EFSI Digest April 2013

HKU EFSI Digest – Issue IV

This Month in the HKU EFSI DIGEST! Rise of Emerging “Middleweights” and a Strategy – Ryan Gao

Market News: March 2013 – Leslie Tay What is ECFA? - Yang, Jung Hsuan

Editor’s Note

Happy Easter Folks!

Back from a refreshing holiday, post mid-terms, we are ready to tackle our last bout of studies before we slip into the exam mode next month.

The world is ready to tackle its own economic rollercoaster rides: natural gas becomes cheap while homes become expensive in the States, Mauritius faces unemployment crisis as world economic woes hurt its tourism sector, Cyprus problems worsen as big depositors in biggest bank face losses as much as 60%, while post Arab Spring Egypt looks eagerly as IMF deliberates advancing a loan to the fresh country.

In the world of technology, Amazon.com is planning to buy Goodreads, the book recommendation website, while Saudi Arabia is frowning upon Whatsapp and Skype, while Chinese govt. official hints that WeChat might no longer be a free service.

The BRICS summit held at South Africa came up with plans to set up a BRICS Development Bank as further strengthening of co-operation between emerging economies. This bank will be catering to the infrastructural needs of almost 45% of the global population.

However, the road is not smooth, as China and India have disagreements over initial corpus and whether voting rights should be linked to initial contributions. Further developments are eagerly awaited as the world sees a unique collaboration between fast growing economic and political powers.

On our side of the world, we gear up for our final weeks as postgraduate students at HKU. Already peeking over the horizons, looking into the future, the world economy affects our job searches and career planning. We know not what the future will bring, yet it cannot stop us from living our present and final few weeks at HKU to the fullest!

Gauri Noolkar Editor, VP (Publications) EFSI Digest (March-13)

Suggestions, questions, contributions? Tell us! Gauri Noolkar: [email protected] Leslie Tay: [email protected] HKUEFSI Club: [email protected]

Source:www.davegranlund.com

mailto:[email protected]




Rise of Emerging “Middleweights” and a Strategy By Ryan Gao

A close look at the emerging economies

impresses us with their importance on the global development landscape: their combined output share of world GDP doubled in the past 20 years and they now consume over half of the global commodities, world exports and inflows of FDI. A closer look tells another story, that most of these are contributed by megacities - cities with population of over 10 million: Developed economies and emerging market megacities have generated over 70% of global GDP by now.

Yet the global landscape is about to change. A report by McKinsey Global Institute estimates that developed economies and emerging market megacities will only produce 33% of global growth, while much of the contribution will be made by emerging market “middleweights” – second tier cities with current population between 150 thousand and 10 million.

The sharp change will result from the rise of the middleweights. Cities like Shanghai, Mumbai, Seoul, Jakarta and Bangkok are recognized as national economic hubs, however, with profitability starting to drop due to over-heating costs and market saturation. On the contrary, the second-tier cities will expand their population and raise their per capita GDP, and overtake the megacities to contribute half of global growth. By estimation, 13 second-tier cities will become megacities by 2025.

With such critical dynamic changes, few companies have adopted clear strategies for second-tier cities that embrace larger potentials. Firms have benefited from the growth of developed economies and emerging market megacities for long, and have based their models primarily on these markets. Much

less attention was given to middleweights, not only due to the slower development in the past, but also because of the uneasiness to master development in second-tier cities. They vary widely on growth potentials, consumption profiles, and market dynamics. Furthermore, emerging markets lack adequate basic infrastructure such as transportation and communication to facilitate efficient geographic connections.

One way to address the challenges is to build strategy around selected city clusters – groups of cities located within a radius of 200 to 500 km. The idea is simple: city clusters share similarities in culture and consumption profile, and are within manageable distance. In China, 22 such clusters are identified, the most well-known of which are Jingjinji Clusters with center of Beijing, Yangtze River Delta Clusters and Pearl River Delta Clusters with centers of Shanghai and Guangzhou respectively.

Having headquarters based in Guangzhou, many firms find it easy to penetrate into the Pearl River Delta cities. Such strategy benefits enterprises in several ways. First, cities are selected in close proximity to each other to avoid huge management and logistic costs. Second, the cities share a number of attributes in common such as consumption culture and consumer attitudes, enabling the firm to implement the same strategies with little or no variation. Third, more clusters look likely to appear as rapid urbanization proceeds and income rises.

Nevertheless, firms still need to bear in mind that no single strategy will do for all middleweights and that they need to find the right clusters that are likely to generate most global growth.


Why are Women more

pessimistic about the economy

then Men?

Because men are in charge of

the economy!

Source:www.jokes4us.com

"If you put two economists in a

room, you get two opinions,

unless one of them is Lord

Keynes, in which case you get

three opinions."

(Winston Churchill)

Source:www.econosseur.com

Source:www.oxflam.blogs.org


Market Report: March 2013 By Leslie Tay

Asia ex Japan: Record high current account deficit in India

This month, India reported higher current account deficit for last quarter, Q4 2012 at a record level of $32.63 billion ($20.2 billion a year earlier) or 6.7$ of GDP. Despite a positive balance of payment, heavy oil and gold imports (a gain of 9.4%) caused a surging current account deficit. This has added pressure for the government to repeal policies restricting foreign investments and work towards liberalization, including allowing foreigners to purchase rupee bonds come April 2013 and allowing a greater role for foreign capital in sectors such as aviation and retail.

Maya Bhandari, director at Citigroup, expects the current account deficit to remain high beyond 2014. The Indian rupee, which was the third worst performing currency in Asia in 2012, is expected to come under further pressure as a result of the deficit.

Europe: Bailing in and out of Cyprus

All eyes turn to Cyprus this month as the Euro crisis saga continues. Unable to refund state expenses, Cyprus’s banks were shut from March 16 to March 29th for fears of a bank run as the Cypriot government led by President Nicos Anastasiades, alongside with European leaders, worked towards achieving a bailout package, which include conditions such as forcing losses on savers (a bail-in).

The financial rescue will be funded partially by those with deposits of more than 100,000 euros in Cyprus’s two largest banks. This is also the first time a member of the Euro area has imposed controls on the movement of capital such as a 300-euro daily withdrawal limit and restrictions in transfers out of the country. EU officials remain deeply concerned about the bail-ins as it may spark contagion fears and encourage investors to move money out of the Euro area.

America: Dell vs. Icahn and Blackstone

Michael Dell and private equity firm Silver Lake’s bid to take the number 3 personal computer company, Dell, private encountered counterbids from long-time corporate raider cum activist investor Carl Icahn and private equity group Blackstone. Icahn and Blackstone have been in talks to propose an offer that beats Michael Dell’s current offer of a $24.4 billion buyout at $13.65 per share. Icahn has proposed paying $15 per share while Blackstone has indicated its willingness in paying more than $14.25 per share for the whole company in cash or in shares.

Michael Dell has aired his concerns of demerger plans by Blackstone although the latter has not stated explicitly stated its turnaround plan. Dell share price has surged to $14.33 from $10.68 (see figure below) at the start of year on optimism that the buyout action that will benefit shareholders.

Source:www.muftah.org


10

10.5

11

11.5

12

12.5

13

13.5

14

14.5

15

Dell Dell

Sources: Bloomberg, Economist, Financial Times, ITPro.

Why did God create

economists?

In order to make weather

forecasters look good.

Source:www.economicshelp.com

How many economists does

it take to change a light

bulb?

Irrelevant - the light bulb's

preferences are to be taken

as given.

Source:www.uh.edu


What is ECFA? By Yang, Jung Hsuan

Economic Cooperation Framework Agreement (ECFA) is a preferential trade agreement between the governments of the People's Republic of China (mainland China) and the Republic of China (Taiwan) aiming to reduce tariffs and commercial barriers between the two sides. The pact, signed on June 29th 2010 took effect on September 12th 2010 and was seen as the most significant agreement since the two sides split after the Chinese Civil War in 1949. Controversy in ECFA has always been heated in Taiwan. On one hand, the proponent, Kuomintang Party (KMT) regarded ECFA as a life-saving straw for Taiwan’s ten-year stagnant economy and an important step for Taiwan to open to the world; on the other hand, the opponent, Democratic Progressive Party (DPP) believed that ECFA would lead to Taiwan’s economic dependence on mainland China and eventually to political merger.

According to President Ma Ying-Jeou,

the main contents of ECFA include three parts: 1) Tariff reduction, which is critical for Taiwan to compete with its main competitors, Korea and Japan, for Chinese markets due to the possible threat of free trade area formation by ASEAN Ten Plus Three (mainland China, Japan and Korea); 2) Investment protection, which helps to solve disputes and protect about 7 billion USD Taiwanese capital invested in mainland China; and 3) Intellectual property right protection, which can protect abundant Taiwanese cultural creations and technological innovations from piracy and infringement.

As a framework agreement, ECFA left most of the cooperation details to be discussed later step by step. However, an “early harvest” list was kicked off on Jan 1st 2011 immediately to cut tax and enjoy the early fruits of cooperation. Up to Jan 1st 2013, mainland

China has allowed zero tariffs on 539 items imported from Taiwan, ranging from agricultural goods to manufacturing products (which accounted for 16% of mainland China’s total imports from Taiwan in 2009) while Taiwan has allowed zero tariffs on 267 items imported from mainland China, including no agricultural goods but limited to manufacturing items (which accounted for 11% of Taiwan’s total imports from mainland China in 2009). As for trade in services, mainland China has also opened up more of its service sectors for Taiwanese entrepreneurs to invest in, including banking, securities and futures, insurance and business services.

ECFA has greatly helped Taiwan in its

goods and service export. Taiwan’s goods export to mainland China has grown by 8% in 2011 and 5.8% in 2012, reaching 132 billion USD at the end of 2012. Financial service export to mainland China has also been greatly promoted. For example, 12 banks, 12 security dealers and 9 insurance companies have already set branches and offices and invested in mainland China. As for non-financial services, 65 new investments have been made in Taiwan by Chinese businessmen; the first Taiwanese hospital has been opened in mainland China; 11 Taiwanese movies have been approved to be broadcast in mainland China. Many Taiwanese businessmen in mainland China are also willing to come back to invest in Taiwan due to the bilateral zero tariff. This will help create job opportunities for Taiwan. (This reminds us of the increasing return to scale theory and the substitute between FDI and trade.)

Although ECFA has achieved

satisfactory results till now, various concerns are expressed. Firstly, follow-up negotiations for further cooperation and “the second harvest list” seem to be at a standstill. If the free trade area of ASEAN Ten Plus Three was established, the dominant position of ECFA and Taiwan’s superiority over Japan and Korea would have gradually faded out. Secondly, according to comparative advantage theory, if Taiwan


opened up to more imports from mainland China in a wider range in the future, domestic industries with comparative disadvantage would suffer great impacts, leading to closing down of factories and unemployment. Although the economy would gradually shift to industries that Taiwan had comparative advantages in and people would find jobs again, the adjustment would take time.

In response to these challenges, I have

some suggestions for Taiwan’s government. Firstly, provide subsidies, trainings and capital to help industrial restructuring and help workers in the comparative-disadvantage industries to cultivate new job skills fitted for comparative-advantage industries. Secondly, build attractive investment environment and further open up for investments from mainland China and elsewhere to create job opportunities. Thirdly, fuel science and technology development to create Taiwan’s absolute advantages in different industries, which will determine Taiwanese real wage rate and living level, according to Ricardian Model we have learnt in class.

Source:www.studentreporter.org


References Rise of Emerging “Middleweights” and a Strategy By Ryan Gao Bibliography Urban World: Cities And The Rise of The Consuming Class. McKinsey Global Institute, 2012. Yuval Atsmon, Ari Kertesz, Ireena Vittal. Is Your Emerging-Market Strategy Local Enough? https://www.mckinseyquarterly.com/Strategy/Growth/Is_your_emerging_market_strategy_local_enough_2790/. 2011. Urban World: Mapping the Economic Power of Cities. McKinsey Global Institute, 2011. Emerging Vs. Developed Economies: Power Shift. http://www.economist.com/blogs/dailychart/2011/08/emerging-vs-developed-economies. 08.04.2011 K. CHOE and A. LAQUIAN. City Cluster Development: Toward An Urban-led Development Strategy For Asia. Asian Development Bank, 2008. China’s Emerging City Clusters. http://www.squarefoot.com.hk/news/272/chinas-emerging-city-clusters/ 1

st April Cartoon: Source – www.ownbond.com, April Fools’ Day Cartoon: Source – timepass.info.

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Source: www.andertoons.com

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EFSI Digest April 2013