Dienstag, 30. Juni 2009

Migration in OECD Countries

The OECD has collected data on migration flows during the period 1998 to 2007. While the quality of local population data (i.e. registration of immigrants and emigrants) varies wildly from country to country, some interesting observations can be made:

- In 2000, 12.5 % of Germany's population was foreign-born. That put Germany at the top of the list of "big countries", higher than the US.

- By 2007, Germany's foreign-born population had increased less than 10 % compared to 2000. But many other countries saw big jumps:

* Spain tripled its foreign-borns (4.9 % -> 13.5 %, 2 m -> 6 m)

* Ireland doubled them (8.7 % -> 15.7 %, 329,000 -> 682,000)

* Norway added 46 % (6.8 % -> 9.5 %, 305,000 -> 445,000)

* the Czech Republic also added 46 % (4.2 % -> 6.2 %, 434,000 -> 636,000)

* the UK added 40 % (7.9 % -> 10.2 %, 4.7 m -> 6.2 m)

* Austria also added 40 % (10.5 % -> 14.2 %, 0.8 m -> 1.2 m)

- The countries with the highest shares of foreign-borns in 2007: Luxembourg had 36 %, Switzerland 25 %, and Australia also 25 %.

- In terms of flows, Germany has lots of immigrants coming, but also lots of people leaving. Other countries appear to see fewer people leaving (if they register departures correctly).

- In recent years, the countries with the highest inflows were Spain (>2 % of population in 2007), Ireland (> 2 %), Switzerland (>2 %), Luxembourg (>2 %), Norway (>1 %), Sweden (>1 %) and Austrria (>1 %). In comparison, Germany had an inflow of 0.7 % (the UK was only slightly higher at 0.8 %).

- Most of the countries with high inflows are comparatively small, so it's natural that they have a higher inflow in % of population, because large countries have more domestic migration due to their bigger size (moving from Munich to Berlin is domestic, but moving from Luxembourg to Brussels is international).

- However, Spain is a big country, and it is at the top of the 2007 inflow list. Also, while small size explains higher inflows, it doesn't explain why these countries have low outflows: In terms of net inflow, all the above countries were big gainers in 2007. And the UK, in spite of having similar inflows, saw less than half of Germany's outflows and recorded a much bigger net gain.

- Strangely, both Italy and France record very low inflows in % of population (their outflow data for some reason isn't available), though I suspect that in the case of Italy, the quality of the data is bad and many immigrants go unrecorded.

It will be interesting to see if/how these figures change due to the crisis. There is anecdotal evidence of foreigners leaving the UK, Spain and Ireland, but no hard data is available so far.

Montag, 29. Juni 2009

Asian Air Traffic

Amazingly, Air China is reporting a 14 % rise in passenger numbers for the year to May (i.e. five months, year-on-year).

At the same time (according to Bloomberg), non-PRC Asia Pacific air traffic is still showing record declines (-14 % yoy in May), and revenues are dropping much more than that due to evaporating demand for business class tickets.

So maybe the PRC's domestic economy is indeed doing quite ok, as opposed to all the rest of East Asia...?

Nevada's Prostitutes

According to The Guardian, not even America's prostitutes are immune to the crisis: So far this year, business at Nevada's 25 licenced whorehouses is down 20-70 % yoy.

(Previous post on Las Vegas)

Commercial Shipping

I guess that's what you call anti-cyclical behavior:

"Shanghai - already the world's busiest port by total cargo volume - is charging ahead with plans initiated during boom times to more than double its capacity...Shanghai also plans to build the world's biggest shipbuilding yard on its northern Changxing island ... Bank of Communications, China's fifth-largest bank, announced last month plans to create a ship financing division... but there will be stiff competition because Hong Kong, Singapore, Japan and Korea are not going to let Shanghai stand alone"

(Source: AFP)

By the way, this snippet explains how Shanghai managed to become the world's "busiest port": It now offers free container storage:
"The programme enables shipping companies to safely store their containers, which have been idled as the global economic downturn has battered demand for exports. It also allows the company to inflate its throughput volume - which measures container volume handled not cargo loaded and unloaded"

Meanwhile, China Merchants Bank has just extended a 20 bn RMB (2.2 bn €) credit line to state-owned China Shipping Group, the country's biggest operator of container vessels.

Why did they extend the credit line? Well, if you must know: "as part of the bank's effort to support the nation's shipping industry." And just in case the money is not enough, no problem: The companies also agreed "to cooperate in the field of short-term liquidity loans".

(Source: Alibaba)

In other news, three state-owned companies inaugurated Southern China's biggest shipyard near Guangzhou a few days ago:

"This has fully demonstrated the confidence of Baosteel and China Shipping in the Chinese shipbuilding industry's long-term development... target products include various kinds of civilian ships such as very large crude carriers (VLCC), Suezmax tankers, Aframax tankers, very large ore carriers (VLOC), bulk carriers and large container ships."

It's good that they have confidence in the "long-term development". They surely won't earn any money in the short- and medium-term building those kinds of ships. Unless of course China Shipping Group uses its new credit line to place lots of orders...?

(Source: People's Daily

But maybe I'm being too pessimistic, because here's another potential customer: Nanjing Tanker aims to quadruple its oil tanker fleet by 2011, and has secured a 2 bn RMB credit line from Agricultural Bank of China for that purpose.

(Source: Lloydslist)

This will not end well...

Sonntag, 28. Juni 2009

Munich Airport

According to an interview in yesterday's SZ, Lufthansa CEO Mayrhuber firmly believes that Munich's airport needs a third runway "aus wirtschaftlichen und ökologischen Gründen" ("for business and for ecological reasons"). He didn't elaborate.

Maybe I'm stupid, but why would it be necessary for - of all things - ecological reasons to build an additional airport runway?

Things Learnt at a Class Reunion

Yesterday, I went to my 20 year Abitur school reunion.

The principal of the school gave us a tour of the building, and kept complaining about deterioration and decay. According to him, they urgently need several million Euros to fix the worst problems, but the city has no money, so little will happen. When I mentioned the stimulus funds specifically earmarked for education-related investments, he said that it doesn't help, because the city needs to make a contribution as well, and simply has no money. (We are talking about a reasonably prosperous mid-sized Bavarian city with - so far - little unemployment)

Though later, I talked to an ex-classmate who is now involved in municipal politics in a Munich suburb. He said that everybody there is really happy about the stimulus funds, because 85 % of investment costs are paid by Berlin, with only 15 % to be contributed by the municipality. According to him, there is large demand for the funds.

Regarding German demographics, it might be interesting to note that out of a class of 56, not a single person is currently residing abroad. A handful apparently lived abroad for a few years, but all have since returned. Roughly 90 % live in Bavaria. All of the others have moved to Hessen or Baden-Wuerttemberg.

While lots still don't have any kids, the number of families with 3 (and in one case even 4) kids was surprisingly large. But overall, I doubt that the fertility rate has reached the national average of 1.4 - there were too many people with no kids at all. Well, I suppose there's still a bit of time left to get there.

One ex-classmate who hasn't moved away and who now has two kids in elementary school told me that in their school in our once "purely Germanic" small town (there was not a single "migrant" in my elementary school class, and the Abitur class of 56 people had one ethnic Croat and 55 Germans), nearly half the kids do not have German as their native language. Russian is by far the most common foreign language, but apparently there are now also significant numbers of Polish, Czech, Turkish, Iraqi, Lebanese, Afghani, Pakistani and Vietnamese kids.

As far as I could figure out, nobody had so far lost his/her job due to the crisis, and nobody felt in any immediate danger. Though the various engineers did unanimously report that their companies had pretty much eliminated business trips altogether over the last 6 months, some were on Kurzarbeit, and in one case, a company was postponing salary payments by one week to be able to be able to meet financial convenants.

Freitag, 26. Juni 2009

Germany's Fiscal Stimulus

As part of the fiscal stimulus package, the German government decided some months ago to provide up to 13 bn € to finance infrastructure and education projects. That's 0.6 % of GDP, i.e. a significant sum.

Today's FTD reports that to date, only 11 m € have been paid out. That's not as bad as it sounds, as payments are only made upon completion, and you can't expect infrastructure investments to be completed so quickly.

However, it is worrying that applications for funding (which need to be made before work can start) are also quite low:

Nordrhein-Westfalen is one of the most active states in terms of applications. But even though it accounts for more than 20 % of Germany's GDP, total applications to date are only for 422 m €, and work has only started on 40 % of those projects.

Even assuming that all other states end up applying for a similar amount of projects as Nordrhein-Westfalen, total volume for Germany as a whole would only reach 2.1 bn €, i.e. 16 % of the stimulus budget, or barely 0.1 % of Germany's GDP.

So much for the effectiveness of infrastructure stimulus spending...

(The FTD also notes that 2008's federal package for childcare projects was 2 bn €. However, only 68 m € of it was used.)


As discussed ad nauseam in the press during the past few days, Quelle (Arcandor's huge mail-order subsidiary) urgently needs government cash because an obscure bank called Valovis is no longer willing to buy Quelle's customer receivables.

The bizarre bit (and not mentioned at all by most press reports): Valovis is a 100 % subsidiary of the Arcandor pension trust, i.e. is 100% owned by Arcandor's staff! (It used to be a 100 % Arcandor subsidiary, and was sold to the pension trust in 2005.)

(Source: Handelsblatt)

Donnerstag, 25. Juni 2009

GDP Imputations

Following up on my previous post, I started wondering about the logic of behind imputations as part of GDP calculation.

In case you don't know what an "imputation" is:

Parts of GDP are not based on market transactions for goods and services. Instead, they are "imputed", i.e. valued "as if" there was a transaction.

The most important category is "imputed rent" for owner-occupied housing: If you live in your own house, you are assumed to pay rent to yourself, which is part of GDP. No kidding!

In the US, "rent for housing" is part of "services consumed", and makes up 10 % of GDP. As Americans are into home ownership, I assume that 2/3 or more of this are imputed payments as opposed to actual rent payments.

The interesting thing: In spite of the housing price crash, "rent for housing" has increased 3 % in nominal terms from Q1 2008 to Q1 2009 (it increased 0.5 % in real terms, i.e. the statisticians apparently calculated average rent increases of 2.5 %).

As most of this is imputed as opposed to "real rent", the question beckons: Does this make sense, considering the situation of the US housing market?

(Roughly 15 % of US GDP is due to imputations. My guess is that at least half of this is imputed rent. German GDP also includes imputations. However, I was unable to find any details as to the extent. Imputed rent should be less important than in the US, as Germans are more likely to be renters than owners)

(Another side note: For some reason, there is no imputed rent on cars. So if I understand correctly, leasing a car as opposed to buying it increases GDP, because the leasing payments are counted, whereas the use of an owned car isn't. A tad bizarre, isn't it?)


One of the strange things about the current crisis is the observation that GDP decline in Germany and Japan is much sharper than in the US, even though the crisis originated in the US, and is to a large extent due to a drop in US external demand.

Sure, the obvious explanation is that "surplus countries" are hit by a decline in their foreign trade surplus, whereas America's GDP benefits from a drop in the deficit.

But the really interesting question: Why is America's deficit dropping so much? If the drop in US imports is due to a drop in overall demand, wouldn't it be reasonable to expect that demand for domestically made goods is also down sharply, and GDP is dropping right along with it?

According to US GDP statistics, the answer seems to lie first and foremost in the consumption of services: These account for 45 % of US GDP, and they were still growing at nearly 1 % yoy in Q1 (in real terms).

In particular, "medical services" (10 % of US GDP) were up 3 %, and "housing" (another 10 % of US GDP) was up 0.5 % (housing in this context refers to rental payments and imputed rent on owned property). The catch-all category "others" (a further 10 % of US GDP) also increased by 0.6 %. And the "residual", i.e. the unexplained remnants, accounted for a further 0.4 % improvement in overall service demand.

As for consumption of goods, "furniture and household equipment" was stable, in spite of the housing crash. "Nondurable goods" overall were down 3.5 %. Cars crashed by 20 %, but they only made up less than 4 % of GDP to begin with.

Based on these figures, it seems that demand for consumer products (with the exception of cars) has not exactly crashed. So apparently, the drop in imports has to be due to inventories and/or imports of investment goods (investments in "equipment and software" were down a massive 20 % yoy).

(Unfortunately, Germany's Destatis does not seem to publish a breakdown of private consumption, so we are unable to make an item-for-item comparison.)

Hans-Werner Sinn and the German Economy

As discussed on Herdentrieb, Hans-Werner Sinn just told us his assessment of the crisis in a Wirtschaftswoche article.

He sticks to his usual theme: German labor costs are too high, particularly at the low end. As a result, manufacturing has migrated abroad, and capital is also fleeing abroad.

I don't get it:

First of all, he says that Germany has needlessly chased away work-intensive manufacturing such as textiles. Textiles as in "clothing"? Is there any developed country that still produces lots of clothing? Surely nobody will accuse the US of overpaying low-skilled workers and being "too egalitarian". Yet most of America's labor-intensive manufacturing has long migrated to Mexico and China. Can Sinn name a single country on a similar level of development as Germany that still has lots of labor-intensive low-skill manufacturing? I doubt it. Is he aware that the British and American press and public opinion see Germany as an example of a country that still has a "broad industrial base", whereas the US and the UK no longer have it? How does that fit into his world view?

Then there's the point about capital flight: According to Sinn, we have a massive current account surplus because Germans save like crazy, but due to high labor costs, it is unattractive to invest in Germany, so capital is tempted to travel abroad. He claims that Germany has the lowest investment rate among OECD nations. I am not sure that's true - I think the US is investing less as a % of GDP (I didn't check the data for other European countries). But even if it is in fact true, isn't it natural that an ageing society with a declining population invests less than a younger and growing country? What sort of investments does he think Germany is lacking? More industrial production capacity? More real estate? One hundred billion Euros more of it per year?

The only bit where I tend to agree is the service sector: Services are comparatively expensive in Germany. And for those services that compete with "doing it yourself", tax and social security costs are a big disincentive. Therefore, I do agree that it makes sense to think about ways of encouraging certain parts of the service sector. But there isn't all that much leeway to lower wages even further. The only practical way would be to reduce indirect costs such as VAT or social security contributions.

Mittwoch, 24. Juni 2009

German Pensions

The OECD likes to do all sorts of international comparison studies, and preferably compares stuff that can't really be compared without endless caveats and footnotes. One of their latest studies tackles pensions in OECD countries (summary of results regarding Germany: here and here).

Some highlights:

Apparently, Germany's pensions for low-income earners are the lowest among all OECD countries (in % of previous salary).

So Germany has the lowest pensions among all OECD countries?

How can that be?

Especially as the report also notes that elderly Germans have one of the lowest poverty rates of all OECD countries (only 10 % of elderly are classified as "poor").

The answer, as far as I was able to figure out: The OECD doesn't actually look at current pensions, but at the pension a young person about to enter the labor force can expect when he retires. That's right: They are trying to compare pension payments to be made in 2050 and beyond.

I wonder: Can that approach make any sense whatsoever? Who can predict the various changes to pension legislation, economic performance, demographics and whatnot that will take place in the various countries over the next 40 years?

What's the point of comparing current legislation, considering that some countries (most notably Germany) have already legislated pension formulas that will provide for adequate pension reductions as the population ages, whereas other countries (Italy comes to mind) have so far refused to do any such thing, even though they are aging just as rapidly? No wonder that the OECD report shows very low future pensions for Germany and very high pensions for Italy. But Germany will face strong political pressure to "protect" pensioners by cutting pensions less (as we can already see right now), while Italy will be forced to make deep cuts or simply go bankrupt...

Lastly, the comparison doesn't take the standard pension age into account at all. Obviously, it differs from country to country, and it strongly affects pension entitlements.

We are also told that needy elderly people qualify for social assistance of 8,200 € per year (I assume this is Hartz IV + housing allowance). According to the OECD, this is only 19 % of average income, and lower than in most OECD countries (though the US and Japan provide even lower social assistance).

So Germany's social security net is also one of the weakest of all OECD countries?

Unfortunately, the statement is rather misleading:

If we calculate the average income based on 8,200 € assistance and 19 %, we arrive at 42,000 € annual income. Obviously, this is pre-tax and pre-social security (otherwise the number would be way too high as an average income figure).

Germany is a country with comparatively high deductions (as the OECD never ceases to remind us), so the social assistance figure would look better when compared to net income instead. Which would also make more sense, because living standard is determined by net income, not by pre-tax income.

Another snippet: Apparently, Germany has the highest penetration of voluntary private pensions schemes for lower and middle income households among all OECD countries. For upper middle class households, the US and the UK have a slightly higher penetration, but the difference is not big.

Not sure what that tells us, as there are all sorts of ways to save for retirement, including real estate, bank deposits and life insurance.

But still it's interesting, as certain politicians keep insisting there's a need for more financial incentives for private pension savings, because Germans are not signing up in sufficient numbers. Apparently, they are in fact signing up. At least compared to other OECD countries.

Dienstag, 23. Juni 2009

Germany's GDP

Most forecasters have by now reduced their German GDP projections to worse than -6.0 % (anything between -6% and -7% is currently on offer). For some reason, I am slightly more optimistic and still think it will be a bit better than -6%.

Though I've already been forced to cut my own expectations from -4% some months ago to -5% not too long ago to "hopefully better than -6%" now. I suppose my crystal ball isn't better than anybody else's...

( Previous post made back in April, when I still expected "-5 % or possibly a bit better" )

Montag, 22. Juni 2009

Migration in Germany, Austria, Switzerland

Apparently, Germany struggled to achieve a positive migration balance in 2008: Immigration and emigration were roughly equal in size (detailed figures aren't out yet, though).

In contrast, Austria recorded an immigration surplus of 0.4 % of population (and a balance of +10,000 with Germany), and Switzerland announced a surplus of 0.7 % (couldn't find the balance with Germany, but I'm sure it's at least in the +10,000 to +20,000 range). Switzerland's total population increased by a massive 1.4 % (apart from immigration, most of the growth is due to "status change" from short-term residents to "real" residents, i.e. actual net immigration is even higher than the officially stated 0.7 % due to increase and subsequent reclassification of short-term residents).

It is striking that Austria and Switzerland appear to be attractive for immigrants (many of which are Germans), whereas Germany isn't.

(By the way, the frequently heard point that Germany has a negative migratory balance regarding German citizens and there "loses its own citizens" is probably not very instructive: As most Germans live in Germany, and comparatively few Germans live abroad, it's entirely natural that more Germans leave the country than come back. Even Switzerland with its huge overall inwards migration recorded a net emigration of 6,000 Swiss citizens in 2008: adjusted for population size, that's equal to a net emigration of 70,000 Germans...)

Germany's "Schuldenbremse"

Earlier this year, the German parliament decided to put something called the "Schuldenbremse" into the German constitution. What it means is that both the federal government and the states will no longer be allowed to run deficits from 2016 (federal government) and 2020 (states) onwards. Certain exceptions apply.

Wolfgang Münchau comments on this in today's FT. In his opinion, Germans have a "bizarre" level of debt-aversion, and consider debt to be "morally objectionable". As for the Schuldenbremse, he thinks it will either turn Germany into a "structural basket case and ... drag down the rest of Europe for a generation" or "the tensions inside the eurozone are going to become unbearable". Why? Well, he basically seems to think that Germany needs to run significant budget deficits more or less forever. Otherwise, lack of demand and high personal savings rates will keep Germany in a perennial recession.

I'm not sure I agree.

Well, I actually do agree that it's very unlikely that Germany can run a balanced budget. Assuming nominal GDP keeps growing, a balanced budget would mean that government debt is continuously declining in % of GDP. If Germans keep saving the way they've done in the past, and if Germany can't continue to run a massive trade surplus like it did in the past, at least a moderate budget deficit will probably be required to keep the economy going.

But I don't quite understand Münchau's fear of "locking the door and throwing away the keys": Basically, he's afraid that this rule will have to be followed slavishly, because it can only be changed with a 2/3 majority.

Maybe he should relax:

- Apart from 0.35 % of GDP federal deficit that remains allowed, it is also explicitly permitted to run a larger deficit if the economy is weak. If there really is a structural lack of underlying demand in the German economy, it will always stay weak unless the government runs a deficit.

- But more importanty, in case of "natural catastrophes or exceptional emergencies", the rule does not apply at all. All that is needed is a simple majority in parliament. The current financial crisis is explicitly seen as an "exceptional emergency".

On top of this, I foresee something else:

What's the problem if you are not allowed to run deficits on budget? Simply create off-budget vehicles! If banks can set up tons of SPVs, why can't the government? Instead of giving taxpayer money to the pension system, let the pension system take out government-guaranteed loans. Instead of financing roads directly from the budget, set up an infrastructure fund which takes out loans, repayable from future tax allocations. Let universities borrow from banks to renovate their buildings, again with long-term government guaranteed repayment. Politicians will find ways...

Samstag, 20. Juni 2009

America's Strategic Oil Reserve

According to Mish, several influential Democratic congressmen are currently pushing for the US to sell some of its strategic oil reserves to bring down the excessive oil price.

What a bizarre proposal:

The oil price is still 50 % below its peak, and they want to sell the strategic reserve because prices are so terribly excessive. Has nobody told them that the marginal cost of developing new oil supply is roughly equal to the current market price?

China's reaction to swine flu

This post on Silk Road Blog illustrates why it is still rather "dangerous" to travel to China...

China and Commodity Demand

Over the last few months, China has been importing lots of commodities of all kinds.

While some of this is probably caused by an uptick in domestic demand and restocking of inventories (which contracted sharply during the winter due to the credit crisis), the consensus seems to be that much of it is due to stockpiling.

Most people think that the Chinese government is somehow behind this, pulling the strings behind the scenes. While that's presumably true for oil, Andy Xie argues that other commodities are being stockpiled by China's private sector: It's not too difficult to store copper, and even for bulky iron ore, basically all you need is a large open space and some guards to deter theft. And financing is no problem right now, due to easy money extended by China's banks.

Donnerstag, 18. Juni 2009


Remember IKB?

One of the first dominoes to fall in Germany's banking crisis, IKB used to be a 91 % subsidiary of fully government-owned KfW. The bailout back in 2007 ultimately cost the taxpayer nearly 10 bn €.

After the bailout, KfW's 91 % stake was unceremoniously sold to Lone Star in the fall of 2008 (low price, unknown terms&conditions).

And what do we read in today's FTD?

IKB had already asked for 5 bn € in government guarantees earlier this year. It is now asking for additional 7 bn €.

I'm confused:

Why is Berlin guaranteeing bonds issued by a bank owned by LoneStar? What was the point of selling the bank to LoneStar, if the risk stays with the taxpayer?

China's Stock Market

Snippet from today's FTD:

China's CSI500 small cap index has apparently reached a P/E of 68, only a bit short of its all-time-high of 69 in early 2008.

Similar indices for other emerging markets show much lower P/Es: Brazil 28, India 12 and emerging markets overall 18.

It's always a bit tricky to calculate market P/Es, but 68 sounds extremely high by any measure.

Bubble-trouble, or appropriate reflection of China's marvelous future?

Dienstag, 16. Juni 2009

Willing to work for free to save your job?

It's not unusual that troubled companies ask their staff to take unpaid leave or to work shorter hours. But according to the BBC, British Airways has come up with a new idea:

British Airways is asking thousands of staff to work for nothing, for up to one month, to help the airline survive.

In other words: Hey, we can't afford to pay you. So if you want to keep your job, please volunteer to work for free.

The appeal was sent to 30,000 workers per e-mail. Apart from unpaid work, it also offered unpaid leave. According to BA, roughly 1,000 workers have applied. But we are not told how many wanted the unpaid leave, and how many were workaholics.

400 bn € to be invested in Solar Power Plants?

According to the FTD, 20 German corporates including Munich Re, Deutsche Bank, Siemens and RWE plan to invest 400 bn € to build solar thermal power plants in Northern Africa. In the long run, the project is supposed to generate 15 % of Europe's electricity need.

Reading between the lines, the whole thing still appears to be rather vague: The companies want to "start an initiative" and "develop concrete plans during the next 2-3 years". They are still looking for "outside investors". And it's not even clear in which country those plants would be built (according to Munich Re, they would have to be "politically stable"). So it's not like anybody is actually committing any money at this stage. Rather, it sounds like a feasibility study.

Still, it's a move in the right direction. Certainly better than installing ever more solar cells under Germany's grey skies.

Montag, 15. Juni 2009

Karstadt's Rental Contracts

Some days ago, I argued that Karstadt's rental payments don't sound particularly eccessive.

However, Der Spiegel is now running a story claiming that rents on some properties are outrageous.

The article refers to a few department stores sold to an Oppenheim-Esch fund in which Middelhoff is a major investor.

Apparently, the guaranteed rent for one Munich location is 23.2 % of revenues, and a store in Leipzig is charged 19.6 % of revenues.

If this is true, then these figures do sound over the top: There is no way a department store can pay 23 % of revenues in rent, cover personnel and other costs on top, and still be profitable.

However, in terms of the overall finances of Karstadt and Arcandor, this is only about a very small portion (5 out of 100 department stores). By all means this should be investigated further (and state prosecutors have apparently started to look into the matter), but it won't make or break Karstadt's overall viability.

German Bookstores

The Hugendubel Group, Germany's biggest operator of bookstores, has announced massive job cuts at its main subsidiaries:

- The large-scale Hugendubel stores (the German equivalent of Borders) will slash head-count by 400 staff, or nearly 1/3 of the total.

- The smallish Weltbild outlets (which carry a limited number of bestsellers) is cutting 322 staff, or 20 % of the workforce.

- Regional chain Buch Habel is firing 106 staff, 1/3 of the total.

That adds up to a total headcount reduction of 830.

Reasons for the massive cull aren't clear. Hugendubel says it is losing sales to the internet (i.e. Amazon), and argues that the overall book market has been weak for many years.

The unions suspect the chain has been expanding too fast, but I doubt that this is the main cause (the chain hasn't opened any new shops in Munich for quite a while, but is also slashing headcount in its Munich stores).

I recently spoke to the owner of a small-scale publishing house specialising in fiction. He said that small publishers are under immense pressure. Large bookstores are focusing more and more on a few bestsellers, and small publishers find it hard to get onto the shelves at all. Also, he felt that book sales have weakened a lot this year. As a consequence, he predicted a shakeup with lots of small companies going out of business during the next 2 years.

Sonntag, 14. Juni 2009

Munich Real Estate

We are thinking of buying an apartment. However, I wonder if now is a good time to do so:

- Munich is by far the most expensive of Germany's big cities as far as real estate prices are concerned. Even in mediocre locations, it's quite impossible to find a good apartment for less than 3,000 €/sq.m., and decent locations can easily cost you more than 4,000 €.

- Contrary to Germany overall, real estate prices have been increasing of late (in Q1 2009, they were more than 10 % higher yoy).

- There's quite a bit of construction activity going on, i.e. a steady flow of new housing will hit the market during the next 1-2 years.

- Meanwhile, the usual strong inflow of people is set to slow down: Who moves to Germany's most expensive city without a job and a reasonably good salary? New hiring has certainly slowed to a trickle, and many high-profile Munich companies are hurt badly by the crisis.

- Finally, at least some potential home buyers are probably worried about their job security and hesitate to take out big bank loans in the current climate.

Sounds to me like real estate prices should start sliding soon. Not expecting them to fall off a cliff, but a gentle downward slope does sound realistic.

So maybe it's better to wait a while. Or maybe we should move to Detroit instead, and get a big house for the price of barely two Munich square metres...

( Previous post on this topic )

Samstag, 13. Juni 2009

Foreigners in Germany

According to the Sueddeutsche, yet another government-sponsored study on foreigners in Germany has shown that they are much more likely than Germans to be poor, unemployed and fail to get degrees.

However, there's an interesting snippet hidden in between all the gloom:

- 16 % of first-generation foreigners (i.e. those born abroad) don't manage to get a school-leaving degree, as compared to 2.3 % of youngsters with no foreign background.

- But second-generation foreigners (those born in Germany, but with at least one foreign parent) actually did better(!) than German youngsters, and only 2.2 % of them didn't get a degree.

Sure, it doesn't tell you how they succeeded after leaving schol (and it doesn't even say what kind of school the graduated from), but it does seem to indicate that the bad performance of first-generation immigrants is to a very large extent caused by them not "knowing the rules" and not speaking the language.

That migrants can in principle get ahead in Germany is also shown by the increasing number of top politicians with a foreign background:

- The deputy governor (stellvertretender Ministerpräseident) of Niedersachsen, one of Germany's largest states, is a "pure-blood" Vietnamese. He's tipped for a Berlin cabinet job if/when the FDP manages to enter a coalition government again.

- The co-head of the Greens is of Turkish descent.

- And another Green shooting star, the current head of the Hesse Greens, is a half-Jemenite (a nationality usually associated with fundamentalist Islam). Apparently, his great-uncle was King of Jemen at some point. The press widely tips him for a Berlin cabinet post as well, should the Greens make it back into the government.

Germany may not have its Barack Obama yet (and maybe never will). But for a country with a rather limited number of second-generation immigrants with German passports, having three top-rank politicians with "exotic backgrounds" isn't that bad.

US Real Estate

(Asking price for this house: 950 US$!)

According to Mish, the median selling price for homes in the city of Detroit (population 1 million) is now down to a mere 6,000 US$. For the metro area (which includes all the upper-middle-class suburbs and has 4.5 million people), it has dropped to 50,000 US$.

Freitag, 12. Juni 2009

Germany's VAT to rise to 25 %?

Somewhat belatedly, I just picked up that numerous economists have suggested to raise German VAT (Mehrwertsteuer) from 19 % to 25 % in 2011, i.e. less than two years from now. Apparently, the idea is to make Germans go out and buy stuff before everything becomes a lot more expensive.

That's a pretty bizarre proposal, I'd say:

- For a start, it means making services even more expensive. Why go out to a restaurant if you can cook yourself at home without having to pay any VAT?

- It also means that shopping trips to places like Salzburg and Strasbourg (or week-end excursions to Paris and Milan) become even more attractive compared to Rosenheim and Freiburg. It's bad enough already that people fill their tanks abroad whenever they are close to the border.

- More generally, an increase in VAT is a one-time wealth tax (assuming that wealth is acquired for the purpose of being consumed eventually), but not only imposed on the wealthy, but on everybody who has any savings intended for future domestic consumption. In particular, it hits the elderly hard, because surely there will be no corresponding increase in pensions, and their savings will also be devalued.

- Reasonably well-off pensioners have a way out, though: They can take their money and emigrate to Mallorca or the Canary Islands.

Sure, the proposal discourages savings, and that's in principle good when the economy is in a "savings glut". But it seems to me that the side effects of such an extreme measure are way too big.

In any case, I'm pretty sure that no such VAT increase will happen anytime soon. It would be political suicide for any politician who pushes it through...

Karstadt's Profitability

Der Spiegel informs us that Karstadt managed to be profitable during the 6 months ending 3/09:

"Bittere Ironie für die Beschäftigten bei Karstadt: Im Halbjahr vor der Insolvenz haben die Warenhäuser des bankrotten Arcandor-Konzerns wieder einen Betriebsgewinn erwirtschaftet."

Further down in the article, we learn that they are talking about an impressive "operating profit" of 7 m €, as compared to an operating loss of 272 m € during the last full financial year (ending 9/08).

This makes it sound like Karstadt isn't a basket case after all, and with a little bit more patience, an insolvency could have been avoided (or why else would they use the phrase "bitter irony"?).

Nothing could be more wrong:

- First of all, Karstadt is only one part of Arcandor's retail empire. The mail order business apparently made an operating loss of 57 m €.

- Then there's the important detail that the last 6 months included the christmas shopping seasons, so obviously they are better for a retailer than the full 12 months. Not mentioned at all in the article.

- More importantly, this is "operating profit" only. Counterchecking the 272 m € in the Arcandor accounts, it seems that Spiegel is quoting EBIT. Now EBIT is obviously before interest, and Karstadt's segmental debts are 900 m €. Assuming only 6 % annual interest, the 6 month interest charge on this debt would be 27 m €, turning 7 m € profit into a 20 m € loss. And of course Arcandor's total debt is a staggering 13 bn €, so allocating a mere 900 m € to Karstadt means that most of Arcandor's debt isn't allocated to any segment. But it still needs to be serviced if Arcandor continues without restructuring.

- Last year, combined EBIT of all segments was -165 m € (of which -272 m € Karstadt, i.e. the rest of Arcandor excluding Karstadt had a positive EBIT). Yet Arcandor overall posted a net loss of 745 m €, and equity dropped by nearly 1.3 bn €. This divergence makes it very clear that it's totally useless to focus on EBIT.

- And let's not forget that Arcandor allegedly lost a cool 500 m € during those same 6 months when Karstadt achieved its 7 m € operating profit.

In short, it's rather bizarre to argue that a modest "operating profit" of 7 m € at Karstadt shows that Arcandor is on the mend. No, quite the opposite is true: If Karstadt cannot do much much better than that, there is absolutely no way that Arcandor's debt can ever be serviced, and that is exactly the reason why Arcandor had to enter insolvency proceedings.

Donnerstag, 11. Juni 2009

Hong Kong's Economy

Hong Kong is China's window to the world.

So as long as China's economy is doing reasonably well, Hong Kong should be able to cope, right?


Latest projections by Fitch now foresee Hong Kong's GDP to drop 9.1 % yoy in 2009. That's far worse than even the worst case projections for Germany and Japan, and among the worst outlooks worldwide (though the HK government continues to remain a bit more upbeat and "only" projects a 6.5 % drop; in Q1, the yoy drop was 7.8 %).

Part of the reason is the declining number of visitors: May visitor arrivals were down 13.5 % yoy. Business travelers are cutting down on trips to save costs and - potentially even worse - mainland Chinese are staying home due to the swine flu scare.

It doesn't help that HK authorities announced today that all of HK's kindergartens and primary schools will remain closed for at least two weeks to avoid the spread of the illness. Rationally, visitors needn't worry, as there are few cases in HK, and surely everybody has realized by now that swine flu in its current form is not exactly a horrible killer disease. But Chinese travelers are rarely rational when it comes to illnesses.

Meanwhile, HK's exports are also down more or less in line with the rest of the region, dropping around 20 % yoy during the first four months of the year.

China's Car Market

This article argues that China's booming car market has been slowing down sharply in recent weeks:

"National Passenger Car Association figures show nationwide car production in the first week of June down 19%, year on year, and 13% down over the first week of April. In terminal markets, retail volume in the first week of June was off 25% from the first week of May, and seems to be falling from there."

Observers comment that impressive sales growth during the first five months of this year was mostly caused by government subsidies for small cars, and the effects are beginning to wear off.

It's a bit silly to obsess over short-term data points, but this seems to be another reminder that China's consumption "growth story" is quite fragile: China's consumers are a cautious lot, and in troubled times, they prefer to hold on to their money.

Edit: This article claims that there is a mysterious disconnect between reported car sales and car registrations for cars of one particular brand (only 1/3 of cars reported as "sold" were actually registered and issued with licence plates). Absolute numbers involved are comparatively small, and it might not mean anything for the car market overall. But then again, it might.

Oil Price

Oil keeps edging higher. Brent reached 72 US$ earlier today. In other words: It has more than doubled from its low just a few months ago. Can't really offer any meaningful analysis, as I'm as mystified as everybody else. Only explanation I can think of is unusually high OPEC discipline (though recent press reports seem to indicate that more and more OPEC members are getting tempted).

Though I do think that a moderately higher oil price is good. If people have to pay more, at least they won't forget that oil is a scarce commodity. 5-10 years from now, we'll be thankful for every drop of oil that wasn't used today.

Mittwoch, 10. Juni 2009

Dubai Airport

According to the Handelsblatt, Dubai's brand new airport will open for business in June 2010. It will boast five runways and a passenger capacity of 160 m passengers.

For comparison: The world's biggest airport is currently Atlanta with roughly 90 m passengers. Dubai's old airport handled 37.4 m passengers in 2008.

Oh, and they don't want to shut the old airport down. No, they are expanding that one as well to a capacity of 80 m passengers by 2013. So Dubai's two airports will then be able to handle 240 m passengers.

I don't doubt that the Middle East has growth potential. The demographics support it, and the oil reserves also support it. And even now, in spite of Dubai's current crisis, passenger throughput doesn't decline: It rose 2 % yoy in Q1 2009.

But come on: Growth from 37 m passengers in 2008 to 240 m passengers in 5-10 years?

For once, China's plans seem downright modest in comparison.

IMHO, it's madness, pure and simple.

By the way, the investment volumes are quoted as 32 bn US$ for the new airport, and 4.2 bn US$ for expansion of the old airport.

German Corporate Pensions

Many large German corporates have on-balance-sheet pension liabilities. In other words, the employees are unsecured creditors, and the companies need to pay the pensions out of core business cash-flows.

In case of bankruptcy, there is an institution called the "Pensionssicherungsverein". Basically, this is a kind of captive insurance pool: All German corporates together guarantee other companies' pensions obligations in case of default.

This works fine as long as there are no major bankruptcies. However, it can become a problem in a deep crisis:

- For Opel, the press talked about 2 - 4 bn € of pension liabilities (presumably all of them on-balance)

- Arcandor apparently has 3 bn €, of which at least 1 bn € on-balance (and the remainder in a separate fund which has claims against Arcandor assets, some of which may prove to be questionable)

So far, the biggest corporate default has been the bankruptcy of AEG in 1982, which caused a claim of 1 bn DM, or a bit less than 1 bn € in today's money (adjusted for 27 years of inflation).

In 2008, member companies paid a levy of 0.18 % of the value of pension obligations, 500 m € in total. So if Arcandor's default leads to a shortfall of 1.5 bn €, this will require a one-time fund contribution equal to 0.6 % of pension obligations.

If there are several more big-name defaults coming up, the volumes will become a major strain for all member companies.

If that happens, there are two options: Either the government voluntarily steps in and takes over the pension obligations, or the balance-sheets of Germany's corporates will take a substantial hit.

Though compared to GM's US pension liabilities, we are of course talking about "manageable" amounts...

Dienstag, 9. Juni 2009

Crisis? What Crisis?

Today and yesterday, I tried to book a hotel for the upcoming long week-end somewhere in rural Austria. After contacting many different hotels and checking various internet reservation platforms, I have decided to give up: All the reasonably nice places are fully booked. Only chance would be to pay more than 100 € per night for mediocre establishments in second-rate locations, which doesn't sound particularly appealing. No crisis in the Austrian hospitality business, it seems.

Thomas Middelhoff

Thomas Middelhoff's new venture is the newly founded investment firm BLM Partners, where he serves as "chairman and founding partner". Roland Berger is one of the partners as well, and Wolfgang Clement is on the advisory board. Some quotes from the "mission page":

“New ideas for extraordinary times”
“Invest in highest calibre people”
“No legacy issues”
“Focused on providing solutions”
“A powerful platform for future value creation"

Sounds a bit like the Arcandor website, doesn't it? (Well, maybe except the "no legacy issues" bit...)

Oh, if you're looking for a job, they are currently hiring a "Special Situations Associate", whatever that means.

German Exports

According to Destatis, German exports have dropped 29 % in April compared to last year. While the drop was exacerbated by a very strong April 2008, the first 4 months of 2009 together have also seen a massive average drop of 23 %.

What's even more worrying: New orders from abroad are down even more, dropping 36 % year-on-year in April (after a 34 % drop in March). Doesn't look like a turnaround in exports is anywhere near...

Montag, 8. Juni 2009

Down and out for the long term in Germany?

Today, the FT's Wolfgang Münchau published a commentary entitled "Down and out for the long term in Germany".

His central thesis: Deficit countries (US, UK, Spain) will reach a balanced current account in the near future, or possibly turn into surplus countries. This means that surplus countries (Germany, Japan and China) will be forced to reduce their current account surplus to zero or even slide into negative territory.

How will this happen? According to Münchau, there will be a "violent increase in the euro's exchange rate against the US dollar and possibly the pound and other free-floating currencies". For Germany, "this will not end well".

I'm not sure I can follow him here: Yes, Germany's current account surplus has fallen dramatically over the last 6 months, and will probably drop further. However, it is not clear that it will evaporate completely or even turn negative. It may, but it also may not. Even Münchau seems to think that this will only happen due to "violent exchange-rate movements". But is it really inevitable that the dollar and the pound will collapse? Why would they do so? Aren't they already far below PPP by all conventional measures?

Germany has experienced a lot of economic pain over the last 6 months (as has Japan), with GDP dropping much more than in the US. Much of this has yet to register for private households, as employment has barely dropped so far. It will certainly be exceedingly hard to make up that lost ground in the forseeable future. But I fail to see why there needs to be a further dramatic contraction in the near future that will hit specifically Germany due to a much higher euro exchange-rate.

Karstadt's Cost Structure

A lot has been written about Karstadt's leasing arrangements with various investment funds (Goldman Sachs et al), and how the high rents allegedly bleed the company dry.

Not sure if that is correct, though:

According to this link, yearly rental payments amount to 323 m €.

And according to the interim financials, floor-space is 1.56 million sq.m., so average annual rent is 207 €/sq.m., or 17 € per month.

During the last financial year, Karstadt's revenues reached 4.1 bn €.

So total rental payments were 8 % of revenues.

Is that a lot?

It depends:

This article tells us that rents in good locations are up to 300 € per month in Munich. Frankfurt, Düsseldorf, Hamburg and Stuttgart also see top location rents above 200 €.

As for second-tier cities: Dresden and Leipzig cost you around 100 €, Potsdam only 45 € (says this link), and 60-100 € are charged in various mid-sized Bavarian cities (according to here).

In other words, Karstadt's 17 € aren't exactly excessive, far from it.

However, Karstadt has another problem:

Low revenue per square meter.

To illustrate:

- Karstadt's average annual revenues per sq.m. are 2,600 €

- Random googling shows that a mid-sized Salzburg shopping-mall reaches 8,000 € per sq.m.

In other words: It's hard to pay market rents if you have lots of "dead space" that doesn't sell much.

Still, if the above numbers are correct, I would argue that it can't exactly be said that Karstadt has to pay extortionary rents.

Chinese Shipyards

China's Ministry of Industry and IT has announced that China's shipyards will nearly double their shipbuilding capacity from now until 2011 (from 28.8 m deadweight tons to 50 m).

And they don't mind spending government money:

"The government will extend credit support to shipyards that were hit hard by plunging orders and will offer loans to foreign companies buying China-built ships and vessels, the plan said."

(Not to mention that most big shipyards are government-owned SoEs anyway, i.e. their profits and losses belong to the government.)

New orders in Jan-April 2009 are down 95 % compared to 2008, but so what: Expanding capacity is always more fun than downsizing!

Sonntag, 7. Juni 2009

Preliminary GDP Estimates

China's National Bureau of Statistics is capable of performing miracles: The much-discussed 6.1 % year-on-year growth in Q1 2009 was published on April 16, barely two weeks after the end of the quarter. No other major country even comes close to matching the speed of China's statisticians.

Ever wondered how they can aggregate all the required data from the various Chinese provinces in the space of two weeks? Surely they must use lots of statistical shortcuts and projections, many of which may be reasonably adequate in a "stable" situation, but hopelessly inappropriate in times of economic upheaval.

Why am I writing this?

Well, the BBC reports that British Q1 GDP statistics will be revised downwards because the initial estimate of a 2.4 % drop in construction activity turned out to be wrong, and construction activity dropped 9 % instead.

Just a minor estimation discrepancy, huh? I wonder how they came up with the initial 2.4 % estimate? Can preliminary GDP data have any meaning whatsoever if a major component such as construction activity can be utterly and totally misestimated?

And surely nobody thinks that China has an easier job of aggregating nationwide data than comparatively small and compact Britain?

Samstag, 6. Juni 2009

University Endowments

America's private universities have lost lots of money on their endowment funds over the last two years. That's not news.

But this is (at least to me):

This interview with the president of Yale University reveals just how much many of these universities have come to rely on their endowment money:

At Yale, the endowment will provide 43 % of next year's budget. Tuition (net of financial assistance) accounts for just 11 %. It is not specified where the remaining 46 % come from.

Yale's tuition (including room and board) is 47,500 US$ for one academic year. Though many students receive financial aid, and average net tuition is "only" 18,000 $ (apparently, Yale is among the most generous schools as far as financial aid is concerned).

But in spite of those massive charges, tuition makes up only 11 % of the budget!

(In passing, the article also mentions that schools which mostly rely on tuition due to small endowments tend to run into trouble during recessions, because fewer and fewer students can afford to pay. As for public universities, their funding is also being cut due to tight state budgets.)

Seems to me that American higher education will experience some drastic changes during the next few years.

P.S.: Yale's president is rather condescending when it comes to European universities. Quote: "Europe, I think, has fallen by the wayside." I don't know about that. I rather like it that German universities only charge 1,000 € per academic year.

The Arcandor Disaster

According to a leaked PWC paper, Arcandor managed to burn a cool 1 bn € of equity during the last six months. And apparently, various major irregularities/discrepancies are still under discussion.

The 3/09 financials were supposed to be published last week, but have been delayed until the middle of June.

(Source: Handelsblatt, picked up via Egghat)

Edit: As discussed in an earlier post, equity declined by 500 m € in the 3 months to 12/08. So if they lost 1 bn € over 6 months, it seems that they are losing money at a constant quarterly rate of 500 m €...

The Future of the Car Industry

The Economist is running a leader on the future of the car industry.

It argues that the world will have 3 bn cars in 2050, as compared to 700 m cars today. China alone will have nearly as many cars as the entire world today.

No way.

Based on current projections, the world will have around 9 bn people in 2050, and China's population will be only slightly higher than today.

So those numbers would imply that worldwide, there would be 1 car for every three people (i.e. more than one car per household), and in China, there would be 1 car for every two people (roughly as many as in Western Europe today).

Apart from the (IMHO) rather unrealistic implied assumption that car ownership will soon begin to skyrocket in places like Africa, Pakistan, Bangladesh and North Korea, there is one glaringly obvious problem:

Based on today's technologies, the world will struggle to keep the current 700 m cars fueled much earlier than 2050. Quadrupling that number will be totally impossible based on fossil fuels of any kind.

If electric cars do take off, the question is only shifted to power generation: How can the world possibly hope to create so much electric power to sustain both other uses of electricity (presumably also growing fast in the much richer world envisaged by The Economist), and 3 bn cars?

It's a ridiculous pipe dream, in my very humble opinion.

New Developments Regarding Opel

According to Der Spiegel, the combined equity investment of Magna and Sberbank will be as little as 100 m € according to the MoU. The press used to quote a figure of 500 m €, but apparently, 400 m € of this will be in the form of a collateralized loan, which will only be converted to equity years later (it's not clear on what basis and under what terms and conditions).

And according to the FTD, Opel will have to pay high licence fees to GM for the Intellectual Property:

3.25 % of revenues until 2015, 5 % thereafter.

This adds up to 6.5 bn € over the next 10 years, and comes on top of a cash purchase price of 300 m € for the 55 % of the shares bought by Magna and Sberbank (somewhat at odds with the 100 m € investment figure quoted by Der Spiegel).

Wow. 6.5 bn €. Based on 45,000 Opel/Vauxhall employees Europe-wide, that's 150,000 € per job.

Wouldn't it have been a lot cheaper to go with Fiat and use Fiat technology, which would be free once Opel is merged into Fiat. Their technology can't be that much worse, can it?

Donnerstag, 4. Juni 2009

China's Electricity Output

I just love the way Chinese bureaucrats phrase their data releases:

"China's power output shipped via major grid networks fell around 3.5 percent in May, narrowing from a 3.55 percent decline in April, according to data from the State Grid Distribution Center. Reasons for the decline are unclear. "

Yes, it's technically correct to say that the drop in power output "narrowed". But wouldn't it be more sensible to say that the decline in May was basically the same as the decline in April?

(Quoted from Caijing, an excellent source for China economic/business news)

A good background discussion of this topic on China Stakes.
(Link picked up via Naked Capitalism.)

The European Airline Industry

The airline industry is in big trouble: Passenger numbers are falling, losses are piling up, and companies are fighting for survival.

All of them?

No, there is one exception:

Ryanair just announced the results of the year ending 3/09. Passenger numbers were up strongly, and according to its investors presentation, Ryanair is now Europe's biggest airline both by passenger numbers and by market value of its equity (though I am not sure if they included the various subsidiaries of Air France and Lufthansa when calculating their total passenger numbers). Ryanair did post a moderate loss, but that was mostly due to oil hedging contracts, which were hard to get right with the oil price fluctuating all over the place.

What's their secret?

The traditional players rely heavily on their business class passengers. Unfortunately, their numbers have been declining rapidly, whereas leisure trips have held up reasonably well. But traditional airlines cannot compete with budget airlines on the price of economy class tickets if their business class seats are half empty. Their business model does not work that way.

Another part of the reason is Ryanair's aggressive use of low-cost secondary airports. These airports struggle to cover their costs, and are willing to accept cut-throat pricing for their landing fees.

Anyway: For the moment, leisure trips are very affordable - even for penny-pinching consumers - due to the low oil price.

However, if (or rather: when) the oil price goes beyond 100$/barrel again, ticket prices will have to rise, and the low end of the market will also suffer.

Mittwoch, 3. Juni 2009

Savings and Investment: The Singapore Experience

I recently posted on China's savings and investment rates, and how they are extremely high by international standards.

Singapore used to be a country famous for its sky-high savings and investment rates, so I thought it might be useful to check how these numbers changed over time as Singapore's economy matured.

The data (according to Statistics Singapore) surprised me:

- The savings rate dropped from 54 % in 1997 to an average of 40 % in 2002-07 (though it was back on an upwards trend from 2005 onwards, increasing from 38.5 % to 46.8 % in 2007).

- The investment rate dropped much faster: It went from 39 % in 1997 to an average of only 20 % in 2003-07 (again, there was an upwards trend from 19.9 % in 2005 to 22.6 % in 2007). In other words, Singapore's investment rate wasn't particuarly high during the last few years. It was more or less equal to Germany's.

- The trade surplus skyrocketed: It went from 13 % in 1997 to nearly 30 % in 2005-07. That's right: Singapore has been running a trade surplus of 30 % of GDP!

If this is an indication of how things will develop in China (i.e. savings rate dropping a bit, but investment rate dropping much faster once a "long-term sustainable capital stock" is reached), there is a major problem brewing:

Singapore is a tiny country, and the world doesn't really care if it runs a large trade surplus or not. China, on the other hand, cannot possibly run a trade surplus of 20 % or more of GDP. The current 8 % or so are already considered a major problem, and as China's economy keeps growing, a constant 8 % would already turn into an ever larger absolute number.

If China's investment rate eventually comes down into the 20-30 % range, the savings rate must also drop by nearly half. There is no other way. And as speculated previously, I suspect that higher government debt is the only feasible way to get there.

Dienstag, 2. Juni 2009

China's Savings

China is saving a lot.

And it is investing a lot.

Both its savings and its investment rate are among the highest worldwide.

But is it investing so much because there are so many savings?

Or is it saving so much because there is such a huge demand for investment?

A bit of both actually:

- The household savings rate is very high (most estimates put it at around 30 % of disposable income), so Chinese households obviously want to save.

- But at the same time, most corporate investments are "self-financed" (77 % of fixed investments in 2007 were self-financed, and only 15 % were financed via domestic loans, says the Statistics China Yearbook), i.e. companies pay for them out of their own cash-flow instead of distributing funds to shareholders. In other words: They are saving because they want to invest.

Obviously, China's investment rate can't stay sky-high forever.

What will happen when it eventually starts to come down?

- Insofar as corporate cash-flow is concerned, it can in principle be distributed to shareholders, and thereby becomes available for consumption (-> private shareholders) and government spending (-> state owned enterprises).

- But if household savings rates stay high, there will still be excess savings. Currently, household savings make up 15 % of GDP (rough estimate based on: household income = 50 % of GDP, household savings rate = 30 %). Currently, these are channelled into the trade surplus (close to 10 % of GDP) and to finance corporate investments (via bank loans). If more corporate profits are distributed, this might increase household savings further (as it increases household income as a percentage of GDP, and as shareholders tend to be high-income households, which usually have an above average savings rate).

China's trade surplus can't stay at close to 10 % of GDP in the long run: As its economy keeps growing faster than the rest of the world, the rest of the world's trade deficit with China would keep growing in % terms, and eventually, this will become unsustainable.

So China has only two ways of dealing with its excess savings:

- Either entice households to save less (by reducing their motivation to save, or by taxing them more harshly, thereby taking away the money they might otherwise save)

- Or increase the government deficit (which is still much lower than in Western countries, and extremely low compared to Japan)

My guess is that it will opt for the latter, just like most of the rest of the world has already done long ago.

(Intensive discussion of savings and investments in China can be found at Michael Pettis. Some thoughts on China's investment rate in an earlier post of mine.)

More on the "Bad Bank Law"

Today's press is full of articles criticizing the proposed bad bank law (for example this article on Spiegel Online).

The gist: As banks will ultimately still be responsible for their toxic assets, it's not attractive for them to place them in a bad bank, and it doesn't help their capital base either. Therefore, it is expected that the whole concept will turn into a flop.

Sure. If you want to give banks an incentive to remove problem assets, and if you want to improve their capital base without massive capital increases (either by "normal shareholders" or via nationalization), you need to buy those assets from the banks at attractive prices, i.e. way above fair value. In the process, bank shareholders win, taxpayers lose. The law commendably tries to avoid this wealth transfer, but the inevitable consequence is: This doesn't really help the banks. What they need is fresh capital, and the law doesn't offer them a way to get it.

Der Spiegel has also finally discovered another very valid point:

The plan only deals with "toxic securities", as if American subprime stuff was the only problem facing German banks. Good old-fashioned non-performing loans are not covered. Unfortunately, those non-performing loans are now starting to roll in, and will soon turn into a flood: Germany is in its worst recession ever, and bank loans have a nasty habit of becoming non-performing during recessions.

Montag, 1. Juni 2009

Is China Investing Too Much?

Just about every outside observer seems to agree that China is investing too much.

And the numbers sure look that way:

- China's gross investments make up close to 50 % of GDP.

(Edit: Checked the official national accounts data, and the exact number was "only" 42-43 % in 2004-07)

For comparison:

- Germany records around 20 %

- The US barely manages 15 %.

Already back in the 90s, Krugman famously argued that Asia's "tiger economies" were using more and more capital to achieve their high growth, whereas total factor productivity remained pretty constant. Based on this finding, he argued that the Asian "growth miracle" wasn't particularly miraculous after all.

However, high amounts of capital investment don't necessarily imply inefficient production or overinvestment. This is only the case if the return on the capital employed is not good. Countries can have a different economic structure: For instance, the US has comparatively little capital-intensive manufacturing, whereas Germany has lots of it. This probably explains why Germany has a higher investment rate than the US, even though the US economy has been growing faster than Germany's.

However, the difference between 15 % in the US and 20 % in Germany is dwarfed by China's 50 %. Can such a gargantuan investment rate possibly be adequate and sustainable?

Well, there might be a reason to argue that indeed it can be:

- Germany's economy is basically stagnating (average real growth over the last ten years has been barely more than 1 % p.a.)

- China's economy has been growing at roughly 10 % p.a.

When an economy grows fast, the capital stock also needs to grow fast. This means that new investment as a percentage of GDP must be higher in high-growth countries, otherwise the capital stock will shrink as a percentage of GDP.

Let's illustrate this with numbers:

- Assume that on average, investments have a useful life of 15 years

- In a stable economy such as Germany, a 20 % investment rate implies a total "equilibrium capital stock" of 300 % of GDP (20 % * 15 years).

- Assume China's economy is structurally the same as Germany's, i.e. also has an equilibrium capital stock of 300 % of GDP.

- If China grows at 10 % every year, it needs to grow its equilibrium capital stock at 10 % as well. As the capital stock is assumed to be 300 % of GDP, 10 % growth implies that 30 % of GDP need to be newly invested every year on top of replacement investments.

- China's replacement investments will be lower than Germany's 20 %, as the economy has grown fast, so what used to be 20 % of GDP is far less by the time the investments have reached the end of their useful life. So China's replacement investments are probably more like 10 % of current GDP.

=> Based on the assumptions above, China would have equilibrium investments of 40 % of GDP as compared to Germany's 20 %. The difference is needed to keep the capital stock constant in % of GDP while the economy is growing at 10 %.

(If the average useful life of investments is longer than 15 years, equilibrium investments will be even higher than 40 %. If the useful life is shorter, they will be below 40 %.)

So China's high investment rate doesn't necessarily mean that there is a huge degree of overinvestment and lots of capital is wasted: A high investment rate is perfectly in line with a capital-intensive economy (similar to Germany's) which needs to expand its capital stock to keep up with high overall growth rates.

(Note: I do not intend to make the claim that China's investment binge is fully appropriate. I agree with most other observers that China seems to be overdoing things investment-wise. But based on the thoughts outlined above, I do believe that the extent of the overinvestment is probably less than commonly suspected.)

Component Shortages in the IT Industry?

According to this article, Asia's electronics industry is now suddenly suffering from shortages of key components:

"A shortage of electronic components such as chips and displays threatens to derail a nascent recovery in Asia's technology sector spurred by China's stimulus plan.

But many tech companies, especially makers of memory chips and displays, have sharply trimmed output since late last year or were too cash-strapped to invest in new production equipment in the sector's downturn, leading to shortages of key components.

'Tight supplies are creating a headache for many computer vendors,' said Alex Huang, vice-president of Taiwan's Mega International Securities. 'So it remains a question mark if you ask me how strong the recovery will be in the next few months.'

AU Optronics Corp, the world's No 3 maker of LCD panels for PCs and flat-screen TVs, said that it has a shortage now and can only meet 70 per cent of its orders even if it runs at full capacity in the next three months.

It is a double blow as many leading PC companies have seen their profit margins weaken as they sell more cheaper netbooks."

To me, this makes no sense:

If there really is a shortage of key components, this implies a constraint on the number of orders that can be fulfilled. If demand is higher than possible supply, then prices will obviously increase sharply, both for components and final products. If this is not happening (and the "double blow" argument seems to suggest that it isn't), this can only mean that demand isn't exactly red hot either.

So my interpretation is: The price war in certain component sectors was crazy over the last 6 months. Now, things are getting a bit better for suppliers (among other reasons because some competitors have exited the market, most notably Qimonda), so prices are recovering, but are still way below pre-crisis levels. Meanwhile, end-product demand is also picking up a bit, but not enough to allow producers to increase prices. Sufficient components would quickly become available again if prices rose high enough, but demand still isn't big enough to justify a real price recovery.

So what they really mean is: "At the (low) price we are willing to pay, there are not enough components". That's a bit like saying: "There's a shortage of oil" because you only want to pay 20 US$ per barrel, but suppliers insist on 50 US$...