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Daily Archives: April 2, 2009

Most watched ETF in history

To prevent future housing market bubble, Bob Shiller designed two ETFs, and they will be trading soon.

link to the news

These ETFs will look at the house prices in FIVE years… a brilliant idea.

More information is on Macroshares.

Investors now "fly in the dark"

The rule change by FASB put investors fly in the dark. Interview of former Chief Accountant at SEC.

Laura Tyson wants China to do more

Laura Tyson, former chairman of Council of Economic Advisors (CEA) under President Bill Clinton, says China stands as one of the strongest countries in the current crisis, and China could do more to spur its domestic demand.

China’s Electric Car Ambition

Looks like there is going to be a good competition between US and China in building electric cars. China’s advantage is its huge pressure to develop such vehicle to prevent heavy domestic pollutions while at the same time satisfying the rising demand for “freedom” (owning a car is a symbol of such) from its burgeoning middle class. Detroit’s advantage is its huge pressure to revive America’s auto industry and find new growth engine for its huge pool of auto workers.

The bottom line is consumers will benefit and the world environment will benefit.

China Vies to Be World’s Leader in Electric Cars

Source: NYT

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today.

“China is well positioned to lead in this,” said David Tulauskas, director of China government policy at General Motors.

To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.

Japan is the market leader in hybrids today, which run on both electricity and gasoline, with cars like the Toyota Prius and Honda Insight. The United States has been a laggard in alternative vehicles. G.M.‘s plug-in hybrid Chevrolet Volt is scheduled to go on sale next year, and will be assembled in Michigan using rechargeable batteries imported from LG in South Korea.

China’s intention, in addition to creating a world-leading industry that will produce jobs and exports, is to reduce urban pollution and decrease its dependence on oil, which comes from the Mideast and travels over sea routes controlled by the United States Navy.

But electric vehicles may do little to clear the country’s smog-darkened sky or curb its rapidly rising emissions of global warming gases. China gets three-fourths of its electricity from coal, which produces more soot and more greenhouse gases than other fuels.

A report by McKinsey & Company last autumn estimated that replacing a gasoline-powered car with a similar-size electric car in China would reduce greenhouse emissions by only 19 percent. It would reduce urban pollution, however, by shifting the source of smog from car exhaust pipes to power plants, which are often located outside cities.

Beyond manufacturing, subsidies of up to $8,800 are being offered to taxi fleets and local government agencies in 13 Chinese cities for each hybrid or all-electric vehicle they purchase. The state electricity grid has been ordered to set up electric car charging stations in Beijing, Shanghai and Tianjin.

Government research subsidies for electric car designs are increasing rapidly. And an interagency panel is planning tax credits for consumers who buy alternative energy vehicles.

China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.

The United States Department of Energy has its own $25 billion program to develop electric-powered cars and improve battery technology, and will receive another $2 billion for battery development as part of the economic stimulus program enacted by Congress.

Premier Wen Jiabao highlighted the importance of electric cars two years ago with his unlikely choice to become minister of science and technology: Wan Gang, a Shanghai-born former Audi auto engineer in Germany who later became the chief scientist for the Chinese government’s research panel on electric vehicles.

Mr. Wan is the first minister in at least three decades who is not a member of the Communist Party.

And Premier Wen has his own connection to the electric car industry. He was born and grew up here in Tianjin, the longtime capital of China’s battery industry, 70 miles southeast of Beijing.

Tianjin has thrived in the six years since Mr. Wen became premier. It now has China’s first bullet train service (to Beijing), a new Airbus factory and an immaculate new airport. Tianjin has also received a surge of research subsidies for enterprises like the Tianjin-Qingyuan Electric Vehicle Company.

Electric cars have several practical advantages in China. Intercity driving is rare. Commutes are fairly short and frequently at low speeds because of traffic jams. So the limitations of all-electric cars — the latest models in China have a top speed of 60 miles an hour and a range of 120 miles between charges — are less of a problem.

First-time car buyers also make up four-fifths of the Chinese market, and these buyers have not yet grown accustomed to the greater power and range of gasoline-powered cars.

But the electric car industry faces several obstacles here too. Most urban Chinese live in apartments, and cannot install recharging devices in driveways, so more public charging centers need to be set up.

Rechargeable lithium-ion batteries also have a poor reputation in China. Counterfeit lithium-ion batteries in cellphones occasionally explode, causing injuries. And Sony had to recall genuine lithium-ion batteries in laptops in 2006 and 2008 after some overheated and caught fire or exploded.

These safety problems have been associated with lithium-ion cobalt batteries, however, not the more chemically stable lithium-ion phosphate batteries now being adapted to automotive use.

The tougher challenge is that all lithium-ion batteries are expensive, whether made with cobalt or phosphate. That will be a hurdle for thrifty Chinese consumers, especially if gas prices stay relatively low compared to their highs last summer.

China is tackling the challenges with the same tools that helped it speed industrialization and put on the Olympics: immense amounts of energy, money and people.

BYD has 5,000 auto engineers and an equal number of battery engineers, most of them living at its headquarters in Shenzhen in a cluster of 15 yellow apartment buildings, each 18 stories high. Young engineers earn less than $600 a month, including benefits.

When Tianjin-Qingyuan puts its entirely battery-powered Saibao midsize sedan on sale this autumn, the body will come from a sedan that normally sells for $14,600 when equipped with a gasoline engine. But the engine and gas tank will be replaced with a $14,000 battery pack and electric motor, said Wu Zhixin, the company’s general manager.

That means the retail price will nearly double, to almost $30,000. Even if the government awards the maximum subsidy of $8,800 to buyers, that is a hefty premium.

Large-scale production could drive down the cost of the battery pack and electric motor by 30 or 40 percent, still leaving electric cars more expensive than gasoline-powered ones, Mr. Wu said.

But Mr. Wu has plenty of money to pursue improvements. He interrupted an interview at his company’s headquarters on Thursday to take a call on his cellphone, politely declined an offer from the caller, and hung up.

The general manager of a state-controlled bank had called to ask if he needed a loan, he explained.

Stiglitz: Obama’s Win-Win-Lose Plan

Obama’s Ersatz Capitalism

Source: NYT

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveragingin the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997, was awarded the Nobel prize in economics in 2001.

"Greenshoots" in China’s Housing Market

Some cautious optimism in China’s housing market.

Source: WSJ

BEIJING — There are tentative signs of improvement in a key sector of China’s economy, as lower prices start to lure buyers back into the battered housing market.

The nascent uptick in home sales hasn’t yet translated to a restarting of construction, a driver of jobs and economic activity, because the supply of empty homes that built up during the boom remains large. Still, the fact that Chinese households are responding to falling mortgage costs and lower real-estate prices is a positive sign for consumer spending in the world’s third-biggest economy.

The volume of residential property sold nationwide in January and February inched up 1.1% from a year earlier, government figures show. That compared with a 20.3% decline for all of 2008. Property consultancy Soufun says the numbers for housing transactions in major cities have been rising in the past few weeks.

“The Chinese housing market may have a good chance to be among the first ones to see real signs of picking up,” said Mei Jianping, a professor of finance at the Cheung Kong Graduate School of Business in Beijing.

President Hu Jintao, speaking just before flying to London for Thursday’s Group of 20 summit, said early effects of his government’s stimulus policies already are evident, giving him confidence China’s growth will stabilize.

China’s housing boom wasn’t as heavily fueled by easy credit as those in the U.S. or Spain were, analysts say, and there is still real demand for homes from its urbanizing population. In February, average housing prices in China were down 1.2% from a year earlier. U.S. declines have been far sharper.

Huang Yang, a 26-year-old in Beijing who works for a financial magazine, bought a modest apartment in December. “I had thought about buying an apartment for a long time,” she said. The price had dropped nearly 15% from the peak; that helped convince her.

Many analysts forecast a further decline of 10% to 15% in Chinese property prices this year, because of the huge existing supply.

How many more Chinese follow Ms. Huang into the housing market this year will be crucial to determining whether China can meet its leaders’ goal of 8% economic growth, or end up closer to the 5% that some private-sector analysts expect. The stimulus plan, while large, can’t restore growth without a return of private-sector investment.

The first broad indicator published for March suggests the economy hasn’t yet managed to reverse its downturn in growth. Data for the first two months, however, show some encouraging increases in bank lending and investment. Manufacturing activity in China declined in March for the eighth consecutive month as prices and new orders continued to weaken, according to the CLSA China Purchasing Managers Index. The index fell to 44.8 in March from 45.1 in February, CLSA Asia-Pacific Markets said.

Housing will help determine the path that commodity prices take because China’s construction sector accounts for a big part of global demand for raw materials such as steel and copper.

Housing sales are still well below their levels in the boom years, and Chinese consumers aren’t likely to splurge this year.

More important, analysts say the large supply of unoccupied housing needs to be sold off before developers start to build again.

Nationwide, construction starts declined 14.8% in the first two months of 2009 from a year earlier, and purchases of land for development also are still falling. While some economists predict a turnaround by the second half of the year, businesses are still adjusting to what they expect to be a much weaker market. British home-improvement retailer Kingfisher PLC said last week it plans to cut the number of its B&Q stores in China to 41 from 63 this year.

According to Dragonomics, a Beijing-based research firm, 90 million square meters of new, vacant residential property were built in 2008, equivalent to about 820,000 units. Citigroup analysts estimate that real-estate markets in most major Chinese cities will take more than a year to digest the current backlog, and some 20 months in some.

“The market cannot clear in just one or two quarters,” the State Information Center, a government think tank, said in a recent report. “This means that the current industrial adjustment will extend for some time into the future.”

Still, the perception that prices are bottoming is causing home buyers like Xia Feng, a 33-year-old bank employee in Shanghai, to think the worst may be past. He had been eying one place for nearly a year, but held off because prices were too high. When Mr. Xia found out that the price of the unit, near his daughter’s school, had dropped 20%, he signed the deal.

“Last year, there was no doubt that prices would go down,” Mr. Xia said, but further declines now seem less of a sure bet.

China extends lockup period of foreign banks

Most foreign banks have gotten out already due to the fire at their backyard. But this new policy aims to make foreign banks more committed to Chinese market in the future (source: wsj)

Buying a stake in a Chinese bank certainly isn't easy, but getting out of that stake just got a whole lot harder.

China's banking regulator has said it will extend the lockup period on shares owned by overseas investors to five years, from the current three years.

A move like this will discourage potential sources of capital for China's companies. Even in good times, a five-year lockup period would be a stretch for many investors.

That, of course, may be the point.

This is a further hardening of Chinese attitudes to foreign investors — in this case, with some justification.

As recently as three years ago, when a number of Western financial institutions first took strategic stakes in Chinese banks, confidence in China's banking sector was seen as a considerable bonus for both sides.

The stakes gave the Chinese banks credibility ahead of initial public offerings, while giving Western banks a way to tap China's potentially lucrative — and certainly huge — market.

Four years on, and the ravages of the credit crunch have Western banks exiting their investments with unseemly haste.

That hasn't gone down too well in Beijing. The exiting banks have made tidy profits in the process, while plans for the Western "experts" to share technology and know-how now look like so many other promises made during the heyday of the credit bubble.

So the new message is clear: if you're going to invest in China's banking sector, Beijing's going to see to it that you commit long-term.

Clearly Goldman Sachs got the message — hence the pains it took last week to focus on its agreement to extend the lock up on 80% of its 5% stake in Industrial & Commercial Bank of China, skirting over its decision to offload the rest of its stake as quickly as it was allowed.

True, it's not as though there's a long queue of foreign financial institutions with cash to invest anywhere, let alone a Chinese bank, right now.

Even if there were, China's not giving foreign banks the red carpet treatment anymore.