The role that the US plays in Asia: Containment of China!

Image via Wikipedia

Tweet

The role that the US plays in Asia

Comment by XUE LITAI

SINO-US ties were in focus at the recent Asia-Pacific Economic Cooperation (Apec) summit in Honolulu and the just concluded East Asia Summit (EAS) in Bali, especially because of the European economic and political crises.

It was not a good time for US President Barack Obama to attend the EAS, given the unstable state of the American economy, and the Congressional super committee’s failure on the federal budget.

The frictions between the United States and China – from the yuan’s exchange rate to the South China Sea disputes – are nothing new. But the problem now is that the two countries seem unable to narrow their perception gap.

Obama met with Premier Wen Jiabao twice during the EAS to say that China should allow the yuan to revalue more rapidly.

At the Apec summit in Hononulu, Obama had complained to President Hu Jintao that the yuan was undervalued and said it “disadvantages American business; it disadvantages American workers. And we have said to them that this is something that has to change”.

The Chinese leaders responded that the yuan’s exchange rate was not responsible for the US’ high trade deficit with China, instead structural problems in the American economy were to blame for that.

In fact, China has been emphasising the need for a new mechanism for global economic governance to increase “the voice of emerging markets and developing economies”.

Before the summits, US officials had said countries concerned should exercise self-restraint and refrain from taking any action that could escalate or complicate the territorial disputes in the South China Sea. The US remark was directed at China, too.

But before that, Obama had issued an indirect message to China saying: “We want you to play by the rules.”

He warned that “where we see rules being broken, we’ll speak out and, in some cases, we will take action.”

Chinese leaders and people, however, think that the US dragged the South China Sea disputes, an irrelevant issue, to the EAS to fulfil its own agenda.



To them, the US’ intention is clear: It is using the South China Sea disputes to drive a wedge between China and some of its South-East Asian neighbours, which have enjoyed “20 years of steady friendship”.

It is clear that the US is desperate to engage full-time and establish its diversified presence in Asia as part of its global repositioning strategy. Washington is in the process of one of the most important transitions, that is, repositioning and rebalancing its foreign policy priorities.

To that end, it has begun shifting its resources and capabilities from the Middle East and South Asia to East Asia. Recognising that the “American future is in Asia”, the US is hell-bent on establishing a strong presence in Asia.

In the 21st century, as US Secretary of State Hillary Clinton has said, the world’s strategic and economic centre of gravity “will be Asia Pacific”. Clinton said that with the withdrawal of American forces from Iraq and Afghanistan, the US had reached a “pivot point” that should allow it to “lock in a substantially increased investment – diplomatic, economic, strategic and otherwise – in this region”.

Obama soon underscored the shift by stressing: “There is no region in the world that we consider more vital than the Asia-Pacific region; we are going to prioritise this region.”

Such a strategic calculus makes US-China ties the most important and complex relationship Washington has ever established. Thus, the US has to have constructive engagement with China.

But simultaneously, some senior US officials also consider it necessary to continue their China-containment policy. As a result, the US is using the South China Sea disputes to prevent China’s influence from advancing southward
.
Actually, Obama’s decision to attend the EAS is symbolic of Washington’s policy shift towards Asia. In other words, the US’ purpose was to use the EAS to reduce China’s influence in the region.

The Obama administration has demonstrated the US’ established policy on containment of China over the past two years.

Once, Obama even declared: “We’ve brought more enforcement actions against China over the last couple of years than had taken place in many of the preceding years.”

Probably, his declaration was aimed partly at the strategic calculations mentioned above and partly to blunt criticism of his administration by trade unions and Republican rivals, who could accuse him of not taking tougher action against China in the run-up to next year’s presidential election.

The US’ focus on Trans-Pacific Partnership could be interpreted as part of its economic strategy to compete with China’s increasing influence in the region.

In response, China has announced that it would offer its South-East Asian neighbours US$10bil (RM31.8bil) in infrastructure loans and establish a three billion yuan (RM1.5bil) fund to accelerate maritime cooperation with Asean member states.

Among the areas covered by the fund are marine research, navigation safety and combating transnational crimes. Asean member states now look to China for economic revitalisation and seek security guarantee from the US.

But such is the triangular US-China-Asean ties that only after the US and China reach greater agreement over Asia-Pacific affairs can Asean member states overcome the dilemma of choice. — China Daily/Asia News Network

> The author is a research associate at the Center for International Security and Cooperation at Stanford University in California, US.

Related post:
Pentagon planning Cold War against China - AirSea Battle concept!

Longer wait for certainty and clarity - Accounting standard for property developers

Tweet

OPTIMISTICALLY CAUTIOUS By ERROL OH

Property developers, plantation firms given more time to adopt new accounting standards

PROPERTY developers and plantation players must be a relieved lot these days after the Malaysian Accounting Standards Board (MASB) recently ruled that such businesses are not obliged albeit temporarily to comply with two new accounting treatments that would have otherwise come into effect in January.

The two industries have complained that certain international accounting policies that Malaysia is supposed to adopt, ignore the way such businesses operate here and thus can be onerous and can distort the local companies' financial results.

The Real Estate and Housing Developers' Association of Malaysia, for example, has argued that the international accounting rules for recognising revenue from property development are based on the build-then-sell model of the West. However, in Asia, it's the norm for purchasers and their end financiers to pay progressively for the properties according to the stage of construction. Therefore, it makes more sense for developers to report revenue based on the percentage of completion method.

As for the Malaysian plantation companies, their contention is that their oil palm or rubber trees are comparable to a factory with its associated plant and equipment. These trees, the so-called bearer biological assets, should be valued differently from consumable biological assets such as wheat and maize.

The industry players' efforts to impress these points on the MASB has apparently been fruitful, and the board has worked to push forward these views at the regional and international levels.

On Nov 19, the board issued a new accounting framework called the Malaysian Financial Reporting Standards (MFRS), comprising standards issued by the International Accounting Standards Board (IASB) that are effective or will be effective on Jan 1 next year. This is part of the MASB's long-standing plan for convergence with the International Financial Reporting Standards (IFRSs).

However, entities that are within the scope of MFRS 141 Agriculture (MFRS 141) and IC Interpretation 15 Agreements for Construction of Real Estate (IC 15) are allowed to defer their adoption of the MFRS framework by another year.



MASB chairman Mohammad Faiz Azmi explained: “The rationale to provide the transitional period for both the agriculture and real estate industries is that, while the board is seeking full convergence, we need to be mindful of potential changes on the horizon that may change current accounting treatments. As the IASB is planning to issue a new standard on revenue recognition next year that will subsume IC 15 and may likely amend IAS 41 Agriculture (the equivalent of MFRS 141) requirements for bearer biological assets, we believe that to accommodate those affected by imminent accounting standard changes, a transitional arrangement should be given.

“Given this uncertainty, the board felt we should allow the status quo until the IASB direction is clearer. On balance, we believe this will not affect our convergence objective as the MFRS framework is fully IFRS-compliant and the transitional period given is only for a limited period and based on the IASB's own programme for standard changes.”

The MASB calls it a transitional period, but it also means there will be another year of uncertainty. And can we be sure that the IASB will sort out these things in time? Observers say it may be easier to amend IAS 41, but breaking the impasse over how developers should recognise revenue is likely to take a while.

On Nov 14, the IASB issued for public comment a revised draft standard to improve and converge the financial reporting requirements for revenue recognition. It is the second time that there is an exposure draft on this subject; the first such document was published in June 2010. IASB will be accepting comments on the current exposure draft until March 2012. After that, there will surely be months of deliberation and consultation. Is MASB being merely hopeful in expecting IASB to deliver a new standard on revenue recognition next year? And what happens meanwhile?

The plan initially was for the relevant Malaysian entities to adopt IC 15 for financial years beginning on or after July1, 2010. However, in August 2010, the MASB deferred it to January 1, 2012. At the same time, the board allowed companies to voluntarily implement IC 15 ahead of the deadline. One listed company, ATIS Corp Bhd, clashed with its auditors over a major subsidiary's decision to opt for early adoption.

Mazars, the auditors, insisted that property developers in Malaysia should stick to the percentage of completion method. With neither side willing to back down, three shareholders of ATIS requisitioned for an EGM to remove Mazars and the resolution was voted through.

This may well be an isolated episode, but asking shareholders to be pick sides in such a complex and esoteric debate was ludicrous. The corporate scene could do without a repeat of this. But when certainty and clarity are put on hold, there's always the risk of making poor decisions.

Executive editor Errol Oh wonders if it's naive to believe in the idea of one set of financial reporting standards to rule them all.

The audacity of hedge funds and their lack of righteousness

Tweet

THINK ASIAN By ANDREW SHENG

IN the old days, technical books were read for one's education, but they are so boring that you would fall asleep. You read novels instead for their drama, romance and excitement. In this fast moving world where daily events are more thrilling than fiction, books like More Money than God by Sebastian Mallaby make you want to turn the next page.

Written by a former journalist, who today works for the US Council for Foreign Relations, the book has combined blood and guts story-telling of the hedge fund industry with careful analysis, tracing meticulously how the industry works like Sherlock Holmes. The narrative is so thrilling that when the author described the scene where the hedge funds took down Thailand in 1997, my hair stood on end. I was a ringside witness but I had not known who was doing what and how they did it.

If you want to know how hedge funds sniff out opportunities by talking to honest and nave central bankers who admit that they made policy mistakes and then make more money than God, read this book. It is both a clinical analysis of how hedge funds emerged from nowhere to become the market movers of today, as well as a morality story that raises more questions than it is able to answer. It may not be illegal (at least under existing law) to do a trade that tips a nation into abject poverty because there were tragic policy mistakes, but is it morally right to take home billions by accelerating the process of “creative destruction”?

The central insight of the hedge fund industry is brilliant it is that the academic finance theory is all wrong and we are all naive to believe otherwise. Modern finance theory begins with the assumption that the market is efficient and knows best. The efficient market hypothesis is based on the view that it is not easy to beat the market.

However, the hedge fund industry makes most money from the inefficiencies of the market. If you are not convinced, how between May 1980 and August 1998, the Tiger Fund earned an average of 31.7% per year after fees, beating the 12.7% return on the S&P500 index. The offshoots of the Tiger Fund, created by people who left the Fund to set up on their own, generated returns of 11.9% per year between 2000 and 2009, compared with the average of 5.3% per year for the S&P index.



Mallaby takes the story from the 1949 creation of the first hedged fund by Alfred Winslow Jones to the emergence of a sophisticated and complex US$2 trillion industry. He weaves a wondrous tale of how tribal and interconnected the industry became as it emerged.

Nobel Laureate Paul Samuelson, famous for arguing that randomly chosen stock selection would beat professionally managed mutual funds, was a founder investor of the Commodities Corporation, one of the first “quants” to use computer analysis to trade commodities. The Commodities Corporation was the nursery for three future hedge fund giants, Bruce Kovner (Caxton), Paul Tudor Jones (Tudor Investments) and Louis Bacon of Moore Capital.

Louis Bacon had connections with two of the Big Three in the early 1990s, being related by marriage to Julian Robertson (Tiger Funds) and worked briefly with Michael Steinhardt. The last of the Big Three is George Soros (Quantum Fund), who became famous as the man who made 1bil speculating in sterling and has become a philosopher/philanthropist. Many of these funds were involved during the speculative raids on Asian currencies during the 1997/98 Asian crisis and it is likely that many of them are having a food fest in Europe right now.

The last chapter of the book is a defense of why hedge funds should not be regulated. “The case for believing in the industry is not that it is populated with saints but that its incentives and culture are ultimately less flawed than those of other financial institutions.”

In Mallaby's view, “whereas large parts of the financial system have proved too big to fail, hedge funds are generally small enough to fail. When they blow up, they cost taxpayers nothing.” Yes, but when their prime brokers blew up with them, it cost taxpayers trillions.

Here lies the contradiction of their existence. Hedge funds are symbiotically tied to their prime brokers, the investment banks and large global banks that provide the leverage for their activities. No leverage means no ability to hedge or speculate. The latter group is too big to fail and its proprietary trading, combined with those of the hedge funds, are large enough to move markets.

The earlier argument that the prime brokers would safeguard systemic stability by indirectly regulating hedge funds (many of whom are former staff of the prime brokers) failed when Lehmans collapsed.

Hedge funds thrive because of regulatory and information arbitrage. The more the regular banking system is regulated, the more business drifts to the under-regulated shadow banking institutions.

Mallaby argues that it remains unproven whether heavier regulation will succeed. The regulators were scared to regulate, because of moral hazard, that is, the industry would take higher risks and the government would pay. Unfortunately, whenever there is a financial crisis, the government would be blamed and have to pay, irrespective of heavy or light regulation.

While hedge funds are not of public concern if they remain small, their herd like effect becomes a real problem when the momentum play can drive even mid-sized nations over the brink. Europe today is a live experiment of gigantic proportions. If someone makes tens of billions through speculation from the failure of some European countries and millions become unemployed, it is no longer a regulatory issue. Rightly or wrongly, this is a political crisis of the first order.

More Money than God should be the first book for everyone to read if they are to understand how the hedge funds dissect the European crisis as an opportunity.

Andrew Sheng is President of Fung Global Institute and author of From Asian to Global Financial Crisis.