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The development of China into a major economic superpower, within a time span of only 28 years, has been described as one of the greatest economic success stories of modern times. By some measures, China has become the world’s second largest economy and analysts have predicted that it could be the largest within a decade. Although China’s prosperity and integration has had a number of positive influences on the world economy, there is no doubt that it threatens to undermine the US and its economic power as it stands today. Some contend that China’s economic policies, such as subsidies to its state sector, an undervalued currency and low wages, threaten US jobs, wages, technological supremacy and living standards.
Currently, the United States and China view each other as the strongest challenger to their power in the international economic system. Both countries have had an increase of economic interdependence for the past twenty-five years. This has made the possibility of a war of major military powers breaking out remote, but has done nothing to diffuse the rivalry between them. China has sought to gain advantage in this interdependent relationship not only economically, but also politically by seeking influence in regions of the world such as Asia, Latin America, the Middle East and Africa. The US has seen its influence reduced in these regions due to its interdependent relationship with China.
The continuing economic investment that the United States has made in China over the past twenty-five years – free trade agreements, the expansion of private business ties between the business communities of both countries and the purchase of cheap Chinese exports for home consumption – has given China an advantage in terms of its economic power in the world.
China has also been making increasingly aggressive investments in some of the world’s most prestigious financial companies in recent months, most of them American. Morgan Stanley, Bear Stearns, Blackstone Group and Britain’s Barclays have all negotiated major stakes by Chinese government-controlled investment funds. China is leading a surge of strategic investments from Asia and the Middle East that, so far, have sunk about $25 billion into Wall Street banks. This is just the start of what some believe is a dramatic reversal of financial power in the shadow of Wall Street’s credit turmoil.
So how does this relate to Irish graduates and future career prospects? China is fast becoming the workplace of the world. Its growth in manufacturing alongside investment is impressive. Manufactured goods exports rose during the 1990s at a 15% annual rate to about $220 billion in 2006. On one estimate, China now makes 50% of the world’s telephones, 41% of video monitors, 23% of washing machines, 30% of air conditioners and 30% of colour TVs. Many companies in the United States, Japan, Taiwan and elsewhere are moving operations there. Jobs are shrinking even in Mexico’s factories, as work shifts to the Chinese market. Furthermore, demand for skilled workers continues to soar.
The Chinese language has fast become business’s second tongue, with Mandarin-Chinese topping the list for the most spoken language worldwide. While the demand for Chinese language is growing, it is nearly impossible to find teachers to of the language. Despite the universal language of the world being English, English-speaking students want to learn Chinese and that is a major problem that needs to be addressed.
President Obama’s recent trip to China resulted in a commitment to expand the number of American students studying in China from 20,000 to 100,000. This would represent a huge jump in American students studying abroad. Last year 13,000 American students travelled to China to study in a number of universities. Obama commented that the US desperately needs to expand its Chinese expertise – and the most effective way to do so is to study in that country. His intentions highlight the importance of China and its role in America’s future, something we too should consider.
At home, education is one of the most important ties between Ireland and China. Ireland is a very attractive high-quality destination for Chinese students. We offer an excellent English-speaking education system and a close link between academics and enterprise. But, we are failing to realize what China can offer our graduates. Only in October 2008, a Memorandum of Understanding between the China Scholarship Council and the Irish Universities Association on PhD Cooperation was officially launched in Beijing in the presence of the Taoiseach, Mr. Brian Cowen, the Minister for Education and Science, Mr. Batt O’Keeffe, and the Minister for Industry and Commerce, Mr. John McGuinness. This provides the framework for the further development of the exchanges of top quality students between Ireland and China.
Since then, very little has been done to encourage us to open our eyes to the vast opportunities available in Chinese third-level institutions. Tsinghua University, Peking University and the Chinese University of Hong Kong all made the top one hundred universities in 2009 and provide the latest in technology and learning facilities to students. China’s emergence is one of the most important forces currently reshaping the world economy and for graduates a vital part of the world of business and careers. |
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Sometimes ignorance can be bliss when trading in stocks. Taking long breaks from watching the stock ticker might be just what an emotionally-hyped trader needs, writes Jason Somerville
They say “ignorance is bliss” and indeed it is a phrase that is uttered too frequently. However, might it also be profitable? One of the greatest obstacles that a trader must overcome is that of human emotion. Experienced traders often warn of the dangers of becoming emotionally attached to a stock. Those who do may exasperate their losses by failing to exit a stock despite the clear warning signs.
But that doesn’t seem very rational. Homo economicus would be rolling in his fossilised grave.
What Homo economicus doesn’t understand is that emotions affect the decision-making process. While it may prove trivial for day-to-day decision-making, it can have disastrous consequences for some traders’ portfolios.
When an investor sees the value of an investment fall she experiences disappointment and regret. These emotions have a much stronger impact on a trader than the elation and rejoicing that is elicited from seeing an investment rise. Throw into the mix the anxiety associated with a financial loss and the decision-making of traders appears to be more prone to irrationality than most.
Interestingly, traders are presumed to be the most calculated of all decision-makers. After all they receive years of training in finance and economics and are frequently told to avoid irrational decision-making. Despite this, they are frequently observed succumbing to the most basic limitations of human judgment. This shouldn’t be surprising given the complex ways in which emotions affect our cognitive ability.
The “trick” then to being a good investor is that you should buy a stock and not give in to the temptation of real time prices on the Bloomberg screen. By doing so you can avoid the rollercoaster of emotion that often clouds people’s judgement. But why is it that seeing an investment fall elicits a stronger emotional response than an increase? The answer resides in the phrase “losses loom larger than gains.”
The Irish economy provides an excellent example. In the period between 1990 and 2007 Ireland experienced unprecedented economic growth. From a country once viewed as an economic liability within the Eurozone, Ireland came to be ranked as the 4th richest country in the world in 2005 in terms of Gross Domestic Product. However, the recent downturn has been so extreme that Ireland has become perceived, both at home and abroad, as a country in economic difficulty.
While the structural imbalances that have developed within the Irish economy over the past decade cannot be ignored, the reality is that Ireland is still a very wealthy country that continues to attract multi-national investment. An explanation for such biased representation is based on prospect theory which was put forward by Nobel laureate Daniel Kahneman and his associate Amos Tversky.
The most basic assertion that prospect theory makes is that economic actors place a greater value on a loss when compared to an equivocal gain. Indeed, this claim has been empirically supported. Shlomo Benartzi and Richard Thaler have suggested that this is because people display “myopic loss aversion.” In other words nearsightedness (myopia) and a tendency to place a higher value on avoiding a loss can explain why Ireland is currently perceived as an economic laggard when in fact, we are still one of the richest countries in the developed world.
If we place a greater value on losses than we do gains then it’s not surprising that when a trader sees a 20% drop in an investment they experience a greater influx of emotion when compared with a similar gain. Making decisions while heavily under the influence of emotions can lead to irrational decisions which markets have a tendency to punish.
So perhaps all those Bloomberg screens were a waste of money? Not exactly: caution is still required. One of the greatest paradoxes of the efficient market hypothesises is that a market is only efficient because inefficiency exists. Therefore the more traders endorse such rational techniques the more efficient traders will be.
The net result? Markets will be inefficient and such techniques will prove useless. |
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Alan McQuaid, Senior Economic Analyst at Bloxham Stockbrokers, looks ahead to what might happen to US economic policy when the money finally runs out
It looks like US policymakers may finally have reached the end of the road, or at least a major roadblock, in their ability to get households to take on more leverage.
The US consumer debt overshoot in the past decade was far in excess of anything we had seen before, and it was based on very misguided assumptions about the future path of house prices. The hangover from the housing boom and bust will be long lasting in terms of banks’ willingness to lend and consumers’ willingness to borrow. On the surface it is hard to see how the United States can borrow and spend its way out of a crisis that was caused by too much borrowing and spending in the first place. But, that’s what the Debt Super-cycle (the long-term decline in balance sheet liquidity and rise in indebtedness during the post-WWII period) process has always been about, and things will only change when the limits of borrowing have been fully exhausted. And there is one final act left to go in this long-running saga.
If consumers are no longer willing to borrow and spend at a level that guarantees decent growth, then governments have shown that they will do it on their behalf. As a result, the major economies are in the midst of an unprecedented peacetime surge in government deficits and debt. In other words, there is a transition from rapidly-expanding private debt, to rapidly-expanding public debt. The private sector’s ability to carry rising loads is limited by its income.
In theory, the public sector is less constrained because it has the power to generate taxes, and is less prone to going bankrupt than borrowers in the private sector. However, in practice, the financial markets will act as disciplinarians when they perceive that public debt trends are headed out of control. For the US, a fiscally-related financial market crisis should be several years away given that government debt servicing costs are currently less than 8% of total spending. To put that into perspective, when Canada faced the debt wall in the first half of the 1990s, debt servicing costs exceeded 20% of spending. But the fact remains that major fiscal restraint will be needed in the years ahead if the United States, the UK and many other economies are to avoid a crisis.
It is also the case that government borrowing and spending can provide only a partial offset to restraint in the private sector. If we are right that the private sector Debt Super-cycle is exhausted, then it implies weaker than normal economic growth in the developed economies during the next few years. The situation in the emerging world is quite different. It has taken decades of building imbalances and excesses to get the US and several other advanced economies into their current financially debilitated state. In contrast, the emerging world is in a very different stage in its development. Consumer and business debt loads are low because credit infrastructure has been generally undeveloped, and weak or non-existent property ownership rights prevented the development of mortgage markets. Also, many countries suffered external financing crises in the 1980s and 1990s, requiring them to strengthen their balance sheets.
Finally, savings are high because of limited investment opportunities, and the need to set aside money for education, health and pensions. The solution is obvious. While Western consumers concentrate on rebuilding financial health, those in the healthier Asian emerging economies can become more oriented toward borrowing and spending. Such a shift would go a long way to encouraging a much-needed transition in the world economy. The US needs to spend less and save more, while Asia, especially China, needs to do the opposite.
All in all, it is now widely accepted that we are in the midst of a gradual shift in global economic power toward Asia and certain other emerging countries. As part of that process, Asia should become more oriented toward domestic demand, and less dependent on exports to the West. And that is unlikely to occur without Asian consumers becoming more Western in their use of credit.
Debt is not evil as it is necessary to have freely available credit in a modern functioning economy. Few people can afford to buy homes and cars for cash, and companies need access to credit in order to finance investment and inventories. Of course, credit does get abused, and it is up to financial regulators to minimise the dangers, a task in which they failed miserably all across the globe in the past decade. |
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While British media focus on the cultural importance of Cadbury following its sale to Kraft Foods, the history of brokering a deal for the troubled choclatier is primarily an issue of business and finance. Grace Walsh gives us the overview
The midnight deal that sealed the fate of Cadbury formally ended five months of hostile takeover negotiations. Kraft’s £11.6 billion bid is comprised of an 840 pence per share offer plus a 10 pence dividend on the unaffected share price as of 4 September 2009. Cadbury shareholders officially have until February 2 this year to approve the deal. As Kraft’s offer is largely comprised of cash it does not require its own shareholders to vote on the acquisition and only requires the agreement of fifty percent of Cadbury shareholders to move forward with the takeover.
Kraft increased its borrowing to $9.5 billion to finance the cash part of the offer, following shareholder Warren Buffet’s criticism of using too much stock to finance the deal. Mr. Buffet argued that Kraft’s use of stock in the Cadbury deal was an “expensive currency”, prompting speculation that Kraft’s shares were undervalued at current prices. CEO of Kraft, Irene Rosenfeld’s final offer of sixty percent cash, which she had hoped would sate Mr. Buffet’s fears of using too much stock, also drew criticism from the shareholder. He said he felt “poor” following the Cadbury deal because it came with $1.3 billion of reorganisation costs and $390 million of deal fees. He was also unhappy with the sale of Kraft’s “very fine pizza business” this month to Nestlé. Mr. Buffet stated publicly that he and Ms. Rosenfeld had a strong relationship, calling her a “good operator”, but he openly admitted his concerns regarding the success of the acquisition. Kraft’s level of debt will rise to over $30 billion including the $3 billion of Cadbury debt it will assume.
Kraft’s reasons for acquiring the booming UK confectioner include its desire to exploit positive synergies to the tune of at least $675 million and to boost its growth, which had been stagnant, with Cadbury’s girth and optimism. 2009 was a profitable year for Cadbury with 5% organic growth and EBITDA of £1.02 billion.
Kraft’s initial offer of 720 pence per share only gave an enterprise value of twelve times EBITDA, relatively low for an industry where takeover values usually fluctuate between fourteen and fifteen times EBITDA. Their final offer of 840 pence per share plus a ten pence dividend came closer to satisfying Cadbury’s initial demand of 850 pence per share, amounting to approximately fifteen times EBITDA. Although some shareholders have expressed disappointment that the company’s board did not get a higher price, most are expected to approve the deal.
In September of last year, Cadbury dismissed Kraft’s initial offer of £10.2 billion as derisory and rapidly mounted a stiff defence to Kraft’s offer. Lazard Ltd., Citigroup and Deutsche Bank advised Kraft whilst Morgan Stanley, UBS and Goldman Sachs represented Cadbury’s interests. The takeover bid drew speculation that rival bids would appear from Swiss confectionery giant, Nestlé, American favourite Hershey and Italian family-run business Ferrero. However, Nestlé failed to engage in the bidding process due to regulatory concerns that merging the two companies would have negative effects on competition.
Hershey markets Cadbury products in the US under an exclusive licence and was rumoured to be considering mounting a rival bid for the UK-based confectioner. Hershey, who is controlled by a trust and would represent a stronger cultural fit and fewer job losses than Kraft, was understood to be the preferred option for Cadbury. The American chief executive of Cadbury is twice believed to have sought a merger between the two companies. Attempts failed both times as the controlling trust behind Hershey refused to support the deal. Following their failure to top Kraft’s offer and pay a £118 million break fee, Hershey disqualified itself from the race to rescue the UK’s “national treasure”.
Early reports from sources close to the Ferrero family stated that they were “absolutley united” on their decision to jointly explore an acquisition of Cadbury with Hershey. However, late last week they formally withdraw as a counter-bidder to Kraft before a UK Takeover Panel. Cadbury’s white knight failed to appear and the deal was approved on the 2 February.
Following the announcement of the proceeding acquisition of Cadbury, the Confederation of British Industry, a powerful lobby group, issued a stark warning to British and US business: beware of embarking on a wave of value-destroying acquisitions as the country emerges from recession. Mergers and acquisitions are often seen as a quick and sure-fire way to achieve growth following recessionary cost-cutting and saving. In the aftermath of the financial crisis the cost of borrowing has increased dramatically, hovering two hundred basis points above the LIBOR, as opposed to fifty in 2007. Combined with the fall in the value of the sterling, many firms including Kraft are looking towards the UK for expansion. Kraft’s rationale for acquiring Cadbury, driven by these factors and the lure of synergies, in a recessionary time may well be considered profitable, but fears of arbitrage and concerns over Kraft’s financial standing pose significant threats to the long-term viability of this deal. |
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