Expert: China Controls Future of U.S. Dollar

China will shy away from the dollar, causing a collapse for the U.S. currency, predicts Andy Xie, an independent economist who was formerly chief Asia Pacific economist for Morgan Stanley.
The U.S. government’s move to inflate itself out of recession is “pushing China towards developing an alternative financial system,” Xie writes in the Financial Times.
“For the past two decades China’s entry into the global economy rested [partly] on … pegging the renminbi to the dollar,” he explains.
“The dollar peg allowed China to leverage the U.S. financial system for its international needs, while domestic finance remained state-controlled.”
Xie writes, “This dual approach has worked remarkably well. China could have its cake and eat it too.”
But China knows it must one day become independent of the dollar.
“Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system,” Xie explains.
“The year 2020 seems remote,” he points out.
“However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a…market-based financial system.”
Result: “The dollar will collapse,” Xie says.
Others don’t expect the dollar to go away so quickly. China recently proposed that the IMF’s special drawing right replace the dollar as the world’s reserve currency.

Barclays and Lloyds reveal steep rise in bad debts

Barclays and Lloyds Banking Group both warned today that bad debt write downs are set to soar over 2009, blaming poor economic conditions for the surprise rise in impairment charges.
In a trading statement for the three months to March 31, Barclays said impairment charges had increased by 79 per cent to £2.3 billion. However, it said strong growth from its investment bank, including the newly acquired Lehman Brothers in New York, resulted in a 15 per cent rise in first quarter profits to £1.19 billion, offsetting a 45 per cent fall in income from its retail and commercial lending arms.
Lloyds, which is now part-owned by the taxpayer, warned that falling commercial property values, the recession and rising unemployment meant it had seen "significant rise in impairment levels in its lending portfolios"
Eric Daniels, chief executive of Lloyds, said bad debt and corporate defaults by clients, particularly property developers who were former customers of HBOS, which it rescued last year following Government intervention, would be even worse during this year as a whole.
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It announced that corporate impairments for the year would be more than 50 per cent higher in 2009 than last year. In February, Lloyds shocked investors when it revealed that it would have to take a £10 billion hit from soured loans at HBOS.
However, Mr Daniels pointed out that much of the mounting bad debt would be taken on by the taxpayer after Lloyds' outline agreement last month to join the Government Asset Protection Scheme.
This will see Lloyds transfer £260 billion worth of its worst loans to the Government. Lloyds will only bear the first losses on these loans of up to £25 billion, with any further write downs being taken by the taxpayer.
Lloyds also warned that its insurance businesses Clerical Medical and Scottish Widows would take a £700 million hit in the quarter as the value of its corporate bond and equity investments collapsed.
Royal Bank of Scotland issues a trading update tomorrow, its first since unveiling a £28 billion loss, the biggest in British corporate history earlier this year.
Barclays chief executive John Varley said trading since in April had "been generally consistent with the overall trend for February and March after an exceptional January." But he also warned that the proportion of loans written down in the full year would be at the upper end of his earlier indicated range of 1.3 per cent to 1.5 per cent.
He reiterated his intention to pay a cash dividend in the first quarter of next year for the 2009 year but warned that it would be a far lower proportion of the bank's total profit than the 50 per cent the bank had been paying out during the boom years.

How We Tested the Big Banks

THIS afternoon, Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve will announce the results of an unprecedented review of the capital position of the nation’s largest banks. This will be an important step forward in President Obama’s program to help repair the financial system, restore the flow of credit and put our nation on the path to economic recovery.
The president came into office facing a deep recession and a damaged financial system. Credit had dried up, forcing businesses to lay off workers and defer investment. Families were finding it difficult to borrow to finance a new house, buy a car or pay college tuition. Without action to restore lending, we faced the prospect of a much deeper and longer recession.
President Obama confronted these problems with dramatic action to address the housing crisis and to restart credit markets that are responsible for roughly half of all business and consumer lending. The administration also initiated a program to provide a market for legacy loans and securities to help cleanse bank balance sheets. These programs are helping to repair lending channels that do not rely on banks, and will contribute to fixing the banking system itself.
However, the banking system has also needed a more direct and forceful response. Actions by Congress and the Bush administration last fall helped bring tentative stability. But when President Obama was sworn into office in January, confidence in America’s banking system remained low.
Because of concern about future losses, and the limited transparency of bank balance sheets, banks were unable to raise equity and found it difficult to borrow without government guarantees. And they were pulling back on lending to protect themselves against the possibility of a worsening recession. As a result, the economy was deprived of credit, and this caused severe damage to confidence and slowed economic activity.
We could have left this problem as we found it and hoped that, over time, banks would earn their way out of the mistakes they had made. Instead, we chose a strategy to lift the fog of uncertainty over bank balance sheets and to help ensure that the major banks, individually and collectively, had the capital to continue lending even in a worse than expected recession.
We brought together bank supervisors to undertake an exceptional assessment of the strength of our nation’s 19 largest banks. The object was to estimate potential future losses, and ensure that banks had enough capital to keep lending even in the face of a deeper recession.
Some might argue that this testing was overly punitive, while others might claim it could understate the potential need for additional capital. The test designed by the Federal Reserve and the supervisors sought to strike the right balance.
The Federal Reserve marshaled hundreds of supervisors to spend 45 days rigorously reviewing the banks’ detailed loan data. They applied exacting estimates of potential losses over two years, along with conservative estimates of potential earnings over the same period, and compared them with existing reserves and capital. The results were then evaluated against strict minimum capital standards, in terms of both overall capital and tangible common equity.
The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses. It will also bring more private capital into the financial system, increasing the capacity for future lending; allow investors to differentiate more clearly among banks; and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government.
The test results will indicate that some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios. These banks have a range of options to raise capital over six months, including new common equity offerings and the conversion of other forms of capital into common equity. As part of this process, banks will continue to restructure, selling non-core businesses to raise capital. Indeed, we have already seen banks, spurred on by the stress test, take significant steps in the first quarter to raise capital, sell assets and strengthen their capital positions. Over time, our financial system should emerge stronger and less prone to excess.
Banks will also have the opportunity to request additional capital from the government through Treasury’s Capital Assistance Program. Treasury is providing this backstop so that markets can have confidence that we will maintain sufficient capital in the financial system. For institutions in which the federal government becomes a common shareholder, we will seek to maximize value for taxpayers and enable these companies to attract private capital, thereby reducing government ownership as quickly as possible.
Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without F.D.I.C. guarantees. In fact, we expect banks to repay more than the $25 billion initially estimated. This will free up resources to help support community banks, encourage small-business lending and help repair and restart the securities markets.
This crisis built up over years, and the financial system needs more time to adjust. But the president’s program, alongside actions by the Federal Reserve and the F.D.I.C., is already helping to bring down credit risk premiums. Mortgage interest rates are at historic lows, putting more money in the hands of homeowners and helping slow the decline in housing prices. Companies are finding it easier to issue new debt to finance investment. The cost of borrowing for municipal governments has fallen significantly. Issuance of securities backed by consumer and auto loans is increasing, and the interest rates on these securities are falling. The Federal Reserve reports that credit terms are now starting to ease a bit.
This is just a beginning, however. Our work is far from over. The cost of credit remains exceptionally high, and businesses and families across the country are still finding it too hard to borrow to meet their needs. We are continuing to execute our programs to relieve the burden of legacy assets, help small businesses and community banks, and tackle the mortgage and foreclosure crisis. The ultimate purpose of these programs is to ensure that the financial system supports rather than impedes economic recovery.

Is the economy recovering?

‘Pakistan is one of the few countries that enjoys more macroeconomic stability today than it did on September 14, the day before the bankruptcy of Lehman Brothers turned the world upside down. In those prelapsarian days, Pakistan’s currency was tumbling; its foreign exchange reserves covered barely two months of imports; and the cost of insuring its sovereign debt against default was almost 1000 basis points (10 per cent ),’ wrote The Economist in its issue of April 25.

The situation has improved considerably since those very difficult days. Foreign exchange reserves (with the State Bank of Pakistan) have climbed significantly, recovering from a low of $3.5 billion on October 31, 2008 to $7.8 billion on April 17, 2009.

Fiscal deficit was brought under control although not by raising revenues from inside the country but by drastically cutting development expenditure. Some structural reforms were put in place by removing subsidies on energy. Prices of agricultural products that are still fixed (support price) by the government were raised thus providing incentives to the producers but also reducing the burden on the state.

One consequence of this may be a bumper wheat crop this year. If that happens, the rate of GDP increase may not plunge to the level feared a few months ago. But is this trend sustainable? Will the recovery result in a significant revival of growth, increased employment, particularly for the poor; and, perhaps most important, return in investor confidence?

The answers to these two questions depend upon four factors: continuous availability of external finance, pace of recovery in the global economy, strategic moves by Islamabad to address some of the structural problems the country faces, and the government’s ability to bring the rise of extremism under control.

The Pakistani economic and finance team met with the Fund officials during the recently concluded spring meetings involving the IMF and the World Bank. The Fund, satisfied by the progress Islamabad had made in stabilising the economy, agreed to release the second tranche of its $7.6 billion assistance programme. The programme is to run for two years. There was some indication that the amount available to Pakistan could be increased somewhat if the country continues to proceed on the track it has been following.

Both the World Bank and the Asian Development Bank are interested in expanding their programmes, prepared to provide fast disturbing money as well as project aid. The successful outcome of the Tokyo meeting may provide the country with some additional resources from bilateral sources. However, the real issue over here is Pakistan’s ability to implement the programmes and execute the projects which interest the donors. This will need considerable amount of emphasis on building state institutions.

This brings me to the second question: Would the country’s economic recovery be helped by the recovery in the global economy? There are some faint signs that the global economy may have begun to recover and the recession may be bottoming out.

Pakistan’s economic problems were more the result of internal developments than the cause of the global downturn. That notwithstanding, sharp deterioration in the global economy had an unexpected impact on Pakistan. Most other emerging economies were hurt by the contraction in international trade. Pakistan, with a very small share in global trade, was not as deeply affected. But it was hurt in a different way. The credit squeeze that followed the problems in the banking sector resulted in a sharp decline in external capital flows to emerging markets.

In the case of Pakistan a significant amount of money came into the stock markets. Not only did the flow dry up, the investments that were made were liquidated and capital flew out of the country. Islamabad responded by putting a floor under the prices of individual scrips. This had the effect of suspending trading and further eroded the confidence of foreign players in the markets. It will take a long time for confidence to return.

There are a number of signs that suggest that improvements are taking place. The Economist, the British news magazine, tracks 42 stock markets and in the past six weeks their value has improved by 20 per cent. The slump in global manufacturing seems to be ending and some of the major economies are showing unexpected strength.

The Chinese economy has begun to respond to the large stimulus provided by the state by a sharp increase in infrastructure spending. The German industrial output appears to be reviving. Perhaps by far the most important development is the seeming revival of consumer confidence in America. In the data released on April 28, the index of consumer confidence in the United States touched an unexpected high level. The American consumer is important for the global economy, in particular for global trade.

Sounding less terrified than they were when they met six months ago at the annual meetings of the World Bank and the IMF, finance ministers representing the world’s richest countries, the G7, saw ‘signs of stabilisation’ in the global economy.

This time they had gathered for the spring meetings of the two institutions. According to Timothy F. Geithner, the US Treasury Secretary, ‘there are signs that the pace of deterioration in economic activity and trade flows has eased. These are encouraging signs, but it’s too early to say that the risks have receded.’ In a joint statement the G7 went further and predicted that economic activity should begin to edge up later in 2009, but it is too early to say that the risks have receded.

If Pakistan continues to recover, if the international environment continues to improve, would this set in an attitude of complacency that has overtaken the policymakers in the past whenever the end of a particular crisis became visible?

Foreign capital flows can only provide temporary relief. Foreign direct investment will only come back once foreign players develop confidence that the state has been able to establish its control over all parts of the population and all parts of the country. Sustainable growth can only be achieved if the country begins to raise resources from within the economy. This will need a significant increase in domestic savings rates and a sharp rise – by as much as 50 per cent – in the tax— to— GDP ratio. Both changes will happen only with the adoption of the right set of public policies.

As mentioned above, domestic and foreign investment will return only when there is confidence that the state has established control over extremist forces who, albeit, not very large in number, have managed to scare not only the people of Pakistan but the entire world. For that to happen Islamabad will need to show a combination of resolve as well as imagination. Resolve should aim at reestablishing the writ of the state in all parts of the country. Imagination should be directed at persuading people that the government will do what needs to be done in order for them to develop confidence in their future.

The worst may be over for the economy but sustaining the trend will need a great deal of hard work by the state. The political leadership will have to convince a worried and nervous population that it is up to the difficult task.

Saudi Arabia’s foreign assets continue to plunge

Foreign assets controlled by the Saudi Arabian Monetary Agency declined 2.8per cent, or about $11 billion, in March from a month earlier. The decline has accelerated from a 2per cent drop in February. Since November 2008, when the global economic got hold, oil rich Saudi Arabia has shed more than $31 billion in foreign assets.

Although Sama’s foreign assets rose by about 19 per cent in March from their level a year earlier, they were at their lowest level since July, 2008. The global financial crisis has battered global markets and oil prices have fallen around $100 from a record high near $150 in July last year, hitting both the revenues and the foreign holdings of the oil exporters too.

The boom in oil prices since 2002 has filled the kingdom’s coffers and made it one of the largest holders of US Treasury and other securities. But as the global economic downturn cramps its development plans and strains its financial system, the government has increased its support of the local economy, putting a strain on public finances.

Saudi Arabia injected SR31.4 billion in the fourth quarter of 2008 to support its financial system through a variety of measures including direct deposits into local banks.

The central bank also arranged deposits of SR17.9 billion by government-owned entities, which helped lower the local banks’ loan-to-deposit ratios and freed up lenders to extend credit to consumers and businesses in the kingdom.

Liquidity conditions have eased in Saudi Arabia this year, with the broadest measure of money supply growth inching up slightly to 15.8per cent in March. Saudi Arabia’s domestic liquidity has crossed SR1 trillion-mark, the Saudi Arabian Monetary Agency said in an earlier announcement.

Sama cut its reverse repo rate by 25 basis points to 0.5 per cent in mid-April, saying then the move was designed to realign the reverse repo with short-dated market rates, which have fallen to historic lows as liquidity conditions have improved and the need for interbank lending has diminished. According to Samba Financial Group’s Economic Monitor for April, banks’ non-statutory deposits with SAMA have risen sharply since the intensification of the global financial crisis in the third quarter of last year, reaching SR74 billion by end-February, up from virtually nothing in October 2008.

Simultaneously, banks have also reined in lending to the private sector: Year-on-year growth in lending remains strong, at around 17 per cent, but it has slowed sharply over the past six months, while month-to-month values have fallen.

Textile exports decline by 7.58 per cent

Textile exports during July-March (2008-09) were recorded at $7.193 billion as compared to the exports of $7.783 during July-March (2007-08), according to Federal Bureau of Statistics.
Export of cotton yearn declined by 15.52 per cent, cotton carded or combed by 5.62 per cent, yarn other than cotton yarn by 53.30 per cent while the export of knitwear declined by 4.80 per cent.
Similarly, export of bed-wear witnessed a negative growth of 11.68 per cent, tents, canvas and tarpaulin 19.29 per cent, readymade garments 13.10 per cent, art, silk and synthetic textile 32.50 per cent, made up articles (excluding towels and bed-wear) 2.69 per cent while the exports of other textile materials witnessed a negative growth of 16.37 per cent.
Only three textile items showed positive growth. Export of raw cotton during the period under review witnessed an increase of 73.57 per cent as compared to the same period of last financial year.
Similarly, export of towels increased by seven per cent while export of cotton cloth witnessed positive growth of 3.53 per cent.
The economic observers believe that the textile sector was passing through a difficult phase due to energy shortage in the country, resulting in less production and exports.
Meanwhile, the government is all set to launch textile policy next month and is considering curative measures on the recommendations of stakeholders to address the problems and issues faced by the textile industry.
‘The textile policy is in final stages and would be announced in June,’ advisor to textile ministry, Dr Mirza Ikhtiar Baig told APP.
The ministry has consulted all textile sector associations and the chambers of commerce and industry and taken them board before finalising the textile policy, he said, adding that the policy was nearing completion.
Ikhtiar Baig said that the ministry has received recommendations for zero rating on import of textile machinery, zero rating exports, tariff reduction, incessant energy supply to textile units.
Issues related to market access and quality products with timely delivery and single digit mark up and special power tariff for the textile industry have also been recommended.
It has been suggested that textile policy might include the issue like duty free market access to European Union and US as Pakistan is the largest importer of US long staple cotton to the tune of $400 million to $500 million every year.—APP

Financial Fundamentals

Business owners rarely go into business to deal with the financial aspects of running a company. And it's easy to understand why: You're most likely passionate about the products or services you provide and want to focus your time and energy there. So your financial responsibilities usually fall to the bottom of your "desirable duties" list.
But it's critical to the long-term success of your business that you understand some of the financial fundamentals of being a business owner. You don't have to be an accountant or a financial analyst, but it's important that you have some key skills in your business toolkit to measure the financial aspects of your business.
And while it's okay to outsource this activity so that someone else can do the work you don't like to do, you need to be sure you understand the output of the financial information. You'll need it to help make informed decisions about your business. Remember: Accounting isn't just about taxes. There's so much more to know about the numbers, so you'll know how your business is doing from a management perspective.
There are a number of key parts of the financial picture that you need to be aware of, and they can be outlined based on the three critical financial statements your business generates: profit/loss, cash flow and balance sheet.
I meet with entrepreneurs every day who are unsure of their business's profitability. They "think" they're making money because they have money in their checking account. But this is not how you should be running your business!
Having money in your checking account doesn't mean you're profitable. It could mean you haven't paid all your bills so you still have a little cash on hand. But cash and profit are two different concepts. If you aren't profitable, you won't have long-term success in your business.
So what's the difference between profit and cash? Profits are determined through the following equation:
Revenues - Cost of Goods Sold = Gross Profit - Overhead Expenses = Net Profit
This equation is equivalent of your profit/loss statement. Revenues are the dollars that come from generating sales within your business. The cost of goods sold reflects the direct costs of labor and materials involved in your business. Overhead expenses encompass all those other costs that you incur so that your business can function, such as rent, taxes, insurance, marketing and accounting.
You can have activities that affect your cash but aren't considered revenues or expenses. For example, when you borrow money from a lender, that money is not considered income. It's classified as an increase in your liabilities (that is, your debt). When you repay that loan, it won't be considered an expense--it's a reduction in your liability. Any interest you might incur on that loan would be classified as interest expense, but the principal portion is not. Similar concepts apply for owner investments and withdrawals.
Often, small-business owners don't clearly understand the concepts of cash and profit and therefore don't have a good handle on their finances and how to interpret any outcomes from financial reporting. For instance, did you know that you can show a profit and still have a negative cash flow? You can, if your loan payments, owner withdrawals and other non-expense activities are taking more cash out of your business than you have profit.
The same is true on the opposite side of the flow: You can have a lot of cash coming into your business through an increase in personal or lender-financed activities and still not show a profit (because you're not generating enough revenue). The most basic cash flow statement can be outlined as follows:
Beginning Cash Balance + Cash Inflows - Cash Outflows = Ending Cash Balance
It's important for you to understand the difference between your profit/loss statement and your cash flow statement. They provide two very different views of your business.
The third financial statement you should be generating monthly is the balance sheet. The balance sheet provides information on your assets, liabilities and equity. Assets are what you own that is of value, such as your bank accounts, accounts receivable, inventory, property, manufacturing facility and equipment.
Liabilities represent your obligations to others and include such things as accounts payable, notes payable to lenders and loans from shareholders. The equity balance reflects the value of your ownership in your business. When you take the value of your assets less the value of your liabilities, the remainder is your equity.
It doesn't matter the size of your business--profitability and ongoing financial stability are something you should be monitoring on a regular monthly basis. And while some entrepreneurs will say their business is too small to have to create financial statements for it, that's just a way of not holding yourself accountable for managing your business wisely. It'll always be someone else's fault when your business fails...or at least that's what you'll say.
You can choose to succeed, or you can choose to fail. It's always a choice, not a default. So make the choice to be a financially informed business owner. Your business will thank you through its increased profitability and longevity!