Asia Fun Club: PRC Seizes Japanese Cargo Ship

The Japanese have literally been, ah, Shanghaied.

Us Asians generally have a longer-term perspective than Americans (whose planning horizon is near-zero as evidenced by all sorts of things ranging from the negligible savings of its retirees to the $17.5 trillion plus they will dump on future generations). However, it can go to ridiculous lengths as we bear grudges against each other stretching for decades and decades. The archetypal example is of remembering wartime atrocities committed during Japanese occupations of WWII. The Greater East Asia Co-Prosperity Sphere and all that stuff. Just recently, the Japanese Prime Minister paid tributes to the Yasukuni shrine which the Chinese and Koreans are greatly offended by since they believe it contains the remains of war criminals.

So how does China get back at Japan over this and lingering territorial disputes over uninhabited rocks in the East China Sea? Even I was shocked by this: Chinese authorities have detained a Japanese merchant vessel the Baosteel Emotion while making steel deliveries in China over commercial disputes dating before WWII:

The seizure of a Mitsui O.S.K. Lines vessel in China may have consequences for Japanese business activity there, Tokyo warned Monday as officials here pondered the true intention behind the move. Embittered by a territorial row, Japan and China were just starting to seek a rapprochement when the Shanghai Maritime Court said Chinese authorities had impounded the Baosteel Emotion on Saturday.

The iron ore carrier appears to have become a pawn in a dispute stretching back to the 1930s. At the time, a Chinese shipowner chartered two freighters to a Japanese shipping company that later changed names and merged with Mitsui O.S.K. Lines. The vessels were commandeered by the Japanese government and subsequently sank. The owner's relatives sued Mitsui O.S.K. Lines for damages in China and won, with a high court upholding the original verdict in 2010.

The company "was seeking the possibility of out-of-court settlement when the vessel was suddenly impounded" by authorities in Zhejiang Province, Mitsui O.S.K. Lines said in a statement Monday.

Dredging up ancient history is an Asian specialty, but this is ridiculous. What will the effects on trade ties be when a Japanese vessel making routine deliveries can be seized at random over some long-forgotten pre-WWII grievance?

The seizure threatens to "fundamentally undermine the spirit of the normalization of Sino-Japanese relations as laid out in a 1972 joint communique," Chief Cabinet Secretary Yoshihide Suga told reporters.

Tokyo maintains that because China renounced its demand for war reparations from Japan, any private claims for war-related damages are void. The Japanese government is calling for an explanation of the ship seizure and, depending on what it hears, may lodge a formal protest.

OTOH, China claims its courts have found against the Japanese shipping concern:

The owners of the shipping company, identified by Kyodo as Zhongwei Shipping, sought compensation after World War Two and the case was reopened at a Shanghai court in 1988, China's Global Times said. The court ruled in 2007 that Mitsui had to pay 190 million yuan ($30.5m, £18m) as compensation for the two ships leased to Daido, a firm later part of Mitsui...

Be that as it may, China's timing is curious, to put it mildly. In one sense it's an idiotic stunt by the Chinese to offset another made by the Japanese. As they say, however, two wrongs do not make a right, and you have to wonder what prospects for regional trade are when its biggest players are so prone to making dumb stunts. It's a tad...immature, really.

UPDATE 1: Thanks to GPS, you can follow the Baosteel Emotion's whereabouts. At of 1600 GMT on April 22 , it's still stuck in Majishan port in Zhejiang province.

UPDATE 2: Mitsui OSK forked over $28M in ransom money to free the ship on April 24.  I guess the shipping line does not have the same resolve as the Japanese government.

VW, GM & Toyota Vie for PRC Auto Supremacy

It's definitely not your grandfather's Buick.

Having discussed the troubles Chinese automakers have selling cars at home and what it means for their export prospects, let us now turn our attention to the real battle for market supremacy in the PRC. In 2009, it surpassed the US as the world's largest market in terms of vehicle sales, so it certainly isn't small fry and represents a burgeoning market with vast possibilities relative to the saturated Western and Japanese ones. Yes, China is horribly polluted already. But no, the automakers seem to be implying that sales can continue to grow with hybrids, never mind that charging in China will probably be powered by ubiquitous coal plants. Ride bikes in Beijing? Are you Communist or something? (Ooh, the delicious irony.)

The opening of the 2014 Beijing Auto Show, famous for its equal-opportunity exploitation of female and male models alike--do you come with the car honey, etc, etc--prompted me to write this post. As in the rest of the world, the major combatants are those we've become accustomed with fighting for global supremacy. In 2013 global sales, Toyota came in first, Volkswagen second, and GM third. In China, though, VW is the largest seller, followed by GM in second and Toyota only in sixth place. Toyota isn't even the largest Japanese seller in China, which is Nissan. Unsurprisingly, all three have big plans for the market that ate America and Europe to boot. Let's go through these in order, then:

1. Volkswagen - the Germans plan to double their dealerships in China. It is also relying on its vast portfolio of renowned brands to serve all income segments:

VW, the Wolfsburg, Germany-based carmaker that owns a dozen automotive brands, is planning to increase its number of dealerships in China to more than 3,600 by 2018, up 50 percent from now, the company said. VW said it will also introduce a range of low-to zero-emission models to meet rising demand for such cars in the country, starting with the e-Up! and e-Golf this year, followed by models such as the Audi A3 E-Tron plug-in hybrid. “We will intensify our customer orientation even further so that we can respond even faster and more flexibly to customers’ wishes -- particularly here in China,” Winterkorn said.

Outselling GM in China helped VW surpass the U.S. automaker as the world’s second-biggest carmaker by sales last year. VW, whose businesses include the Audi and Porsche premium marques and the Skoda mass-market nameplate, has said that it may sell more than 10 million vehicles for the first time in 2014, four years earlier than planned. 

So VW is growing like gangbusters, and its upscale brand Audi is leading the charge:

Volkswagen's (VOWG_p.DE) luxury division Audi plans to sell about half a million cars this year in China, the world's biggest auto market, and raise the number of its Chinese dealers to 500 by 2017. The German automaker hopes its car sales will exceed 500,000 this year, executives told reporters on Friday before the Beijing auto show, which opens on Sunday...

In 2013, Audi sold 488,000 vehicles in China and a total of 492,000 including Hong Kong. Executives said it aimed to take advantage of the increasing popularity of SUVs and rising demand for compact premium cars.

2. General Motors - having been dethroned in China, the Yanks plan a fightback based on investing considerable sums there:

U.S. car giant General Motors Corp (GM) (GM.N) plans to invest $12 billion in China from 2014 to 2017 and build more plants next year as it competes with aggressive rivals in the world's largest auto market. "We are investing wisely and accelerating our vehicle development and manufacturing to keep pace with market demand. In total we are investing $12 billion between 2014 and 2017," Matt Tsien, president of GM China, said at the Auto China show in Beijing.

GM plans to build five more plants in China next year, as part of its efforts to ramp up manufacturing capacity there by 65 percent by 2020, executives said on Sunday. 

3. Toyota - being in sixth position in China but first in the world, Toyota is arguably trying the most to make up the deficit. On tap are a boatload of new models--mostly of the more affordable sort:

Japanese automaker Toyota Motor Corp. said Sunday that it plans to launch more than 15 new models in China by the end of 2017 and also strengthen its production operations in the world's largest auto market. At the 2014 Beijing Motorshow, Toyota Executive Vice President Yasumori Ihara said that the new Corolla and Levin sedan models, to be unveiled shortly, will be available from next year as hybrid models with major hybrid components produced in China.

Toyota hopes to achieve auto sales in China of more than 2 million vehicles per year, but did not give any specific time frame to achieve that target. He noted that Toyota's sales target in China for this year is more than 1.1 million vehicles. The company sold 920,000 vehicles in China in 2013...

In order to make its products more attractive to Chinese consumers, Toyota plans to focus on launching highly desirable new models in the compact vehicle segment that accounts for 60 percent of the Chinese market.

Japanese brands are handicapped by being vents for nationalist sentiment when the PRC leadership needs one to distract from homemade problems. Just today, Japanese PM Shinzo Abe made another offering to venerate those at Yasukuni Shrine--considered by the Chinese as housing war criminals. I'll bet Toyota cringes whenever these things arise since it becomes yet another opportunity to smash up Japanese cars in China...

To deflect criticism about being overrun by imports, all the majors are to various extents using the ploy of manufacturing in China to portray themselves as "domestic" producers. Especially in the case of Toyota, we'll see if it works. Make no mistake: there is much money at stake.

NSA Spying: A Visual Guide

I likened the NSA to East Germany's notorious secret police the Stasi via a job placement for electro-spooks a few moons ago. Data privacy is very much a hot topic in IPE as to the appropriateness of government spying. The American debate concerns citizens' rights to privacy and their willingness to abrogate them because of purported "security" concerns over terrorism and the like. While I am sure Americans don't particularly care about their spooks spying on foreigners, the issue is even more complicated at the international level. That is, does the American government's utter indifference to privacy concerns when spying on other countries' residents raise global governance concerns?

There are thus two big issues in this respect. First, should the current US-centric architecture continue? Already, plans are afoot to transferring assigned names and numbers away from the American non-profit corporation ICANN. Even if this transfer is done, the question remains of how easy it will be for the NSA to spy on you and me with such great ease. Hence the oft-mooted plans to make the UN International Telecommunications Union (ITU) the primary overseer of Internet governance. (Meanwhile, I am amused by American complaints that doing so may result in Internet security concerns when their government's spying animates much of this discussion. The point is that more proactive Internet governance could have made the system more resilient to American intrusion than today's Pincushion 1.0.) Second, should other nations route their Internet traffic away from US hubs and servers to ensure information privacy? I am inclined to think it's a Brazilian/European PR gimmick since the Americans are endlessly resourceful at sticking their noses into everyone else's business.

Speaking of which, I have long been looking for an overview of American spying technologies care of the NSA. The leaks have produced a steady dribble of oddly-named projects: Candygram, Toteghostly, Gopherset, Dropoutjeep, Monkeycalendar. Bruce Schneier has detailed some of these, but there has not been a single, relatively broad overview...until very recently.

Head over to Bloomberg Businessweek for a neat infographic detailing most of the nefarious programs the NSA is running to extract data. Or, at least those which have been uncovered so far. They are in equal parts ingenious and sinister.

It all makes me want to go back to the good old days of fax machines (remember those?) But seriously, consider using analog technologies for transmitting more sensitive information if they prove more resilient to America's vast data tentacles. Make no mistake: having alienated the rest of the world, the US is pretty much alone against everyone else on this matter.

Transitory Income and the One Percent

From today's NY Times:

Thomas A. Hirschl of Cornell and I [Mark Rank of Wash U] looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking. 

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.... 

It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60).... 

Rather than talking about the 1 percent and the 99 percent as if they were forever fixed, it would make much more sense to talk about the fact that Americans are likely to be exposed to both prosperity and poverty during their lives, and to shape our policies accordingly. As such, we have much more in common with one another than we dare to realize.

Bhutan's Gross National Happiness & Money-Grubbing

Everybody Wangchuck [L] Tonight and Meet the Jetsun [R].

Us Asians are routinely amused by Westerners buying our dear neighbor Bhutan's schtick hook, line and sinker. You see, Bhutan is famous the world over for measuring "gross national happiness" instead of the materialistic, output-oriented measures us unenlightened folks use like GDP and GNP. King Jigme Khesar Namgyel Wangchuck is certainly not averse to playing along. Especially among self-styled "progressives" this is taken as evidence for their enlightened stance in the place of mammon-worship common to the rest of us.

Take, for instance, this travelogue from Canada's Globe and Mail:

I was in the Kingdom of Bhutan, a small, mountainous country sandwiched between the giants of India and China. Protected all around by the snow-capped Himalayas, this is a place with its own distinct culture, ruled by a 34-year-old king who loves romantic comedies and Elvis, and guided by the principles of Gross National Happiness. While it may not be the easiest travel destination – Bhutan requires a prepaid daily minimum spend in order to secure a visa, and a trip from Canada will involve at least three separate flights – visiting this kingdom in the clouds can feel like a journey to another world, an almost-mystical destination that’s even more difficult to leave.

At this point I should also mention Jetsun Pema, formerly a student in London who now outdoes Kate Middleton by virtue of her exalted status as queen opposed to just a princess. Like Princess Catherine, she has become tabloid fodder. (Surely it helps draw the tourists?) I guess the glamor got to our Globe and Mail correspondent who goes about tossing lots of softballs Snowden 'n' Putin-style until he elaborates on this part:

The Bhutanese government requires visitors to spend a minimum of between $200 (U.S.) to $250 a day in order to issue a visa. The funds include basic hotel, guide and meals and must be prepaid to an approved tour operator. Visitors are also welcome to spend more, and have many opportunities to do so at one of the country’s luxury lodges. For more information, visit [...]

Wait, wait, wait: In the middle of all these paeans to the progressiveness of being more concerned with happiness than material possessions, we learn that Bhutan does not welcome travelers on a shoestring budget. Shouldn't Bhutan be "sharing" all this happiness with folks of lesser means? What's more, doesn't encouraging a minimum spend contradict the notion of being anti-materialistic? Bhutan's tourist information also points this out:

The minimum daily package for tourists travelling in a group of 3 persons or more is as follows: USD $200 per person per night for the months of January, February, June, July, August, and December. USD $250 per person per night for the months of March, April, May, September, October, and November

So much for Bhutan being the world's biggest hippie commune. To be fair, though, there are two lines of argument here:

1. Bhutan is populated by money-grubbing hypocrites (see above); or
2. The minimum spend provision has to deal with promoting sustainable tourism. Backpackers and the sort are not welcome since they go it alone and are more likely to be insensitive to polluting the environment, observing modest behavior, and generally acting ugly. By providing fewer guests with guides, this sort of inappropriate conduct is avoided for the benefit of all.

Bhutan obviously takes the second line:

The royal government has always been aware that an unrestricted flow of tourists can have negative impacts on Bhutan's pristine environment and its rich and unique culture. The government, therefore, adopted a policy of "high value-low volume" tourism, controlling the type and quantity of tourism right from the start.

All that's well and good, but isn't it all a tad elitist and materialistic?

So far, the government’s objective of maximizing foreign exchange earnings while minimizing the potentially adverse cultural and environmental impacts of tourism has paid off. The number of tourist arrivals has increased from just 287 in 1974 to close to 41,000 high-end tourists [my emphasis] in 2010. There was also a 56% increase on 2009 figures in high-end arrivals from neighbouring countries, especially India, highlighting the importance of the regional market.

Actually, Bhutan does not restrict tourist numbers, which would make sense ecologically speaking. So, combine a minimum daily spend with unlimited arrivals and it's hard not to question all these "green" and "post-materialist" marketing gimmicks that ever-so-gullible Westerners keep lapping up. Whatever your opinion of the matter, let's just say that economic considerations are not totally out of the picture. They're quite hard-nosed about all this travel business, actually. Plus, it makes me wonder why Bhutan is included in the Lonely Planet guide when the country is definitely not marketing itself to travelers on a shoestring budget.

TPP Hara-kiri: Will Japan Kill Off This Trade Pact?

Hara-kiri is defined as "ritual suicide by disembowelment." Two years ago, I described Japan joining negotiations to enlarge the existing TPP membership as a non-starter mainly because of Japan's  strong agricultural lobbies blocking off any sort of liberalization of sensitive crops--especially rice. There too remains the quite frankly idiotic complaint Americans have that the Japanese car market is "protected" since they have time and again failed to sell their oversized, gas-guzzling, left-hand drive cars that are unsuitable for sale in Japan. Yet, for obvious reasons, the US has been keen on Japan joining since it's the world's third largest economy and would in theory induce "bandwagoning" effects wherein others will feel they cannot be left behind and join as well.

As it is turning out so far, Japan has [surprise!] been the most intransigent of parties to TPP negotiations over agriculture. The US Trade Representative has already complained about their Japanese counterparts:

The US has accused Japan of blocking progress on a trade deal between 12 countries on the Pacific Rim by not allowing open access to its markets for agricultural products and motor vehicles. In his most critical comments yet on Japan, Michael Froman, the top US trade official, said: “We can’t have one country feeling entitled to take off the table and exclude vast areas of market access while the other countries are all putting on the table more ambitious offers...”

Japan wants to maintain – or phase out slowly – tariffs on five agricultural products including rice, beef, and pork that it has declared “sacred”. The two countries also disagree on what is needed for the three big US carmakers to compete on a level playing field with Toyota, Nissan and others. At a congressional hearing on Thursday, Mr Froman, the US trade representative, said he had told Japan that it was not living up to its commitment to help create a “high-standard, ambitious, comprehensive” agreement.

Harakiri here refers to political suicide by Japanese politicians. Removing protections on what they call "sacred" sectors (including beef, of course) would result in lost votes from rural interests who've traditionally supported the Liberal Democratic Party (LDP) and played a not-insignificant role in keeping it in power. So, apparently, the US is now backtracking. Call it a "low-standard, unambitious, shallow" agreement instead:

It remains highly uncertain to what extent the two countries can move closer on outstanding issues at a series of planned meetings between Akira Amari, minister in charge of TPP talks, and Michael Froman, U.S. trade representative, likely to last until Friday, as they remain far apart after their 18-hour talks held in Tokyo last week...

Washington, which had long called on Tokyo to stick to the basic TPP principle of abolishing all tariffs, gave up on doing so, and it is now asking Tokyo to lower its tariffs on beef — one of the main U.S. interests — to below 10 percent, according to negotiation sources [my emphasis].

So either no deal is done or a highly watered-down one is riddled with exemptions and opt-outs. As I said before, it would be low-standard/unambitious/shallow to the point that American lawmakers and their constituencies would become disinterested altogether

Japan’s position on agricultural products also has broader implications for concluding the TPP negotiations anytime soon. When one member doesn’t eliminate tariffs on a broad swath of products, others are compelled follow suit. Japan’s failure to eliminate tariffs on a large number of food and agricultural products would result in the withdrawal of concessions to Japan not just by the United States but by other TPP members. Some of those countries no doubt are looking for such an excuse to protect their own sensitive products.

The result would be a downward spiral of expectations for the TPP, with the deal moving from a comprehensive, first-class agreement to one that may have difficulty generating the level of interest and support needed here at home to gain congressional approval [my emphasis].

I remain rather pessimistic about TPP's prospects since Japan is far from the only country expressing reservations. If Japan doesn't kill it(self) off, there are others waiting in the wings to do so.

UPDATE: US-Japan bilateral talks have not yielded results, unfortunately for TPP's US boosters.

Cheers to Vlad Putin for Boosting My Euro Bonds

 

Ever heard of the term "financial martyrdom"? If you haven't, don't feel so bad since I just coined it at this very moment. In an earlier post, I talked about a Franklin Templeton bond fund I was offered that was full of Ukraine bonds. Let's just say I was sane enough to dodge that bullet. I have since invested my euro-denominated savings--I am not dumb enough to hold a boatload of dollars as I keep mentioning in this blog. What did I put them in? As a conservative investor, I put it into a bond fund of short duration, "just right" investments: not quite investment-grade but reasonably safe and higher yielding in comparison to German bunds and the like.

Anyway, I placed my funds at the end of last month. I was afraid that I had run out of juice since Eurozone yields were already at historic lows. Could they go even lower? Thankfully they can. What's more, I have Vlad Putin to thank. The geopolitical story goes like this: diversified investors want to keep a European presence, yet they are aware that bond prices don't have much higher to go. Even the brokest of the broke, the Greeks, can actually borrow again at sub-6% rates. It's a miracle if you ask me.

Now, to the "financial martyrdom" part. Putin is sacrificing the well-being of the Russian economy to help small retail investors like yours truly with a few euros to place. Largely because of its leader's military adventurism, Russia has scrapped bond auction after bond auction in 2014:

Russia canceled its eighth bond sale this year as Finance Minister Anton Siluanov said the nation is facing the toughest conditions since 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the financial crisis. Yields on local currency 10-year bonds jumped 76 basis points since Russia’s incursion into Ukraine’s Crimea region at the start of March. Rates on similar-maturity securities of Turkey, ranked one level below Russia at Fitch Ratings, fell 30 basis points in the period.

Russia is being frozen out of government bond markets after President Vladimir Putin’s annexation of Crimea drove relations with the U.S. and Europe to a Cold War low. The economy may not grow this year, with “considerable geopolitical risks” the main driver of Russian capital outflows, Siluanov said at a ministry meeting yesterday.

Yields on Russian debt are circling the stratospheric heights previously occupied by Greece and other European deadbeats:

The government won’t sell bonds when yields are too high, Siluanov said on April 1 after Russia announced a second-quarter borrowing plan of 150 billion rubles, 50 percent smaller than the same period last year.

The yield on Russia’s 10-year securities rose for a third day yesterday, adding seven basis points to 9.14 percent as of 6:27 p.m. in Moscow. The rate reached 9.79 percent on March 14, the highest since October 2009. “The current rates are still too expensive for them,” Yulia Safarbakova, an analyst at BCS Financial Group, said by e-mail yesterday. “That’s as long as the budget is in surplus” no other territories join Russia and the oil price stays high, she said.

Russia isn't exactly desperate to borrow at the moment since it has those $400 billion-something in foreign exchange reserves. That's even as its economy heads towards the zero growth mark due to all those Western sanctions and what else have you as money flees the country. This is where Putin's magnanimous nature comes in. Where else would the money fleeing Russia go but to nearby EU member countries? Investors are still looking for more yield than German bunds and other investment-grade stuff to place in. So, why not invest in places like Romania? As it so happens, this former Soviet-bloc country's borrowing costs are hitting all-time lows:

Romania raised 1.25 billion euros ($1.7 billion) in its second international bond sale this year, taking advantage of record-low borrowing costs to finance its budget deficit. The government sold 10-year bonds today at a yield of 200 basis points above mid-swaps, the equivalent of 3.7 percent, the lowest on record for the country, Budget Minister Liviu Voinea said in a phone interview. Citigroup Inc. (C), ING Groep NV, Societe Generale SA (GLE) and UniCredit SpA (UCG) managed the sale, Diana Popescu, deputy director at the Treasury, said by phone...

“We’ve completed our international funding needs for this year eight months ahead of schedule with today’s sale,” Voinea said. “This doesn’t mean that we won’t issue again if market opportunities allow, but it will be to pre-finance 2015.” 

As investors flee Russia, they are piling into the likes of Romania and other "just-right" investments:

Romania, the European Union’s fastest growing economy in the fourth quarter of 2013, is seeking to attract capital outflows from Ukraine. Investors are pulling money out of Romania’s northeastern neighbor as concern mounts that Russia will seize more of Ukraine after annexing Crimea in March. The yield on Romania’s eurobonds due in 2020 fell 2 basis points to 3.097 percent at 8:14 p.m. in Bucharest, a record low, according to data compiled by Bloomberg...

“The disputes between Russia and Ukraine remain important to watch, but I would say investors have now digested the fact that as long as negotiations continue in Ukraine the contagion impact on central Europe is minimal,” Raffaella Tenconi, a London-based economist at Bank of America Corp., said by e-mail. 

While Russia and Ukraine are locking horns, others stand to benefit as money piles in elsewhere. Thankfully, "elsewhere" happens to be in Europe just as investors seek the relative safety of bonds in parts of that continent where Putin isn't likely to send his guns, goons and gold. It seems Russian aggression is inversely related to bond yields of EU debt issuances.

As I said, what a thoughtful man this Vlad Putin. He's always helping out us small retail bond investors. Just when you thought euro-denominated bonds had run out of room to run, he engages in all these amusing forays into neighboring countries to not only entertain us with his exploits of shirtless machismo but to also improve the performance of our fixed-income investments. Paraphrasing George W. Bush who drew Putin's portrait above, I looked through his eyes and straight into his soul and saw a man who would capsize his country's economy just to help me eke out better returns on my humble euro investments.