Commentaries

For Chinese exporters, the grass is greener abroad

   The U.S.-China tyre dispute threatens to spill into other sectors and further squeeze Chinese exporters’ already razor-thin margins. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.

    But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.

    In addition, selling to large buyers such as Wal-Mart creates enough volumes to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.

    But as the tyre spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China.  By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.

Investor protection, Singapore style

Who needs a whole new government agency to protect  consumers from irresponsible banks? Authorities in Singapore have taken a refreshingly straightforward approach in tackling banks deemed to have been less than scrupulous when selling structured notes dragged down by the failure of Lehman Brothers: they banned them.

The Monetary Authority of Singapore on Wednesday banned 10 banks from selling structured notes until they can prove that they have improved processes to highlight the risks involved. Banks including DBS and ABN Amro, now part of Britain’s Royal Bank of Scotland, are out of the business for at least six months. Hong Leong Finance receivd a two-year ban. (The full list is here.)

The so-called Lehman Minibonds are one of the many scandals triggered by the Wall Street investment bank’s collapse. They were sold as bonds that offered principal protection and an attractive rate of interest. In fact, they were complex structures supported by synthetic CDOs with Lehman acting as a swap counterparty. When Lehman filed for bankruptcy, the notes collapsed.

The MAS report is fairly dry, but nonetheless it is fairly clear that banks either didn’t understand the risks of what they were selling, or failed to tell their clients.

Some of the specific failings highlighted by the MAS include:

a) risk ratings assigned by some financial institutions to some series of the Notes that were inconsistent with risk warnings stated in the prospectus and pricing statement;

b) insufficient steps taken by some financial institutions to ensure that all their financial advisory representatives were properly trained before marketing and selling the Notes; and

c) weaknesses in how some financial institutions ensured that their financial advisory representatives were properly equipped with accurate and complete information about the Notes.

This is some consolation for the 7,000-odd Singaporean investors who lost money on the notes. Though 67 per cent of investors have received compensation, they have got just 30 per cent of their money back.

Banks must brace for creditcard pile-up

Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.”

Ever after today’s record report — delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent — the peak may still be far off.

The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just 8.4 percent in this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent.

As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead.

The dismal job market bodes ill for default rates. The United States is continuing to hemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at last month’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained — an unlikely but possible outcome — unemployment would climb to 11 percent in less than six months.

Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent — the highest level since records began in 1948.

While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued Tuesday by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.

Job losses still ginormous

ADP this morning came out with its survey of joblessess, reporting that private sector nonfarm payrolls dropped by 473K in June, but noted that losses originally reported in May and April were slightly less than had been originally reported.

Some may take this as a reason to celebrate since -473K marks another month showing a slowdown in job losses since they hit their peak at -736K in March. But 473K jobs lost in a single month, especially given the blood letting we’ve seen since the nosedive in financial markets in September, is still impressive, and worrying.

Many take comfort in the fact that jobs data is a lagging indicator, but given the state of the U.S. housing  and the U.S. consumer, the speed and depth of job losses still threatens to  undermine already flagging consumer confidence further and spark more delinquencies in prime home loans and credit card debt.

Yesterday, the government reported that such home loan delinquenices had already shot up in the first quarter, even as loan modifications spiked.

From Reuters:

The U.S. government report showed that servicers implemented 185,156 loan modifications during the first quarter, up 55 percent from the prior quarter.

The report also showed that seriously delinquent mortgages, defined as loans that are 60 or more days past due, increased by nearly 9 percent from the prior quarter to 5 percent of all mortgages in the portfolio.

The portfolio includes 34 million loans worth $6 trillion, or about 64 percent of all mortgages in the United States.

Prime loans experienced the biggest increase in serious delinquencies, which rose by more than 20 percent from the prior quarter to 2.9 percent of all such mortgages.

And if it’s not the layoffs that hurt the debt-laden consumer, it’s stiffer credit card fees.