Saturday, February 26, 2005

The Year of the Dollar

You have heard it a thousand times: diversify, diversify, diversify. It is a staple of investment advice columnists, and, as it applies to a personal portfolio, it probably makes good sense. But coming from the lips of a central banker, especially an Asian central banker, the mere mention of the word “diversification,” can cause all hell to break loose.

That’s what happened last week when the Bank of Korea, in a briefing distributed to members of the National Assembly, said that it plans to invest more money in higher-yielding securities than in U.S. Treasury bonds, such as Australian Canadian dollar assets. That sent the dollar tumbling and the euro (not to mention the Korean won) to new heights.

Of course, the Bank quickly issued a disclaimer insisting that it was not planning to sell dollars, which calmed the markets down somewhat. But it was more in the nature of a non-denial denial, since the Bank had never actually threatened to dump the greenback, only to adopt a more diversified investment strategy in the future. The Bank of Japan issued a similar statement.

They probably won’t actually sell any of their current dollar holdings. They just might not buy as many dollar assets in the future. That will become clearer over the next three to four months, when we can observe South Korea’s actual buying pattern. Once the dust settles, we’ll see the color of South Korea’s money.

In international finance circles the word “diversification” has become a scare word. It should be recalled that only last November the mere mention of the word from an obscure Chinese bank official at an investment seminar in Shanghai was enough to boost the euro to a record level.

That same month Fed Chairman Alan Greenspan, speaking at a banking conference in Frankfort, said, “The insatiable foreign demand for dollar holdings would eventually fall as investors diversify . . . away from U.S. assets or lead them to seek higher rates of return.”

Of course, Asian countries are stuffed with dollars because of America’s growing current account deficit. Asian countries now hold about $2 trillion in dollar-denominated assets. South Korea has about $200 billion in foreign currency reserves, including $69 billion in U.S. Treasury bonds. That makes Korea the fourth largest holder of foreign reserves and the fifth largest of Treasury bonds.

U.S. Treasury Bonds in Asian Banks (in $billions)

Japan $711.8
China $193.0
Korea $ 69.0
Taiwan $ 58.8
Hong Kong $ 52.7
Singapre $ 28.0
Thailand $ 15.0

One gets the impression that central bankers are panting to diversify their holdings out of the greenback. Then they get spooked when they see the market’s reaction to any hint of diversification, or perhaps they get a call from Washington or maybe even they look into the face of economic abyss and then they back down again. But eventually they may start doing what they say they want to do.

In previous periods of a weak dollar, the central bankers had little choice but to stick with the greenback, but this is no longer the case. With the advent of the euro, they have for the first time ever a choice to diversify into what is really a perfectly good alternative global reserve currency.

Today the euro is the world’s second-most widely traded currency and has become the offset currency to the dollar. It now captures a 31% share of the trade, compared with just 20 % in 1999. So there is a lot of room for growth. Even though the Eurozone economy is growing at a slower pace than the U.S., every time the dollar weakens one immediately sees that weakness offset by strength of the euro.

Looking back, the economic story of 2004 was the rise in petroleum prices. One could say that it was the Year of Oil. One can predict that economic news in 2005 will be the dominated by the dollar’s steady decline and its consequences. The Bank of Korea may be just a curtain raiser on The Year of the Dollar.

Friday, February 18, 2005

All You Need is (Pure) Love

Ikuko Kamia can’t wait until Saturday comes around. The Japanese housewife, who lives in the western suburbs here, awakens with a light hearted feeling. It isn’t because it is a holiday. It is a day when she can watch not one but two of her favorite Korean love dramas on television.

“Now I only watch Korean dramas,” said Ms Kamia. She thinks that Japanese television dramas are boring. She is just one of tens of thousands of mostly middle-aged women in Japan who have been captivated by the televised imports. It has turned several Korean actors into superstars and sparked new interest by Japanese in things Korean.

Bae Yong Joon, 32, -- universally known here as “Yon-sama” using the honorific suffix for idols -- was a relatively obscure Korean actor until the Japanese success of his popular drama “Winter Sonata” catapulted him to international stardom. He has many fans in other Asian countries from Vietnam to Indonesia too.

Bae’s visit to Japan in November to open an exhibit of his photographs elicited airport scenes not experienced since the Beatles sent younger women into swoons in the 1960s. Thousands of women turned up at Narita airport to greet their hero. Hundreds more besieged his hotel. “Now I can die happy,” said Noriko Fukawa, 48.

They have been captivated by Yon-sama’s soft good looks, killer smile, the excruciating sensitivity in which he plays his roles and his polite demeanor. No other Japanese or Western actor even comes close. The Korean stars are also seen as being humble and polite – gentlemen – qualities seemingly lacking in the current crop of Japanese talent.

The stories are popular because they depict “pure love.” Pure love, or jun ai in Japanese, has a special meaning in Japan, explains Kaori Shoji, who writes frequently on social issues and trends for the Japan Times. “A jun ai couple would face many obstacles contrived to keep them apart and pining for a romantic reunion.”

That, of course, is precisely what Korean love dramas portray. In Winter Sonata a young woman played by Choi Ju Woo meets the love of her life in high school only to lose him in a traffic accident. Ten years later while working in an office she meets a Korean-American played by Bae who looks just like her long-lost love.

The stories are full of obstacles that the protagonists must overcome in the quest for true love. They unfold slowly, dreamily, with lots of long shots of the couple walking hand-in-hand through snowy woods, or Yon-sama giving the heroine long, searching and loving looks.

The fabulous success of these television dramas has sparked widespread interest in things Korean among Japanese, who in the past tended to look down on their neighbor across the Sea of Japan (or East Sea as Koreans call it). Indeed, Yon-sama may well be the first Korean that Japanese have unabashedly admired in their long histories.

Most of the Korean love dramas are broadcast late at night in a time slot that used to be the preserve of American imports such as Ally McBeal. Korean stars have also been bumping American faces for lucrative advertising gigs. Ms Choi, the comely heroine of Winter Sonata, is seen in commercials almost every day.

Copies of the television series are, of course, hot (and expensive) sellers in DVD format. Korean language schools have noticed a sharp increase in enrollments, and thousands of Japanese tourists have traveled to South Korea to visits locations where the television series was shot.

The house in the South Korean city of Chuncheong that was used as a set for Winter Sonata recently was closed after the owner said she had become physically and mentally exhausted coping with the thousands of Japanese visitors. Dai-Ichi Life Research Institute estimates that the shows and other products and tourism have injected about $700 million into the South Korean economy.

What Japanese call the hanryu, or the Korean Wave, has been building for about five years. It got a big boost when Japan and South Korea jointly hosted the 2002 World Cup. Just before the games South Korean President Kim Dae Jung relaxed a long-standing ban on Japanese cultural imports. Although Japan never had an official ban on Korean cultural imports, Seoul’s action also opened the way for a more general acceptance of things Korean in Japan.

Many fans say that the Korean dramas hark back to an earlier, golden era of Japanese films and television dramas of the 1950s, when the male stars were more stoic, manly, more protective of women. Many had “pure love” plots with lovers separated by war or soldiers returning to find their loved ones married to someone else..

Some critics think that the Korean dramas took the country by storm because Japanese television and drama are at a low creative ebb. Many of the older stars, such as Kiyoshi Atsumi or Toshiro Mifune, have passed from the scene and not been replaced by talent of equal drawing power. Most Japanese TV programs also seem to be aimed at single people, especially single, big-spending Japanese women, who are normally the most desirable demographic for advertisers.

But there are signs that Japanese producers are beginning to get on the pure love bandwagon. If Winter Sonata was the uncontested hit of 2004, then the second biggest phenom of the year was a blockbuster Japanese tearjerker with a jawbreaker of a title: Sekai no Chishin de Ai wo Sakebu (Crying out for love in the center of the world), or “Sekachu” for short. Based on a bestseller about a man whose girlfriend is dying of leukemia, it was turned into a hit movie of the summer season.

One intriguing question is whether Japan’s new interest and respect for things Korean will spill over into better treatment for Japan’s own Korean minority, known as zainichi, who have been the object of many forms of discrimination and disrespect in Japan since the end of World War II.

It may be too early to give a verdict, but it is seen as encouraging that Fuji Television’s new “pure love” series Destiny of Love has cast a Japanese-Korean as the female lead. It is the first time in Japanese television history that a series has been built around a zainichi.

Todd Crowell is the author of Tokyo:City on the Edge.

Saturday, February 12, 2005

We Have the Bomb. Ho hum.

You might think that North Korea’s statement last week that “we have manufactured nuclear weapons for self defense” and was withdrawing from the six-party negotiations might have raised anxiety levels in nearby Japan. But you would not know it from the reaction here.

The Japan Times reported the latest development in a curious manner. The headline read: “Pyongyang’s nuclear move weakens threat of sanctions over abductions.” And the newspapers editors did not feel any need to comment on the North’s action. The paper’s lead editorial the following day discussed implications of the Palestine-Israel truce.

The coverage underscores the truth that the Japanese public is far more agitated about the fate of its nationals kidnapped in the 1970s than it is with North Korea’s nuclear aspirations. Of course, the latter has been a running story for more than a decade now, while the abduction issue is front and center.

For months Japanese have been roiled by the fate of one of those abductees, a young woman, a girl really, named Megumi Yokota. Ms Yokota was kidnapped in Japan in 1977 and taken to North Korea. She reportedly died (or committed suicide) in 1994.

In November her “remains” were turned over a visiting Japanese delegation. But when DNA tests were made on the remains, the results showed that they belonged to “a number of other people.” (The DNA tests were made possible because many Japanese preserve the umbilical cord of their new born children.)

North Korea’s government in 2002 acknowledged that some rogue elements had turned to kidnapping Japanese in order, it said, to help train spies in the Japanese language and culture. But that doesn’t really explain why Ms Yokota was nabbed returning home from badminton practice when she was only 13 years old.

Pyongyang maintains that the DNA tests were in error. Tokyo formally replied – on Feb. 10, the very day that North Korea made its nuclear announcement – that it stood by the tests. The remains were not those of Megumi Yokota.

Since then the Japanese government has been debating whether to impose economic sanctions on North Korea as perhaps the only way to force Pyongyang to explain once and for all the fate of the Japanese nationals abducted in the 1970s and 1980s.

These sanctions, such things as stopping Koreans living in Japan from sending remittances back to North Korea or limiting ships from making port calls, would be unilateral sanctions. They have nothing to do with possible U.N.- approved multilateral sanctions against North Korea’s weapons program.

It is not clear why suspension of the six-party negotiations (the parties are North and South Korea, Japan, China, the U.S. and Russia -- they are hosted by China.) would inhibit Japanese sanctions. One might think quite the reverse.

Tokyo has been restrained from imposing sanctions in part because the other parties to the negotiations, particularly the U.S., do not want to see the larger issue of eliminating nuclear weapons on the Korean peninsula muddled by what they consider a fairly parochial matter.

Tokyo may settle for more subtle ways to punish Pyongyang without having to formally impose sanctions. For example, on March 1 a new law goes into effect requiring added nautical insurance against oil spills for ships making port calls. Few North Korean have such insurance.

The idea of a nuclear-armed North Korea is simply not shocking to many in the region as it appears elsewhere. After all, Pyongyang has been talking openly about its nuclear ambitions for several years.

On the other hand, most of it has been just that – words and speculation -- since North Korea has not yet exploded a bomb. If it were to do so that it would surely change attitudes fast, even in Japan. There is nothing like setting off an atomic bomb to get the world’s attention.

Saturday, February 05, 2005

Poster Child for What?

The Heritage Foundation and Wall Street Journal recently released their Index of Economic Freedom for 2005. Not surprisingly, Hong Kong headed the list of 166 countries as the world’s freest economy as it has almost every year since the Index was first published. Hong Kong remains the world’s“poster child for economic development around the world,” said the Foundation..

China ranked 112th. That is not surprising either considering that China is still formally a communist state even if the command economy has given way to market socialism. Considering their relative positions, one might think that a huge gulf, an enormous chasm, exists between Hong Kong, the paradise of free markets, and China, paradigm of the command economy.

That’s not how a lot of Hong Kong people see it these days. “China’s cities are becoming more like us every day,” says Michael Kadoorie, scion of an old Hong Kong business family, owner of the territory’s leading electric power company. He wasn’t just observing that there are a lot of cars on the streets.

Or, consider the recent remarks of Gordon Wu, proprietor of Hopewell Holdings, “Hong Kong has lost the backbone of its success, a level playing field.” he said in a recent interview. He grumbled that he did not want to bid on any more government projects because the rules were becoming opaque, capricious and weighted towards insiders.

Hong Kong, the poster child for free-market economic development? More like a poster child for crony capitalism.

A growing number of people are beginning to think that China’s economy may, at least in some respects, be more receptive to open competition and more supportive of a robust private sector than Hong Kong’s. Political scientist and longtime observer Michael DeGolyer, put it this way in a recent essay in the Toronto Star:

“While regulation and taxation still lag behind Hong Kong standards
the battle for market share is far more contested in the [Chinese] mainland
than in the monopoly and cartel plagued and developer-dominated
Hong Kong.”

Writing on the 20th anniversary of the signing of the Joint Declaration that set the terms for Hong Kong’s return to China, DeGolyer went on to say:

“Free market ideologue Margaret Thatcher undoubtedly never thought
China would outdo the rabid Thatcherites when it came to competition
and trade. But 20 years on, not only the prospect looms before us but
China makes every other imitator of Manchester manufacturing pale in

Of course, Hong Kong still scores high on many of the criteria that the Heritage Foundation uses to rank economies. Its tax rate is relatively low. There is no tax on capital gains or savings. The rule of law is firmly in place. The civil service is free of corruption. Yet Hong Kong is falling behind in aspects no one would have imagined.

Why, for example, are there no big discount retailers in Hong Kong? The last time any major retailer made a foothold in Hong Kong was the British retailer Marks and Spencer in the late 1980s while Hong Kong was still a British colony. Yet Wal-Mart stores are opening all over China – two of them just across the border in Shenzhen.

In Hong Kong “collusion” has suddenly become the buzz word for 2005 much as “democracy” (meaning the direct election of all public officers) wa the political issue for most of 2004. In his most recent policy address Chief Executive Tung Chee-hwa felt compelled to declare his opposition to “collusion between business and government.”

Of course, the two are connected. The Chief Executive is not picked by the people. He is selected by a committee made up mainly of big business interests. Half of the legislature too is picked from narrow special interests. Tung himself is the scion of a major ship owning family. Since the handover of Hong Kong in 1997, Tung has been dogged by the belief of many that he is beholden to special interests.

Exhibit A in the indictment is a decision the new SAR government made fairly soon after the handover. In 1999 the government awarded several hectares of prime government-owned land on the east side of Hong Kong Island (almost all land on Hong Kong island is government-owned) to a company controlled by Richard Li, the son of Hong Kong's richest man, Li Ka-shing, a prominent Tung supporter. He proposed building Cyperport, which was billed as an incubator for transforming Hong Kong into a regional high tech center.

Nothing too controversial about that, excerpt the government did so without putting the project out for public bidding. Many observers believe Cyberport was Tung’s biggest blunder (among many). Over the years the issue has continued to fester and is one reason for Tung’s continuing unpopularity.

Last month -- six years after the project was awarded -- the government felt compelled to defend its action. Secretary of Commerce, Industry and Technology John Tsang wrote a lengthy defense of the government’s role, which was carried as an opinion piece in six Hong Kong newspapers. (Some refused to carry the article complaining of the government’s unusual demand that it be run unedited and uncommented on. “We’re Nobody’s Mouthpiece,” declared The Standard)

Tsang argued basically that the decision had to be made quickly if Hong Kong were to be competitive in the fast-moving high tech environment of the dot-com boom. And to be fair, there was considerable angst in Hong Kong in the immediate aftermath of the Asian Financial Crisis (which broke out one day after the July 1, 1997, handover) that Hong Kong was losing its competitiveness to other Asian cities, such as Singapore and Shanghai. There still is.

The issue has come to the fore again in part because of another mammoth development pending on government-owned land. The proposed West Kowloon Cultural Center will comprise four museums, four large concert halls and theaters and a school for the performing arts. Every major cultural institution in the world, from the Pompidou Center in France to the Guggenheim Foundation in America, is watching this project closely.

But the government’s decision to put the entire project out for tender as a single project means that only a handful of the wealthiest property developers in the city have the means to bid. Many of the smaller, though still wealthy property developers have been lining up against the project, until and unless it is withdrawn and broken into smaller pieces on which they might compete.

This year marks the 20th anniversary of the signing of the Joint Declaration between Britain and China in 1985 setting the terms under which Hong Kong would revert to Chinese sovereignty. At that time, China was just beginning with the market reforms that would transform the country, 20 years later, into an economic powerhouse. It was still seen mainly as a backward, country dominated by the dead hand of the communist party.

So the best efforts of the British negotiators their Hong Kong allies were directed at trying to insulate Hong Kong from China and from the Communist Party cadres, who lacking any understanding of how the free market works, were sure to muck things up if they were given a chance to run Hong Kong’s economy.

Twenty years on, Hong Kong is the one that seems to be stuck in the past and it is China that has moved ahead in many ways. Hong Kong pales in comparison with the kind of freewheeling enterprise that characterizes much of China’s economy today. The world’s “freest economy” might benefit from a little of the cowboy capitalism from across the border.