Humans can survive weeks without food, but only days without water — in some conditions, only hours. It may sound clichéd, but it’s no hyperbole: Water is life. So what happens when private companies control the spigot? Evidence from water privatization projects around the world paints a pretty clear picture — public health is at stake.
In the run-up to its annual spring meeting this month, the World Bank Group, which offers loans, advice and other resources to developing countries, held four days of dialogues in Washington, D.C. Civil society groups from around the world and World Bank Group staff convened to discuss many topics. Water was high on the list.
It’s hard to think of a more important topic. We face a global water crisis, made worse by the warming temperatures of climate change. A quarter of the world’s people don’t have sufficient access to clean drinking water, and more people die every year from waterborne illnesses — such as cholera and typhoid fever — than from all forms of violence, including war, combined. Every hour, the United Nations estimates, 240 babies die from unsafe water.
The World Bank Group pushes privatization as a key solution to the water crisis. It is the largest funder of water management in the developing world, with loans and financing channeled through the group’s International Finance Corporation (IFC). Since the 1980s, the IFC has been promoting these water projects as part of a broader set of privatization policies, with loans and financing tied to enacting austerity measures designed to shrink the state, from the telecom industry to water utilities.
But international advocacy and civil society groups point to the pockmarked record of private-sector water projects and are calling on the World Bank Group to end support for private water.
In the decades since the IFC’s initial push, we have seen the results of water privatization: It doesn’t work. Water is not like telecommunications or transportation. You could tolerate #$%$ phone service, but have faulty pipes connecting to your municipal water and you’re in real trouble. Water is exceptional.
Private sector priorities
“Water is a public good,” Shayda Naficy, the director of the International Water Campaign at Corporate Accountability International (CAI), told me, “for which inequality has to fall within a certain range — or it means life and death.” When the private sector engages in water provision, greater disparities in access and cost follow.
Water is also different because it requires such huge, and ongoing, infrastructure investments. An estimated 75 percent of the costs of running a water utility are for infrastructure alone.
The track record of publicly funded private water projects shows that the private sector doesn’t find it profitable to invest in the infrastructure really needed to ensure that communities have access to clean and affordable water. “Water companies have found that their niche is seeking efficiency solutions through hiking prices and cutting spending on infrastructure investment,” Naficy told me.
Even as the World Bank Group continues to promote water privatization, its own data reveal that a high percentage of its private water projects are in distress. Its project database for private participation in infrastructure documents a 34 percent failure rate for all private water and sewerage contracts entered into between 2000 and 2010, compared with a failure rate of just 6 percent for energy, 3 percent for telecommunications and 7 percent for transportation, during the same period.
Instead of using its position to line the pockets of water companies, the World Bank should support what is most needed: affordable and clean – and public – water for all.
A look at projects deemed successes (PDF) by the World Bank Group shows they are not experienced that way on the ground. An IFC-funded private water project in central India’s largest city, Nagpur, for example, is the country’s first “full city” public-private partnership and has raised serious concerns among local residents. Worries range from high prices to project delays to unequal water distribution and service shutdowns. Allegations of corruption and illegal activity have led residents to protest, and city officials have called for investigations of contract violations. “In the last three years, the cost of operation and maintenance of the system has increased drastically and the price of water has increased manyfold,” Jammu Anand of the Nagpur Municipal Corporation Employees Union said in a statement released by CAI. (CAI details other examples like this one from Nagpur in its 2012 report “Shutting the Spigot on Private Water: The Case for the World Bank to Divest.” Full disclosure: I am a strategic adviser to CAI.)
What advocates, including Naficy and Anand, are reminding the IFC today is that significant and steady infrastructure investment is the only way to foster safe, affordable and dependable water supplies. And that is done more effectively by the public sector than by private corporations. Water systems need treatment facilities and a mechanism to channel water from its source in a stable way, usually through pumps, piping to households and individual connections from main pipes to households. According to Naficy, “There is no end run around building a strong public sector and building strong public oversight.”
In addition, financing by the IFC, which is both investor and adviser on these projects, poses a conflict of interest. On the one hand, the IFC is advising governments to privatize the sector; on the other, it’s investing in the corporations getting those contracts. “It’s self-dealing: setting up a project that it’s in a position to profit from,” Naficy told me. When the IFC was established in 1956, it was expressly prohibited from purchasing corporate equity to avoid this sort of conflict, but the board amended this rule a few years later, allowing these kinds of deals. The IFC insists there are interior barriers to such conflicts of interest, even as its own annual report touts “client solutions that integrate investment and advice.”
Opening up the spigot
Independent water advocates, from CAI to Anand’s group in India and others including the Focus on the Global South network, point to India today as evidence that privatized systems lead to underfunded infrastructure and unpredictable, often high prices. The IFC defends the private sector by claiming that these companies offer efficiency gains (PDF). But those gains come at the expense of lower-income households, advocates such as Naficy point out, as companies increase rates to subsidize their own profitability.
There’s a growing backlash against these projects. In 2000, headlines around the globe documented protests in Bolivia’s third-largest city in response to the privatization of the city’s municipal water supply and against the multinational water giant Bechtel, eventually pushing the company out of the country. The IFC’s own complaint mechanism reports that 40 percent of all global cases from last year were about water, even though water projects are only a small fraction of what the IFC funds. In 2013, CAI and 70 advocates from around the globe released an open letter (PDF) to the World Bank Group calling for “an end of all support for private water, beginning with IFC divestment from all equity positions in water corporations.”
“Corporations don’t have a social or development mission,” Naficy told me. “Right now we’re funding development to prop up private projects, instead of putting the decisions for funding in the hands of governments that are accountable to people.”
Clean and affordable water is the basis of life. Skyrocketing water prices, unsafe supply, failing infrastructure — these problems fall disproportionately on the most vulnerable among us. This is why public institutions, not private corporations, must lead the development of water systems and delivery. The World Bank Group is uniquely positioned to increase access to clean water for the billions who need it. Instead of using its position to line the pockets of water companies, it should support what is most needed: affordable and clean — and public — water for all.
heard it first at national geografic documentary on 2008 crisis
The United States has constructed a financial neutron bomb. For the past 12 years an elite cell at the US Treasury has been sharpening the tools of economic warfare, designing ways to bring almost any country to its knees without firing a shot.
The strategy relies on hegemonic control over the global banking system, buttressed by a network of allies and the reluctant acquiescence of neutral states. Let us call this the Manhattan Project of the early 21st century.
"It is a new kind of war, like a creeping financial insurgency, intended to constrict our enemies' financial lifeblood, unprecedented in its reach and effectiveness," says Juan Zarate, the Treasury and White House official who helped spearhead policy after 9/11.
“The new geo-economic game may be more efficient and subtle than past geopolitical competitions, but it is no less ruthless and destructive,” he writes in his book Treasury's War: the Unleashing of a New Era of Financial Warfare.
Bear this in mind as Washington tightens the noose on Vladimir Putin's Russia, slowly shutting off market access for Russian banks, companies and state bodies with $714bn of dollar debt (Sberbank data).
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The stealth weapon is a "scarlet letter", devised under Section 311 of the US Patriot Act. Once a bank is tainted in this way - accused of money-laundering or underwriting terrorist activities, a suitably loose offence - it becomes radioactive, caught in the "boa constrictor's lethal embrace", as Mr Zarate puts it.
This can be a death sentence even if the lender has no operations in the US. European banks do not dare to defy US regulators. They sever all dealings with the victim.
So do the Chinese, as became clear in 2005 when the US hit Banco Delta Asia (BDA) in Macao for serving as a conduit for North Korean commercial piracy. China pulled the plug. BDA collapsed within two weeks. China also tipped off Washington when Mr Putin proposed a joint Sino-Russian attack on Fannie Mae and Freddie Mac bonds in 2008, aiming to precipitate a dollar crash.
Mr Zarate told me that the US can "go it alone" with sanctions if necessary. It therefore hardly matters whether or not the EU drags its feet over Ukraine, opting for the lowest common denominator to keep Bulgaria, Cyprus, Hungary and Luxembourg on board. Washington has the power to dictate the pace for them.
The new arsenal was first deployed against Ukraine - of all places - in December 2002. Its banks were accused of laundering funds from Russia's organised crime rings. Kiev capitulated in short order.
Nairu, Burma, North Cyprus, Belarus and Latvia were felled one by one, all forced to comply with US demands. North Korea was then paralysed. The biggest prize yet has been Iran, finally brought to the table. "A hidden war is under way, on a very far-reaching global scale. This is a kind of war through which the enemy assumes it can defeat the Iranian nation," said then-president Mahmoud Ahmadinejad to Iran's Majlis. He meant it defiantly. Instead it was prescient.
The US Treasury faces a more formidable prey with Russia, the world's biggest producer of energy with a $2 trillion economy, superb scientists and a first-strike nuclear arsenal. It is also tightly linked to the German and east European economies. The US risks endangering its own alliance system if it runs roughshod over friends. It is in much the same situation as Britain in the mid-19th century when it enforced naval supremacy, boarding alleged slave ships anywhere in the world, under any flag, ruffling everybody's feathers.
President Putin knows exactly what the US can do with its financial weapons. Russia was brought into the loop when the two countries were for a while "allies" in the fight against Jihadi terrorism. Mr Putin appointed loyalist Viktor Zubkov - later prime minister - to handle dealings with the US Treasury.
Mr Zarate said the Obama White House has waited too long to strike in earnest, clinging to the hope that Putin would stop short of tearing up the global rule book. "They should take the gloves off. The longer the wait, the more maximalist they may have to be," he said.
This would be a calibrated escalation, issuing the scarlet letter to Russian banks that help Syria's regime.
He thinks it may already too late to stop Eastern Ukraine spinning out of control, but not too late to inflict a high cost. "If the US Treasury says three Russian banks are "primary money-laundering concerns", do you think that UBS, or Standard Chartered will have anything to do with them?"
This will graduate to sanctions on Russian defence firms, mineral exports and energy - trying not to hurt BP assets in Russia too much, he adds tactfully - culminating in a squeeze on Gazprom should all else fail. Whether you are for or against such action, be under no illusion as to what it means. We would be living in a different world, and Wall Street's S&P 500 would not be trading anywhere near 1,850.
It is true that Russia is not the power it once was, as you can see from these Sberbank charts showing relative economic size against China and Europe.
This is not a repeat of the Cold War. There is no plausible equivalence between Russia and the West, and no ideological mystique.
It has $470bn of foreign reserves but these have already fallen by $35bn since the crisis began as the central bank fights capital flight and defends the rouble. Moscow cannot easily deploy the reserves in a slump without causing the money supply to shrink, deepening a recession that is almost certainly under way. Finance minister Anton Siluanov says growth may be zero this year. The World Bank fears -1.8pc, while Danske Banks says it could be -4pc.
Putin cannot count on global allies to carry him through. Only Venezuela, Bolivia, Cuba, Nicaragua, Belarus, North Korean, Syria, Sudan, Zimbabwe and Armenia lined up behind Mr Putin at the United Nations over Crimea, a roll-call of the irrelevant.
Yet as the old proverb goes: "Russia is never as strong as she looks; Russia is never as weak as she looks."
Princeton professor Harold James sees echoes of events before the First World War when Britain and France imagined they could use financial warfare to check German power.
He says the world's interlocking nexus means this cannot be contained. Sanctions risk setting off a chain-reaction to match the 2008 shock. "Lehman was a small institution compared with the Austrian, French and German banks that have become highly exposed to Russia’s financial system. A Russian asset freeze could be catastrophic for European – indeed, global – financial markets," he wrote on Project Syndicate.
Chancellor George Osborne must have been let into the secret of US plans by now. Perhaps that is why he issued last week's alert in Washington, warning City bankers to prepare for a sanctions fall-out. The City is precious, he said, "but that doesn't mean its interests will come above the national security interests of our country".
The greatest risk is surely an "asymmetric" riposte by the Kremlin. Russia's cyber-warfare experts are among the best, and they had their own trial run on Estonia in 2007. A cyber shutdown of an Illinois water system was tracked to Russian sources in 2011. We don't know whether US Homeland Security can counter a full-blown "denial-of-service" attack on electricity grids, water systems, air traffic control, or indeed the New York Stock Exchange, and nor does Washington.
"If we were in a cyberwar today, the US would lose. We're simply the most dependent and most vulnerable," said US spy chief Mike McConnell in 2010.
The US defence secretary Leon Panetta warned of a cyber-Pearl Harbour in 2012. "They could shut down the power grid across large parts of the country. They could derail passenger trains or, even more dangerous, derail passenger trains loaded with lethal chemicals. They could contaminate the water supply in major cities, or shut down the power grid across large parts of the country,” he said. Slapstick exaggeration to extract more funds from Congress? We may find out.
Sanctions are as old as time. So are the salutary lessons. Pericles tried to cow the city state of Megara in 432 BC by cutting off trade access to markets of the Athenian Empire. He set off the Pelopennesian Wars, bringing Sparta's hoplite infantry crashing down on Athens. Greece's economic system was left in ruins, at the me
WASHINGTON—Putting the nation on alert against what it has described as a “highly credible terrorist threat,” the FBI announced today that it has uncovered a plot by members of al-Qaeda to sit back and enjoy themselves while the United States collapses of its own accord.
Multiple intelligence agencies confirmed that the militant Islamist organization and its numerous affiliates intend to carry out a massive, coordinated plan to stand aside and watch America’s increasingly rapid decline, with terrorist operatives across the globe reportedly mobilizing to take it easy, relax, and savor the spectacle as it unfolds.
“We have intercepted electronic communication indicating that al-Qaeda members are actively plotting to stay out of the way while America as we know it gradually crumbles under the weight of its own self-inflicted debt and disrepair,” FBI Deputy Director Mark F. Giuliano told the assembled press corps. “If this plan succeeds, it will leave behind a nation with a completely dysfunctional economy, collapsing infrastructure, and a catastrophic health crisis afflicting millions across the nation. We want to emphasize that this danger is very real.”
“And unfortunately, based on information we have from intelligence assets on the ground, this plot is already well under way,” he added.
A recently declassified CIA report confirmed that all known al-Qaeda-affiliated organizations—from Pakistan to Yemen, and from Somalia to Algeria—have been instructed to kick back and enjoy the show as the United States’ federal government, energy grid, and industrial sector are rendered impotent by internal dissent, decay, and mismanagement. According to statements made by top-level informants and corroborated by leading Western terrorism experts, if seen through to its conclusion, al-Qaeda’s current plot could wreak far more damage than the events of 9/11.
In the past year, money transfers to al-Qaeda cells around the world have reportedly been accompanied by instructions to use the funds to outfit safe houses with the proper equipment to receive American cable news broadcasts and view top U.S. news websites, allowing terrorists to fully relish each detail of the impending demise of the last global superpower.
One of Russian President Vladimir Putin's closest ex-advisers has claimed that the ex-KGB agent ultimately wants to reclaim Finland for Russia.
Andrej Illiaronov, Putin's economic adviser between 2000 and 2005 and now senior member of the Cato Institute think tank, said that "parts of Georgia, Ukraine, Belarus, the Baltic States and Finland are states where Putin claims to have ownership."
"Putin's view is that he protects what belongs to him and his predecessors," he said.
When asked if Putin wishes to return to the Russia of the last tsar, Nicholas II, Illiaronov said: "Yes, if it becomes possible."
Illiaronov admits that Finland is not Putin's primary concern at present but, if not stopped in other areas of Eastern Europe, the issue will one day arise. Russian troops are currently massing on the eastern border of Ukraine, following Russia's recent annexation of Crimea.
"Putin said several times that the Bolsheviks and Communists made big mistakes. He could well say that the Bolsheviks in 1917 committed treason against Russian national interests by providing Finland's independence," Illiaronov told a Swedish news website.
He believes that Putin is not planning to invade Ukraine for territorial gain but rather "the goal is a pro-Russian puppet government in Kiev."
"Six years ago Putin conquered Abkhazia and South Ossetia from Georgia. The west let him do it with impunity, and now he has got Crimea," he continued.
"Now, eastern and southern Ukraine is destablised so that the self-defence forces can take power there. If the situation allows, it may be a military invasion."
Finland was a part of the Russian Empire for 108 years but broke away in 1917 at the end of the first world war.
The Scandinavian nation was attacked at the beginning of the second world war by the Soviet Union, with Finland fighting the winter war and the continuation war in resistance and losing 10% of its pre-war territory.
Finland is not a member of Nato, so any invasion of its land would not constitute an attack against all members under Article 5 of Nato's founding Washington Treaty.
A new classified intelligence assessment concludes it is more likely than previously thought that Russian forces will enter eastern Ukraine, CNN has learned.
Two administration officials described the assessment but declined to be identified due to the sensitive nature of the information.
The officials emphasized that nothing is certain, but there have been several worrying signs in the past three to four days.
“This has shifted our thinking that the likelihood of a further Russian incursion is more probable than it was previously thought to be,” one official said.
The buildup is seen to be reminiscent of Moscow’s military moves before it went into Chechnya and Georgia in both numbers of units and their capabilities.
U.S. military and intelligence officials have briefed Congress on the assessment.
As a result, Republican members of the House Armed Services Committee late Wednesday sent a classified letter to the White House expressing concern about unfolding developments.
An unclassified version obtained by CNN said committee members feel “urgency and alarm, based on new information in the committee’s possession.”
The committee said there was “deep apprehension that Moscow may invade eastern and southern Ukraine, pressing west to Transdniestria and also seek land grabs in the Baltics.”
Transdniestria is a separatist region of Moldova.
Committee members noted that Gen. Philip Breedlove, head of the U.S. European Command and NATO military chief, noted the Russians had sufficient forces to make moves into those areas.
American officials believe the more than 30,000 Russian forces on the border with Ukraine, combined with additional Russian forces placed on alert and mobilized to move, give Russian President Vladimir Putin the ability to rapidly move into Ukraine without the United States being able to predict it when it happens.
The assessment makes several new points including:
Troops on Russia’s border with eastern Ukraine – which exceed 30,000 - are “significantly more” than what is needed for the “exercises” Russia says it has been conducting, and there is no sign the forces are making any move to return to their home bases.
The troops on the border with Ukraine include large numbers of
“motorized” units that can quickly move. Additional special forces, airborne troops, air transport and other units that would be needed appear to be at a higher state of mobilization in other locations in Russia.
There is additional intelligence that even more Russian forces are “reinforcing” the border region, according to both officials. All of the troops are positioned for potential military action.
Russian troops already on the border region include air defense artillery and wheeled vehicles.
The United States believes that Russia might decide to go into eastern Ukraine to establish a land bridge into Crimea.
The belief is that Russian forces would move toward three Ukrainian cities: Kharkiv, Luhansk and Donetsk in order to establish land access into Crimea. Russian forces are currently positioned in and around Rostov, Kursk, and Belgorod, according to U.S. intelligence information.
The Federal Reserve dealt an embarrassing blow to Citigroup on Wednesday, attacking the bank’s financial projections for its sprawling operations and denying the bank’s plan to increase dividends and repurchase stock.
In a report, the Fed rejected Citigroup’s plans to manage its capital, citing concerns about the “overall reliability of Citigroup’s capital planning process.” It was the only one of the nation’s top five banks that failed to persuade the Fed to bless its plans for shareholder payouts.
The Fed did not give many details behind its rejection, which was the second denial of Citigroup’s capital plan in the past three years. But analysts and investors said the message from the regulator was clear.
“The Fed is saying that the bank’s financial processes are not where they should be, and this is five years after the crisis,” said Mike Mayo, the CLSA banking analyst. “It is not as though they haven’t had time to clean up their act.”
The Fed’s rejection of Citigroup was particularly striking not only because most of its large peers, like JPMorgan Chase and Bank of America, had their plans accepted, but also because Citigroup’s capital cushion — a key measure of a bank’s strength — comfortably exceeded the regulatory minimum.
The rebuke could derail the plans of Michael Corbat, the bank’s chief executive, to gradually rehabilitate Citigroup by dialing back risk and cutting costs. The Fed’s decision is already reviving calls to break up Citi’s far-flung businesses that stretch from New York to Mexico.
Indeed, the Fed said on Wednesday that it had concerns about the bank’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations.”
The Fed’s criticisms echoed concerns voiced by investors and analysts after the discovery of a $400 million fraud in Citigroup’s Mexican unit last month. The fraud, involving a Mexican company, forced Citigroup to restate its earnings and raised questions about whether the bank is properly overseeing its many units.
In a statement, Mr. Corbat said that “needless to say we are deeply disappointed by the Fed’s decision,” adding that the bank would work with the Fed to address its concerns. Citigroup can resubmit a revised capital plan, but the bank said it was not clear when it would do so.
News of the stress test results set off a panic within Citigroup, according to two people with knowledge of the matter. Citibank’s board and top executives thought that the bank would fare well on the annual review, especially because Mr. Corbat makes regular trips to Washington in an effort to bolster open dialogue with regulators.
Hours after the stress test results were released, Citigroup convened a board meeting at the bank’s Park Avenue headquarters. The mood, according to two people familiar with the matter, was grim. Few expected such a blow, the people said. Mr. Corbat scrambled to determine what exactly had happened, contacting the authorities at the Federal Reserve.
Michael L. Corbat became chief at Citigroup after its capital plan was denied in 2012.
Bryan Bedder/Getty Images
Michael L. Corbat became chief at Citigroup after its capital plan was denied in 2012.
The Fed’s last rejection of Citigroup’s capital plan, in 2012, helped precipitate a leadership coup at the bank. The bank’s failure to pass the test that year augmented pressure on the board to oust Vikram S. Pandit from the chief executive role.
At first, it seemed as though the leadership change was ushering in a new era for Citigroup, which was rescued by taxpayers in the financial crisis. With Mr. Corbat at the helm, the bank passed the stress test last year and its stock price soared. Last year, many bank stocks including Citigroup’s continued to rise, partly in anticipation of increased dividends.
Now, the Fed’s action on Wednesday is already prompting calls for another round of changes at the top of the bank’s management.
“There’s no question in our minds that heads should roll,” Mr. Mayo said.
The Fed said that while Citigroup had made progress in the areas of “risk-management and control practices,” its capital planning process “reflected a number of deficiencies.”
The Fed also said that Citigroup had failed to make “sufficient improvement” in certain areas that supervisors had previously identified as “requiring attention.”
In addition to Citigroup, the Fed rejected the capital plans of the American units of three international banks: HSBC, Santander of Spain and the Royal Bank of Scotland, which operates under the Citizens Bank brand in the United States.
The Fed cited “inadequate governance and weak internal controls” in the capital planning process at HSBC and the Royal Bank of Scotland. Santander faced similar problems in addition to flaws with the bank’s risk management during the process, according to the Fed.
In this year’s test, the Fed expanded the number of banks under review to 30 from 18, and included for the first time the American units of several large European banks.
The Fed also rejected the capital plans of the bank Zions Bancorporation, saying that its capital cushion fell under the regulatory minimum when tested under stress.
Over all, though, the results of the annual test — called the Comprehensive Capital Analysis and Review — showed that most of the nation’s banking system had healed substantially since the 2008 financial crisis. The Fed uses the annual test to review the capital plans of 30 large banks under a series of stressful economic situations. If a bank can pay dividends and buy back stock while still maintaining a minimum capital cushion, the Fed typically blesses its plans.
By this measure alone, Citigroup passed the test easily. When run through the Fed’s adverse scenario test, Citigroup’s capital plan left the bank with a minimum Tier 1 common ratio of 6.5 percent. That is a larger cushion than JPMorgan’s 5.5 percent capital ratio, Bank of America’s 5.3 percent ratio and Goldman Sachs’s 6.1 percent.
The Fed has consistently raised the standards of its annual stress tests, leading some bankers to grumble that the regulators’ efforts to make the financial system safer may be choking off credit to the broader economy. Others have complained that the regulator each year is unfairly changing the rules.
“In raising the bar, perhaps the Fed felt Citigroup didn’t make the cut,” said Moshe Orenbuch, a banking analyst at Credit Suisse.
Many of the 25 banks that passed the review lost little time in taking steps to lift shareholders’ returns. For the first time since 2009, Bank of America announced a dividend increase, to 5 cents a share. The bank also said it was buying back $4 billion in stock. JPMorgan said it was increasing its quarterly dividend to 40 cents a share and buying back $6.5 billion of stock.
Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.
Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.
Regulators seeking to prevent a repeat of the 2008 financial crisis have run annual tests on how the largest banks would fare in a similar recession or economic shock. Analysts estimate that banks were planning to pay out about $75 billion in excess capital to reward shareholders and boost returns. This is the second straight year that the Fed has criticized the quality of some plans.
“As this progresses, the Fed is going to ask for more and more information, and the quality of information is going to have to improve,” Chris Mutascio, a Baltimore-based analyst at Stifel Financial Corp.’s KBW unit, said before the results were announced. “With it becoming more complex, you really have to make sure you dot your I’s and cross your T’s.”
Citigroup, which last year asked for the least capital return among the five largest U.S. banks after having its plan rejected in 2012, would have passed this year’s test on quantitative grounds alone. It had a 6.5 percent Tier 1 common ratio, above the Fed’s 5 percent minimum.
The central bank identified multiple deficiencies in Citigroup’s planning practices, including areas the Fed had flagged previously. The regulator expressed concern with the New York-based company’s ability to project losses in “material parts of its global operations” and to reflect all business exposures in its internal stress test.
Bank of America and Goldman Sachs saw each of their Tier 1 leverage ratios drop to 3.9 percent in their original capital plans, below the required 4 percent. Both firms lowered their requests and were approved, meaning they don’t have to resubmit.
The two banks asked for too much in buybacks and dividends after their own internal stress tests showed better performance than in the central bank’s exam. New York-based Goldman Sachs predicted its Tier 1 common ratio would be about 3.8 percentage points stronger than the Fed estimated in a worst-case scenario. The gap for Bank of America was 2.7 percentage points.
Chief Executive Officer Brian T. Moynihan seeks to fulfill his quest to raise the firm’s dividend, five years after it was cut to 1 cent during the crisis. The Fed blocked plans in 2011 for an increase by the Charlotte, North Carolina-based bank, which didn’t ask for anything the following year and won permission for a $5 billion stock buyback last year.
JPMorgan Chase & Co., which won approval last year while still having to resubmit to address qualitative weaknesses, had its capital plan ratified as it maintained a Tier 1 common ratio of 5.5 percent, a half-point above the minimum. Wells Fargo & Co.’s ratio was 6.1 percent, while Morgan Stanley’s was 5.9 percent.
Zions, the Salt Lake City-based bank that had a 4.4 percent Tier 1 common ratio in the test, said before today’s results were announced that it planned to resubmit its capital plan.
The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.
Banks typically announce planned dividend increases and buybacks shortly after the Fed releases results of the stress tests. Raises may boost yields closer to the norms that prevailed before the financial crisis, when the stocks were favored by income-oriented investors. The average yield for the 24-company KBW Bank Index stood at 4.9 percent at the end of 2007. It’s now under 2 percent.
The banks in this year’s test collectively received approval to pay out about 60 percent of their estimated net income during the next four quarters, according to a Fed official. That ratio is higher than in recent years and closer to what lenders were returning to shareholders in 2005, before the crisis, according to data from Bloomberg Industries.
The Fed last week disclosed how banks performed in a hypothetical recession in which U.S. unemployment peaks at 11.3 percent, home prices fall 25 percent and stocks plunge almost 50 percent.
Projected losses for the 30 banks under a scenario of deep recession would total $366 billion over nine quarters, the Fed said last week. The aggregate Tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to a minimum of 7.6 percent, before factoring in the banks’ proposed capital plans.
The KBW Bank Index advanced 4.9 percent this year through yesterday, compared with the 0.9 percent gain for the benchmark Standard & Poor’s 500 Index.
The Fed last week corrected its initial calculations of banks’ capital ratios under the stress test.
Russia has moved more troops near Ukraine's border in recent days, despite assurances it would not attack the country's east, US Defence Secretary Chuck Hagel says.
Although Russia's defence minister had told Hagel last week that Moscow would not send troops into eastern Ukraine, "the reality is that they continue to build up their forces, so they need to make sure they stay committed to what Minister (Sergei) Shoigu told me," the Pentagon chief said after meeting his British counterpart, Philip Hammond.
But it was unclear whether the Russian defence minister carried real influence over decision-making in Moscow, given President Vladimir Putin's dominant role, the British defence secretary told a joint news conference at the Pentagon.
Hammond said "all the evidence suggests that the Russian agenda is being very much run by President Putin personally".
"And other Russian players, including Minister Shoigu, may express views, but it's a moot point, and we cannot know, we do not know to what extent all of those people are really inside the inner circle in which President Putin is planning this exercise," Hammond said.
There are now more than 20,000 Russian troops, including airborne units, fighter aircraft and armoured vehicles, deployed near the Ukrainian border, providing ample firepower to seize the eastern region if Moscow chose to, according to US defence officials.
Hammond said diplomatic and economic sanctions against Russia over its intervention in Ukraine's Crimean peninsula were designed to isolate Moscow over its "aggression" while also deterring any further incursions.
Amid concerns among NATO states in Eastern Europe over Russia's actions in Ukraine, Hammond vowed that the alliance was fully committed to defend the sovereignty of its members.
"And I have no doubt - I don't think any member of NATO has any doubt - that all 28 members are prepared to come to the security interests, if that's what's required, to defend the integrity and sovereignty of those member countries," he said.
Asked about Ukraine's request to Washington for weapons and other lethal and non-lethal assistance, Hagel said the US administration had approved sending military rations to Kiev, while other items were still under review.
"The president's national security team is reviewing all of the other requests for assistance, particularly the non-lethal assistance to Ukraine," Hagel said.
central organ of the Communist Party of China , with 70 million members , recently announced in an editorial line of: Given that Ukraine " by the spirit of the Cold War covered" is , will be " the strategic approach of China and Russia to an anchor of world stability. " With regard to the Ukraine the Chinese leading medium notes: " Russia under the leadership of Vladimir Putin has already forced the West to understand that there is no victory in the ' Cold War ' . "
The strong words stand for a stringent strategy. In the conflict between Russia and the West, the most populous country in the world is on the side of the largest country . Beijing and Moscow are working on an alliance that can change the balance of power in the world dramatically. Although China has abstained from voting in the UN Security Council about the Russian military action in the Crimea from voting. But directed by the Communist Party press leaves no doubt about China's position . "The U.S. and Europe look towards Russia and Putin as a paper tiger from " sneers the Chinese newspaper "Global Times" . The leaf belongs to the holding of the KP central organ , and is of Chinese foreign intelligence close .
Underestimated Russia will
The West , the " Global Times" had " underestimated Russia's will to defend its core interests in Ukraine" . The strategy of the West, according to the paper , a support to " pro-Western Ukrainian government " does not work . This experiment leads " in a mess, to eliminate the the West does not have the capacity or not the wisdom ." The West , the Chinese forecast will be "losers of the fiasco in Ukraine" .
An editorial in the "Global Times" concludes: "We can not let Russia if it is in difficulties , China should be a reliable strategic partners How we make new friends. . . "
The offer from the People's Republic meets in Moscow with open ears . In his address to the State Duma and the Federation Council thanked Putin officially " the Chinese people " . Behind the scenes doing already more . Experts from the Russian Foreign Ministry is currently working on a draft contract for " military cooperation " with China. Details are not yet known, but the agreement envisaged is likely to go further than the contract for " good neighborliness, friendship and cooperation," Putin closed down in 2001 with China.
Already this Agreement provides for a "military and military-technical cooperation " by Russians and Chinese . So both countries are working in the Shanghai Organization for Security , joint maneuvers included. China is a major customer of Russian defense industry. After China were alone in the years 2004 to 2011, approximately 23 percent of Russian arms exports. The Chinese bought from the Russians , among other fighter aircraft , aircraft engines, diesel submarines and missile systems .
Chinese weapons wishes
With regard to the Americans, Moscow has the Chinese does not yet meet some weapons request. This could change soon. So Beijing would like to acquire nuclear-tipped missile submarines of the Russian "Project 949A". Thus, even American aircraft carrier could be sunk in case of emergency.
Influential Manager of the Russian state arms trade already require to store any restraint in arms exports to China. When aircraft and military shipbuilding, according to experts in the industry, including major joint projects are conceivable.
The Chinese interest in arms cooperation also explains the attitude of Beijing to Kiev. According to estimates of the Stockholm research institute SIPRI Ukraine is the third largest supplier of arms of the People's Republic. 2012 alone, provided the Ukraine to China weapons worth 690 million U.S. dollars.
An approximation of Ukraine to NATO, so Chinese fears could end this cooperation. That's why China is strategically interested in Ukraine in the sphere of Russian influence. Therefore, China's shadow over the ailing Ukraine lies.
In addition, the new Chinese party chief Xi Jinping is a profound knowledge of Russian literature. So grows together what was before. After its establishment in October 1949, the People's Republic of China was formed with the Soviet Union the "camp of the people's democracies", which also included the GDR. Even now both superpowers are reconnected by authoritarian state views. Their inner power and strength is often underestimated in the West.
There are two schools of financial market analysis: 1) fundamental analysis, which is concerned economics, financial statements, earnings, and anything else that you would assume would justify a value in a real-world sense and 2) technical analysis, which attempts to forecast prices by studying past price movements.
Fundamental and technical analysis aren't totally mutually exclusive. But the folks who focus on the latter are more easy to identify as they dedicate a larger amount of their time pining over charts.
Fundamental analysts tend to spend more time bashing technical analysts than vice versa. So, they were probably happy to hear about a new study challenging the merits of technical analysis.
FT Alphaville's Dan McCrum alerted us to the paper modestly titled "Technical Analysis and Individual Investors" by Arvid Hoffman and Hersh Shefrin, who use transaction records from a Dutch discount broker from 2000-2006.
By considering actual trades, the authors are able to consider the very real impact of behavior biases. Indeed, the authors conclusions appear to be more about psychology than technical analysis itself.
"We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors," they write.
"Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns."
The authors quantify the underperformance:
The magnitudes are economically important: controlling for concentration and turnover, the marginal cost associated with technical analysis is ap
In the days following China's first-ever default of a corporate bond (Chaori Solar Energy Science and Technology Co's 11 Chaori bond), many tossed around the idea that this was China's 'Bear Stearns moment' or its 'Lehman moment'.
The fall of investment bank Bear Stearns and the bankruptcy of Lehman Brothers marked key risk events during the great recession.
Chaori's default ended up being neither, writes Lombard Street Research's Diana Choyleva.
"Unlike Bear Stearns, Chaori’s default did not change the market’s perception of inherent credit risk in the economy, causing a liquidity crunch," writes Choyleva.
This is because it was known for some time that the solar company was in trouble.
"Nor is it a replay of Lehman’s collapse, which triggered a panic partly because it introduced uncertainty about the US government’s intentions."
That being said, Choyleva does think that "China's Bear Stearns moment may strike any time."
China's overall debt reached 238% of GDP last year, but even in an extreme case China will find the clean up more manageable. China could "use its ability to absorb loan losses to postpone the debt problem and defer financial market reform," writes Choyleva.
Choyleva argues that with reforms China faces financial distress but that without it the debt will continue to balloon and cause a bigger crisis. "If the leadership opts to mop up the mess while still wasting capital, it could be only 2-3 years before a major financial crisis hits the economy." From Choyleva:
"Debt in China over the past five years has grown much faster than in Japan at the same stage of development. Studies show the rate of increase in debt is as important, if not more important, in precipitating a crisis than the absolute level of debt. On that front, China scores extremely poorly. Japan’s debt didn’t start to rise at a similar speed until the mid-1980s. China’s debt has surged sooner because its economy is much bigger than Japan’s was. The world is just not big enough to let China continue to increase its income per capita and waste its savings on a vast scale for years to come. The financial crisis was the beginning of the end of China’s export and investment-led growth model."
Both scenarios could prompt a Bear Stearns moment, but in the reform scenario China will be able to manage the situation.
"If it happens later in a no reform scenario the crisis will be much bigger and China's catch-up growth would be compromised, i.e. China grows at below the rate of global growth for a decade," Choyleva told Business Insider in an email.
"Russian businessmen are very scared," the 54-year-old former billionaire, who served in the Soviet embassy in London during the Cold War and owns Russia's National Reserve Corp., said by phone. "There are risks to the Russian economy. There could be margin calls, reserves might be drawn down, exchange rates may fall and prices will rise. This worries me."
Billionaires in Russia and Ukraine risk further losses as market volatility and the threat of Iran-style economic sanctions intensify following Russia's incursion into Crimea. Since February 28, the day unidentified soldiers took control of Simferopol Airport in southern Ukraine, Russia's 19 richest people have lost $US18.3 billion ($20.3 billion), according to the Bloomberg Billionaires Index, a daily ranking of the world's 300 richest wealthiest people.
Ukraine's richest person, Rinat Akhmetov.
Ukraine's richest person, Rinat Akhmetov. Photo: Reuters
"The instability caused by the situation in Crimea could be a problem for the oligarchs," Yulia Bushueva, who helps manage $US500 million at Arbat Capital in Moscow, said in a telephone interview. "If a billionaire pledged their stakes in publicly traded companies as collateral for a line of credit, they could face margin calls and have to re-negotiate with banks."
The US and the European Union are threatening sanctions against Russia if it doesn't back down from annexing the Black Sea province, which is holding a referendum in two days to join Ukraine's former Soviet-era master.
"All sides now understand each other's positioning and understand the constraints each other face,"Michael O'Sullivan, chief investment officer of Credit Suisse Private Banking, said in a telephone interview. "It's now clear as well that an escalation would have negative consequences on pretty much all the players."
The European Union last week froze the assets of 18 Ukrainians, including "hundreds of millions of euros" in the Netherlands controlled by former President Viktor Yanukovych and his son, Oleksandr, Dutch Finance Minister Jeroen Dijsselbloem said March 6 on the television show Pauw & Witteman.
Dmitry Firtash, a 48-year-old Ukrainian billionaire who made his fortune importing Russian natural gas, was arrested in Vienna Wednesday by an organised-crime unit of the Austrian police on a warrant issued by the US Federal Bureau of Investigation, according to a statement by the country's Interior Ministry.
He is alleged to have paid bribes and formed a criminal organisation, according to the warrant, issued after an FBI investigation that began in 2006, the ministry said.
One Russian billionaire, who asked not to be identified because of the sensitivity of the situation, said he was concerned about the effect potential sanctions might have on business. He said he'd consider buying assets outside of Russia if sanctions were imposed.
Dmitry Peskov, a Kremlin spokesman, said in a March 11 telephone interview that "there were no consultations" with Russian businessmen and that they "have not expressed any concern" over the situation.
According to a March 13 report in the Wall Street Journal, a spokesman for President Vladimir Putin acknowledged that business leaders in Russia have been in "constant contact," and that Putin had not met with any of them. The report said a recent meeting between the country's industrialists and high-ranking government officials turned "tense" when the subject of sanctions came up.
Doing business under sanctions might not be all bad for Russian entrepreneurs, according to South African billionaire Natie Kirsh.
"There are opportunities that come out of sanctions," the 82-year-old, who started building his $5.9 billion retail and real estate empire during apartheid, said by phone from Johannesburg. "Sanctions can be broken. It always depends on the extent of the sanctions and how they take."
F.W. de Klerk, South Africa's last president during the apartheid era, said the country and businessmen were able to work around the sanctions levied by the US beginning in 1986.
"The sanctions delayed change in South Africa because it made us look for ways to evade them," de Klerk, 77, said in a telephone interview from Cape Town. "We worked with the business community to find ways to keep companies going. In the end, not many factories shut down, they just changed ownership."
Kirsh said the Cold War could reemerge out of Russia's incursion in Ukraine, and energy suppliers outside of Russia will benefit if sanctions are levied.
"It's a different story with Putin," Kirsh said. "South Africa doesn't supply 30 per cent of Europe's oil and gas. There will be some people outside of Russia that will see a huge benefit. Some people who supply oil and gas for Russia will not believe how busy they will be."
Rinat Akhmetov, Ukraine's richest person, has lost more than $US550 million since February 28. The 47-year-old billionaire, who owns Donetsk, Ukraine-based conglomerate System Capital Management Group, expanded his business with help from Yanukovych. Akhmetov's DTEK Holdings BV was the only bidder in two of five auctions of state-owned energy assets, which were organised by the former president's government.
The billionaire no longer supports his longtime ally and has committed to rebuilding the government of Ukraine, according to a March 10 report in London's Telegraph newspaper. Elena Dovzhenko, a spokeswoman for Ahkmetov, said the billionaire wasn't immediately available to comment.
"He understands that the previous state of things is over," Ihor Burakovsky, head of the Board of the Institute for Economic Research and Policy Consulting in Kiev, said by phone. "He will try to maintain relations with all the significant players in the country."
Ahkmetov on March 9 met with Vitali Klitschko, leader of Ukraine's UDAR party and a potential candidate for Ukraine's presidency, to discuss the situation, according to a statement from UDAR.
"The use of force and lawless actions from outside are unacceptable," the billionaire said in a separate statement on March 2. "I state with all due responsibility that SCM Group, which today employs 300,000 people and represents Ukraine from west to east and from north to south, will do everything possible to maintain the integrity of our country."
The 19 Russian billionaires on the Bloomberg ranking have businesses, homes and bank accounts scattered around the globe valued at more than $208 billion. Some of that wealth was accumulated through government ties that enabled them to acquire former state assets during privatisation in the 1990s, transactions Putin called "unfair" in 2012. They have since moved control of the assets out of Russia and into the West.
Alisher Usmanov, the country's richest person, controls his most valuable asset, Metalloinvest Holding Co., Russia's largest iron ore producer, through three subsidiaries, one of which is located in Cyprus, an EU member nation. The 60-year-old also owns a Victorian mansion in London that he bought in 2008 for $70 million, according to a May 18, 2008, Sunday Times newspaper report.
He's lost $1.5 billion since the crisis began, according to the Bloomberg ranking.
"We are concerned with the possible sanctions against Russia but don't see any dramatic repercussions for our business," Ivan Streshinsky, CEO at USM Advisors LLC, which manages Usmanov's assets, including stakes in Megafon OAO and Mail.Ru Group Ltd., said in an interview at Bloomberg's offices in Moscow.
"Mail.Ru and Megafon revenue is coming from Russia and people won't stop making calls and using the Internet," he said. "Metalloinvest may face closure in European and American markets, but it can re-direct sales to China and other markets."
Transferring ownership abroad may prove problematic if sanctions are imposed. The US Securities and Exchange Commission and other regulatory authorities may tell US-based banks to exhibit greater compliance with the existing Foreign Corrupt Practices Act, Standard Bank (STAN) Group Ltd. said in a March 11 report.
The report also said the US might investigate Russia's compliance with the Financial Actions Task Force on Money Laundering and Terrorism Financing in an effort to push the country onto a black list, a move that would prevent global banks from dealing with Russian lenders.
The third escalation would be actual asset freezes, which perhaps would be "the nuclear blow, as it would risk countermeasures from the Russian authorities," according to the Standard Bank report.
"Currently, there is no clear link between events taking place in Ukraine and any steps that might be available to freeze assets of wealthy Russian citizens overseas," Marta Khomyak, a partner of London-based PCB Litigation, said in a telephone interview. "However, given the pace of events and the underlying political tensions, I would not rule out attempts being made to attack various Russian interests overseas."
Sanctions related to the Crimea crisis so far have been levied on individuals the EU said were responsible for the "misappropriation of state funds" and "human rights violations," according to the regulation passed by the Council of the European Union on March 5. President Obama echoed the language in a briefing with journalists at the White House the next day.
"Russians who are making bank transactions and opening new accounts will now be confronted with increased suspicion," Valery Tutykhin, an attorney with John Tiner & Partners, a Geneva-based law firm that specializes in wealth management, said in an e-mail.
The crisis also threatens to derail the relationship between the West and the Russian businesses the billionaires control. Among the companies potentially affected is OAO Novolipetsk Steel (NLMK), the country's most-valuable steelmaker, which is controlled by Vladimir Lisin, Russia's 13th-richest person. The company derived 21 per cent of its $US12.1 billion in 2012 revenue from Europe, according to data compiled by Bloomberg. Sergey Babichenko, a spokesman for NLMK, declined to comment.
"In the event of a European and US ban on exports of the metal, NLMK's position would be weakest among Russian steelmakers, because it ships steel slabs to its own mills in Europe," Kirill Chuyko, head of equity research at BCS Financial Group said. "We see such actions as unlikely for the time being."
With its stock market falling and interest rates rising, Russia has suffered most of the financial pain the crisis has inflicted.
"To the extent that they can, the businessmen in Moscow will be making their sentiments and voices heard," said Credit Suisse (CSGN)'s O'Sullivan. "I'm not sure the Kremlin will listen to them."
Billionaire Naguib Sawiris, Egypt's second-richest person, who's done business with North Korea, Russia and Pakistan through his telecommunications companies, said he's concerned about potential sanctions.
"Putin has proven that toward the end of any crisis, he always goes back to reason and finds compromises," Sawiris, 59, said in a March 14 e-mail. "Therefore, I bet this crisis will end amicably."
World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall
Phillip Inman economics correspondent
The Guardian, Thursday 13 March 2014 20.29 GMT
Premier Li Keqiang waves
China's Premier, Li Keqiang, was speaking after the annual session of the national people's congress. Photograph: Feng Li/Getty Images
China is braced for a wave of industrial bankruptcies as its slowing economy forces companies with sky-high debts to the wall, the country's premier has said.
Premier Li Keqiang told lenders to China's private sector factories they should expect debt defaults as the world's second largest economy encounters "serious challenges" in the year ahead.
Speaking after the annual session of the national people's congress, Li Keqiang said: "We are going to confront serious challenges this year and some challenges may be even more complex." He told lenders to China's private sector factories they should expect debt defaults.
Li said China must "ensure steady growth, ensure employment, avert inflation and defuse risks" while also fighting pollution, among other tasks.
"So we need to strike a proper balance amidst all these goals and objectives," he added. "This is not going to be easy," he said.
Li's warning followed the failure of Shanghai Chaori Solar Energy to make a payment on a 1bn yuan (£118m) bond last week. The default was the first of its kind for China and widely seen as pointing to the end of 11th-hour government bailouts for troubled enterprises.
Some analysts said the decision to let some indebted firms collapse was a sign the authorities had learned from the Japanese boom and bust experience of the late 1980s and early 1990s. Tokyo was plunged into two "lost" decades of stagnation after it prevented zombie companies from declaring bankruptcy – even blocking petitions from bondholders in the courts - when a property collapse exposed debts many times the value of their businesses.
However, figures this week revealed that Beijing is copying the Japanese tactic of ramping up public infrastructure spending to replace the steep slowdown in private sector investment. Fixed asset investment, a measure of government spending on infrastructure, expanded 17.9% during the first two months of 2014, the National Bureau of Statistics said.
China's industrial production rose at its slowest pace in five years with surveys showing a faster slowdown than expected. Industrial output, which measures production at factories, workshops and mines, rose 8.6% in January and February year on year, which is the lowest pace of growth since the 7.3% annual growth figure recorded in April 2009.
The figures covered a two-month period owing to China's lunar new year holiday week, which fell in both months.
Retail sales gained 11.8% in the two months from the year before, the lowest since an 11.6% increase in February 2011.
The pessimistic data surprised economists but followed indicators for manufacturing, trade and inflation that also suggested weakness in China's economy.
China's GDP grew 7.7% in 2013, unchanged from the year before, the slowest growth since 1999. Li said this month that Beijing was targeting economic growth of about 7.5% in 2014, the same target as last year.
Société Générale said in a research note that the results were a confirmation of "fast deterioration of China's economic growth". But Julian Evans-Pritchard, Asia economist for Capital Economics, said officials were unlikely to intervene.
"Limited and seasonally distorted data over the last few weeks have made it difficult to make sense of what's really happening in China's economy," he said in a note. "Despite this broad evidence of a slowdown, we don't think policymakers will necessarily step in to support growth," he said, adding that officials were "comfortable with a moderate slowdown".
The figures come as China's leadership says it wants to transform the growth model away from an over-reliance on often wasteful investment, making private demand the driver for the country's development.
A reliance on public sector investment while the private sector rebalances away from low margin manufacturing relies for its success on the economy maintaining the government's growth target.
Li said: "Last year, without taking any additional short-term stimulus measures, we succeeded in meeting our target. Why can't we do this this year?"
He emphasised the target was approximate. "This 'about' shows that there is a level of flexibility here."
At any rate, he said authorities were not focused on the figure itself, but how it contributes to improving livelihoods, saying growth "needs to ensure fairly full employment and needs to help increase people's income".
The world’s most-profitable banks have never been so unloved by stock investors.
China’s four-biggest lenders, which reported $126 billion of earnings in the 12 months through September, sank to the lowest valuations on record in Hong Kong trading yesterday. The MSCI China Financials Index dropped to an almost decade low versus the global industry benchmark while the market value of Industrial & Commercial Bank of China Ltd., the nation’s largest lender, fell below net assets for the first time on March 12.
The state-controlled banks known as China’s Big Four are getting squeezed by slower economic growth and rising bad debts just as policy makers open up the nation’s financial system to non-government competitors. Their shares have lost $70 billion of value this year, equivalent to the size of New Zealand’s entire stock market, even as U.S. and European peers rally. Wells Fargo & Co. and JPMorgan Chase & Co. have knocked ICBC from its ranking as the world’s biggest bank by market value.
“The market is concerned about future profitability” in China, Diana Choyleva, the head of macroeconomic research at Lombard Street Research, said by phone from London on March 11. “I would not be investing Chinese bank shares just yet. They have further to go.”
ICBC, China Construction Bank Corp., Agricultural Bank of China Ltd. (1288) and Bank of China Ltd. were stock-market darlings as recently as 2011, when the world’s second-largest economy was growing at close to 10 percent and banks reaped profits from a $3 trillion lending spree during the previous two years. Now investors are concerned that those loans will turn sour at an increasing rate as growth slows toward 7.5 percent, the weakest annual pace since 1990.
At the same time, the ruling Communist Party’s plan to increase the role of markets in China poses a threat to state-owned banks that have benefited from tightly regulated interest rates. Central bank Governor Zhou Xiaochuan said on March 11 that the government will free up deposit rates within two years, while the China Banking Regulatory Commission said the same day it has approved a trial program to establish five privately-owned banks.
“The more the government moves to freeing the market, the more they have to compete on more level terms,” Michael Aronstein, whose $21 billion MainStay Marketfield Fund (MFLDX) has outperformed 96 percent of peers tracked by Bloomberg during the past three years, said in a phone interview from New York. “They are not prepared to do that. It’s like releasing your house cat into the jungle.”
Calls to spokesmen at ICBC, China Construction Bank and AgBank weren’t returned. A Bank of China official said she couldn’t immediately comment.
The Big Four banks, all based in Beijing, tumbled an average 15 percent in Hong Kong this year through yesterday, led by an 18 percent retreat in AgBank. The shares are valued at a mean 0.94 times net assets, or book value, the lowest level since AgBank’s initial public offering in 2010 and down from a level of 2 in March 2011, data compiled by Bloomberg show. JPMorgan, the biggest U.S. bank by total assets, has a price-to-book ratio of 1.08, while BNP Paribas SA, the largest French lender, fetches a multiple of 0.87.
The MSCI China Financials Index, which includes banks along with developers and securities firms, trades at about the same level as its net assets, a 19 percent discount versus the MSCI All-Country World Financials Index. The Hang Seng China Enterprises Index (HSCEI), a benchmark for mainland companies listed in Hong Kong, has dropped 14 percent this year and is valued at 1.1 times book.
ICBC declined 0.7 percent at the close in Hong Kong, while China Construction Bank fell 0.2 percent and AgBank lost 0.6 percent. Bank of China was unchanged.
Some analysts say the selloff has gone too far. ICBC is poised to rebound and will surge 38 percent over the next 12 months, according to the average of 24 analyst forecasts. China Construction Bank has a return potential of 42 percent while AgBank may increase 28 percent, according to estimates tracked by Bloomberg.
“Even in the worst case scenario of a sharp increase in nonperforming loans, the impact for the banks’ net profit will not be very significant,” said Steven Chan, an analyst in Hong Kong at Maybank Kim Eng Securities Pte, which has an overweight rating on Chinese banks.
Lenders rallied in early Hong Kong trading yesterday on media reports that regulators will allow them to sell preferred shares for the first time, giving banks a new way to meet long-term fundraising requirements. The shares then erased most of the gains after data showing China’s industrial-output, investment and retail-sales growth cooled more than economists estimated in January and February.
The figures were the latest signs of a weakening expansion in the $9 trillion economy. Previously released data for February showed exports unexpectedly plunged the most since the global financial crisis, producer-price deflation deepened and credit growth trailed estimates.
The slowdown is making it harder for Chinese borrowers to repay their debts. Nonperforming loans increased by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013 to 592.1 billion yuan, according to the banking regulator. While that’s still just 1 percent of total lending, it’s the highest amount since September 2008.
Some lenders are increasingly financing insolvent companies to help them pay off maturing debt in a bid to avoid outright defaults, according to Mike Monnelly, a money manager at Arhammar Global Capital Management LLP in London. The practice, known as evergreening, reduces banks’ ability to lend to profitable businesses, he said.
“The capital consumed by evergreening is capital that could otherwise be used productively,” said Monnelly, a former analyst at hedge fund Kynikos Associates Ltd., which rose to fame shorting Enron Corp. before the energy company went bankrupt.
China averted its first trust default in at least a decade in January as investors in a troubled 3 billion-yuan high-yield product issued by China Credit Trust Co., and distributed by ICBC, were bailed out days before it matured.
Creditors of Shanghai Chaori Solar Energy Science & Technology Co. weren’t so lucky. The company became China’s first onshore corporate bond default after failing to pay a coupon due on March 7.
Total debt of publicly traded nonfinancial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007, while the number of companies with debt twice their equity has increased 57 percent.
“The Chinese banking sector has to initially address the perceived risk in its system, and by doing so, lift some of the uncertainty revolving around asset quality,” Ismael Pili, a Hong Kong-based analyst at Macquarie Group Ltd., wrote in an e-mail. Pili recommends underweighting Chinese banks, while favoring lenders in the Philippines, Japan, Singapore and Indonesia.
After years of earning a government-controlled spread between what they pay for deposits and charge for loans, China’s big banks now face increased competition for both.
PBOC’s Zhou said at a briefing in Beijing on March 11 that deposit rates will be liberalized in one to two years, while reiterating that interest rates will initially rise as controls are removed.
The banking regulator will allow privately owned banks to be set up in the cities of Shanghai and Tianjin, along with Guangdong and Zhejiang provinces. Alibaba Group Holding Ltd., the Internet company that sells China’s biggest money-market fund online, said it plans to apply jointly for a license with China Wanxiang Holding Co.
Investors in Chinese banks are concerned “the ongoing interest-rate liberalization will squeeze their profits,” Wang Weijun, a Shanghai-based strategist at Zheshang Securities, said by phone. “Over the short or medium-term horizon, pessimism over the industry is still there and share prices could become even cheaper.”