Plan to make complex debt more expensive

Plan to make complex debt more expensive

By Gillian Tett in London

Published: June 1 2008 23:31 | Last updated: June 1 2008 23:31

International regulators and supervisors have started drawing up plans to make it far more expensive for investment banks to hold large volumes of complex financial instruments, such as mortgage-linked securities, in their trading books.

The move is intended to prevent a recurrence of the type of massive, unexpected losses that emerged at banks such as UBS in recent months, as a result of the subprime turmoil in the US.

The new measures, which are being spearheaded by the Financial Stability Forum – a committee of global regulators and supervisors – could force banks to rethink the business models they use to repackage assets such as mortgages into complex financial securities.

In particular, supervisors believe that the rules will reduce incentives for banks to engage in so-called “warehousing” activities – the practice of keeping repackaged assets inside a bank for an indefinite period, before selling them to outside investors.

One senior western policymaker said: “These changes are significant. They are definitely going to make some warehousing activities more expensive.”

The FSF has been quietly reviewing the rules regarding banks’ trading books for a couple of years, as part of a broader initiative that is accompanying the launch of the Basel II capital adequacy regime.

However, in April the committee indicated that it wanted to place a greater emphasis on this debate, as part of a bigger initiative to overhaul the regulatory regime in response to the credit turmoil.

And while the trading book issue received scant public attention, it has now shot to the top of the behind-the-scenes discussions between global regulators, since many policymakers hope that it could be a key lever for tightening standards in global banking.

This is because the recent credit turmoil has highlighted a stark disjuncture in the Basel regime in relation to trading books. Most notably, though the Basel rules require banks to hold large capital reserves against the risk of credit default in their loan book, regulators only require small buffers for assets held in the trading book if these are labelled as low-risk, according to so-called Value at Risk models.

Research by supervisors suggests that the proportion of assets held in banks’ trading books has risen sharply in recent years, often to above 50 per cent of those assets, apparently because of the favourable regulatory treatment.

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Treasury eyes Chinese private equity

By Martin Arnold, Private Equity Correspondent

Published: June 1 2008 23:32 | Last updated: June 1 2008 23:32

China has been advised by the government on how to establish a thriving private equity industry, with the Treasury passing papers on tax and regulation to Beijing as London seeks a strategic advantage over the US.

The advice, coupled with discussions between senior UK buy-out executives and Beijing officials, may give London a head start in the tussle with New York for influence in China, widely seen as private equity’s next Eldorado.

“The Chinese are very keen to develop a domestic market,” said Dag Detter, senior adviser to Terra Firma, the UK buy-out firm, who has worked with the Chinese government on private equity.

“Their leadership rightly believes that doing so would further stimulate growth and strengthen the country’s business sector, and the UK’s participants are happy to help,” said Mr Detter.

The strength of Anglo-Sino ties on private equity will be underlined on Tuesday when the Boao Forum, Asia’s equivalent to Davos, comes to London for its first conference outside the continent.

“Yes, we have pointed them in the right direction by passing on papers about a range of fiscal and regulation policies for private equity,” said a senior Treasury official.

“But this is not about us pushing this stuff down their throat, as there is huge appetite from the Chinese to learn about how the UK has encouraged private equity,” he said.

A flood of private equity groups are pouring into China in search of investment opportunities amid its rapid economic growth, especially as the credit squeeze has made it harder to fund big buy-outs in the US and Europe.

Western private equity firms have found it hard to deploy large amounts of capital in a tightly regulated market where many sectors, including defence, media and energy, are considered off-limits.

In the year to mid-May, private equity firms had deployed only $512.4m (£259m) in China, against $624.4m in the year-ago period, according to Thomson Reuters.

Talks between the UK and China on private equity date back to the formation of the UK-China venture capital joint working group, launched by Gordon Brown during his visit to Beijing in 2005.

China and its colossal sovereign wealth funds, CIC and Safe, have been inundated with people offering advice, from government officials to consultants and leading endowments.

But buy-out bosses say the UK has benefited from China’s wariness about the US over its aggressive attitude towards Beijing on issues such as sovereign wealth investments in US companies and the value of the renminbi.

“I think the relationship between the UK government and the Chinese has been tremendously helpful to us,” said Patrick Dunne, communications director at 3i, which is firmly established in China with offices in Shanghai and Beijing.

On Mr Brown’s first visit to China as prime minister in January he urged the new $200bn CIC to open its first overseas base in London.

The first day of the three-day Boao Forum event will focus on private equity, with Blackstone, TPG Capital and Goldman Sachs executives joining discussions alongside Yvette Cooper, chief secretary to the Treasury.

The event will be attended by Chen Jian, China’s minister of commerce, and Xu Lin, head of fiscal and financial affairs at the National Development and Reform Commission, which is *guiding China’s economic restructuring.

Mr Lin has granted approval to about a dozen new state-backed Chinese private equity funds with a combined war chest of more than $10bn, such as the Bank of China’s Bohai fund, to finance the mainland’s cash-hungry state-owned industries.

Mr Detter at Terra Firma said: “Before long China’s vast corporate sector could well be serviced by a domestic industry, which could be even more successful in its aims if it followed the UK’s model of attracting foreign talent.”

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Vietnam losing allure for investors

By Amy Kazmin in Bangkok

Published: June 1 2008 22:03 | Last updated: June 1 2008 22:03

Vietnam’s foreign business community is warning that rapid inflation, growing labour unrest and a real estate bubble could erode the communist-ruled country’s appeal as an investment destination.

At the annual meeting of the country’s authorities and members of the foreign business community on Monday, Michael Pease, chairman of the American Chamber of Commerce in Vietnam, will appeal to Hanoi to act quickly to restore macro-economic stability.

It comes just days after news that inflation surged to 25.2 per cent in May, its highest level since 1992, spurred on by steep rises in the cost of food, construction and housing.

“Vietnam’s success in attracting foreign investment has largely been built on the expectation of economic and political stability,” Mr Pease, who is general director of Ford Vietnam, will say in a speech.

Hanoi now needs to take “urgent and decisive action” to curb a speculative real estate bubble that “not only threatens the financial sector, but is also undermining Vietnam’s long-term competitiveness as it is challenged for foreign investment by neighbouring countries”.

Rising labour costs are also “a significant concern to US business operating in Vietnam” and labour unrest is directly related to the macro-economic problems.

Since its entry into the World Trade Organisation in January 2007, Vietnam has been a magnet for foreign investors, drawn by its rapid growth – which averaged 7.5 per cent a year over the past decade – and its youthful, motivated population.

Between January and May, authorities say they received foreign investment pledges of $15.3bn (£7.5bn, €10.2bn), more than double those received in the same period last year. In 2007 foreign capital inflows were about $15bn, coming from foreign direct investment, portfolio investment and the remittances from Vietnamese overseas.

But economists say the flood of foreign money has had destabilising effects that could deter investment, as it fuels excessive credit growth, driving inflation higher.

Rapidly rising consumer costs – especially food prices – have led to more frequent, sometimes violent, strikes as workers find they can no longer make ends meet and press for higher wages. Hanoi has said that curbing inflation is its top economic priority, but its efforts to cool the economy by raising interest rates have not yet had much impact.

Mr Pease acknowledges that workers “have legitimate concerns about the eroding purchasing power of their wages” but says the government should do more to prevent or resolve strikes by “helping better communication between workers and management of [foreign-invested] factories”.

He also calls corruption “one of the biggest challenges to progress in Vietnam” and urges the government to protect, not penalise, whistleblowers and journalists investigating corruption cases.

Last month Vietnamese authorities arrested two journalists who had exposed a scandal involving transportation ministry officials, who bet on European football matches with money allocated for infrastructure development.

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China's forex reserves hit 1.76 trillion dollars: report
AFP - 23 minutes ago

SHANGHAI (AFP) - China's foreign exchange reserves rose to 1.76 trillion dollars at the end of April, state media reported Monday, reaching a level higher than the rest of Northeast Asia's combined.

China's reserves, by far the largest in the world, expanded by another 74.5 billion dollars during April, the China Business News reported, equivalent to about 100 million dollars every hour.

At 1.76 trillion dollars, China's reserves are now larger than those of Japan, Taiwan, South Korea and Hong Kong combined.

The growth in reserves came amid rising official concern about a fresh surge in hot money -- or speculative inflows -- spurred by a strengthening yuan and a widening spread between falling US interest rates and rising Chinese rates.

The increase in reserves was roughly three times larger than the trade surplus and the value of incoming foreign direct investment -- the two traditional sources of reserve growth.

This led analysts to conclude that perhaps as much as 50 billion dollars entered the economy in the form of hot money.

"This (figure) seems to suggest the inflow of hot money is speeding up," the newspaper quoted Logan Wright, an analyst with Stone and McCarthy Research Associates, as saying.