Yuan depegging long-term positive

June 21, 2010 By Leave a Comment

(Reuters) – China’s decision to end the yuan’s nearly two-year peg against the dollar will boost its stock market heavyweights, as it heralds a long-term yuan appreciation based on robust productivity growth and aids an economic adjustment toward less reliance on exports.

China

All major sectors in China’s stock market — from airlines and banks to property and investment firms — are set to gain in the short or long term. Assets of Chinese companies, almost exclusively denominated in the yuan, stand to appreciate along with the value of the currency.

Exporters will be the main losers as they will find it more difficult to sell outside China.

But that may not be bad news for the economy as Beijing adjusts its economic mix to become less reliant on exports. Foreign trade, both exports and imports, typically accounted for two-thirds of gross domestic product until the peak of the global financial crisis in 2008.

Exporters are no longer the mainstream stock market sector and the impact of losses in such stocks will have only a limited impact on the overall market.

“The yuan’s appreciation is an indisputable trend in the long run, and it will be a great boost to China’s stock market by helping to improve China’s economic structure,” said Cao Xuefeng, senior analyst at Western Securities in Chengdu.

“Weak global economies and China’s rising costs of labor mean China will no longer be able to rely on exports as its engine for growth. Consequently, domestically focused companies, such as banks and investment firms, will be favored.”

Shares in China’s top three airlines — Air China, China Eastern and China Southern — are expected to rise in the short term due to cost reductions, as their main operating costs are aircraft purchases overseas.

LARGE-CAPS

Banks, such as Industrial and Commercial Bank of China, the world’s biggest bank by assets, are seen rising in the medium term as their huge volume of yuan assets will appreciate in line with the rise in the currency. Land and property stocks will benefit from expectations of yuan appreciation in the long run.

The yuan reform could therefore be a pleasant surprise for foreign firms, such as Standard Chartered Bank, which plans to tie up with Agricultural Bank of China as China’s third-largest bank prepares for an initial public equity offer in Shanghai and Hong Kong this month.

Other winning sectors include heavy importers of raw materials, such as paper makers, and investment firms, which will get a boost from government moves to boost domestic consumption to compensate for the smaller portion of exports in the economy.

But the boost to the stock market will likely be gradual, as China will control the pace of appreciation in the near term to deter speculative “hot money” inflows betting on the yuan’s rise.

The spot yuan rate is expected to move in narrow daily ranges of at most 50 pips in the coming weeks, if not months. That will still be much larger than movements of one or two pips a day since July 2008, when China repegged the yuan to the dollar to soften the impact of the global financial crisis on its economy.

Cumulatively, the yuan can be expected to appreciate 3 percent in about six months and 5 to 6 percent in a year, in line with the progress of China’s economic growth. These levels are not enough to push the value of major Chinese companies, such as banks, sharply higher during those periods.

The Chinese stock market’s benchmark Shanghai Composite Index, which has moved in a narrow range between 2,500 and 2,600 points since the start of this month, may not be able to break out of that band soon. Sentiment has been weakened by official steps to cool the property market and worries that the euro zone debt crisis will slow the economic recovery.

“The initial impact of the yuan reform will be limited as everybody in this market knows the process will be gradual,” said Qian Qimin, analyst at Shenyin & Wanguo Securities in Shanghai.

“The market will largely move in line with developments in other factors, such as the government’s property cooling steps, until yuan appreciation has reached a degree where it has a big enough impact on the overall economy.”

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U.S. Q1 productivity growth revised to 2.8 pct

June 4, 2010 By Leave a Comment

June 3 (Reuters) – U.S. non-farm productivity growth was much slower than initially estimated in the first quarter, government data showed on Thursday, as businesses started adding workers to maintain output.

Global Markets

The Labor Department said non-farm productivity rose at a 2.8 percent annual rate, instead of the previously reported 3.6 percent pace. It was the smallest advance in a year, following a 6.3 percent growth pace in the fourth quarter.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 3.4 percent rate in the January-March period.

Following a rapid expansion in the previous three quarters as businesses squeezed more output from a small group of workers, productivity is slowing down and analysts expect the trend to continue as companies increase payrolls.

Some companies have held off hiring new workers, opting instead to add hours for the existing workforce, but analysts believe this policy cannot be adopted indefinitely.

The economy grew at an annual pace of 3.0 percent in the first quarter, slowing from a 5.6 percent rate in the fourth quarter.

Total non-farm output grew at a 4.0 percent rate in the January-March period, rather than the 4.4 percent pace previously reported, after a robust 7.0 percent pace in the fourth quarter, the Labor Department said.

Hours worked increased at a 1.1 percent rate, instead of 0.8 percent. The increase in hours was the highest since the second quarter of 2007 and marked an acceleration from the 0.7 percent pace in the fourth quarter.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a less steep1.3 percent rather than 1.6 percent. That follows a 7.8 percent drop in the fourth quarter.

Analysts had expected unit labor costs to fall 1.4 percent in the first quarter.

Weak unit labor costs still pointed to muted inflation pressures and augur well for the U.S. central bank’s pledge to keep benchmark interest rates low for an extended period (Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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Diversify or die: economists warn on mining dependence

March 25, 2010 By Leave a Comment

The Finance Minister, Lindsay Tanner, has warned that Australia needs to reduce its reliance on mining by revitalising other export industries.

He told ABC local radio that he was worried that a former expansion in tourism, education and wine exports had gone into reverse.

Lindsay Tanner was asked whether Australia’s economy is too dependent on China. This is what he said:

“I wouldn’t so much say China but I would say that we do need to reinvigorate the breadth of our exports,” he told ABC radio 774 in Melbourne.

“We have had a worrying period over the past decade or so where the diversification of our exports in the ’90s kind of stagnated.

“So we had a huge growth in tourism, in education, in specialised manufacturing, in wine, in pharmaceuticals – all kinds of things that helped us to diminish our enormous reliance on minerals, and that’s kind of almost gone into reverse in recent times.

“So it’s not so much that there’s one country that we’re dependent on. It’s that we have I think to some extent too many eggs in that basket.”

The Finance Minister says Australia needs to diversify its exports.

“Minerals are always going to be critical for Australia. There’s no question about that,” he added.

“But our strategy of improving infrastructure and skills and lifting out productivity very much has in mind the need to revive our performance in some of our other exports which have been languishing.”

Dollar damage

What the Finance Minister did not say is that the decline in the export industries that boomed in the 1990s has gone hand in hand with the boom in mining.

“One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education,” said Saul Eslake, the director of the Productivity Growth Program at the Grattan Institute, a policy think tank affiliated with Melbourne University.

“Although the mining industry is generating a lot of prosperity for Australians at the moment, and will do in the foreseeable future, nonetheless the mining industry can’t possibly guarantee prosperity for the vast majority of Australians given that it accounts for less than 3 per cent of total employment.”

Warren Hogan succeeded Saul Eslake as chief economist at the ANZ Bank and he shares his concerns.

“Our real effective exchange rate is at a 30 year high, and this, of course, is a major constraint strategically on this economy,” he explained.

“When you have a commodity boom that drives up your currency because you’re seeing certain of your exports go up in price it puts pressure on other sectors.

“Manufacturing but, I think more importantly in Australia’s case, I’m worried about tourism and I’m worried about education exports. This is the classic Dutch disease. And you know I don’t think many Australians would be happy to think that all we sell is iron ore and coal.”

The term Dutch disease was coined in the 1970s. It described the effect of a huge natural gas reserve discovered in the 1950s which drove up the currency and killed Dutch manufacturing.

It has become synonymous with mineral booms that destroy other export sectors, and it is a real risk for Australia.

“The mining boom, though it may well go on for more than a decade, isn’t going to go on indefinitely any more than previous mining booms have,” Mr Eslake added.

“Future generations of Australians are going to look for other sectors of the economy for their employment prospects long after this present mining boom has come to an end.”

The danger is they will no longer be there by the time the mining boom ends and the currency edges lower.

Industry policy revival?

Frank Gelber, the chief economist with forecasting firm BIS Shrapnel told PM last week that, without intervention, Australia risks becoming a quarry.

“We’re running down the rest of the economy. We’re specialising in minerals, and this is all very nice when we’ve got very high minerals prices and very strong demand,” he said.

“But minerals prices don’t always boom and demand isn’t always strong. The lessons of the last 50 years should have taught us that.”

He is calling on the Federal Government to resurrect unfashionable ideas such as industry policy to help other sectors survive.

“What we need to do is to try to impede the demise of the other tradables industries. Does it mean some sort of an industry policy again? Yes it does.”

However, that concept is anathema to the Department of Treasury.

Back in 2006 the Treasury Secretary, Ken Henry, predicted a commodities super cycle lasting up to 50 years.

He said it would see capital labour relocate to the mining states, enriching those areas and stripping wealth from others, and government policy should be judged on whether or not it backed the trend.

“Proposals that seek to resist the changes should themselves be resisted,” Dr Henry said.

Lindsay Tanner is not talking about resisting the mining boom, and he is not using the phrase “industry policy”.

But if the government wants to maintain a diverse economy and a diverse export base it will have to start asking some hard policy questions, and it may have to buck the Treasury line.

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Australia too reliant on resources: Tanner

March 24, 2010 By Leave a Comment

The Federal Finance Minister says Australia has become too reliant on resources and needs to expand its export base.

Lindsay Tanner says there has been a “worrying period” over the last decade where resources have increased their domination of Australia’s exports.

Lindsay Tanner says the 1990s saw great diversification, with strong exports across a range of sectors, and he says there needs to be a return to that kind of diversification.

“We had a huge growth in tourism, in education, in specialised manufacturing, in wine, in pharmaceuticals that helped us to diminish our enormous reliance on minerals,” he told ABC radio 774 in Melbourne.

“That’s kind of almost gone into reverse in recent times. So it’s not so much that there’s one country that we’re dependent on, it’s that we have, I think to some extent, too many eggs in that basket.”

Mr Tanner says Australia’s future prosperity should not be pinned to one industry, and the Government is looking at ways to boost productivity in other sectors.

“Minerals are always going to be critical for Australia, there’s no question about that,” he added.

“But our strategy of improving infrastructure and skills and lifting our productivity very much has in mind the need to revive our performance in some of our other aspects which have been languishing and, also, to strengthen newer areas like financial services.”

Mining can’t guarantee prosperity

One of Australia’s leading economists says he has some sympathy with Mr Tanner’s view.

The Grattan Institute’s program director for productivity growth Saul Eslake says, while the mining boom certainly has contributed to wealth creation and an increase in tax revenues, it also has some negative side-effects.

He says the recent boom in mining activity may actually be damaging some of the sectors of the economy that Lindsay Tanner wants to revive.

“The mining industry can’t possibly guarantee prosperity for the vast majority of Australians, given that it accounts for less than 3 per cent of total employment,” Mr Eslake told ABC News Online.

“One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education, most of which employ considerably more Australians than the mining industry does.”

He says the currency impacts will be exacerbated by wage pressures as Australia’s economy nears full-employment again.

“Growth in demand from the mining sector could well put upward pressure on wages in other sectors of the economy contributing, in the context of a strong exchange rate, to a further squeeze on the profitability of employers in other parts of the economy and thus diminishing the viability of those industries.”

Mr Eslake says, while the damage to those other industries could be long-lasting, the current mining boom has a finite lifespan.

The danger is that, when the mining boom does come to an end, there will be few other internationally competitive export industries left standing to provide employment alternatives.

“The mining boom, though it may well go on for more than a decade, isn’t going to go on indefinitely any more than previous mining booms have, and future generations of Australians are going to look for other sectors of the economy for their employment prospects long after this present mining boom has come to an end,” he noted.

Mr Eslake says a resource rent charge is likely to be one tax canvassed by the Henry Review, which is due to be released before the Federal Budget is handed down in May.

He says, while the Government would not want to actively constrain the mining sector, shifting the tax burden to those resources companies that are highly profitable by introducing a resource rent tax to replace the current mining duties would make sense.

“There are reasonable arguments for moving away from a production based system of taxing the mining industry, one which takes no account of the profitability of individual mine ventures, to one which allows the community to share in high prices as well as increased volumes of production of mineral resources, whilst also ensuring that in periods when commodity prices are very low mining companies are not punitively taxed.”

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