trade with India, Pak Suzuki – country’s largest carmaker – is openly supporting the cause.

Pak Suzuki seems more enthusiastic unlike the other two carmakers – Honda Atlas Motors and Indus Motors – because of Suzuki Maruti, an affiliate of Suzuki Japan with over 50% market share in India from where it can import cheap parts for its cars in Pakistan.

Zafar believes the auto part makers in Pakistan are more vulnerable to liberal trade with India compared to the local car assemblers.

“In case Pakistan and India start trading, the likelihood of Pakistan importing car parts is much higher than the import of Indian cars. This is why Pakistani car part makers are more exposed to competition,” he added.

Former Paapam chairman Syed Nabeel Hashmi said that auto part makers just need an assurance from the government that a liberal trade regime with India will not hurt their interests.

Ronaldo beats Messi to top the Goal Rich List 2014

The Real Madrid star takes over from retired 2013 winner David Beckham at the top of our index, with Samuel Eto'o, Wayne Rooney and Kaka rounding off the top five

Cristiano Ronaldo has been named the world's richest footballer after topping the annual list of players' net worth compiled by Goal.

The Real Madrid superstar held off Barcelona rival Lionel Messi in the Goal Rich List 2014 with an estimated wealth of €148 million.

The Goal Rich List is collated by a team of analysts and takes into account all streams of revenue for active footballers over the course of their careers. 

Ronaldo succeeds David Beckham, who led the way on the 2013 list but called time on his playing career last May. 

Only current professionals are eligible with the earnings of more than 200 contenders assessed before Goal's experts finalised the top 10.  

Ronaldo has enjoyed a remarkable 12 months in which his value to club and country has never been more evident.

He scored all four goals as Portugal beat Sweden in the World Cup play-offs, landed the 2013 Ballon d'Or and signed a record-breaking new five-year deal with Madrid.

Messi came in second after inspiring Barcelona to the Spanish title and signing up for a range of lucrative endorsements. It was a mixed year for the Argentinian, however, who appeared in a Spanish court in September to testify over alleged tax fraud relating to commercial contracts and lost his grip on the Ballon d'Or after a year blighted by injuries.

Wayne Rooney makes the top four on the list following Manchester United's decision to offer him the biggest contract in British football history, worth €365,000 a week. 

Neymar's controversial transfer to Barcelona sees him rocket up the standings to sixth, with his parents' €40m 'compensation' payment included Goal's figures due to its game-changing significance. 

The rest of the list is made up of global superstars, who have accrued huge wealth over significant spells at the top of the professional game.

Samuel Eto'o is at number three, ahead of Rooney, thanks largely to the millions he earned at Russian club Anzhi Makhachkala, with Kaka, Ronaldinho, Zlatan Ibrahimovic, Gianluigi Buffon and Thierry Henry completing the top 10.

Click here to view the full Goal Rich List 2014