Professional Documents
Culture Documents
An Smu Economics Intelligence Club Production
An Smu Economics Intelligence Club Production
AN
SMU
ECONOMICS
INTELLIGENCE
CLUB
PRODUCTION
-
Incubating
the
Future
of
Chile
-
Likonomics
-
Uncovering
Key
ASEAN
Needs
Vital
to
US
Economic
Legitimacy
in
ASEAN
(Part
3)
The
Fortnight
In
Brief
(8th
July
to
2 1st
July)
US:
CPI
up,
credit
rating
revised
from
negative
to
stable
US
data
for
June
were
largely
positive
with
retail
sales
rising
0.4%,
though
m issing
the
0.8%
estimate
by
economists,
and
industrial
production
up
0.3%,
the
biggest
since
February.
Julys
Empire
State
Manufacturing
Index
was
also
up.
June
CPI
rose
0.5%,
also
the
largest
since
Feb,
edging
closer
to
the
Feds
2%
inflation
target.
In
his
testimony
before
Congress,
Chairman
Bernanke
said
the
Fed
expects
to
start
scaling
back
on
QE
this
year,
and
that
the
bond
buying
program
does
not
follow
a
preset
course.
The
USs
Aaa
credit
rating
was
also
revised
from
negative
to
stable
by
Moodys,
on
the
back
of
the
narrowing
b udget
deficit,
which
according
to
the
CBO,
is
expected
to
be
the
smallest
since
2008
this
year.
Asia:
China
reports
slower
growth;
Attention
shifts
to
election
in
Japan
Chinas
year-on-year
home
prices
rose
strongly
in
June.
New
home
prices
in
70
major
cities
saw
a
0.8%
increase
in
June
from
the
previous
m onth
and
a
6.8%
increase
from
a
year
ago.
The
appreciation
of
home
prices
come
as
China
reported
a
GDP
growth
of
7.5%
growth
in
Q2,
0.2%
lower
than
in
Q1.
In
Japan,
Shinzo
Abes
ruling
coalition
is
expected
to
win
the
upper
house
of
parliament.
A
victory
would
give
the
Liberal
Democratic
Party
(LDP)
a
majority
in
b oth
houses
of
parliament,
allowing
Abe
more
flexibility
in
implementing
Abenomics.
The
Nikkei
has
seen
a
41%
increase
year
to
date
thanks
to
the
aggressive
monetary
stimulus,
increased
fiscal
spending
and
structural
reform,
dubbed
the
three
arrows
of
Abenomics.
EU:
Japan
advocates
Britain
to
keep
major
role
in
EU
PM
David
Cameron's
promise
to
renegotiate
Britain's
role
in
the
EU
and
hold
a
referendum
on
EU
membership
by
2017
has
been
greeted
with
concern
by
the
United
States
among
others.
In
addition,
British
Foreign
Secretary
William
Hague
has
said
that
withdrawal
from
the
EU
would
deter
investors,
undermine
trade
and
damage
Britain's
global
status.
Meanwhile,
Japan
has
mentioned
"The
advantage
of
the
UK
as
a
gateway
to
the
European
market
has
attracted
Japanese
investment.
"The
(Japanese)
government
is
committed
to
making
its
relationship
with
the
EU
stronger
than
ever
before.
In
this
context,
it
expects
that
the
UK
will
maintain
a
strong
voice
and
continue
to
play
a
major
role
in
the
EU."
1710
1690
1670
1650
1630
302
IN COLLABORATION WITH
S&P 500
take in the best ideas, the fact remains that start-ups have a low probability of success and a high variance in potential payoffs. Without public money flooding this sector, it would be safe to say that there will not be as many incubators around. This was especially telling during interviews with the founders, who shared that most of them started out around 2009 or 2010. This was when the incumbent President, Sebastin Piera, took office and began a push for more entrepreneurship and pro-business reforms. Second, we were unconvinced of the unfeasibility of some of the business ideas we saw during the visits. It was uncertain if public funds used to spur entrepreneurship were being spent wisely. This concern was echoed by a few students, one of whom asked the director of an incubator if a start-up bubble was forming. Did the Governments enthusiasm at developing an entrepreneurship ecosystem cause a larger than optimal number of incubators and start- ups to thrive as they ride this boom? The Chilean Government may have been trying to grow roses, but they could have been cultivating too many weeds. Zombie start-ups and incubators supported by taxpayer funds could emerge, much like how aggressive monetary policy caused zombie banks and companies to proliferate in Japan and Europe. The entrepreneurs we spoke with were also uncertain if the next Government will continue to encourage entrepreneurship as much as the present one. When political winds change and Government support wanes, these incubators, start-ups and initiatives may go into limbo and crash, damaging the image that Chile had been trying to build. These fears were partially assuaged as long as spending is properly audited and the money did not leave the Chilean economy. The closed loop4 in the economy should ensure that at its worst, the spending will be no different from any traditional expansionary fiscal policy, except that entrepreneurs are spending the money on behalf of the Government. Even if these start- ups failed, the effects on the macroeconomy should be relatively benign. The objective of generating more productivity growth and entrepreneurship is much more important for the long term health of the economy. Our professor also explained that there were many intangible benefits which further strengthened the case for encouraging entrepreneurship and innovation. The spending was conspicuous enough that it attracted the attention of media agencies worldwide, strengthening Chiles image as a centre for entrepreneurs. This currency can later be exchanged for more Foreign Direct Investment (FDI), which would in turn attract more foreign start-ups to Chile. Even if the Start-Up Chile programme did not culminate in a Fortune 500 company, the long run effects may eventually result in one being created. Furthermore, another classmate explained that even if a bust were to occur in the short run, Darwinian natural selection will ensure that only the very best incubators and start-ups remain, allowing the ecosystem to grow more organically around a core of tested companies. Having more players in the ecosystem now may not necessarily be bad as there is a greater variety of investors, incubators, and start-ups. Less capable ones are then weeded out in the market, allowing a stronger core to form. Lastly, a participant from the first run of Start-Up Chile compiled a few statistics about the 22 start-ups in the programme after their first year to determine if the programme was a success. 3 Copyright 2012 SMU Economics Intelligence Club
Some of this information can be seen in Figure 1 below. The figures show a low failure rate and significant benefits such as the media exposure and image created by the campaign have yet to be taken into account. Figure 1: Statistics from Start-Up Chile Participants Companies with at least cofounder living full time in Chile Companies with significant businesses still running in Chile Capital raised from angel investors and Venture Capitalists Companies still operating on own finances Companies which are profitable or raised significant capital Companies which have failed Companies which have been acquired Companies which still have business relationships in Chile Jobs created in Chile Companies which joined over the four subsequent rounds of Start-Up Chile Homeward bound The scales fell from our eyes during our stint away from home as we realised the opportunities and support in Singapore available for entrepreneurs. If not for the parallels we saw in a foreign land, many of these opportunities at home will have simply passed us unnoticed. If entrepreneurship can begin to take root and thrive in Chile, where the level of support and infrastructure is not as strong, Singaporeans can aspire to achieve much more. Lastly, to a brave friend who stayed behind for an internship in Chile and has plans to try for the Start-Up Chile programme, all the best! 6 (27%) 10 (45%) US$4,020,000 (Raised by 7 Startups) 16 (73%) 12 (55%) 3 (14%) 1 (5%) 19 (86%) 16 400
1 PPP$
Purchasing Power Parity Dollars is a hypothetical unit of currency derived by converting a countrys currency into a common international currency based on the relative price differences of a selection of goods across countries. 2 Infant Industries A new and usually promising industry which is not yet able to compete internationally and needs to be protected. 3 Incubators Programs designed to support the successful development of a start-up by providing business support resources and services such as cheap rental, education and training, networks and mentorship. 4 Closed Loop An economy with a closed loop is one which sees relatively little capital and trade outflows or leakages. Sources: 1. CORFO 2. E27 3. Janus Corporate Solutions 4. NathanLustig.com 5. OECD 6. The Guardian 7. The Next Web
Likonomics
By
Henry
Chan
and
Wang
Haochen,
Singapore
Management
University
After
the
June
10-12
Dragon
Boat
Festival
holiday,
the
Chinese
government
engineered
an
unprecedented
stress
test
on
the
nation's
interbank
market
that
saw
overnight
rates
surge
from
the
usual
2-4%
to
13%
on
June
20th
(Figure
1).
Though
subsequent
intervention
of
the
government
had
restored
order
to
the
market
and
moved
the
rate
back
to
its
usual
range,
most
economists
agreed
that
the
episode
had
sent
an
unmistakable
reform
signal
to
the
market
and
there
is
intense
interest
around
the
economic
thinking
of
the
new
Premier
Li
Keqiang.
Figure
1:
Repo
&
Shibor
(Shanghai
Interbank
offered
rate)
rate
fixing
Despite the collective nature of Chinese leadership and the absence of definite policy pronouncement, Barclays Capital coined the word, Likonomics, to describe the economic philosophy of the new Chinese cabinet led by Premier Li. The market generally agreed that Barclays view is a fitting description of the economic directions of the administration. Barclays Likonomics has three major parts: no stimulus, de-leveraging and structural reform. They are internal measures aimed at correcting the existing imbalance of the Chinese economy and maintain the economic momentum to overcome the middle-income trap that the country will face in near future. The first two parts of Likonomics: no stimulus and de-leveraging are aimed at correcting the unintended economic imbalance of rapidly accumulated debt and high credit growth of the four trillion RMB stimulus package of 2008. A key feature of the 2008 stimulus package is that the local government takes the lead in the program implementation. The Chinese local government had limited taxation power and resources; their traditional way of funding capital expenditure is through bank loans and land sales. They undertook the assigned 2008 stimulus package by (1) setting up a local government financing vehicle (LGFV) and took out bank loans (2) expanding their participation in the real estate sector to raise funds and indirectly stimulate real estate prices (Figure 2). 6 Copyright 2012 SMU Economics Intelligence Club
The subsequent monetary expansion associated with the RMB four trillion stimulus package is many times over the original stimulus target (Figure 3). In this aspect, China was the first country to engage in Quantitative Easing (QE). Figure 3: China lending growth
Source: Economist When the government realized the problem in 2010 and tried to curtail credit, the medium & long term nature of the local government stimulus measures just moved the credit demand to shadow1 banking and credit expansion went unabated (Figure 4). Figure 4: Chinese credit growth with other channels gaining share over traditional bank loan after 2009
Before 2008, there was almost no gap between credit and nominal GDP growth (Figure 5), but recent credit growth as measured by outstanding total social financing2 was 12% higher than nominal GDP growth. Although there is no economic theory or historical evidence that link a 7 Copyright 2012 SMU Economics Intelligence Club
widening gap between credit and GDP growth to a debt crisis. The mismatch raised enough concern among economists and very well reflects the losing productive edge of the economy. Coupled with the overheating of the property market, the surge of shadow banking and the rapidly accumulating debt by the local government and corporate sector, many economists have voiced danger of a possible Minsky moment3 in China. Figure 5: Recent gap between credit & nominal GDP growth
Source: PBOC (in trillion of RMB) The decision of having no stimulus and to de-leverage is indeed a prudent economic philosophy under the present circumstances. Figure 6: China growth
(note 2Q 2013 marked the fifth consecutive quarterly growth of below 8%) Infrastructure investment, export and manufacturing fueled the Chinese growth for much of the last 30 years. The model is running out of steam as the population is aging, and the labor force shrinking (Figure 7). Rising wages is also eroding Chinese exports competitive position (Figure 8). Premier Li asked the World Bank to conduct a study on China's middle-income trap challenge in 2010. Through the study, the need to continue reforms at the macro and micro level of the economy was emphasized, in order to sustain Chinas productivity gain. The 3rd pillar of structural reform is more important now as the whole world is moving into a low growth phase and China's old model cannot sustain its growth. Of all the three aspects of Likonomics, this particular aspect of structural reform is the most critical and carefully watched. 8 Copyright 2012 SMU Economics Intelligence Club
The
Chinese
incremental
approach
to
reform
is
often
construed
as
conservative
and
resisting
changes.
However,
China
has
undergone
more
changes
than
most
countries
in
recent
years
(sans
Japan's
Meiji
restoration)
and
they
have
reaped
the
most
benefit
associated
with
reform
in
human
economic
history.
The
country's
economic
achievement
really
ties
to
reform.
There
are
two
major
economic
restructuring
in
China
since
opening
up
in
1978:
the
first
is
the
agricultural
liberalization
and
legitimizing
of
private
property
rights
in
the
1980s
and
the
second
is
the
state
enterprises
reform
&
WTO
entry
associated
reform
of
the
late
1990s.
The
second
series
of
reforms
in
particular
has
laid
the
foundation
of
the
rapid
growth
of
the
last
decade.
We
noted
the
two
reforms
are
all
conducted
in
an
incremental
approach
and
done
in
a
trial
and
adjustment
basis.
Goals
are
clear
but
not
well
stated
and
often
move
in
a
two-step
backward,
one-step
forward
fashion.
It
is
often
many
years
after
a
certain
reform
is
implemented
that
people
realize
that
it
has
been
in
place.
Chinese
leaders
realized
the
value
and
necessity
of
reform.
They
have
clearly
identified
the
challenges
they
face
and
what
they
want
to
do.
However,
it
is
clear
that
they
have
no
clear
view
on
how
to
proceed
and
how
long
it
will
take
them.
On
the
future
of
Likonomics,
they
will
probably
move
in
the
same
fashion
continuing
with
incremental
steps
to
move
forward
with
the
objective
of
preserving
stability
and
the
stated
objectives
in
their
mind.
In
conclusion,
we
will
not
know
whether
Likonomics
will
work
or
not
until
a
few
years
after.
1
Shadow
Banking
Refers to loans extended through non-banking channels such as trust, wealth management products, insurance loans & bonds. A distinguishing feature of the Chinese shadow banking system is that banks are deeply involved in shadow banking. They serve as sales channels but keep those products out of the balance sheet and assume no legal obligation on credit quality. 2 Total Social Financing (TSF) Loans extended in China encompassing bank loans & shadow banking loans. 2 Minsky Moment A time of sudden collapse of asset values after an extended period of spiraling prices built on market speculation and unsustainable credit growth.
Sources: 1. Bloomberg 2. BofA Merrill Lynch Research 3. CEIC 4. Nomura Global Economics 5. Trading Economics 6. The Economist
Source: CEIC Second, through a reduced dependence on precautionary savings, only then can the imbalance between ASEAN as a surplus entity and the US as a deficit entity be reduced. The savings rates 11 Copyright 2012 SMU Economics Intelligence Club
of major ASEAN countries far exceed that of the US (Figure 9), and these savings can be better channelled to projects and investments that derive higher returns. Figure 10: Net bilateral aid flows from US to Myanmar (USD)
Source: Trading Economics Third, with this cross-border financial institute acting as a substitute to US aid, the US might also benefit from the reduced reliance on any one ASEAN member on future US funds and aid. For example, US net bilateral aid2 flows to Myanmar alone amounted to about US$ 31 million in 2010 and to more than US$70 million in 2007 (Figure 10). Figure 11: Asian bond market breakdown by country
Source: Asian Development Bank Finally, through the maturity of such a cross-border financial institute, further modes of fund raising, such as the issuance of bonds in the support of these institutes, can also be implemented. This will pave the way for a more mature equity and debt-trading market in which ASEAN currently lacks. The collective bond market size of major ASEAN countries are at present, paling in comparison with the bond market size of China and South Korea (Figure 11). The maturity of such financial markets will in turn pave the way for a joint ASEAN currency, if it ever desires so. Incentivization The US can also have a hand in incentivizing regional institutions and US businesses to invest in ASEAN. Grants or special economic arrangements can be granted to ASEAN-US business 12 Copyright 2012 SMU Economics Intelligence Club
activities within specific sectors of focused, thereby encouraging US investments in ASEAN and even vice versa. Figure 12: Exports of goods and services as a % of GDP
Source: UN Statistics Division The goods and services export sector is a viable place to start. With most major ASEAN countries (except Singapore) facing a less-than-100 percent of total exports of goods and services as a percentage of GDP (Figure 12), such sectors are potential growth areas. The time is also ripe for the US and foreign investors to participate in such opportunities. Via the ASEAN Economic Community (AEC) 2015, foreign investors will be able to enjoy up to a massive 70% of foreign ownership in ASEAN businesses. Also, in order to incentivize ASEAN businesses to adopt US patents and trademarks, further grants can be given to ASEAN businesses to incentivize such behaviour. A lower cost of patent adoption will increase the utilization-rate of US patents, and reduce the need for patent theft, amounting to a benefit to all parties involved. Figure 13: US exports of goods to ASEAN, 2001-2011
Finally,
as
ASEAN
seeks
to
industrialize,
technology
exports
and
the
exports
of
high
end
manufacturing
tools
and
machinery
from
the
US
to
ASEAN
might
also
see
a
rise.
Currently,
Singapore
is
the
biggest
receiver
of
these
exports,
but
such
exports
are
vital
to
other
developing
ASEAN
countries
as
they
seek
to
industrialization
and
move
up
the
value
chain.
Grants
and
special
economic
arrangements
that
incentivize
ASEAN
countries
to
enter
into
contracts
for
these
highly
valued
products
can
therefore
be
viable.
US
total
exports
to
ASEAN
have
seen
an
overall
rising
trend
over
from
2001
to
2011
(Figure
13).
Integration
To
foster
economic
integration
that
will
lead
to
the
fulfilment
of
objectives
as
stated
by
the
AEC,
and
for
trade
and
investment
facilitation
between
ASEAN
and
US,
a
range
of
principles
and
procedures
will
have
to
be
aligned
and
integrated.
For
example,
investment
policies,
investor
protection
regimes,
policies
on
non-discrimination,
transparency
and
self- disclosure,
market
access
rules
and
regulations
all
requires
integration
into
a
common
set
of
rules
and
procedures
unwaveringly
abided
by
all.
Integrating
each
countrys
previous
procedures
into
a
simplified
set
of
customs
procedures,
while
simultaneously
enhancing
the
transparency
of
the
groups
entire
customs
administrations,
will
bode
well
to
enhance
the
overall
economic
integration
with
ASEAN
and
the
US.
Also,
an
integrated
set
of
principles
governing
the
use
of
information
and
communication
technology
is
vital.
It
will
help
assist
policymakers
and
enforcement
agencies
on
contemporary
issues
such
as
cross
border
information
flow
and
local
content
requirements.
Finally,
the
US,
in
pursuing
an
integrated
set
of
principles
governing
environmental
protection,
and
on
the
safeguarding
of
small
and
medium
enterprises
(SMEs)
which
generates
the
majority
of
all
jobs
in
ASEAN
and
the
US
can
potentially
utilize
these
avenues
to
extend
its
engagements
to
non-state
actors,
such
as
the
various
chamber
of
commerce,
trade
associations,
non-governmental
organizations
(NGOs)
and
research
institutes
throughout
ASEAN.
1
Precautionary
Savings
To avoid future income fluctuations and retain a smooth consumption, individuals set aside a precautionary reserve, by consuming less in the current period, and resort to precautionary savings in case the bad state is realized in the future. 2 Bilateral Aid A voluntary transfer of resources from one government to another. This contrasts with multilateral aid where aid is pooled from one or more sources and dispersed among recipients. Sources: 1. CEIC 2. Trading Economics 3. Asian Development Bank 4. UN Statistics Division 5. United States Census Bureau
14
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Correspondents : Vera Soh (Vice President, Publication) [email protected] Singapore Management University Singapore Samuel Ong (Publications Director/ Editor) [email protected] Singapore Management University Singapore Ng Yongxiang (Marketing Director) [email protected] Singapore Management University Singapore Tan Kwan Hong (Writer) Undergraduate School of Economics Singapore Management University [email protected] Lai Tze Wee (Writer) Undergraduate School of Economics Singapore Management University [email protected]
Ng Jia Wei (Vice President, Operations) [email protected] Singapore Management University Singapore Yingyu Zeng (Liaison Officer) [email protected] Singapore Management University Singapore Darren Goh Xian Yong (Editor) [email protected] Singapore Management University Singapore Henry Chan (Writer) Postgraduate Lee Kong Chian School of Business Singapore Management University [email protected] Wang Haochen (Writer) Postgraduate Lee Kong Chian School of Business Singapore Management University [email protected]
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