Why South Korea isn’t having a crisis…

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Came across the Sovereign Man’s nostalgia trip about mid-1990s Seoul (Hat-tip to See-tell). I will spare you readers the history lesson (if only because The Korean has done an entire series of articles on it anyway) but suffice to say, many Koreans went bankrupt and the entire system, as occurred in Indonesia had to be reformed. Flash-forward a decade and a half later South Korea continues to grow steadily, with low debt and an armory of good guns, good companies and good TV shows (Note: I am saying good in terms of soft power, this is not reflective of taste). Why is that? Well, according to sovereign man it is because Korea did the following:

When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia’s sick economies was to:

1. HIKE interest rates,
2. CUT government spending,
3. Further deregulate, liberalize, and open their economies to foreign investment to attract capital;
4.  And let their zombie banks FAIL.

Though, they experienced brutal recessions after swallowing this tough medicine, the two countries which carried out these policies to the fullest extent:  South Korea, and Indonesia, are today among the most successful and dynamic economies in Asia, and the WORLD.

Hmm… Not quite what happened. South Korea is ranked at 31 with a score of 69.9 in the World Heritage Foundation rankings (Japan is at 22 with 71.6 and Taiwan at 18 with 71.9). This is of course not taking into account the social malaise and other issues that have plagued Korean society.

However, it is still higher than Spain (36), Belgium (38) and France (67). Which countries are currently at the centre of a financial crisis? The short answer is: work ethic.

With few exceptions, the Club Med and the EU just doesn’t work. Yes, it has a tourism industry, yes it has wine and yes the size of the grey economy is large but it doesn’t bring real value-added income or sustainability to the populous in the long-term. If one wishes to see this in action, go to Nice or Cannes. The food is terrible (with the exception of La Voglia in the old town), the service is even worse and it is overpriced.

In contrast let us magically fly to Seoul, Busan (and speak Korean) and try the whole thing again. Competitive prices, competitive service and a can-do attitude. There is that understanding that if you work, you can get something. Now that is not to say that South Korea doesn’t have it’s own problems, notably a rising elderly poverty problem as well as a over-reliance on Chaebol, but there is a general understanding that work is a necessary component, not some entitlement culture that plagues the unions and the political system has conjured up as a mechanism for getting elected rather than the demonstration of any real concern.

 

The efficiency of Chinese State-owned enterprises

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A recent FT article or I should say opinion piece by Minxin Pei, states that the Chinese Government is actively reasserting control of the economy. He writes:

The private sector, a victim of persistent official discrimination, is in full retreat. Critical prices, such as interest rates and land, are officially controlled and severely distorted.

 

The Bank of England until the Big Bang in the UK also controlled interest rates for loans in order to maintain financial stability, I fail to see how this is a big deal. Furthermore, whilst I share the concern over Property rights, given the bi-polar state of Chinese society and a developing functional legal system, this isn’t the sort of thing the Politburo could fix overnight. The residency system is in place for social stability reasons as much as anything else. Those who have moved to the cities have found it increasingly difficult to get by. However, name a developing country that doesn’t have this issue.

The article continues to add that China is playing with protectionism. The author is referring to recent steel tariff disputes between the US and China. The author forgets to mention that a) the Chinese response has been retaliatory and b) when it was applied it conveniently exempted other companies/countries that didn’t kick up a fuss e.g. BMW/Mercedes  production in Alabama. Strangely enough, the Japanese and the UK are not arguing to much with China over RMB. Why? It is because it is advantageous towards them. Unfortunately, the US is not selling enough of what China wants to buy. If a country is developing, it would be an act of insanity to float a currency. It hasn’t worked.

In his closing remarks the author writes

…the CCP is no ordinary ruling party. It is a sprawling political patronage system filled with self-interested individuals eager to cash in their political investments. The conversion of political power into economic privileges and profits is far easier in an economy heavily controlled by the state than in a more market-oriented one. As a result, the interests of the ruling elites are in conflict with the imperatives of market reforms. Seen from the opposite angle, this logic illuminates the systemic cause of China’s “crony compitalism” – the marriage of power and wealth is made possible only when a post-communist autocracy is in charge of a half-reformed economy.

Since reform is no more, one has to wonder why Beijing bothers to commemorate Deng’s southern tour at all.

OK. Let’s dismantle this bit by bit. Point 1, the communist party as it stands is a collection increasingly of people who are picked on the basis of ability rather than patronage. There are some legacies but most academics would agree that it is a changing creature.

Point 2, name a country in where Crony Capitalism has not occurred in the early stages of development. This does not mean that things shouldn’t change, even Chinese policymakers would agree with that.

Point 3, the author is alleging that the state-owned corporations are being pandered to by the state while the rest are being snuffed out. This is a bit more hairy. I would kindly cite this post from a World Bank Economist which states that those with a monopoly are generally profitable in line with their private sector counterparts. In addition, in a recent

Further still, a 2005 Paper by the Journal of Corporate Finance found that corporatization in Chinese SOEs improved their efficiency. However, let’s see what the money men from McKinsey say in their 2008 paper:

…a company’s ownership structure is no longer a legitimate test of its merit. Lenovo and the chemical producer China National BlueStar, a subsidiary of China National Chemical (ChemChina), for example, both have significant state shareholdings but are nonetheless valuable partners for suppliers and customers, as well as astute managers. And in China as everywhere else, private-sector ownership is no guarantee of success: D’Long International Strategic Investment, one of China’s largest private-sector conglomerates, had to be rescued from the brink of collapse in 2004, when the state intervened. (p.3)

 

McKinsey state that amongst these SOEs some are more open than others. They recomend:

Policy makers in the developed world would also do well to understand these nuances. Rather than discouraging investment by an entire class of Chinese companies, they should consider the benefits of attracting well-run, open ones. The goal should be to draw quality global investment, no matter what its geographic origin or ownership. Arbitrary legislative barriers and economic disincentives will lead only to missed opportunities as open companies seek out more welcoming locations (p.6)

So the situation is at best opaque.This echoes work by Chung and Kim on Korean SOEs which found a positive correlation between privatization pressure and the operating efficiency of SOEs. In short a state organisation can work provide you whip it like the market does. In the relatively short history of modern Chinese development this appears to be what is happening in some areas. Especially in a country which is acutely lacking a skilled workforce relative to its requirements, this aids the Chinese quite well, until suitable large alternatives from the private sector emerge (also better accounting and transparency).

We must ask in the long run, if the government will revert the ownership of these firms and hand them over to the private sector? That would depend on how one interprets the third way. The short conclusion we can gather is that reform is slowing down, but it hasn’t impacted necessarily on the efficiencies of business and, when all other socio-political considerations are taken into account, it seems to be holding up. Could things be easier? Yes, but I question whether  Minxin Pei’s ideas are as valid as he thinks.

Japan’s Debt level… and perhaps why the figures are wrong

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So we again greet another week of crisis, political deadlocks and CDS complications… When is 2012 going to start? Come to think of it 2011 wasn’t that different to 2010… oh my.

A cursory glance at this Daily Telegraph Article on the state of the UK drew my attention to the new McKinsey Global Institute on Debt and Deleveraging. I thought I would do my check on the Debt figures for my favourite economies: Japan and South Korea (yes China I love you too but for some reason McKinsey don’t list you… talk to them) More specifically a certain chart shown below

McKinsey Global Institute Debt Composition
McKinsey Global Institute Debt Composition

Please note all copyright goes to McKinsey Global Institute and the graph is from page 5.

Now according to this government debt has increased to about 225% of GDP, the majority of which prior to the Tohoku Earthquake was composed of social security expenditure. According to Kyle Bass of Hayman Capital management along with many other doom-sayers who have an annual rally call on Japan defaulting this model is unsustainable.  Furthermore Bass has highlighted that due to a low rate of immigration and the fact that Japanese government debt is already higher than that of domestic household savings, Japan will be forced to seek foreign buyers that will demand a higher interest rate. This coupled with debt servicing costs (now 50% of the last Fiscal Budget) means that Japan has a high incidence of default.

Now why do I say that this maybe incorrect? I might add that I am by no means stating that  Japan hasn’t got a problem, rather the economic situation is

I would like to point out a often forgotten paper by Broda and Weinstein called ‘Happy News from the Dismal Science: Reassessing Japanese Fiscal Policy and Sustainability’ that was published in December 2004. A quote is perhaps best:

For example, in a consolidated accounting system, if the social security tax raises one hundred yen of revenue and rest of the government spends one hundred yen, the debt of the government would equal zero. In Japanese system, however, this transfer of say, one hundred yen, often involves the purchase of a bond or the creation of a government deposit account. Hence, the same transfer would involve the general account borrowing from the social security system, which creates a liability for the general account of one hundred yen, and the social security system obtaining an asset (i.e a deposit in the government) worth 100 yen. In both accounting systems, the financial implications to the aggregate public sector are identical, but the accounting practices would make the balance sheets look quite different. (p.12)

Of course the kicker: ‘the consolidated government debt would be zero, but the unconsolidated accounts would show a gross Japanese government debt of one hundred yen.‘ This of course forgets any accounts held by the Bank of Japan.

Furthermore, a source of mine who worked for a would-be up and coming Diet member who was tasked with revitalising the social security system revealed that the vast majority of social security spending was consumed just by keeping track of people as there is no standardised social security number system unlike the UK/US/other mature economy. There is a lot of efficiency improvements that would decrease the costs. The idea that the government has no room to manoeuvre is false.

Government debt in Japan is the 2nd cheapest in the world after Switzerland and despite the most recent earthquake at present it is less than 100 Yen to the Dollar and Euro. In fact in a recent bond auction:

A Y2.5tn auction of one-year Japanese bills on Tuesday attracted bids valued at more than six times the amount on offer, the highest ratio since July 2005, according to Japan’s finance ministry. A Y5.5tn auction of three-month bills on Wednesday was more than 10 times subscribed.

More than 6 times? Add to this that Japan has not yet fully privatised Japan Post, has a stake of 50% in Japan Tobacco, $1 Trillion of foreign exchange reserves and a low rate of inflation if not deflation which has maintained if not increased the value of the debt held by individuals (as opposed to UK/US debt which is being inflated away) and other assets in the form of waste management etc it seems as though the Ministry of Finance can hold on for a bit longer. Well, at least until gets all its double-entry accounts up and ready.

Although Mr Bass’s comments on debt servicing are certainly worthy of attention and Japan’s fiscal health is still not sound, the problem I hope has been demonstrated to be not as big as we think. Any thoughts?

Japan’s Space Agency to Take On National Security Role

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Just saw this latest post from the New Pacific Institute about the militarisation of space through the Japanese Space Administrations (JAXA). Mr Mizokami states that:

Along with the recent arms ban export relaxation, the decision to fold military missions into JAXA is part of a broad push towards mainstreaming defense and security in Japan.

I would question that this was part of a broader strategy, as it has been demonstrated by Pekkanen and Kallender-Umezu in their book “In Defense of Japan” (Sample here) which perversely started off as a book on the Japanese Space Program but ended being a book of Japanese defence policy as their interviewees kept on alluding to this “market to the military” policy. In their words:

By this we mean that it is no longer commercial but national security paradigms that are ever more critical in driving Japan’s space policy forward. (p. xi)

I would therefore raise the following point: this is nothing new, the Japanese have a defence policy. If JAXA isn’t already doing intelligence gathering (which the NPI article claims it will now do in its mandate) or at the very least actively assisting the Japanese intelligence community, I would be very surprised.

Transparency is, of course always welcome and I hope we will get to see the goodies/toys that these guys have been playing with. I also would really like to see a photo of the Japanese space shuttle that supposed to be able to dock at the International Space Station. Given constitutional limitations intelligence gathering and logistics management might be the work-around that Japan needs to look after their immediate policy concerns, namely the DPRK, ICBMs, Chinese and South Korean border issues. There is Russia, but  something tells me nobody is in the mood to start a war over it.

China’s elite worry about lack of reform

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Yet another piece of news that will probably not be gracing the BBC anytime soon; a recent financial forum held in Hong Kong with panelists by and large in consent that further financial reform as well as less state-involvement in the economy was needed, less development would be spurred.

There is no shortage of theories about what may cause China’s economy to suffer a hard landing. Foreign observers typically identify risks such as rising property prices, stubborn inflation and weakening exports, but China’s elite seemingly have very different concerns.

 

“China needs deeper reform in its financial sector,” Tu Guangshao, vice-mayor of Shanghai, said at the panel. “It should reduce government interference in the financial market and liberalise the renminbi interest rate and exchange rate market.”

 

Tu, who is the former vice-chairman of the China Securities Regulatory Commission, said the lack of reform is the biggest obstacle in Shanghai’s development as an international financial centre, however, he is confident that the city will achieve that goal in 2020.

John Zhao, senior vice-president of Lenovo Holdings, also argued that a lack of financial reform has stood in the way of many opportunities, and complained that China had failed to mobilise its capital reserves.

“China is changing its role from the world’s factory to the world’s market,” he said. “We often see cash-loaded Chinese corporate and individual buyers shopping around the globe, but there are not enough investment channels at home.”

It was interesting how they were more worried about the facilitation ability of financial markets as opposed to overheating property markets in the main coastal cities. Their logic appears to be sound: if people are unable to channel savings into investments through financial markets within their own country or possibly they do not believe in the capacity of those markets, they will do one of two things. 1) They will buy physical assets (property, gold) as an alternative investment vehicle and 2) the money will be invested abroad (overseas M&A). No surprise then, this is exactly what has happened.

This is, however one small problem. Functioning capital markets require three things:

1) transparency in accounting standards on the part of the companies.

2) freedom for the financial press to report, gather and dessimate data for stakeholders to react to.

3)substantive penalties for those who engage in insider trading, rig the market or otherwise interfere with the operation of market mechanisms.

A failure in any or all of the above will mean that the capital markets are seen as little more than a mugs game, rigged for the benefit of the few and powerful. This perception will also have an impact on well-behaving firms as they will be viewed as guilty by association. Although perhaps South Korea is a stretch, the Japanese financial markets are a good example of this. Once a company is listed it is obliged to make public statements and if there are rumours, it should dispel them quickly and efficiently. The 1990s and the ‘Japan premium’ is a case in point: it was widely held that the Japanese banks were hiding bigger losses than they actually stated. As a consequence Japanese financial institutions had to pay ever higher premiums on the LIBOR market to the point that there was financial melt-down in 1997, culminating with two of the biggest bankruptcies in Japanese corporate history: Yamaichi Securities (now partly absorbed into Merrill Lynch Japan) and Long Term Credit Bank of Japan (LTCB, now Shinsei Bank and the subject of Gillian Tett’s ‘Saving the  Sun’).

This is just one example and I’m not even going to get into regulatory oversight failure which incidently is partially what caused the problem in the first place.

Note: I will be fair here and state that a lot of this was done prior to accounting reform implementation in 2000 before which a) firms did not require consolidated balance sheets for all subsidiaries and b) off-balance sheet vehicles through tobashi or more technically Bogai saimu. Most offences relating to this even in the wake of the Olympus scandal pre-date the new reforms. I will probably have to do a much longer post on this in the future.

My point being is that the Chinese authorities need to develop a mechanism to deal with this. Otherwise asset purchases, loan sharking and direct-bank lending will remain the system du jour. Now that is not necessarily a bad thing, but if you at least want to have capital/financial markets there are times when they can be efficient, for example big rail projects or formerly nationalised industries. Of course the government will have it’s finger in the pie, all OECD members do this to a certain extent (Oil, defence, energy and alcohol to name just a few examples), they even have a sizeable majority stake in the company but by and large the company is left to report as an independent organisation.

Furthermore, if there is a criminal matter, what assurances can the Chinese give that it will be reported and dealt with, as opposed to being let off scot-free? My guess is that Chinese policymakers are aware (my dealings with Chinese financiers have lead me to only one conclusion: they are not stupid) but will have to deal with the dichotomy of reformed legal infrastructure in some areas (Shanghai, the eastern seaboard) with as-yet un-reformed legal infrastructure in the more in-land areas. I suspect it is not reporting that is the problem, but enforcement.  ’Patent Litigation in China‘ by Douglas Clark is perhaps worth a read should you wish to delve into the subject in more detail.

“You are a scholar, a professor, you should never believe Chinese statistics.” – Deng Xiaoping to Lucian Pye now Professor Emeritus of MIT, 1970s (I think reporting has changed a lot since then, but history is a great joke book)

Although Chinese statistics are in general, agreed to be much more accurate than they were (Gregory Chow writes an interesting assessment of Chinese statistics here), the disclosure and dissemination of important information in a timely manner. Now of course, some members of the Communist Party are more efficient than others (central government spending is viewed as relatively efficient as opposed to some rural provincial governments). This is good news and should the government proceed to de-regulate the RMB currency market in the future this should serve it well.

However, especially with local government debt or any state-owned corporate debt, how will it be possible for a independent rating agency, Chinese or otherwise to make a valid unbiased recommendation. Even if the Chinese get over the hurdle of reliable statistics, the ‘relatively’ free press argument is still a problem that needs to be discussed. Giving free speech to FT journalists as opposed to Herald & Tribune writers would be interesting, but it wouldn’t work. Perhaps a gradual cleaning up is taking place, much like in other parts of the world: the press might not be free but the information gets around…

Certainly something worth chewing over

 

 

Type-10 tank (10式戦車) brought into service at GSDF training facility

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Recently the Japanese government announced the introduction Type 10 tank at GSDF Fuji School in Shizuoka Prefecture

(Video Credit: Jiji Video News)

The Type-10 tank (10式戦車), manufactured by Mitsubishi Heavy Industries has been on the cards since the mid-1990s and, following the re-deployment of Ground Self-Defence Force units outside of Hokkaido (originally placed there because of the potential flash-point with the USSR) is now being rolled out.

Here is a demonstration video from last year.

As you can see, quite a nifty little vehicle. It also apparently has a Hydropneumatic Active Suspension, on license from Citroen of France I believe, for a smoother riding experience. Information on the prototype can be found here. Evidently, the Japanese defense industry in some fields is far more sophisticated than western analysts would give them credit forth.

Japan, contrary to popular belief has quite a sizeable Military budget (1% of the World’s 2nd largest economy adds up to quite a bit over the years) which was around $33.91 Billion in 2007 (for interest America was $741 Billion), less than the UK but more than Italy. Furthermore, only 0.8% of GDP was spent on defense in 2007. This contrasts to the US (5.2%), the UK (2.4%), Germany (1.5%) or France (2.6%). It goes to show that you don’t need a huge budget to come up with some decent hardware.

***

It is also somewhat fitting that the Hoover Institution at Stanford University has just published the former president’s book on the Second World War entitled: “Freedom Betrayed: Herbert Hoover’s History of the Second World War and Its Aftermath” (thanks to Ampontan for discovering this, and his/her post that featured this is well worth a read). Hoover demonstrates that American foreign policy at the time was geared towards provoking Japan to strike first. Now, this in itself is not a fresh accusation nor is it ill-founded. What is interesting is that it demonstrates how FDR did deliberately not respond to approachments by an already exhausted Japanese military establishment. Why was FDR so keen on getting into Asia. The Cold War hadn’t begun yet and (we know America wanted Britain to give up it’s colonial activities) it was all but guaranteed that Britain could’t afford an empire anymore so technically, from an industrialists point of view American policymakers just had to sit on their hands and wait for the whole thing to blow over.

We are of course neglecting Roosevelt’s desire to engage in the European theatre, America’s promise that it would engage against the Axis powers. Surely however, dealing with one theatre of war would be enough, unless there was some sort of long-term security objective that was sought in the process. This isn’t meant to exonerate the Japanese or chastise the Americans. Perhaps they too were seeking a ‘secure sphere of influence’. Then again, perhaps that is another discussion for another day.

Bank of Japan: Comments on Volcker Rule Proposal

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As Japan makes headway into the TransPacific Partnership or TPP, the “requirements of commitment” are revealed. A key issue in the debate that has proved to be thorny is the ability of legal disputes to be conducted in a foreign country of the dispute with the subsequent court ruling to be implemented in the country of the original dispute. This, ladies and gentleman is called “extraterritoriality” and likewise is somewhat of a thorny issue. It is probably best summed up by the anti-TPP lobby in New Zealand:

How would a TPPA give foreign investors special rights?

That works at several levels.
1. laws that allow foreign investment would be locked so they could only be weakened, unless the government reserves the right to strengthen them before it signs the agreement. Previous NZ governments have already done that for everything but sensitive land, privatisation of existing SOEs, and a small number of assets.
2. it would guarantee foreign firms are consulted over proposed new laws and the government would have to show how it had responded to their views. NZers have no such guarantee of input into our own laws!
3. if the government does go ahead with a new policy or law that the investors say affects the value of their investment they could sue the government for millions of dollars for breaching their rights under the TPPA (trumping our domestic laws). The case would be heard in a secret international court run by the UN or World Bank, not in our domestic courts.

As you can see, it doesn’t paint a very independent sovereign state-like image. It rather seems almost EU like in nature [shudder].

Needless to say this banter has nominally been utilised by protectionists and the odd free-market economist. This, however has now entered the mainstream with the Bank of Japan  issuing a former letter of comment to their American regulatory counterparts over the issue of the Volcker rule. Although this on the face of it has notihing to do with the TPP which Japan has not even joined or signed, it raises issues that would for certain crop up should the TPP be signed.This quote from the letter used by Reuters sums up the issue:

Considering the potentially serious negative impact on the Japanese markets and associated significant rise in the cost of related transactions for Japanese banks, we would appreciate your refraining from extraterritorial application of the restrictions [p.1]

 

Note the word in bold above. The letter delves further:

We would like to take this opportunity to remind you of a discriminatory treatment against
domestic and foreign banks under the Swap Push-out Rule, Section 716 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act. The author of this clause made clear on
the record of Congress that the exclusion of uninsured branches and agencies of foreign
banks from the exemption and safe-harbor provisions of this rule was an unintended
oversight. We request to clarify that, when applying this clause in your regulation,
uninsured US branches and agencies of foreign banks are treated in the same way as
insured depository institutions under the provision of the rule, including the safe-harbor
application, as originally intended by lawmakers. [p.2]

And…

According to the proposed Restrictions, not only US banking groups but also foreign
banking groups (those that have a branch or a subsidiary in the US) would be subject to
the Restrictions on their current positions of government bonds, except US treasuries.[p.4]

 

A pickle for all concerned. Naturally, if the TPP were signed such issues would only increase and not decrease. On the other hand as noted by SeeTell, it would forcefully reduce speculation on Japanese government bonds which would pretty much force the cost of borrowing JGBs to go up and would cause havoc in the market place. As these rules are meant to protect depositors. Through the main-bank-system the Japanese government has in effect forced Japanese depositors to accept lower rates of interest than would be tolerably allowed in other countries through institutions such as Japan Post.

A dismembering of such an operation, through the unlikely foreign mechanism known as the Volcker Rule may force a new attention on the state of the governments finances. This in turn would air the dirty laundry of the corporate governance practices in Japan that need attention, especially in the wake of the Olympus, Nikko and Livedoor scandals [I hasten to add that I am in no way endorsing the corporate governance sloppiness of British and American companies. With the exception of LG and a handful of others, South Korea has work that needs to be done too. ]. The new transparency would punish poor performance and create opportunities for all concerned. This wouldn’t be a zero-sum game, although the issue of foreign dictat.

However, all is not lost. Thanks to the Republican Scott Brown exemptions for Private Equity and Hedge Fund Investment were allowed: a substantial reduction. This is not including a formalised exchange for derivatives that has also been shelved. In comparison to Britain’s Vicker’s Report which has been adopted in full (at least provisionally), American legislation has been watered down. So we may see Japanese and foreign firms creating more nimble  investment companies to invest in.

There is, unfortunately a problem. Although Japan has a couple of large Securities houses,  Nomura and Daiwa being the two largest, their “proprietary trading” practices are no where near the sophistication of their American counterparts. This leaves a market open for new entrants.

Will we see more ‘Terra Firma‘ like  arrangements whereby talented members of these firms will be given authorisation to set up by their Japanese bosses? SMBC Asset Management anyone? If so, please give me a shout, I’ll be more than happy to talk.

China Everbright signs loan for waste-to-energy plants

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Three things intrigued me about this article. The first is that it shows the Chinese are exploring a greater variety of energy generation options in addition to solving a landfill problem. The second is the people behind the loan:

The $100 million B-loan will be provided by Mizuho Corporate Bank and Hang Seng Bank, which are joint-leaders of the consortium, three Taiwanese lenders (Bank of Kaohsiung, Cathay United Bank, Chang Hwa Commercial Bank) and Export Development Canada, with ADB as the lender of record. All the participating banks will share the benefits of ADB’s preferred creditor status.

 

I’m increasingly beginning to laugh at some of my western colleagues and friends who seem to believe that Japan, South Korea and Taiwan need western firms to do their financing (yes there is the Canadian Export Bank but it’s hardly a Wall-Street firm). Bearing in mind that these countries have been developed for 30+ years (in the case of Japan 100+). While the EU contracts and the US recovers, loan deals like this keep cropping up. In the medium to long-term, if efficient debt and equity markets can be constructed in Asia, then it should make EU and US debt more competitive than they are. This is a key point because a lot of the reason why countries/firms are buying into bailout firms is because in terms of portfolio they have little or no alternatives (especially for large funds). Furthermore issues within Asian equity markets in general (which I will cover in a later post) with perhaps the honourable mention of Hong Kong and Singapore mean that poor corporate governance relative to their western rivals means they are not attractive even to their own countrymen and women.

My third and final insight is it shows, together with this article on Chinese air quality, that the environmental quality is becoming a core concern for the government. Most of the “Miracle” economies as a consequence of their growth have had major environmental problems, most tragically in Japan in Minamata where Mercury poisoning not only contaminated the fishing waters, the land and people but it is also a continuing burden on the Japanese tax payer.

There are many good lessons from Taiwan, Japan and South Korea that policymakers in China would be well-advised to heed. However, providing clean water and air is perhaps one that would be best learnt the easy way (history) rather than the hard way (repeating history).

Japan and North Korea Negotiations

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There’s been a lot of Japan-related news lately, so I’ll kick off with possibly the one that has been below the radar the most: discussions between North Korea and Japan (also here) held in Beijing. The Japan Times article states that it was about the abduction issue and included a DPRK Ambassador responsible for normalising relations with Japan.

The idea of normalising relations between Japan and North Korea, at least conceptually is not surprising for two reasons; one of which is historical and the other is slightly more questionable.

Historically Japan was trading with China after the end of the Second World War and indeed actually normalised relations with China before the Americans did. This was due to China’s pre-war position as a source of trade for raw materials, hence the interest in Manchuria. Furthermore the amount of Japan-China trade increased by nearly nine times from 1952 to 1956, exceeding the level of Japan-Taiwan trade in 1956. The DPRK, likewise is a mineral-rich area unlike it’s Southern Neighbour.

Returning to the point of the article the Abduction issue has been a major issue in Japan for some time. Officially only 13 Japanese have been abducted. Abduction Awareness groups however maintain that the number is much higher. Naturally the return of abductees, much like the reunification meetings of families divided in the Korean peninsula has been a thorny issue for some time. Should this be resolved both sides would benefit enormously.

The other reason is slightly more questionable. As Ampontan’s article on Kan Naoto’s links to the DPRK (well worth a read) show, members of the DPJ have at one time or another voiced support for the DPRK. Indeed, one of the last acts of office from Kan was to ensure    Chongryon (the DPRK’s permanent residents association in Japan) High Schools continue to receive state financing. As Japan has no formal relations with the DPRK, Chongryon acts as a representative for them.

Whilst I doubt that Japan is suddenly go to embrace North Korea or that there are DPRK spies that are Diet members, having sympathisers in the ranks of the governing party makes them far more amenable to negotiate than with President Lee Myung-Bak who although he has offered a helping hand was rebutted almost immediately. This was no doubt in part because of his “Bulldozer” policy, which has had both it’s advocates and critics. They may be certainly far more amenable to providing food-aid to consolidate one’s power base than either the South or the US who are insisting  on abandonment of uranium enrichment.

Contrary to popular opinion, the Cold War is not over. What is certain, for their varying reasons, all countries seemed to be willing to negotiate. We might not get a Moss Burger in Pyong-Yang but we might yet get several tonnes of Corned Beef…

South Korea and Japan re-jigging oil supplies amid oil embargo against Iran

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This recent story that came out towards the end of last week regarding the announcement of oil sanctions against Iran by the US and the EU. The problem with such ideas is that we tend to forget which countries are the most reliant on this oil. America is mostly supplied by Canada, Saudi Arabia and few other Arabian nations, while Europe has the bulk of it’s supply through the likes of the British (a net Exporter of oil), Norway, Russia, North Africa and some of the usual characters. However, Japan and South Korea, like a lot of Asia is heavily reliant on 40%+ coming through the Strait of Hormuz in it’s various forms.

This brings back memories in particular of the first Oil Shock (1974) which caught Japan off-guard. Japan as an ally of America at the time refused to recognise Palestine as a country and found that it was being subjected to Price-fixing by OPEC. Tokyo then hurriedly allowed the creation of an office for Palestine in Tokyo to allow the oil to flow again. Interestingly enough this also spurred Japan’s demand for Nuclear power as a stable source of energy. Granted Japan is no where near as reliant on oil as it once was, but with the power grid in (mostly) cold shutdown fearing Fukushima-like repetitions and a lack of alternatives in terms of supply chains.

South Korea on the other hand is faring much better. During 2010 there was already a ruckus about the sanctions because a number of construction firms had to pull out because of them. the complaint was that they were leaving money on the table and that the Chinese would get the contracts. Proof that despite foreign policy and stability free democratic societies all have their own concerns. I believe it was a Indian politican who stated regarding climate change “where you stand is your position”  i.e. by virtue of your geographical and economic situation your policy stance is determined. I guess it does apply to more than just legislating carbon…

This as always provides an opportunity. Perhaps now would be a good time for both sides to resolve the Dokdo/Takeshima debate to get those gas and oil fields pumping? On the other hand the sole customer of Iranian oil is now China and India. Perhaps Beijing and New Delhi can negotiate a special discount to lower inflation amid a tough economic climate? Time will surely tell.

Breakfast @ Trinity's

Breakfast @ Trinity's