Panama’s $5 Billion Canal Upgrade

It’s an overcast morning as the Zim Shanghai squeezes through the narrow locks near the eastern end of the Panama Canal.

The ship is part of a dwindling fleet that still uses the waterway to transport stacks of freight containers from Asia. Just west of the canal, a new shipping lane is taking shape -- one that is designed to bring Asian vessels back, Bloomberg Markets magazine will report in its March issue. Cranes rise above the jungle, while Caterpillar (CAT) trucks the size of two-story houses carry away some of the 50 million tons of dirt and rock being excavated. The work goes on seven days a week, 24 hours a day, with about 6,000 workers suffering through tropical humidity and an eight-month rainy season.

BLOOMBERG VIEW: Panama Needs to Clean Up Its Act

“Lightning and thunder, you can’t do anything about,” says Ilya de Marotta, the canal’s executive vice president for engineering and program management. “Other than that, you have to work.”

A century after U.S. President Theodore Roosevelt’s gunboat diplomacy made the Panama Canal a reality, the Panama Canal Authority is rushing to finish a $5.25 billion effort to keep the canal relevant. New locks and a deeper channel will accommodate ships 1,200 feet long (366 meters long) and 160 feet wide -- 25 percent longer and more than a third wider than the biggest ships that can use the canal today.
Canal Expansion

These bigger vessels will be loaded with as many as 12,600 20-foot containers, 2.5 times what a ship like the Zim Shanghai can handle. The canal expansion will also make room for ships that carry commodities such as liquefied natural gas. Touring the project in November, U.S. Vice President Joe Biden emphasized this last point.

“This is a very important thing for the United States,” Biden said as workers pounded away on the 10-story-tall concrete blocks that will hold the gates for the new locks. “And as the energy production throughout the Americas grows, Panama is going to play a critical role in bridging energy supplies in the Atlantic with a growing demand in the Pacific.”

The Panamanian economy has been on a tear: Gross domestic product has risen an average of 8 percent annually for the past five years, to $36 billion in 2013. The canal project is both a big reason for this growth and the linchpin of Panama’s plan for sustaining it. The country ranks sixth among emerging markets in investment outlook, according to BLOOMBERG MARKETS’ annual ranking.
Centennial Year

In projected GDP growth, Panama ranks second, behind only China, at 6.7 percent for 2014 through 2015. The Panama Canal Authority, the agency that operates the canal, began the expansion project in 2007, with the goal of completing it in 2014, the waterway’s centennial year. That won’t happen, for reasons including an early foul-up with the concrete mix for the locks, a number of strikes and a still-raging fight between the canal authority and contractors over cost overruns.




The expected opening has been pushed back to late 2015. When the new locks do become operational, the canal will once again shake up shipping and ports worldwide. Among the winners will be manufacturers that move goods from Asia to the U.S. Copenhagen-based A.P. Moeller-Maersk A/S (MAERSKB), the world’s biggest container-shipping company; Beijing-based China Ocean Shipping Group Co.; and other lines may be able to cut transport costs as much as 30 percent by sending bigger ships through Panama to move Asian cargo to Boston, New York and other East Coast ports.
West Coast Ports

These shippers now unload goods onto trains and trucks on the West Coast of the U.S. to finish the journey east, or make the trip to East Coast destinations from Asia via Egypt’s Suez Canal. The losers are likely to be the West Coast ports -- Long Beach, California; Los Angeles; Oakland, California; Seattle -- and the Suez Canal.

“A cheaper Panama Canal route may also divert current US imports from the Suez Canal, with a significant time savings on the shorter routing,” Barclays Plc said in a report issued last April.

The canal project is only part of the massive infrastructure spending that is propelling the Panamanian economy. Panama is nearing the end of a four-year, $13.6 billion campaign intended to, in the terms of a 2012 report from Standard & Poor’s, remake the country as a shipping and logistics hub on a par with Singapore. (The Singapore analogy is also a favorite of Panama’s president, Ricardo Martinelli.)

The spending is mostly on new hospitals and roads and a subway in the capital of Panama City.
Economic ‘Duality’

Singapore status, however, is not imminent. The most significant barrier to achieving it is, in the words of the S&P report, a “duality” in the economy: “a split between a modern, prosperous, and externally oriented sector strongly connected with the global economy and a backward, poorer sector employing less-educated people and generating less per capita income.”

In other words, inequality. Add to that a legacy of corruption and a reputation as a regional center for money laundering. It was only in August that Panama outlawed the bearer share corporation -- a favorite corporate structure for drug traffickers looking to launder cash, says Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development.

The country remains behind even Switzerland in sharing tax information with foreign governments searching for citizens who are hiding income.

“There is less and less tolerance, less and less patience” for that, Gurria says. “Now, 120 nations around the world are [sharing tax information]. Sixty of them have already signed, including Switzerland, to migrate towards automatic exchange of information, which is the standard we are going to have in the world in the near future. Panama should be part of the collective.”
Panamax

That the Panama Canal would one day become obsolete was clear not long after it opened in 1914: Even then, U.S. Navy ships narrowly fit through the waterway. The maximum size of a ship that could pass through the locks came to be called Panamax. By 1996, three years before the U.S. handed control of the canal to Panama, the first post-Panamax ships were in use. Since then, two more generations of new, larger ships have been placed in service.




Even the expanded locks won’t fit the largest of them, but those are specialty ships intended for shorter routes between Asia and Europe. The New Panamax ships, as those designed around the dimensions of the expanded canal are called, will be more than sufficient to alter the face of Asia-to-America shipping.
Widespread Approval

In 2006, Panamanians approved, with 80 percent of the vote, a plan to widen and deepen the canal. By then, Maersk and Singapore’s Neptune Orient Lines had already begun using the Suez Canal for bigger ships from Asia. The rerouting cost the Panama Canal, which produces about $2 billion in annual revenue, about $40 million in business last year, says Jorge Quijano, the waterway’s chief administrator.

“It was going to happen sooner or later,” Quijano says. “We’ll accommodate for it, and we will survive.”

The widening of the canal has triggered preparations at ports up and down the East Coast of the U.S. and throughout Latin America. The Port Authority of New York and New Jersey is raising the Bayonne Bridge; Savannah, Georgia, plans to deepen its river by 6 feet; and Miami has budgeted $2 billion to modernize its port.
Deep-Water Ports

In the Bahamas, Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa Ltd. has built a deep-water port at Freeport, vying to become a transshipment hub, a place where cargo is unloaded to smaller boats that can navigate cramped waterways across the Caribbean. And in Louisiana, Lake Charles Exports LLC got permission in August from the U.S. Department of Energy to ship liquefied natural gas from its terminal in Lake Charles.

It’s the fourth company awarded such a license, and 21 more applications are pending. This activity is largely about Asian markets, which will be made accessible when the expanded canal opens. U.S. exports of natural gas liquids could jump to 20 million metric tons in 2020 from the current 5 million metric tons, according to Sanford C. Bernstein & Co.

Jurisdictions threatened by the canal are fighting to keep their share of the shipping market. U.S. West Coast ports now account for about 70 percent of container trade between the U.S. and Asia. Cheaper transport by water could shift 10 to 15 percent of the action over to Eastern ports, according to Barclays.

Los Angeles, the busiest U.S. port, is spending more than $1 million a day to improve infrastructure during the next five years and defend its market share, says Phillip Sanfield, a spokesman for the port.
Central American Investors

Panama’s neighbors also see gold in opening avenues across the Central American isthmus. Guatemalan President Otto Perez Molina said in July that his government was seeking investors to build a rail line that would shuttle cargo between ships on the Atlantic and Pacific sides of the country, following a similar proposal announced by Honduras.

The most ambitious proposal is from Nicaragua, which narrowly lost out when Panama was chosen as the site of the U.S.-built canal a century ago. In June, President Daniel Ortega’s government granted rights to Hong Kong–based HKND Group to construct an interoceanic canal at an estimated cost of $40 billion.

Rodolfo Sabonge, a former vice president for the Panama Canal Authority, says all competitors are taken seriously. Yet he doubts that any other Central American country has what it takes.

“It’s not that easy,” Sabonge says. “You need human resources, the processes and the culture to be efficient. We have all that.”

To contact the reporter on this story: Eric Sabo in Panama City at esabo1@bloomberg.net

To contact the editor responsible for this story: Bill Faries at wfaries@bloomberg.net


Reference: http://www.bloomberg.com/news/2014-01-31/panama-s-5-billion-canal-upgrade-jolts-u-s-ports.html

Nigeria Central Bank Shifts Reserves from Dollars to Yuan

Nigeria’s central bank plans to shift some of its reserves into yuan from dollars as the Chinese currency takes a greater role in global trade, deputy central bank Governor Kingsley Moghalu said.

The bank will increase the yuan’s share of reserves to as much as 7 percent from 2 percent, Moghalu said in an interview in London, without specifying a timeframe for the change. Nigeria currently holds about 85 percent of its reserves in dollars, he said.

“It was clear to us that the future of international economics and trade will shift in large part to business with and by China,” Moghalu said. “Ultimately the renminbi is likely to become a global convertible currency.”

The central bank started to diversify its reserves into yuan in 2011 and is working with the People’s Bank of China to boost the holdings as soon as the relevant structures are in place, he said. Nigeria’s naira weakened 0.3 percent to 162.74 per dollar at at 3:05 p.m. in Lagos.

Reference: http://www.bloomberg.com/news/2014-01-28/nigeria-central-bank-to-shift-reserves-into-yuan-from-dollars.html

Brazil’s First Islamic Loan to Fatten Cattle as Trade Grows

Brazil’s first Shariah-compliant livestock lending program has been set up by Abu Dhabi Equity Partners and will fund cattle farming, as trade grows between the nation and Middle Eastern countries.

ADEP, a boutique investment bank based in Cayman Islands, has started the financing with $25 million to be used for fattening 70,000 cattle, held by ranch operators in Goias and Sao Paulo states, it said in a statement released today. White & Case LLP, Macquarie Group Ltd. and Swiss Re AG assisted with the deal, according to the statement.

Trade between Brazil and Arab countries reached $25.9 billion in 2012, from $5 billion in 2002, with Latin America’s largest economy exporting sugar, meat and grain, while importing fuel from the Middle East, according to the Arab-Brazilian Chamber of Commerce. Countries from Hong Kong to Morocco are revising laws to tap Islamic financial assets, which expanded 18 percent annually in the last four years to exceed $1.7 trillionin 2013, according to Ernst & Young LLP.

“Shariah-compliant funding of the growing multibillion dollar halal food industry is a natural yet untapped market segment,” Muneef O. Tarmoom, Abu Dhabi-based managing partner at ADEP, said in the statement. “Strategically positioned Islamic financial institutions in the Mid-East and beyond stand to gain substantially from such ‘South-South’ trade corridor in the next two decades.”

The financing was arranged using Wakalah and Murabaha structures, which means ADEP and the ranches will pay returns using the profit generated by cattle sales to comply with the religion’s ban against interest. There’s more than $100 million worth of cattle- and sugarcane-based Shariah-compliant transactions in the pipeline this year, ADEP Managing Partner Juan Fernando Valdivieso said in the statement.

Reference: http://www.bloomberg.com/news/2014-01-19/brazil-s-first-islamic-loan-to-fatten-cattle-as-trade-grows.html

Expectations grow for Trans-Pacific trade deal

Expectations are growing that an ambitious trade pact between a dozen nations around the Pacific Rim may be wrapped up in 2-3 months, with signs that political desire for a deal is trumping a string of technical difficulties in drawing it up.
Just days after the first World Trade Organisation trade reform deal was pushed through on Saturday, trade ministers from 12 countries are in closed-door talks in a Singapore hotel to try to tie up the Trans-Pacific Partnership (TPP).
Agreement would establish a free-trade bloc stretching from Vietnam to Chile and Japan, encompassing some 800 million people and almost 40 percent of the global economy. More far-reaching than other deals, it would go beyond tariffs on physical trade and try to regulate sensitive areas such as government procurement and give companies more rights to sue governments.
Just a few months ago a deal looked a long way off, with Japan only entering into the talks in July and many countries at odds over issues ranging from tariffs on farm produce to rules on Internet freedom and state-owned enterprises.
However, a push by the United States to try to reach some kind of agreement by the year-end looks as if it may be starting to pay off. Yasutoshi Nishimura, a senior vice minister at Japan’s Cabinet Office, told reporters on Monday that progress was made during talks over dinner on Sunday, and observers say plenty of pre-work for the TPP talks went on during last week’s WTO meeting in Bali.
“I would like to continue to make efforts toward an agreement by the year-end,” Nishimura said, adding he planned to hold bilateral talks with the United States later on Monday.
Observers say that while an agreement in Singapore by the time the 4-day talks end on Tuesday is unlikely, there could be enough impetus to conclude a deal within the next couple of months, even if many technical issues are not finalised.
“If they’re close enough on the political issues, they could announce a sort of political agreement and say ‘we’re done’, and the last little bits will be resolved on their own,” said Deborah Elms, head of the Temasek Foundation Centre for Trade & Negotiations. “That’s possible.”
One sticking point has been Japan’s long-stated aims to exempt five sensitive farm products – rice, wheat, beef and pork, dairy products and sugar – from the scrapping of tariffs.
Nishimura said they are unlikely to move far on that issue. “I’ve already mentioned the parts we can’t budge on, so the issue is what both sides can do based on that,” he said, referring to the bilateral talks between Japan and the U.S.
“For my part, I would like the United States to show flexibility.”
The TPP negotiations, which have run for three years, have been mired in controversy over a lack of transparency, and slowed by the conflicting interests of the negotiating countries, U.S. lawmakers and advocacy groups.
No draft of the entire text has been released – a move criticised by campaigners, who say they are being kept in the dark about what’s at stake. A leak of a draft chapter on intellectual property, released by Wikileaks last month, revealed a number of serious rifts among the countries, which would have suggested a deal was some way off. However, observers say political manoeuvring is likely to push it through.
“We are not in a rational zone, we are in a political zone and this agreement has increasingly become one about foreign policy issues and strategic alliances, and making the least worst trade-offs to achieve a final agreement,” said Jane Kelsey, a law professor at the University of Auckland, who is in Singapore to try to observe the talks.
The U.S. has also faced roadblocks at home, with Congress complaining about a lack of consultation over the deal and opposing proposed new legislation that would give the White House a freer hand to clinch such trade agreements.
Even if a deal is reached within the next few months, it’s likely to be some time until it comes into effect.
With the U.S. government lacking the ability to “fast track” approval of the deal and mid-term elections coming up next year, it may not be put before Congress for approval until November at the earliest. “Best case scenario is July 1, 2015, and probably more likely is January 1, 2016 for this to come into force,” said Elms at the Temasek Foundation Centre.
The agreement could also be expanded – last month, South Korea said it planned to join the 12-nation talks soon, while there is also a possibility that China could eventually enter the talks, too.
The full list of those already in the talks is the United States, Canada, Japan, Australia, New Zealand, Singapore, Malaysia, Brunei, Vietnam, Chile, Mexico and Peru.







Reference: Reuters:Singapore

Yuan Passes Euro as 2nd-Most Used Trade-Finance Currency

China’s push to promote the yuan in the international market is starting to take root.

The yuan accounted for 8.66 percent of letters of credit and collections used in global trade finance in October, second only to the dollar and surpassing the euro’s 6.64 percent share, the Brussels-based Society for Worldwide Interbank Financial Telecommunication said in a statement yesterday.

China is seeking a greater role for the yuan in global trade and investment, loosening controls as part of its once-in-a-generation economic overhaul last month and signing agreements to trade the currency more freely with financial centers from London to Singapore. The world’s second-largesteconomy may grow 7.6 percent this year, compared with an average 1.09 percent for the Group of 10 developed nations, Bloomberg surveys show.

“The yuan is on the way to become a truly, truly gigantic market,” David Simmonds, the head of currency and emerging-market strategy at Royal Bank of Scotland Group Plc in London, said in a phone interview yesterday. “Volumes will continue to grow with the evolution of the offshore market and with broader liberalization.”
Less Intervention

The People’s Bank of China outlined plans last month to end daily currency intervention as China’s ruling Communist Party attempts to modernize the economy. HSBC Holdings Plc predicts the currency, which climbed to a 20-year high in October, will be the main tender of international trade after the U.S. dollar and euro by 2015.

“Overseas exporters are using the renminbi more as the contract currency to increase the attractiveness and competitiveness of goods or services sold to China,” Cynthia Wong, the Hong Kong-based head of emerging-market trading for Singapore and Hong Kong at Societe Generale SA, said in an interview.

China announced agreements this quarter to start direct currency trading between the yuan and both the British pound and Singapore dollar. Direct trading with the yen and Australian dollar started in the past two years. The European Central Bank and PBOC agreed in October to establish a bilateral currency swap line of as much as 350 billion yuan ($57.5 billion).
Yuan Gains

International use of the yuan is also increasing as China opens its capital markets. In the first nine months of this year, about 17 percent of the Asian country’s global business was settled in the currency, compared with less than 1 percent in 2009, according to Deutsche Bank AG, the world’s largest foreign-exchange trader.

Greater usage contributed to the yuan’s 2.3 percent jump versus the dollar this year, the biggest gain among Asia’s 12 most-active currencies tracked by Bloomberg. The yuan gained to 6.0802 per dollar on Oct. 25, the highest level since 1993, before trading at 6.0916 in New York at 9:04 a.m. It was pegged to the dollar until 2005, and now trades in a managed range against a currency basket, with different rates inside and outside China.

China will broaden the yuan’s daily trading band in an “orderly way” and accelerate moves to make it convertible with international currencies, People’s Bank of China Governor Zhou Xiaochuansaid after a Nov. 9-12 Communist Party meeting, when reforms to the economic and political systems were announced.
Building Reserves

Deputy Governor Yi Gang said Nov. 20 that “it’s no longer in China’s favor to accumulate foreign-exchange reserves,” which totaled a record $3.66 trillion at the end of September, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“What China is now going to do is move slowly toward a more market-oriented system,” Hans Redeker, the head of global currency strategy at Morgan Stanley in London, said in a phone interview yesterday. He recommended a long-yuan position in a Dec. 2 note. “By allowing more and more” business to settle in yuan, the Chinese currency’s prestige “is going to rise,” he said. “This is a process that’s going to continue.”

The yuan had the fourth-largest share of global trade finance back in January 2012 with 1.89 percent, while the euro’s was the second-biggest at 7.87 percent, Swift said. The U.S. dollar remained the most-used currency in October, with an 81.08 percent share, down from 84.96 percent in 2012. Japan’s yen fell to fourth place and 1.36 percent, from third and 1.94 percent.
Rising Deposits

China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance in October, according to Swift. Yuan deposits in Hong Kong, the largest pool outside China, rose in October by the most since April 2011, reaching a record 782 billion yuan, Hong Kong Monetary Authority data show.

“The renminbi is clearly a top currency for trade finance globally and even more so in Asia,” Franck de Praetere, Swift’s Singapore-based head of payments and trade markets for Asia Pacific, said in the statement, referring to another name for China’s currency.

The yuan still has a way to go before it rivals the main currencies for general business. The Chinese currency ranked No. 12 for transactions in the global payments system in October, unchanged from the previous month, according to Swift. Payment values rose 1.5 percent that month, less than the 4.6 percent growth for all currencies, reducing the yuan’s market share to 0.84 percent, from 0.86 percent in September.

The yuan was the ninth most-traded currency in the world in April, according to the Bank for International Settlements in Basel, Switzerland.

“The constraints to use the yuan have been in the past the lack of liquidity, the dearth of investment options and the inability to invest onshore,” David Loevinger, a former U.S. Treasury official for Chinese affairs and now an analyst at TCW Group Inc. in Los Angeles, said by phone yesterday. “This is all changing little by little.”

To contact the reporters on this story: Fion Li in Hong Kong at fli59@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong atparmstrong10@bloomberg.net




Reference: www.bloomberg.com

First China Default Seen as Record $427 Billion Debt Due

Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default.

A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since ChinaInternational Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 to 6.18 percent, touching a record 6.23 percent on Nov. 27. That compares with a 70 basis-point rise to 2.68 percent for similar-rated notes globally.

People’s Bank of China Governor Zhou Xiaochuan’s signal the central bank will act to prevent excessive leverage has contributed to the surge in borrowing costs and forced many firms to delay financing plans. Rising interest rates may cause a “partial debt crisis to explode,” the official China Securities Journal said in a Nov. 26 editorial.

“The probability of default will get much higher in 2014 as maturing debt reaches a record,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “The central bank’s policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy.”
Sales Pulled

Bond sales by Chinese companies are down 23 percent to 1.57 trillion yuan this half-to-date compared with the first six months of the year, according to data compiled by Bloomberg. Companies postponed or scrapped 96.1 billion yuan of bonds in November compared with 29.8 billion yuan the month prior, according to filings on the websites of Chinamoney, Chinabondand Shanghai Clearing House.

The 2.6 trillion yuan of debt due next year consists of a record 2.13 trillion yuan of notes which must be redeemed, and a record 470 billion yuan in interest, the CICC data show. Investors also have options to sell some 200 billion yuan of bonds back to issuers, according to CICC.
Prominent Problems

There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service. Guosen Securities Co. estimates Chinese non-financial companies’ debt ratios reached 93 percent last year, while the average in Asia hasn’t surpassed 70 percent in the last 10 years, according to a report released on Dec. 2.

The central bank warned on Nov. 5 the economy may see a decline in leverage over a long period, and said there are “prominent” problems in local government and property industry borrowings. China’s broad debt ratio has also been rising sharply, PBOC Deputy Governor Hu Xiaolian said on Nov. 20.

Following the Communist Party’s Nov. 9-12 plenum, China’s leaders pledged to allow market forces a “decisive” role in the allocation of resources. Societe Generale SA China economist Yao Wei said the announcement signals the government may stop saving troubled companies which can’t meet debt obligations and allow the first bond default in the coming 12 months.
‘Doomed Companies’

“If the government is going to let market forces play an important role, it should let those doomed companies fail,” said Yao in Hong Kong. “In industries with overcapacity, such as steel and shipbuilding, there’s a higher likelihood of bond defaults.”

Credit risks are most concentrated in highly leveraged sectors, including heavy industries, according to Ping An’s Shi, who said rising borrowing costs will begin to have a “real effect” on the world’s second-largest economy next year. Corporate bond yields may rise to even higher levels in the first half of 2014, he said.

Xinyu Iron & Steel Co. (600782), a Jiangxi-based steelmaker which reported a loss of 175 million yuan for the January to September period, has 3.25 billion yuan of borrowings due in 2014, compared with 0.31 billion yuan in 2013, according to data compiled by Bloomberg. The yield on the company’s AA+ locally rated 2016 debt has almost doubled this year to 10.5 percent as of Dec. 6, according to exchange data.

The yield on five-year AA rated corporate bonds has risen 125 basis points this year to 7.26 percent, according to Chinabond. The rate on similar-maturity government debt climbed 116 basis points to 4.39 percent. The gap widened 8 basis points to 287.
Debt Burdens

“Companies are facing heavy debt burdens and cash supply is tight. All these factors will make bond defaults very likely,” said Dong Hui, a bond analyst at China Securities Co. in Beijing. “But it’s hard to judge whether the first will happen next year. After all, no local governments want companies in their localities to be the first to default.”

Electricity companies have to repay 520 billion yuan in bond principal and interest next year, the most among all industries, according to CICC, which took out third place for fixed-income research in New Fortune magazine this year. That’s followed by local government financing vehicles, which must repay 239 billion yuan.

As default concerns escalate, the cost of insuring the nation’s debt against non-payment is edging higher. China’s credit-default swaps increased 2.1 basis points last week to 67.5 as of Dec. 6, according to data provider CMA. The swaps rose 1.4 basis points the week prior, advancing for the first time since the five days ended Oct. 25, the data show.
Cash Supply

The yuan advanced to the strongest level in 20 years today after the central bank raised the currency’s daily fixing to a record and the nation’s trade surplus widened to the biggest in more than four years. It rose 0.15 percent to 6.0726 per dollar as of 10:04 a.m. in Shanghai, China Foreign Exchange Trade System prices show.

Guotai Junan Securities Co. Shanghai-based bond analyst Li Qing said China’s slowing economy will also increase default probabilities next year. Guotai Junan, the nation’s third-biggest brokerage, forecast economic growth will slow to 7.3 percent next year, from 7.6 percent in 2013.

“Cash supply will probably remain tight and the economy may decelerate from the second quarter of next year,” said Li. The premium on bonds rated AA or lower may widen further, she said.

SocGen’s Yao said some companies averted defaults in 2012 because local governments stepped in to help. CHTC Helon Co., the fiber maker which used to be called Shandong Helon Co. (000677) and became the first company to lose its investment-grade rating in December 2011, repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.

“Whether there’ll be a bond default or not is mostly a political decision,” said Yao. “Huge maturing debt and cash shortages provide conditions for the first default to happen. But whether it will depends on the leadership’s willingness to make the right choices.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai atxchen45@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas atknicholas2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net




Reference: www.bloomberg.com

India to seek rupee trade payments to help currency

India is preparing to lobby major trading partners including Japan, Iraq and Venezuela to accept rupee payments for some of their exports, one of a series of moves to stabilise the volatile currency and make it more globally acceptable.

Restrictions on large transactions of rupees against foreign currencies are intended to protect India from sustained speculative assaults, but they also limit interest in the rupee and foreign investment flows.

A panel set up in August to study currency swaps has now won support from the finance ministry, the commerce ministry and the central bank to target about 10 countries for such deals, focusing on oil exporting nations and others that run large trade surpluses with India, three sources said.

The panel is likely to decide within the next few days on the size of the swap deals it will seek and finalise which countries to target first, said two sources who have attended meetings. The finance ministry has already agreed in principle to lobby Venezuela to accept rupees for some oil transactions. Another idea is to accept some partners' currencies for trade.

"There is a broad agreement between the commerce and finance ministries and the Reserve Bank of India to push currency swap agreements, particularly with the countries with which India runs a large trade deficit," a senior trade ministry official with the direct knowledge of the issue, told Reuters.

China is already keen to start yuan-rupee trade, and India is hopeful Japan may show an interest in accepting rupee payments. The idea to target oil producers Iraq and Venezuela stems from a rupee payment programme already in place with Iran.

It is not clear how much appetite there will be from the oil nations for the plan -- Iran only accepts rupee payments because sanctions by Western nations limit its options for payment in other currencies.

India's imports from Venezuela were $14 billion in 2012/13, mostly oil, while exports were a meagre $235 million. India's exporters believe a rupee payment deal could drive exports of medicine, engineering goods and IT services to Venezuela, mirroring trade with other Latin American countries.

Japan recently agreed to extend an emergency currency swap facility with India to $50 billion from $15 billion. The new proposal would be separate from that deal and would focus on trade, the commerce ministry official said.

India has over a period of years been loosening capital controls and allowing foreigners to invest in more rupee assets. The move to full convertibility got fresh impetus when the rupee crashed 20 percent against the dollar earlier this year. It is still down about 12 percent.

"This might be a strange time to talk about rupee internationalization, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees," Reserve Bank of India Governor Raghuram Rajan said after taking charge of the RBI in September.

An important step towards internationalization came earlier this week when the World Bank's IFC arm issued its first rupee bond to the value of $160 million, part of a new $1 billion offshore rupee bond programme.

The bond was strongly oversubscribed, the IFC said.

TRADE DEFICIT

The plan to target more countries for rupee payments is also part of India's efforts to tap new markets for exports, which constitute nearly a quarter of the $1.8 trillion economy.

India's trade deficit widened to a record $190 billion in the 2012/13 fiscal year as the gap with major trade partners such as China soared to $40 billion, and the combined deficit with South Korea, Japan and Venezuela touched $30 billion.

"Bilateral currency swaps will offer a win-win situation and would ease pressure on the volatile rupee," said Rafeeq Ahmed, president of Federation of Indian Export Organisations (FIEO).

Ahmed, however, was sceptical of fast progress on the plan.

"It has long way to go and it can take a minimum of six months to operationalise a swap agreement," said the FIEO president, adding swap deals required political commitment and a push from the central bank.

The sharp fall in India's currency value and economic slowdown could discourage oil-exporting nations from making swap deals. Despite importing $2.5 billion of goods between April and September via the rupee channel, Iran recently asked India to pay for oil in other currencies.

Reference: http://in.reuters.com/article/2013/11/22/india-economy-rupee-idINDEE9AL06420131122