As to being rude about Prince Philip, it doesn’t worry me unduly to make fun of someone whose own record of social propriety earned him the PR nickname The Duke of Hazard.

Firstly, your remark above is really disrespectful, and I am appalled at the inference you make.

Secondly, whilst you have a fair understanding of economics, alas you fail spectacularly in your grasp of financial markets. Anyone with substantial funds in savings has been absolutely crippled by low interest rates which has been prevailing since the concept of the single European currency became a reality. Interest rates in Italy, Greece, Spain etc were in the high teens if not higher, in the mid 1990s. Then as the drive to introduce the Single Currency took hold, interest rates in all the Euro hopefuls came down dramatically to match those prevailing in Germany and the disgraceful creative accounting that went on just to meet the Maastricht Criteria. None of this was accompanied by structural reform – just ‘free money’ with which they could have paid off their national debt but didn’t.

When I was selling Eurobonds in the late 80s, Pension Funds needed a minimum return on capital of about 4 % as their overheads are humongous – what with all the quarterly reporting and mark to market valuations. It is well known that the countries are struggling to manage their long term pension liabilities as people are staying healthier and living longer than ever imagined by the actuaries.

The only avenue to improve returns was for the City to devise a ‘safe’ investment yielding much more than could be earned annually through erstwhile safe investments such as blue chip FTSE dividends or government bonds. CDS and Credit Derivatives such as CDOs were duly invented. Most of them bore an investment grade credit rating issued by the international credit rating agencies so as to be eligible for pension funds and the like in which to invest. The credit rating was the icing on the cake. No saver worth his salt would put his money in a vehicle without a credit rating.

This is the real reason behind the credit crunch. I wrote something about this for Open Europe but since you appear to be a Guardian reader, it is doubtful you would have seen it. Moody’s, Standard and Poor and Fitch are like teflon. Everyone turns their fire for the credit crunch on the bankers but it was the credit rating agencies who are the true villains. The very last thing Fred Goodwin said at the Hous of Commons Finance Select Committee was along the lines of ” every investment was rated by Moody’s or Standard and Poorts” if you don’t believe me, check it out.

I sought to join your blog after having read your excellent China Dream. It mirrored absolutely my own beliefs, having lived and worked for an American investment bank in the region. Alas nothing you have written since on your blog has come close to its brilliance.

Joe says: ECB cannot buy bonds for ever because of a thing called politics. (I think there may also be legal restrictions on the growth of its balance sheet.) ECB bond buying of the past two weeks is essentially a back door intervention, with no clear political mandate. EFSF is subject to political oversight which is why it is not being used at present — doing so would involve recognising the enormity of the required debt write-off/adjustment in Italy (and maybe Spain) — much bigger than the current EFSF budgeted maximum, which is also based not on real capital but on notional IOUs from EU governments. The Italian banks are being sold off because the market says, quite reasonably, that the whole situation stinks of bullshit. In other words, in the absence of a political agreement, the market says ‘I don’t want to own this stuff’.

Separately, re. your points, thus far ECB has sterilised its bond purchases because until now they were not very big. And sterilisation, one way or another, has nothing to do with Eurobonds. The case for Eurobonds is to give peripheral Europe German interest rates (again). Naturally Germany and France are reluctant to do this, because instead of bringing itself down, Italy can then screw up the whole Union. Ultimately, however, France and Germany don’t really have a choice because their banks lent Italy much of the money. Hence my prognosis for a solution with ECB money but IMF oversight to make up for the fact that Europe lacks political leadership (i.e. this ain’t the late 1950s).

Joe says: sadly no returned notes to date. Urumqi ’92 trumps Rome ’11.

I’m just finishing your Asian Godfathers. It’s really interesting to read the ‘inside stories’ of how these tycoons actually operate. I’m from Malaysia but yet I admit many of us here do not know the full story.

It’s rather unfortunate that the book ends in 2007, because, as I’m sure you know, in 2008 Malaysia had a watershed general election where the Opposition won landslide victories. Fast forward to today – 8 July 2011. Tomorrow, there may be a massive rally in our capital to demand for fair and transparent elections. If you happen to be here, perhaps you can see with your own eyes the changing political landscape of this country.

TQ.

alex

Joe says: your optimism is refreshing. I wished I shared it.

A fresh view of how you see things would be greatly appreciated.

Joe says: You can get a copy of my own critique of that book in the China Dream Revisited article via the Uploads / Downloads tab on the home page. There will be more on China in the new book, out at the end of the year.

Joe says: I already mentioned your site in the ’150 years of not quite growing up post’ in January 2011.

Christopher Wood
Reference: Vol. 125, No. 33, 16 Aug 1984, 72
There has always been concern about the management independence of Hutchison and, more specifically, worries that the company’s huge cash bank would be raided for the benefit of other Li companies. Such fears seemed confirmed when Hutchison announced in March a cash distribution of HK$4 per share, realeasing a total of HK$2 billion (US$256 million), the major beneficiary of which was Cheung Kong.

Philip Bowring
Reference: Vol. 124, No. 15, 12 Apr 1984, 69
SHROFF
The major recipient of the Hutchison cash will of course be Cheung Kong. With some 38% of the shares it will pick up more than HK$700 million. Li was quoted as saying the money would be reinvested in Hongkong. However, why Cheung Kong — which has substantial borrowings — could find good use for HK$700 million while Hutchison could do nothing with HK$2 billion remains so far a mystery. Either Li has plans up his sleeve or this exercise has something to do with the commitments of Cheung Kong to existing development projects, many of which are through associates and some of which carry guarantees. Some of Cheung Kong’s partners in associates may not be as well heeled as Li. Meanwhile Li himself, as of a year ago, was owed HK$303 million by Cheung Kong.
One associate visibly in need of cash is Green Island Cement, which just announced a rights issue to raise HK$122 million. But equally significant could be the non-public associates and joint ventures. Keep your eye on this ball.
While the market tries to unravel the Hutchison enigma, the HK$4 payout has left holders of Hutchison warrants exceedingly sore as they miss out on the cash while suffering from the decline in the share price. Preference shareholders, on the other hand, who participate to an extent in ordinary payouts, were laughing. As usual, those who missed out claimed that trading prior to the announcement reflected the differential effect on warrant and preference holders.

Reference: Vol. 121, No. 37, 15 Sep 1983, 91
COMPANY RESULTS
Cheung Kong slides
CHRISTOPHER WOOD
Hongkong property group Cheung Kong (Holdings), the quoted vehicle of entrepreneur Li Ka-shing, reported attributable net profits of HK$159.7 million (US$21 million) for the six months ended June 30, compared with HK$559.2 million for the same 1982 period, showing a 71.4% fall. Earnings per share were down from HK$1.36 to 40 HK cents. The interim dividend was cut from 22 cents a share to 15 cents — in line with market expectations. Extraordinary profits were HK$8.6 million (HK$54.5 million previously).
Li said the group’s solid foundation and healthy financial condition, as well as prudent provisions already made, had enabled it to settle all its outstanding land-price guarantees under joint development agreements and also to continue with more than 90% of its land-bank development as planned. Barring unforeseen circumstances the full 1983 net profit would be not less than HK$400 million, said Li, and the total dividend would be 45 cents, compared with 70 cents in 1982.

Reference: Vol. 121, No. 37, 15 Sep 1983, 83
SHROFF
How much Li-way for K. S.?
Christopher Wood
– CONSERVING cash to go for any opportunities that may arise seems the current strategy of Hongkong’s most successful property player, Li Ka-shing. This is Shroff’s surmise from interim results just reported by his companies.
Li has emerged remarkably unscathed from the sharp fall in local property values: the result of his reading the downturn ahead of most of his fellow developers. While others took on new projects, Li was less active from 1980 on, and where he did enter into new commitments he was adept at exploiting the ensuing media fanfare — Li’s public statements are often read as gospel by the less sophisticated among local investors. What was little noticed was that Cheung Kong, Li’s main quoted vehicle, would subsequently farm out stakes in a development, reducing its (and his) exposure. (At last reckoning, Li was thought to hold 59% of Cheung Kong’s equity.)
Despite this cautious policy, Cheung Kong still made a provision of HK$458 million (US$60.2 million) at the 1982 year-end, which covered a 66% drop in the value of properties held. A conservative posture has been maintained with a 70% cut in the interim dividend this year while reported earnings have, if anything, been understated. At least, that appears to be the case, unless Li has been reducing Cheung Kong’s 38.7% stake in associate Hutchison Whampoa. This investment remains Cheung Kong’s prime asset in terms of earnings.
Last year Hutchison contributed HK$461.8 million to Cheung Kong’s net earnings of HK$525.6 million. At the interim stage this year Hutchison’s earnings of HK$434 million (equity accounted) ought to have provided HK$168 million — more than Cheung Kong’s own reported consolidated net profit of HK$151.1 million. Cheung Kong’s earnings also included some HK$27 million from another associate, International City Holdings, plus perhaps HK$30 million from the wholly owned Hongkong Hilton hotel and related investment income. Against this, there was a loss of some HK$8 million through Cheung Kong’s 28.7% stake in troubled Green Island Cement. This is ignoring development profits which will not be booked until the end of the year. Li is forecasting 1983 net earnings of “not less than HK$400 million.”
The apparent discrepancy in the figures points to contrasting conclusions. Either Li is diluting his Hutchison holding more aggressively than before (though the share price has not been so weak as to suggest heavy selling) or he has made more provisions, against perhaps the Silvercord development in Kowloon and/or against advances to China Cement, in both of which Cheung Kong has an interest.
Whatever the explanation, the net effect is a drop in Cheung Kong’s interim dividend payout to HK$59.2 million compared with HK$81.4 million last year — no reason was spelled out for the cut — while by contrast, Hutchison has elected to increase its interim dividend by 40% despite an 11% fall in net earnings. Hutchison’s management asserts there was no pressure from chairman Li to raise the dividend. Certainly, the increase can be rationalised in terms of the company’s cash mountain, a dividend cover of 4.9 times and a reported unrealised exchange gain from hedging the Hongkong dollar since early 1982.
But despite his relative freedom to manoeuvre, Li has not yet begun acquiring a new land bank for the next cycle. This has led some to argue that he has turned completely bearish on Hongkong and 1997. Li could be said to have an inside track with Peking, which he has been assiduously cultivating, though in Li’s two main business ventures with China-based business interests, China Resources’ venture at Tinshuiwai (REVIEW, July 2, ’82) and China Cement, the results so far have been hardly satisfactory.
The other explanation for Li’s stance, and in Shroff’s view the more likely, is simply that he remains an agnostic on the Hongkong issue. This may not mean, however, that when the right opportunities emerge he will not be prepared to go for them.