Monthly Archives: July 2011

China, U.S. pull together to eliminate stock regulation loopholes

BEIJING, June 28 (Xinhua) — China and the United States are working together to eliminate loopholes in their cross-border stock regulation system, as revelations of acts of fraud committed by some Chinese companies in the U.S. stock market have invoked criticism by investors.

The U.S.-based Public Company Accounting Oversight Board (PCAOB) is working with Chinese authorities to revise the cross-border auditing system, PCAOB spokeswoman Colleen Brennan told Xinhua during a recent interview.

The two sides are trying to establish a “meaningful inspection arrangement for Chinese auditing firms by the end of the year,” Brennan said.

Many Chinese companies enter the American stock market through reverse mergers, or mergers in which private companies buy large amounts of shares of public companies. This option allows Chinese companies to get around the strict financial scrutiny that is usually applied to initial public offerings (IPOs).

The auditing loopholes, then, have emerged from different auditing systems being used for reverse-merged companies.

According to the PCAOB, a non-profit corporation created in 2002 to oversee audits of public companies, the United States audited 74 percent of Chinese reverse-merged companies, while China-based auditing firms tackled 24 percent.

“Different jurisdictions produce totally different calculus. What’s more, some auditing firms in China are totally out of the sight of PCAOB,” said John Smith, who is working for a U.S.-based auditing firm.

More than 50 auditing firms in China are registered with the PCAOB.

These companies can audit other Chinese companies, but the PCAOB has no authority over them, according to a PCAOB report.

This makes it possible for some companies to falsify their financial statements in the absence of strict regulation, according to the report.

NASDAQ-listed China MediaExpress Holdings, Inc., China’s largest television advertising operator on inter-city and airport express buses, was questioned in January by Citron Research, a U.S.-based stock analysis company, over allegations of fraud.

Brennan said both countries have already recognized the loopholes in their respective jurisdictions and are working to close them.

Brennan said the PCAOB met with the China Securities Regulatory Commission (CSRC) during the recent U.S.-China Strategic and Economic Dialogue last month to “facilitate inspections of PCAOB-registered auditing firms in China.”

“Both sides have agreed to accelerate their efforts to close these loopholes. This will mean conducting negotiations and engaging in technical assistance activities to reach a bilateral agreement governing cross-border auditing oversight,” Brennan said.

However, it is already too late for several Chinese companies that have suffered in the wake of the allegations of fraud. Previously high-flying Chinese stocks are starting to crash.

Investors who have suffered losses as a result of the crash have joined together to file lawsuits against some of the companies.

“It may take years to settle lawsuits like these,” said David Wang, a partner of Simons & Simons, a law firm that focuses on international stock disputes.

Under the din of the crash, however, lies a deeper problem with the market. Investors based in both China and the U.S. believe that the market’s overall credit has suffered most from the regulatory loopholes.

According to the PCAOB, out of the more than 600 companies that were given access to U.S. exchanges through reverse mergers between January 2007 and March 2010, 159 were from China.

Brennan said the U.S. has sent a joint delegation from the SEC (Security and Exchange Commission) and the PCAOB to Beijing to discuss the inspection process and cross-border auditing oversight system for U.S.-listed Chinese companies.

“We have been trying to work through the concerns of Chinese authorities, as we have worked through similar concerns with authorities in other countries,” Brennan said.

The PCAOB recently completed similar negotiations with Switzerland and the United Kingdom.

“In these and other jurisdictions, the PCAOB has been able to successfully resolve issues pertaining to local law, sovereignty, and jurisdiction,” Brennan said.

According to the PCAOB, the recent agreements that it has entered into with the United Kingdom and Switzerland are not agreements based on mutual recognition, but are instead arrangements for cooperative joint inspections that have enabled PCAOB inspectors to evaluate auditing work being done in these countries.

“We are expecting to establish a meaningful inspection arrangement for Chinese auditing firms by the end of the year,” Brennan said.

A CSRC official who requested anonymity told Xinhua that a definitive agreement on auditing oversight will be made between the two countries.

“We are working together to solve the issue. The agreement will probably be made in the near future,” said the official.

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Posted by on July 29, 2011 in Finance


Free-market and inflation

Missing Milton Friedman

TIM LEE asks an important question: why are conservatives and libertarians so uniformly hawkish about inflation? Mr Lee (a friend and former colleague) notes that this regularity is far from inevitable. Milton Friedman, a revered figure in right-of-centre circles, famously pinned the severity of the Great Depression on contractionary monetary policy. Scott Sumner, a professor of economics at Bentley University who identifies himself as a “neo-monetarist”, has argued that Friedman would have supported monetary stimulus. And he has argued, on neo-Friedmanite grounds, that tight monetary policy both precipitated and exacerbated our recent recession. I happen to think Mr Sumner is correct, but his expansionary prescription remains anathema on the right. Why? Mr Lee writes:

I can think of two possible explanations. One is that we’re still having the monetary policy debates of the 1970s, when right-of-center thinkers, following Milton Friedman, argued that the era’s persistently high inflation was the fault of unduly expansionary monetary policy. They were right about this, and a whole generation of free-market intellectuals has been on guard against the threat of inflation ever since. And this is obviously reinforced by the reciprocal trend on the left: because most of the inflation doves are on the left, people who are in the habit of disagreeing with left-wingers are discouraged from adopting their arguments on this issue.

Another likely factor is that American conservatism is a fundamentally populist movement, and the inflation hawks’ position has a simplicity that makes it intuitively appealing, especially to a movement that tends to see all policy issues in terms of virtue. Rhetoric about “printing money,” “debasing the currency,” and so forth are not only intuitively appealing, they also dovetail nicely with broader conservative themes of thrift and self-control. The arguments of inflation doves are more subtle and lack the same kind intuitive appeal.

I think both these factors play a role. I would emphasise the latter, though I think Mr Lee makes too much of the intuitive appeal of common-sense moralising rhetoric about thrift and “debasing the currency”. The influence of this kind of talk has been augmented powerfully by a certain moralising strand of Austrian economics, which is hostile to the very idea of fiat money, and encourages the idea that its entire purpose is to expropriate savings and monetise government debt. This strand of Austrianism also encourages scepticism about the existence of distinctively macro-level economic phenomena. Accordingly, macroeconomics as a discipline is often seen as pseudo-science that exists mainly to justify technocratic social control. Conventional counter-cyclical policy proposals, meant to address putatively macroeconomic phenomena, are thus routinely met with a combination of suspicion and animosity. 

Although sophisticated Austrian-school monetary economists such as George Selgin and Larry White defend rule-based inflation-targeting policies not all that different from Mr Sumner’s neo-monetarist nominal GDP-targeting rule, the ghost of Murray Rothbard looms much larger on the free-market right. To some, even to play the game of identifying optimal rules for the centralised state monetary authority is to give away the game to the Keynesian social planners. Here’s Rothbard on Friedman:

In common with their Keynesian colleagues, the Friedmanites wish to give to the central government absolute control over these macro areas, in order to manipulate the economy for social ends, while maintaining that the micro world can still remain free. In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.

In reality, the macro and micro spheres are integrated and intertwined, as the Austrians have shown. It is impossible to concede the macro sphere to the State while attempting to retain freedom on the micro level. Any sort of tax, and the income tax not least of all, injects systematic robbery and confiscation into the micro sphere of the individual, and has unfortunate and distortive effects on the entire economic system.

As a veteran of the “free-market movement”, I can attest to the remarkable influence of this line of thinking. Now, Milton Friedman was one of the 20th century’s great economists as well as one of its most formidable debaters. This made him a powerful check on the influence of anarcho-capitalist Austrians, obviously much to the chagrin of Rothbard. “As in many other spheres,” Rothbard wrote, “[Friedman] has functioned not as an opponent of statism and advocate of the free market, but as a technician advising the State on how to be more efficient in going about its evil work.” Rothbard’s fulminations notwithstanding, Mr Friedman died a beloved figure of the free-market right. Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman’s monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein. When a significant portion of a political movement’s activists believe that the whole point of central banking is “systematic robbery”, and that inflation is the means by which this robbery takes place, widespread, reflexive opposition to inflation is not surprising. 

Now, I don’t claim that the right, loosely defined, is chock full of Murray Rothbard fanatics. And whatever it is that is keeping Ben Bernanke’s Fed from loosening up, it’s not the enduring intellectual legacy of Murray Rothbard. At least, not directly. But I do believe elements of Ron Paul’s Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right, and I believe this exerts a considerable gravitational force on the institutional right, such that arguments for zero or very low inflation are accorded more weight than they would were Milton Friedman still in full effect.

If only the free-market right still had such a powerfully persuasive “technician advising the state how to be more efficient”, our economy might now be slightly less screwed. Maybe it would help were “advising the state to be more efficient” less widely considered “evil work”. 

Source: Finance and Economics


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Posted by on July 26, 2011 in Finance



Chinese IPOs : A pause or a plunge?

A hot market starts to sputter

BACK in May, the biggest problem for bankers, lawyers and accountants in Hong Kong was finding enough people to handle a deluge of initial public offerings (IPOs). Come July and the mood has abruptly changed. Officially only seven IPOs have been abandoned this year, meaning that a prospectus has been issued and withdrawn. But plenty more have been shelved at an earlier stage on worries about China’s slowing economy (which were reinforced by another interest-rate rise this week).

The bullish view is that any pause in the IPO frenzy will be short-lived. PwC, a consultancy, this week forecast that the second half of 2011 would be even more active than the first. It expects a total of 110 IPOs for the year in Hong Kong (after 48 in the first six months) and almost triple that number on the mainland, in Shenzhen and Shanghai. Edmond Chan, a PwC partner, points out that the first-half boom came in spite of Japan’s earthquake, the Arab spring and crisis in Greece.

 During the second half of the year, Mr Chan predicts, at least one large Chinese bank, two securities companies, one insurance company and a few (very large) construction companies will probably list in Hong Kong, along with a host of retail and consumer-goods companies. The size of the listings on all three Chinese markets has, on average, been declining (see chart), as smaller private companies supplant state enterprises, but there is no fall in the appetite to go public. And along with Asian companies, says Mr Chan, there is clear evidence that Hong Kong has become a focal point for the listing of companies from around the world.

There is another perspective. Yes, foreign companies have been listing in Hong Kong and for several years there have been expectations of foreign listings in Shanghai, but the process has not been smooth. Prada, an Italian luxury-goods firm, and Glencore, a Swiss commodities trader, both recently listed in Hong Kong: the offerings were a slog and went off at low prices. In the aftermarket Prada has traded up, a bit; Glencore down, a bit.

All of this is in sharp contrast to 2006 and 2007 when the number of IPOs on the various Chinese exchanges began to accelerate. Early on, the gains were staggering, creating huge demand for whatever might be offered next. But over the past two years PwC reckons 30-40% of listing firms soon traded below their offering prices.

That means the markets are changing. Questions are being asked about how debuting companies are structured, about their accounts and about the overall growth story in China. More information is being demanded, something many Asian firms are still reluctant to provide. Mr Chan says future deals will be done in droves but he concedes they are likely to command lower valuations. Even the optimistic take has become a little less rosy.

Source: Finance and Economics

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Posted by on July 26, 2011 in Finance



Managing Interest Rate Risk

If a financial institution has more rate-sensitive liabilities than assets, a rise in interest rates will reduce the net interest margin and income, and a decline in interest rates will raise the net interest margin and income.

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Posted by on July 25, 2011 in Finance