Blog 4: China says “No” to the appreciation on its currency

When we talking about currency and exchange rate, the first thing come into my mind is the cost of doing foreign-exchange business. As whenever a company import, export or even merge with a foreign business, they should consider the currency risks, thus minimize those risks.

    
China always reluctant to put its currency policies under the spotlight, especially in the international financial forum. After G-20, China becomes isolated by other companies like US and France, as Chinese government resist appreciating its currency (Wall Street Journal). What was worse, they even push great pressure to China, as one of the central bank in G-20 said that “negotiators can’t stay here forever and waiting for Chinese agreement”. French officials convinced China that Yuan appreciation can help contain inflation, in that it would makes imports much cheaper in dollar terms. However, appreciation in Yuan can make Chinese companies lose lots of profits. Let’s imagine that if one American tourist transfers his one million dollars into Yuan in 2005, which means that he can gain 8.5 million Yuan. After he spend 2 million in China for travel in last five years, he still can transfer his 6.5 million Yuan into one million dollars in 2010, this implies that he don’t even need to spend one dollar for this five years’ travelling because of the appreciation in Yuan. After considered the potential loss for companies, Chinese government resist to adopting exchange-rate appreciation.


People could be forgiven for thinking that appreciation on Yuan can boost China’s import business. Indeed, it can help importers improve its products volumes as the costs are much cheaper than before. However, on no account can we ignore the influence on the export business. A typical example is the benefits gained by UK companies from sterling’s weakness. As Financial Times reported in Thursday that Conductix-Wampfler which is a UK manufacturing company, taking advantages of the weak pound not only to improving sales volumes but also to increasing its profits margins. In terms of China, which is the world’s biggest debtor of America, owns almost two trillion dollars in 2009. From my perspective, if China has appreciated its currency, which means US dollar get much weaker against Yuan, this will result in amounts of hundred billion lost for China.  


In order to stimulate exports and balance the slightly appreciation on Yuan, China began to reduce or even eliminate some tax rates in exported products, which is called export Rebates policy. In my opinion, even though the cost on those exported products has reduced because of the reduction on tax rate, the biggest beneficiary is not China; it is still those countries that hold stronger currencies. As we all know that tax is one of the main financial resources to support governments, hence, the reduction on tax rate can be a great reverse problem to Chinese government, like the potential influence on constructing infrastructure to the public. Moreover, the reason why I believed countries like US can gain benefits from this export rebates policy lies with their steady currency. As those people are the final consumption group, who still can use the same amount of money to buy the same products. It seems that reduction on tax rates has noting to do with their money as they don’t have to spend extra to buy products, isn’t it?         

  

Blog3: Equity Finance& Debt Finance

Barclays, which was operated for almost 326 years in UK, has got numerous lessons in raising finance area. Bob Diamond, Barclays’ new CEO, declared the media conference in last week that the bank suffers great pressures of tougher capital requirement. In order to meet their capital demand, Barclays began its expansion plan. Consolidation with Spanish distressed regional savings bank and South African bank are typical examples in raising finance. However, given Barclays’ severe performance condition, will those investors still believe in Barclays without looking at the potential return of finance? Maybe not! Hence, in my viewpoint, if companies want to raise capital through equity, what they should consider is the rate of return which offers to their investors. Companies are not recommended to focus only on their own profit increase but ignore their investors’ interests. In terms of investors, they tend to analyzes companies’ information and financial performance according to prospectus provided by underwriters or brokerages. Therefore, banks like Barclays who suffers a great recession in its business may have difficulties to increase its capital through raising equities.

Apart of equity finance, debt finance becomes prevalent among companies. Bond is regarded as the most common debt raised by companies. However, from my perspective, bond can be one of the most risky methods for banks. For example, banks will suffer large risk of inflation if people borrow a large amount of long-term bonds. Therefore, so many central banks have real concerns about inflation, and make bonds interest materially more expensive for companies to do business. This can be one of the main reasons for credit crisis in 2007. Another method of debt finance is syndicated loans, which can retain customers and spread risks at the same time. Like Barclays’ cooperation with China Development Bank (CDB) in 2007, Barclays ask CDB to invest almost 22 hundred million euro to buy its 2 hundred million ordinary shares. According to Barclays’ CEO, they lend these capitals to Algemene Bank Nederland afterwards. Syndicated loans, indeed, do have advantages for banks to gain profits. However, did Barclays even considered the consequence if Algemene Bank Nederland failed to return those large amount of capitals? Regardless of the capital losses for Barclays itself, but the cooperation relationship between these two companies may be break down. Therefore, banks should focus on their long-term strategic viewpoint instead of short-term interests when they raising capital through debts or lend money to borrowers.        

Blog 2: Stock Market Efficiency

Barclays made an announcement that it would no longer offer financial advice to customers. It is primarily due to the fine￡7.7m after Barclays’ advisers failed to explain the risks of shares to elderly clients, many of whom lost significant sums in that investment. As Kendal’s theory: Random walks (1953) supported that share price movement within a company is based on new information which is hard to predict. Hence, some people even hold the opinion that investors who earn money from stock market are totally by chance. However, if this is true, then why there are still investors like Warren Buffett can earn money during 15 years?

Undoubtedly, from my own perspective, the share markets do have some potential rules for those investors. Firstly, on the weak form market efficiency basis, the classic mistake for investors is to buying high and selling low. Equipped with historical information on share price movement, investors tends to overpay their investments if buying high, while suffers loses if selling low. A specific example related to this is nowadays hot topic on the partnership between Nokia and Microsoft. As we can see that, Nokia is no longer the dominant telephone brand, its share price decreased dramatically from EUR11.61 to 6.13 per share (London Stock Exchange). Hence, people may sell their shares as they think Nokia’s share price has reached its bottom. However, in my opinion, EMH still happen which can reveal the new information of Nokia; moreover, there will be a prosperous market for Nokia after the cooperation with Microsoft, as Stephen Elop (Nokia’s CEO) said this partnership will value the business as it is jointly by two giants. Secondly, it is easier for investors to be trapped into the “Herd Effect”, for people are likely influenced by their mate recommendation and behavior. As Turner (2009) said that individual behavior is not entirely rational. If everyone in a company is talking about a share because it has risen rapidly in value, people tend to buy that share even without any knowledge on it, but remember rule one: don’t buy high.

In conclusion, stock market is a place where people can gain benefits from it only if people know the potential rules behind the market. It can be forgiven for thinking that some people’s information are outdated or even distorted, like in the weak form and semi-strong form efficiency. But we can’t turn blind eyes to people who have good performance in stock market. Hence, maybe we should question on the notion “random walks” in share price.    

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary-chart.html?fourWayKey=FI0009000681FIEUREQS

               

shareholder wealthy maximization and value creation

BP launched a partnership with Russian state oil company Rosneft in last month; it formed a company called TNK-BP which is considered as the third biggest oil company in Russia. This joint venture is regarded as an opportunity to boost BP’s shareholder wealth after last year’s Gulf of Mexico oil spill.

The fundamental objective of BP is to protect and enhance shareholder value in a sustainable way, in both the short and long term. Peter Sutherland, the Chairman of BP, says that BP will still continue its policy of returning cash in excess of its investment requirements to its shareholders both through buybacks and progressive dividend policy (2006).

Nevertheless, in the end of January, ARR (a group formed by shareholders from Russian) argued that BP’s alliance with Rosneft breaches their shareholder agreement. Therefore, a legal decision on “Russian shareholders winning the injunction to halt the share swap” has been made by the High Court of London in the first of February. The court’s decision is considered as “legally just” and “morally” to the benefits of shareholders.

Moreover, a decision made by BP in January is to sell its Texas City refinery. This implies that BP divesting its assets in order to increase its value creation. Since the explosion makes BP had a terrible reputation in Texas City, there is no point to increase investments in there. This can be one of the reasons to BP’s strategy: extend cooperation within the whole world’s oil companies.

Since managers are selected on behave of shareholders, they are supposed to acting in the interests of those owners. Gerard Kleisterlee, the former chief executive of Philips, is appointed as the next chairman of Vodafone. Many analysers argued that Kleisterlee does not have broad experience of the telecoms industry. However, shareholders in Vodafone think that Kleisterlee is eligible as he has worked in Philips for ten years for chief executive, hence, he should be well placed to supervise the UK group. Nevertheless, shareholders in Mouchel are disappointed about managers’ rejection on several bid approaches over the past year. At Mouchel’s annual meeting on Monday, several shareholders said they were frustrated that the board has not made clear its position on the bid approach. Moreover, shares in Mouchel lost as much as 79% of their value last year, for the company’s fate is determined by managers. It is assumed that managerialism is a disaster for company’s development, for agent only acts on themselves instead of shareholders’ benefits.