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As Trade Slows, China Revamps Its Strategy - NYTimes.com“Trade finance is collapsing,” said Victor K. Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. “We’ve got orders we can’t ship right now.”
Mr. Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months. Other business leaders say the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.
Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But figures in dollars do not come to close to capturing the real depth of the downturn.
Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.
Indications are that the December data will be even worse.
Consumer electronics manufacturers have been hit the hardest, according to customs data. “No one has any money any more, so demand for our mini hi-fi systems has declined a lot,” said Lion Yuan, the sales manager at the Shenzhen Yidashi Electronics Company, where exports have dropped 30 percent in the last year.
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Mish's Global Economic Trend Analysis: 200,000 Retail Store Closings Coming in 2009This Christmas season was the worst ever for many retailers. And with too many stores and too few customers, expect to see A Rash of Retailer Closings in 2009.
The most dramatic pullback in consumer spending in decades could transform the retail landscape, as thousands of stores and whole malls close down. And analysts expect prolonged woes in the industry as the dramatic changes in shopping behavior could linger for another two or three years amid worries about the deteriorating economy and rising layoffs.
"You are going to see a substantial retrenchment in the retail industry," said Rick Chesley, partner in the global bankruptcy and restructuring group at international law firm Paul Hastings. "The downturn has been catastrophic."
The retail casualties, which were first among home furnishing stores and then many apparel stores over the past year or so, are expected to cut across all sectors as shoppers have slashed their spending on non-essentials, from TVs to jewelry.
About 160,000 stores will have closed this year and 200,000 more could close next year, said Burt P. Flickinger III, managing director of consulting firm Strategic Resource Group. That would be the industry's biggest contraction in 35 years. Flickinger expects 2,000 to 3,000 malls to close in March and April.
AlixPartners, a turnaround consulting firm, predicts that 25.8 percent of 182 major retailers it tracks are facing major financial distress or will face a significant risk of filing for bankruptcy next year or in 2010 -- the highest level in the 10 years that the firm has been compiling the figures. That compares with the 4 percent to 7 percent that it predicted would face financial woes in the previous two years.
Wave of Bankruptcies and Closures Coming
International Council of Shopping Centers comes up with a different set of numbers numbers as reported by Bloomberg in Holiday Sales Drop to Force Bankruptcies, Closings.
U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.
Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.
“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”
Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.
The ICSC predicts, using U.S. Bureau of Labor Statistics data, that 148,000 stores will shut down in 2008. That would be the largest number since 151,000 closings in 2001, during the last recession, according to ICSC Chief Economist Michael Niemira.
Retailers’ pricing models are being challenged by consumers, according to Richard Hastings, consumer strategist at Global Hunter Securities LLC of Newport Beach, California.
“The whole pricing system is becoming an old-fashioned bazaar,” Hastings said today in a telephone interview. “They’re going into the stores and they’re looking at the stuff and they’re saying ‘You know what? I know that that price is way too high,’ and they have figured out that the signage doesn’t mean that much.”
List of Retail Store Closings
Terri Potratz has a List of Retail Store Closings in US. Most will recognize the names on the list.
Evidence is now irrefutable that the Shopping Center Economic Model Is History.
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Exit Strategy: Inflation « The Baseline ScenarioThe Baseline Scenario
What happened to the global economy and what we can do about it
Exit Strategy: Inflation
We know there is going to be a large fiscal surge in the US (the latest estimate is a stimulus of $675-775bn, which is a bit lower than numbers previously floated). This will likely arrive as the US recession deepens and fears of deflation take hold.
The precise outcomes for 2009 are, of course, hard to know yet - this depends primarily on the resilience of US consumer spending and whether large international shocks materialize. But we can have a sense of what happens after the fiscal stimulus has played out (or its precise consequences become clear). There are two main potential scenarios.
First, the fiscal strategy works. In this case, the US pulls out of recession reasonably quickly (perhaps by the second half of 2009). Once this seems likely, the Federal Reserve will want to cut back on its quantitative easing and perhaps even think about raising interest rates. But this will be hard to do for political reasons - the Fed will feel pressed not to quash an incipient recovery, so it will err on the side of keeping interest rates low and credit available on generous terms. At the same time, a great deal of the fiscal stimulus will be working its way through the pipeline for at least two years. The net effect is inflation and presumably a weakening of the dollar (although the latter of course depends on what others are doing around the world.)
Second, the fiscal strategy does not work. In this case, the US recession deepens and we head into a serious global slump. Some more fiscal stimulus might be offered, but faith in its effectiveness will decline sharply. The next policy move in this case is even more quantitative easing (i.e., essentially issuing even more money). This would not usually be appealing, but the global depression would be fed by and feed into serious deflation, and the consensus will shift from “avoid inflation over 2%” to “any inflation is preferable to deflation”. The net effect is again inflation, at least in the US and probably more broadly.
Of course, there are other possibilities. The fiscal stimulus could reflate the economy just enough, i.e., so that growth returns to potential (whatever that is after a crisis of this nature), but not “too much” - so that prices increase but annual inflation never rises significantly above 2%. This scenario seems rather too ideal, and to require too many things to go right, to be high probability.
It is also possible that in a global depression/deflation scenario even the Fed could not make inflation positive. But this also seems to be quite a remote possibility.
So inflation seems hard to avoid, irrespective of how the upcoming fiscal moves play out.
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RGE Monitor# Duy: The Fed and Treasury are setting the stage for a disorderly adjustment of the Dollar by ignoring the external imbalance. Without external adjustment in place, pushing rates to zero, flooding the economy with money, and pumping out hundreds of billions of new debt threatens to pull the rug out from under the Dollar. Even more worrisome, however, is that surplus nations respond with competitive depreciations
# FT: A full scale panic out of the dollar would indicate the outside world believes the policy of quantitative easing will fail. On the other hand, if the Fed's policy actions work, Bernanke will be forced to normalize rates to prevent excess inflation - and in the process will inflect massive losses on those buying Treasuries at 2.25%
# Setser: There is a real risk that the adjustment (of global imbalances) won't be gradual
# Bergsten: A renewed fall of the dollar could deepen the housing crisis and economic weakening. Rate cuts would exacerbate dollar weakness. It may be necessary to consider currency intervention in the strategy for responding to the crisis
# BNY: USD policy over the past eight years to 2Q08 could best be characterized as "benign neglect". It seems possible that the appointment of the new Treasury Secretary under Obama could see the revival of the "strong USD" mantra. Given the nation's huge funding needs in the years ahead, a stable to gently rising USD would help keep attracting in much needed capital from abroad (China and Saudi Arabia would likely be happy with this outcome)
# UniCredit: Though a falling dollar risks rising inflation, asset bubbles and loss of macroeconomic control in dollar peg countries, dollar pegs are likely to continue anyway
# PIMCO: Current account deficit will continue to put downward pressure on USD
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DB ResearchDoes the IMF have sufficient resources to bail out the emerging markets?
December 29, 2008
It is now difficult to imagine that only a year ago the IMF was going through an existential crisis. Almost all major borrowers had repaid their loans and some pundits were suggesting that the high level of precautionary FX reserves in the emerging markets would make the International Monetary Fund unnecessary as a lender of last resort. The global financial crisis has of course once again turned the Fund into an important and, in many cases, pivotal global liquidity provider. The financial shock has exposed financial vulnerabilities in a number of emerging markets. Over the past few months, the IMF has increased its loan commitments by more than USD 40 bn. Further loan agreements are ready for approval by the Fund Board or in negotiation currently being negotiated (Belarus, El SalvadorLatvia and, Serbia,Turkey) and other countries may yet be forced to request IMF financial support over the coming months. This raises the question whether the Fund will have sufficient resources to deal with the global financial crisis.
aThe massive increase in cross-border financial flows has no doubt made it more challenging for the Fund to counter capital account shocks. In 2002, net private capital flows to emerging markets amounted to USD 170 bn. Last year they reached a staggering USD 1,030 bn. Stripping out more stable FDI flows, net private capital flows exploded from an average of USD 10 bn in 1999-2002 to more than USD 550 bn last year. In gross terms, private cross-border flows also skyrocketed. Gross bank lending to emerging markets soared from USD 117 bn in 2000 to USD 455 bn in 2007, while gross bond issuance doubled from USD 69 bn to USD 142 bn over the same period. Net portfolio equity flows amounted to USD 145 bn in 2007, a ten-fold increase compared to 2000!
But have emerging markets not sharply reduced their financial vulnerabilities over the past few years? This is true for most of the larger, systemically important emerging markets, but is not true for the emerging markets universe as a whole. While emerging markets’ FX reserves have risen dramatically over the past few years, the accumulation has been concentrated in just a handful of countries. FX reserves surged by a staggering USD 1 tr in 2007, but the BRIC countries – and first and foremost China – accounted for over two-thirds of the increase. Emerging markets are also running an aggregate current account surplus, but according to the World Bank one in two registered a deficit in excess of 5% of GDP last year! Not all of these countries depend on private capital flows to finance their current account shortfalls, but many of them do. So the IMF will have its work cut out should the current decline in cross-border financial flows prove more permanent than expected. The longer the global crisis drags on, the greater will be the call on IMF financial resources.
aThe IMF’s lending capacity has improved in recent years following substantial loan repayments by countries such as Argentina and Brazil. As of September, its one-year forward commitment capacity (FCC) amounted to USD 200 bn, not including an additional USD 50 bn under the New and General Arrangements to Borrow (NAB/GAB). In 2002, the FCC stood at a mere USD 74 bn. Nonetheless, the IMF’s financial resources have seen only very modest growth compared to the staggering upturn in private-sector financial flows (e.g. USD 5.7 bn or 1.8% ad hoc quota increase in 2006). The last significant increment took place during the regular, quinquennial general quota review in 1998 when quotas were boosted by 45% (and the NAB was approved). (A second round of quota increases under the quota and voice reform process will, once approved by IMF members, lift quotas by a further 9.6%.)
The Fund’s new short-term liquidity facility (SLF) provides eligible member countries with access of to up to five times their subscribed quota. This means that in a scenario where four of the world’s six largest emerging markets (e.g. Brazil, India, Korea and Mexico) were to draw on the facility at the same time, the IMF’s lending capacity would decline by USD 100 bn overnight. The fact that loans drawn under the SLF are short-term is somewhat of a mitigating factor. We continue to believe that such a scenario is not very likely. But if the past few months have shown anything it is that almost anything is possible and that financial shocks have become more systemic in nature. If in such a scenario several other countries requested substantial stand-by arrangements (or access to the SLF), IMF resources could quickly become stretched.
Would such a scenario spell doom for the emerging markets? If our optimism about the larger emerging markets were misplaced and several of these countries ended up requiring large bail-out packages, several lines of defence would be available. Other multilateral and bilateral funding sources could be tapped in order to alleviate the pressure on the Fund’s lending capacity. Japan has already offered USD 100 bn. China may also be persuaded to provide additional financing. Being very dependent on trade and enjoying a solid financial position, China would have an interest in stabilising a badly shaken global financial system and pre-empting potential threats to the world trade system. Offering the Fund USD 100 bn in financing would not make a difference to China’s financial stability and politically it would give Beijing an opportunity to strengthen its role as an important stakeholder in the global financial and economic system. Beijing could probably be persuaded to provide funding in exchange for an increase in IMF voting rights. At the multilateral level, the World Bank and other regional development banks could provide additional funding to emerging markets and so could the EU, the US and Japan (and China) on a bilateral basis, either by way of loans or further central bank swap agreements (e.g. recent agreement on establishing/ augmenting currency swap facility between China, Japan and Korea).
In conclusion, even if a prolonged global crisis were to substantially reduce the Fund’s lending capacity and impair its lender-of-last-resort function, this would not necessarily spell doom and gloom for emerging markets. Our baseline scenario remains one where the larger emerging markets will manage to avoid tapping IMF financial support and in this scenario the Fund’s resources should be sufficient to cope with the financial problems that emerging markets are and will be facing over the next 12-24 months.
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Accounting Standards Wilt Under Pressure - washingtonpost.comBy Glenn Kessler
Washington Post Staff Writer
Saturday, December 27, 2008;
World leaders have vowed to help prevent future financial meltdowns by creating international accounting standards so all companies would play by the same rules, but the effort has instead been mired in loopholes and political pressures.
In October, largely hidden from public view, the International Accounting Standards Board changed the rules so European banks could make their balance sheets look better. The action let the banks rewrite history, picking and choosing among their problem investments to essentially claim that some had been on a different set of books before the financial crisis started.
The results were dramatic. Deutsche Bank shifted $32 billion of troubled assets, turning a $970 million quarterly pretax loss into $120 million profit. And the securities markets were fooled, bidding Deutsche Bank's shares up nearly 19 percent on Oct. 30, the day it made the startling announcement that it had turned an unexpected profit.
The change has had dramatic consequences within the cloistered world of accounting, shattering the credibility of the IASB -- the very body whose rules have been adopted by 113 countries and is supposed to become the global standard-setter, including for the United States, within a few years.
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