Wednesday, December 29, 2004

Asia's Biggest Stories of 2004

This is the time when news organizations publish their annual top ten news stories of the Year. The Associated Press’s listing contained not one story originating in Asia. Presumably the voting took place too early to include the cataclysmic tsunami that hit South and Southeast Asia at year’s end. But why leave off the Afghanistan presidential election, which is supposed to be such a seminal event of the war in terror campaign? Anyway, here is Asia Cable’s list of the top stories in Asia in 2004:

1. Earthquake and tsunami kill more than 70,000
2. Indonesia holds first presidential election
3. Taiwan re-elects Chen shui-bian
4. China emerges as mover in world financial markets
5. Indians vote to oust BJP, return Congress Party
6. Megumi affair impacts Japan-North Korea
7. South Korea’s president survives impeachment
8. Kim Jong Il survives presumed assassination attempt
9. Hong Kong’s democrats win seats
10.China signs big oil deal with Iran

What can one say about the end-of-year earthquake and tsunami? At more than 70,000 and counting, the death toll is now double that of the famous eruption and tsunami of Mt. Krakatoa in 1883. The less than urgent response from Washington to the tragedy reflects the general indifference of most Americans to this region. Unfortunately, for most Americans Indonesia is a giant blank spot on the globe. President George W. Bush probably just reflects the attitudes of most of his countrymen, unless prodded by his advisers (or Bill Clinton), who were scattered during the down week between Christmas and New Years.

That’s one reason why Indonesia’s critical presidential election of September 20 received relatively little attention. On that day for the first time since Independence, 150 million voters went to the polls to elect their president. They did it in a grand style, ousting Megawati Sukarnoputri and replacing her with Susilo Bambang Yuhoyono. Indonesia is a largely Muslim country often beset by civil strife, and at times terrorist bombings that is transforming itself successfully into a stable democracy after long years under a dictator without U.S. soldiers or other outside assistance. That has to be one of the more encouraging news stories of the year.

Taiwan’s voters by the narrowest of margins gave President Chen Shui-bian a second term, although they defeated, also by a narrow margin, a referendum asking whether Taiwan should bolster its anti-missile defenses in the face of China’s buildup. Apparently, the voters instinctively felt that re-electing President Chen was provocation enough for one election. In December, however, Chen’s pan-green alliance fell short of a majority in the election for the Legislature, which may restrain Chen from pushing the envelope of independence too far.

When a modest quarter percent increase in the People’s Bank of China lending rate makes the front page of the New York Times, you know that the ground is shifting. The increase in late October was not so significant in itself, being part of a general effort by Beijing to slow the economy, but the notice that the world took underscored just how important China is becoming in the world economy. Consider too that an off hand remark by an obscure bank official at a Shanghai seminar about China’s possibly pulling back on buying U.S. Treasury bonds (later officially denied) boosted the euro a record level.

Another country, another election. In May India’s voters surprised themselves and the rest of the world by ousting the BJP-dominated alliance led by Prime Minister Atal Behari Vajpayee and returning the Congress Party to power. The Congress and its allies won 215 seats compared to the BJP’s 182 to emerge as the largest bloc in Parliament. The leader of the Congress and head of India’s most important political dynasty, Italian-born Sonia Gandhi, declined to serve as prime minister. Instead, Manmohan Sing was appointed.

Relations between Japan and North Korea reached a new low late in 2004 over the perennial issue of missing Japanese kidnapped by North Korea in the 1970s. The latest incident involved a woman named Megumi Yokota, who was abducted in 1977 and reportedly died in 1994. Her “remains” were turned over to a visiting Japanese delegation in November, but DNA tests (made possible because Japanese traditionally save the umbilical cord of newly born children) showed the remains “belonged to a number of other people.”

One could say it was a tough year for the leaders of both of the Koreas. South Korea’s President Roh Moo Hyun suffered the indignity of being impeached by the National Assembly in March for alleged incompetence and mismanagement. He had to turn over power to Prime Minister Goh Kun for two months until the Constitutional Court ruled that the charges were not serious enough to justify unseating a popularly elected president. Roh’s Uri Party won control of the Assembly in April in part because of voter fury over the impeachment.

Kim Jong Il does not have to worry about being impeached, but he may have some other concerns on his mind. Two trains carrying gasoline and LPG collided at a railway station in Ryongchon near the Chinese border causing a devastating explosion. Kim’s train had passed through the station only a few hours before, returning him to Pyongyang after a brief visit to Beijing. Whether this was an assassination attempt or a coincidence remains a mystery. Yet reports filtering out of North Korea, such that some people were doffing their little Kim Jong Il pins, suggested some political unrest in the country.

Hong Kong’s people were pulled this way and that by political controversies for the first nine months of 2004. China’s National People’s Congress said, in effect, don’t expect any movement toward greater democracy anytime soon; another half a million people took to the streets on July 1 to demonstrate for greater democracy and voters finally expressed their views in the September Legislative Council election (the first with half of the 60-seat body returned through direct elections). Democrats as a whole increased their margin, but the Hong Kong Democratic Party, long the standard-bearer for democracy, suffered losses as new voices, such as perpetual protestor Leung Kwok-hung, won seats in the body.

China’s signing of a $100 billion deal to buy liquefied natural gas from Iran was just the largest of a number of deals negotiated in 2004 as Beijing scoured the world for secure sources of energy to meet its rapidly expanding economy and energy needs. China’s petroleum imports expanded by a whopping 40% during the year. She replaced Japan as the world’s second largest consumer. In addition, during the year Chinese petroleum companies were prospecting for contracts in Canada and as far away as Venezuela. These are obvious portents of what will become an increasingly important economic and geopolitical story in 2005 and the years beyond.

Tuesday, December 21, 2004

I Miss My Aussies

By now even people who do not usually read the business pages or follow financial news are vaguely aware that the dollar has been steadily weakening against almost every other currency in the civilized world. Scarcely a day passes that some pundit or analyst does not prophesize dire consequences if the country does not get its fiscal house in order.

Since 2001 the dollar has weakened 33% against the euro and 20% against the Japanese yen not to mention similar declines against the Canadian dollar, the Australian dollar or the British pound sterling and others. But put another way, you could have earned 33% profit if you had bought euros. That is, if you could have gotten your hands on euros.

But banks in this country stubbornly resist offering retail customers foreign currency accounts. Of course, the big banks do have international departments to provide the millions in Japanese yen or whatever that exporters need to do business in the Pacific Rim or to send remittances back to El Salvador. But go down to your local banks branch and ask to open an account in, say, Swiss francs, and you will get a blank look.

This is in contrast to other countries where savers can choose to park their money in any one of a dozen different currencies. When I lived in Hong Kong I put much of my savings into an Australian dollar account. I don’t claim to have been smart enough to foresee the Aussie appreciating 24% in six months. I was simply looking for savings account that offered an interest rate with a numeral on the left side of the decimal point.

Why is it that you can walk into any bank in Hong Kong – and I mean any bank, not just the downtown giants, banks in ordinary neighborhoods that are sandwiched between the Chinese medicine store and the birds nest soup shop – and open a savings account in euros, or yen, or Swiss francs or Canadian dollars? Why can’t we do this in the Land of the Free?

“Only in America do we think only in dollars. But people in most of the rest of the world have a choice of currencies,” says Chicago-based personal investment columnist Terry Savage. “Why not follow the smart money?”

If you want to profit from the fall in the dollar in this country is left basically with two choices. You can go down to Thomas Cooke and buy a big glob of foreign currency and then put it in a savings deposit box (or under your mattress). Or, you can open an account with Everbank.

Everbank of St. Louis ( is an online bank and the only one I know of in the U.S. that actively seeks foreign currency deposits. These are normal, federally insured savings accounts usually offering interest rates considerably higher than U.S. dollar savings accounts (more than 6% on the South African rand, for example).

Why don’t more American banks provide this service? To some extent it is a chicken-egg situation. Trading in currencies is labor intensive, with banks having to set up special bookkeeping and back office operations to keep track of the transactions. This makes them think that chasing nickel and dime savings may not be worth the cost – especially if they don’t feel the public clamoring for them.

Moreover, there seems to be a perception that saving in foreign currencies is somehow unduly risky. Never mind that betting on a falling dollar is about as safe a bet as one can make over the next few years. Economists differ only on whether the dollar’s decline will be gradual or precipitous.

People who think nothing of putting their savings in some new dotcom startup, seem to think that currencies are for speculators. True, there are traders who make quick profits by placing big bets on small fluctuations in currency values. This is a risky business, akin to trading in commodity futures. But I’m talking of ordinary savings accounts. Investors can reduce their risks by sticking with short-term CDs and moving money out if the currencies fall.

Gretchen Steel, vice president of for foreign exchange trading at US Bank in Seattle, discourages ordinary savers from opening such accounts. “People say you can make a killing in say, yen, but to do so you have to have a lot of money.” Well, maybe. Even a 20% return on, say, Australian dollars may not set you up for life in Hawaii. But it is still a nice piece of change.

Tuesday, December 14, 2004

Bravo Lenovo

Few transactions between countries have caused Americans to take notice of the rising commercial power of China more than Lenovo’s recent successful bid to buy IBM’s personal computer business for $1.75 billion.
Inevitably, comparisons were made with the late 1980s and early 1990s when giant Japanese companies swept through America buying up such trophies as Rockefeller Center and Universal Studios. Yet such comparisons are slightly off the mark, or, more exactly, a little premature.

The big Japanese companies, like SONY and Matsushita, were already established international players and well-known recognizable brand names, virtual household words, when they went on their buying spree. Moreover, it came at the height of the Bubble Economy, when many Japanese companies had more cash than they knew what to do with.

Lenovo is not all that rich, and the actual cash outlay -- $650 million, the rest of the deal in stock – is relatively modest. Indeed, Lenovo’s profit margin has been squeezed in recent months because of intensive competition in the Chinese PC market with major American computer firms such as Dell.

That’s one reason why analysts that follow Chinese stocks in Hong Kong have been recommending that investors sell their Lenovo stock. The IBM deal made little difference to the analysts at UOB Kay Hian in Hong Kong, which continued to recommend selling the stock due to “execution risk,” meaning uncertainties that come from merging corporate cultures.

The other difference, of course, is that Lenovo is all but unknown in America. These days it is virtually impossible for Americans to buy a Christmas present that is not made in China, but one has to look closely at the label to find out. On the other hand, not one person in ten thousand could come up with even one Chinese brand name.

You could tell that the television newscasters had never formed their mouths around the word Lenovo before. But that is essentially the point. Lenovo’s ambition is to be the first internationally recognized Chinese brand name, the first Chinese equivalent of SONY or Toshiba, and the IBM deal is its means of doing this.

Lenovo has long aspired to be a global giant and has been working steadily toward that goal. Two years ago it changed it name in English from Legend to Lenovo (an invented word from Latin, meaning new) specifically because the name Legend was too common and already trademarked in the West. It had the added advantage of being completely deracinated. The company retains Legend, or Liang Xiang, meaning “association,” as its name in Chinese.

The deal gives Lenovo ownership of two globally recognized trademarks the ThinkPad laptop and the ThinkCentre desktop. The company gets the right to use the well-known IBM name in front of the two brands for five years. But eventually it plans to sell the PCs as Lenovo ThinkPads and Lenovo ThinkCenters. To reinforce its global ambitions, Lenovo plans to move its corporate headquarters to New York -- the corporate headquarters, not just some “Lenovo America” entity.

The only other Chinese company that could also aspire to worldwide brand consciousness is probably Haier, the Chinese maker of refrigerators, air conditioners and other household white goods. Haier established its U.S. branch and bought a headquarters building in New York in 1999. But it does not go out of the way to advertise that it is a Chinese company. You can read the web page of Haier America and never know that it is a Chinese company, merely the U.S. branch of the “international” Haier Group.

But most Americans, if they knew it, would admire Lenovo’s story. It was founded in 1984, literally in a two room, one story bungalow in Beijing by eleven scientists from the Chinese Academy of Sciences, not one of them a businessman. They were armed with the equivalent of $24,000 in seed money (most of which was soon embezzled by an unscrupulous distributor) and a vague mission to turn the academy’s research into some kind of marketable products.

If one were to choose the first global Chinese brand, one could hardly find a better representative of the New China than Lenovo. Here is a company that made its way through China’s emerging and changing socialist market economy with no special government favors or support apart from the initial small grant and no special guanxi, or connections to the Communist Party leadership.

In a country that has traditionally favored the elderly, Lenovo puts the emphasis on youth. Lenovo’s Chief Executive Officer and soon-to-be-Chairman, Yang Yuanqing, earned his post while in his 30s. In a country where business activities are sometimes opaque, Lenovo is famously transparent. All major share transfers, mergers and acquisitions are disclosed fairly and equably.

It took the plunge to produce its own line of branded PCs, withstood the onslaught of foreign competition and emerged as the largest seller of personal computers in China, and now the number three PC company in the world, behind Dell and Hewlett-Packard. In doing so it virtually invented the concept of the state-owned but privately managed enterprise, borrowing management techniques from the West when applicable, but refining them to meet the peculiarities of Chinese culture. Bravo Lenovo.

Todd Crowell is the editor of the forthcoming The Story of Legend, the history of China’s largest computer company.

Monday, December 06, 2004

Banking on Revaluation

Should you buy Chinese money? Not so long ago the mere suggestion would have seemed absurd. You might as well have asked whether anyone is interested in buying Confederate money or old Imperial Chinese railroad bonds. The Chinese currency, known as the renminbi or yuan was something to paper your wall with.

But try and tell that to the thousands of Chinese who lined up outside the Bank of China in Shanghai one day in November to exchange U.S. dollars for their own currency. According to the Wall Street Journal they feared that a revaluation of the renminbi would cut the value of their dollar savings.

For more than a year, massive foreign pressure has been exerted on China to revalue its currency, which has been pegged to the U.S. dollar at a rate of 8.3 for more than a decade. Secretary of the Treasury John Snow has been probably the most persistent proponent of a delinking or re-pegging at a higher rate. Beijing’s leaders have resisted all such calls, saying they will move steadily toward greater flexibility in their own good time.

Depending on whom you listened to, the renminbi is overvalued by about 15 to 25 percent. So, if the Chinese authorities allowed the currency to float to its “natural” level anyone holding large amounts of Chinese money could make a killing. But two questions remain. How realistic is that expectation, and how, do you get your hands on yuan.

After all, it is not that easy to open any foreign currency accounts in the U.S. Just try going down to your local bank branch and ask to open an account in, say, euros. You will likely get a blank stare in return. American banks stubbornly resist opening foreign currency accounts, claiming that there isn’t a demand for them.

That’s in contrast to other places, like Hong Kong, where you can walk into any bank branch, not just the sophisticated headquarters of international commerce in Central but the ones in purely Chinese neighborhoods, sandwiched between the snake shop and the birds nest soup shop, and open an account in any one of a dozen currencies.

I know of only one bank in the U.S. that positively welcomes foreign currency accounts. And last year Everbank of St. Louis ( began offering renminbi deposit accounts last year. “Immediately, it became one of our best offerings,” Chuck Butler, President for World Markets told me.

Everbank requires a minimum $10,000 deposit, and the accounts bear no interest. So anyone opening one is simply speculating that China will widen exchange rate band or break the peg. The investor parks his dollars in the account in anticipation that he can walk away later with a profit. Since the renminbi is a non-convertible, meaning it cannot be taken out of China, the bank can only settle in dollars.

How realistic is it for one can make a profit from renminbi? To date, China has resisted revaluation pressure for a variety of reasons. The banking system is still in poor shape, and any revaluation would simply increase the value of the mass of non-performing loans, for example. But more to the point, Beijing simply does not like to be stampeded into making large moves under foreign pressure.

Premier Wen Jiabao, in response to growing speculation over revaluation, stated Beijing’s case quite explicitly during a visit to attend an ASEAN meeting in Laos in late November. “To be honest, the more speculation that is made about the renminbi, the less chance there will be a measure to change it,” he said. Also, China may re-peg the currency to a basket of other foreign currencies, rather than let it float.

It should be recalled that in late October the People’s Bank of China astonished the world by raising interest rates for the first time in nine years. It wasn’t a very big increase, but it came when nobody expected the bank would make such a move. Renminbi revaluation, when it comes, will probably also take place when nobody is looking.

So basically one has the option of letting capital lie like a lump, earning no interest and waiting until that blessed day, six months from now, a year, whenever, when Beijing decides to make the currency float. Considering many of the other attractive options available these days, one would probably be better off with Australian dollars or the many other currencies that do move.