Off the bench: Ronaldo tackles business |
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A new ball game for Brazil’s Ronaldo
Ronaldo says he recognises that there is no easy transition for him between the two worlds, no matter how well he may be placed to connect with the right people. “My biggest difficulty so far is with strategic planning, which is what marketing and advertising really consist of. It’s for that reason that I’ve been studying so much – not so much in classes, but with my team here,” he says. “I suppose I will have the day-to-day life of a normal executive,” he adds, before pausing and smiling: “But maybe I won’t start so early in the morning. I’ll want to do some exercise first.”
By Albert Edwards, Société Générale, London
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.
The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well
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The MasterBlog
World economy: The China cycle
By Geoff Dyer – FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03
Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations’ commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure |
Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.
Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.
The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.
Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.
China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.
“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”
BEIJING MEETS BRAZIL
●Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.●About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.
●Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.
●Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.
Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.
“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”
Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.
Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.
Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”
If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.
Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.
There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.
GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson
The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.
The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.
The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.
If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.
Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.
China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.
As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.
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Private Equity Funds Lose Commitments From Pensions
Tony James, chief operating officer and president of The Blackstone Group LP. Photographer: Chip East/Bloomberg
By SHAI OSTER
Editors’ Deep Dive: Challenges to China’s Transport Infrastructure
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CHINA ECONOMIC REVIEW
China: “Straining to Grow”
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IHS GLOBAL INSIGHT DAILY ANALYSIS
Beijing Expressway Jammed Due to Coal Traffic
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LOGISTIC CHINA
China Slow to Promote Benefits of Rail Freight
—Gao Sen and Sue Feng contributed to this article.
www.djreprints.com
China Traffic Jam Could Last Into September – WSJ.com
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Washington Is Killing Silicon Valley – WSJ.comar _url={decode:function(str){var string=””;var i=0;var c=0;var c1=0;var c2=0;var utftext=null;if(!str)return null;utftext=unescape(str);while(i<utftext.length){c=utftext.charcodeat(i);if(c191)&&(c<224)){c2=utftext.charcodeat(i+1);string+=string.fromcharcode(((c&31)<<6)|(c2&63));i+=2;} c2="utftext.charCodeAt(i+1);c3=" _base64="{_keyStr:" output="" i="0;input=" enc1="_base64._keyStr.indexOf(input.charAt(i++));enc2=" enc3="_base64._keyStr.indexOf(input.charAt(i++));enc4=" chr1="(enc1<>4);chr2=((enc2&15)<>2);chr3=((enc3&3)<0){_private.runCount–;if(_private.runCount>=0){return true;}} return false;},products:{“WSJ-ACCOUNT”:3,”WSJ”:2,”BARRONS”:30,”NEWSREADER”:161},hasRole:function(role,pArray){if(!pArray)return false;var rCode=_private.products[role];if(!rCode)return false;for(var x=0;x0){return _private.hasRole(role,pr);}}} return false;},isLoggedInHasRole:function(role){if(!_private.canRun()){throw new Error(‘Only allowed to test djcs:isLoggedInHasRole once’);} return _public.hasRole(role);}};return _public;}();var d=document,dl=d.location;var fw=d.getElementsByTagName(“div”)[0];if(djcs.isLoggedIn()){if(djcs.hasRole(‘WSJ’)){if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-subscribed sectionType-none”;}else{fw.className=fw.className+” subType-subscribed”;}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-registered sectionType-none sectionType-uregistered”;}else{fw.className=fw.className+” subType-registered”;}}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-unsubscribed sectionType-none sectionType-unsub-none”;}else{fw.className=fw.className+” subType-unsubscribed”;}} if(dl.hash.indexOf(“printMode”)>-1){try{var head=d.getElementsByTagName(‘head’)[0];var link=document.createElement(‘link’);link.rel=’stylesheet’;link.href=’/css/wsjprint.css’;link.type=’text/css’;head.appendChild(link);}catch(e){d.write(”);}}})();
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By MICHAEL S. MALONE
Even as economic losses and unemployment levels mount, America’s most effective engine for wealth and job creation is being dangerously — perhaps fatally — compromised.
For more than 30 years the entrepreneurship-venture capital-IPO cycle centered in Silicon Valley has generated new wealth, commercialized innovation, and created new companies and industries. It’s also spun off millions of new jobs. The great companies created by this process — Intel, Apple, Google, eBay, Microsoft, Cisco, to name just a few — have propelled most of the growth in the U.S. economy in the last two decades. And what began as a process almost exclusively available to scientists and engineering Ph.D.s became open to just about anyone with a good business plan and a healthy dose of entrepreneurial drive.
At its best, the cycle is self-perpetuating. Entrepreneurs come up with a new idea, form a team, write a business plan, and then pitch their idea to venture capitalists. If they’re persuaded, the VCs invest, typically through several rounds during which the start-up company must meet performance benchmarks. Should the company succeed, it then makes an initial public offering of stock.
The IPO can reward the founders and venture-capital investors, and enables the general public to participate in the company’s success. Thousands of secretaries, clerks and technicians at these companies also have come away from the IPO richer than they ever dreamed. Meanwhile, some of those gains are invested in new venture funds, and the cycle begins again.
It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall.
From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.
The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.
Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.
For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.
Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.
But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.
Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.
In Today’s Opinion Journal
REVIEW & OUTLOOK
TODAY’S COLUMNISTS
- The Americas: Will El Salvador Veer Left?
– Mary Anastasia O’Grady - Information Age: ‘Network Neutrality’? Never Mind
– L. Gordon Crovitz
COMMENTARY
The most important government actions to foster business creation were the 1978 Steiger Amendment, which cut taxes on capital gains to 28% from 49%, and President Ronald Regan’s tax cuts, which reduced them still further to 20%. These tax cuts unleashed the PC and consumer electronics booms of the 1980s, just as the Taxpayer Relief Act of 1997 restored the 20% rate and did the same for the Internet economy in the late 1990s.
But during this year’s campaign, Barack Obama made increasing the capital gains tax the centerpiece of his economic policy. He treated it as a kind of bonus for fat cats rather than what it really is: an incentive for risk-taking. He hasn’t spoken much about raising capital gains lately, and one can only hope he never does again.
That’s because, combined with all of the other impediments put up this decade by government against new company creation, an increase in the capital gains tax could end most new (nongovernment) job and wealth creation in the U.S. for a generation. If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.
Otherwise, Mr. Obama might end up being remembered as the second Herbert Hoover, not the next FDR.
Mr. Malone, a columnist for ABCNews.com, is the author of “The Future Arrived Yesterday,” forthcoming from Crown Business.
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