Fixing bankrupt financial systems is just the beginning

By Martin Wolf

Published: April 29 2009 03:00 | Last updated: April 29 2009 03:00

Can we afford to fix our financial systems? The answer is yes. We cannot afford not to fix them. The big question is rather how best to do so. But fixing the financial system, while essential, is not enough.

The International Monetary Fund's latest Global Financial Stability Report provides a cogent and sobering analysis of the state of the financial system. The staff have raised their estimates of the writedowns to close to $4,400bn (€3,368bn, £3,015bn). This is partly because the report includes estimates of writedowns on European and Japanese assets, at $1,193bn and $149bn, respectively, and on emerging markets assets held by banks in mature economies, at $340bn. It is also because writedowns on assets originating in the US have jumped to $2,712bn, from $1,405bn last October and a mere $945bn last April.

To put this in context, the writedowns estimated by the IMF are equal to 37 years of official development assistance at its 2008 level. Estimated writedowns on US and European assets, largely held by institutions located in these regions, also come to 13 per cent of the aggregate gross domestic product.

The IMF estimates the additional equity requirements of the banks as well. It starts from total reported writedowns up to the end of 2008, which come to $510bn in the US, $154bn in the eurozone and $110bn in the UK. The capital raised to the end of 2008 is, again, $391bn in the US, $243bn in the eurozone and $110bn in the UK. But the IMF estimates additional writedowns in 2009 and 2010 at $550bn in the US, $750bn in the eurozone and $200bn in the UK. Against this, it estimates net retained earnings at $300bn in the US, $600bn in the eurozone and $175bn in the UK.

The IMF points out that the ratio of total common equity to total assets - a measure investors burned by more sophisticated risk-adjusted ratios increasingly trust - was 3.7 per cent in the US at the end of 2008, but 2.5 per cent in the eurozone and 2.1 per cent in the UK. The IMF concludes that the extra equity needed to reduce leverage to 17 to 1 (or common equity to 6 per cent of total assets) would be $500bn in the US, $725bn in the eurozone and $250bn in the UK. For a 25 to 1 leverage, the required infusion would be $275bn in the US, $375bn in the eurozone and $125bn in the UK.

In current dire circumstances, the chances of raising such sums from markets are zero. Part of the reason is that they could still prove to be too little. After all, the IMF's estimates of the potential writedowns on US assets alone have grown nearly three-fold in just one year. It would not be surprising if they rose again.

Yet these are not the only sums required. Governments have so far provided up to $8,900bn in financing for banks, via lending facilities, asset purchase schemes and guarantees. But this is less than a third of their financing needs. On the assumption that deposits grow in line with nominal GDP, the IMF estimates that the "refinancing gap" of the banks - the rollover of short-term wholesale funding, plus maturing long-term debt - will rise from $20,700bn in late 2008 to $25,600bn in late 2011, or a little over 60 per cent of their total assets (see chart). This looks like a recipe for huge shrinkage in balance sheets. Moreover, even these sums ignore the disappearance of securitised lending via the so-called "shadow banking system", which was particularly important in the US.

The IMF also provides new estimates of the ultimate fiscal costs of rescue efforts (see chart). At the high end are the US and the UK, at 13 per cent and 9 per cent of GDP, respectively. Elsewhere, costs are far lower. These, happily, are affordable sums. Indeed, compared with the recession's impact on public debt, they look quite manageable. True, costs are likely to end up higher. But the overwhelming likelihood remains that the fiscal costs of deep recessions are substantially greater than those of rescuing finance. Refusing to rescue financial systems because it looks too expensive is a classic case of being "penny wise, pound foolish".

A better reason for refusing to bail out banks is its dire effect on incentives. The alternative must then be bankruptcy. Jeremy Bulow of Stanford University and Paul Klemperer of Oxford University have advanced a scheme that would do this neatly. Valuable banking functions of each institution would be split off into a new "bridge" bank, leaving liabilities (apart from deposits) in the old bank. Creditors left behind would be given equity in the new bank. Governments could "top up" some creditors beyond this level, without making all creditors whole, as now.

Respectable opinion assumes that it would be best to provide full bail-outs of creditors in systemically important institutions. The rationale for this is that it is the only way to eliminate further panic. The objection is not the fiscal cost. It is that a limited number of large, complex and "too-big-to-fail" institutions would then emerge. Their creditors would naturally believe they were lending to governments. This would be a recipe for yet bigger catastrophes in future years.

Yet imposing large losses on creditors is indeed risky. It would probably have to be done simultaneously everywhere. Only after it was obvious that surviving banks were sound would anybody be willing to lend to them without guarantees.

Even worse than this choice between grim alternatives is the fact that the path to recovery is likely to be slow, whichever is chosen. As the latest World Economic Outlook notes in an important chapter, recessions that follow financial crises are unusually severe. So, too, are globally synchronised recessions. But now we are living through a globally synchronised recession that coincides with a huge financial crisis that emanates from the core countries of the world economy, particularly the US. This is a recipe for a long recession and a weak recovery. Whatever is done about the financial system, "deleveraging" is the order of the day (see chart). The UK's position in this looks dire. But that of the US looks quite bad, too, even compared with that of Japan in the 1990s.

For better or worse, the authorities have decided to bail out their financial systems with taxpayer money. Almost all the affected countries should be able to afford to do this, at least on the IMF's numbers. So now, having made the fundamental decision to prevent bankruptcy, they must return their financial systems to health as swiftly as they possibly can.

Even so, that will prove to be a necessary, not a sufficient, condition for a return to robust economic health. The overhang of debt makes deleveraging inevitable. But it has hardly begun. Those who hope for a swift return to what they thought normal two years ago are deluded.

Retailers Vs. suppliers: Retailers aiming to pass on pain down the chain

"Suppliers are facing pressure to abosrb costs" and "smaller manufactureres and infredient suppliers will have to consolidate in order to strengthen their hand against the retailers they supply" 

By Andrea Felsted and Elizabeth Rigby

Published: April 29 2009 03:00 | Last updated: April 29 2009 03:00

It was last year when a food buyer at Asda's headquarters in Leeds, northern England, hatched a plan to offer customers a £1 ($1.46) frozen pizza. With prices typically about £1.49, the price cut was a drastic one, but it did find a supplier who thought it was possible.

Northern Foods, the food producer, struck a deal with the British arm of retail giant Wal-Mart to slash the price of one of its pizzas lines in return for two things: first, the promise of a spike in sales volumes to help offset the cut in prices and second, an agreement from the retailer to keep the product simple.

By offering just two types of pizza at £1 - a cheese and tomato option and a pepperoni one - the manufacturer made the numbers stack up by dedicating nearly an entire factory in Ireland to producing what is effectively one product.

Delivering big volumes at low cost, the pizzas flew off the shelves at Asda, leaving both the pizza maker and supermarket with some profit.

But win-win situations in supply agreements between retailers and suppliers are few and far between.

Relations between the two are typically combative rather than convivial. In the highly-competitive British retail market, supermarkets are constantly trying to drive better deals from their suppliers.

That imperative has become more acute in the downturn. "There is pressure to push the costs back down the supply chain," says one manufacturer.

"You have to think of it as the converters (companies that take ingredients and then produce ready meals, sandwiches, cakes), the ingredient suppliers and the farmers themselves. A converter will buy from the two below them and the pain is felt right down the supply chain when the retailer tries to cut its costs."

In recent months, retailers have been hammering away at suppliers' contracts as they look to make savings or pass on cheaper prices to customers. Tesco, the UK's biggest retailer changed the terms for hundreds of non-food suppliers, making them wait up to 60 days to be paid for goods instead of 30. Their efforts paid off. Last week it announced that it had made savings of £540m in the past financial year, helping it to deliver best-in-class margins of 6.2 per cent

Judith McKenna, finance director at Asda, says retailers have an arsenal of weapons they can draw upon to try to cut prices.

These can be found in every part of the supply chain, from making sure that lorries leaving depots after deliveries are never empty but are instead filled with goods that can be sent to stores to reducing packaging on ready meals.

When it comes to suppliers the three main levers are to extend payment days, cut the amount of inventory being held by the retailer to improve its working capital and driving down the amount paid for goods.

Asda has recently brought back e-auctions on some contracts, having phased out this practice four years ago. Under this system, suppliers must submit their best bid for a contract online in a blind auction. While the lowest bid might now win, it may be used as a starting point for the negotiations.

Asda says it has only used this in certain commodity products, such as buying in bulk cheese, with just 50 contracts agreed this way out of the thousands across the business. But some suppliers are disgruntled.

"They are using these technologies to get lower prices," complains one food manufacturer. "You have to submit a bid on an auction, you don't know who else is there and you have to submit a price blind. It is psychological, it concentrates all the information [about what suppliers can offer] on one side.

"And, quite honestly, people like us have to pick up this technology and transmit it down the line, unless you have demonstrably something unique to sell, you get into a very bad place."

The primary producers that support the chain know this only too well. Theirs is a market of supply and demand. If resource is scarce, their prices will rise, but in commodity markets where there is plenty of similar product, they have little room to manoeuvre.

The UK's National Farmers Union says that the farming community has seen an increase in retrospective changes to contract terms in recent months, whereby a retailer, having agreed to pay, for example, 20p for a pound of product, might cut that price to 18p.

While the big suppliers have the scale to force through commodity price rises, many in the industry think that the smaller manufacturers and ingredient suppliers will have to consolidate in order to strengthen their hand against the retailers they supply.

Global steel demand to drop 15%

By Peter Marsh in London and agencies

Published: April 27 2009 17:40 | Last updated: April 28 2009 01:40

World steel demand is likely to fall 14.9 per cent this year, making the decline by far the biggest in the industry since the end of the second world war, according to forecasts issued Monday by the World Steel Association.

The projection is considerably more pessimistic than the 10 per cent demand fall for 2009 that is the current central assumption byArcelorMittal, the world’s biggest steelmaker, which reports its first-quarter results on Wednesday.

According to the WSA, the main trade body for steelmakers, the US is expected to experience a particularly large fall in steel demand of more than 36 per cent this year, with the European Union experiencing a fall of nearly 30 per cent.

The association’s projections underline the difficulties piling up for the world’s biggest steelmakers, which have had steep falls in output and profits.

ArcelorMittal is expected by analysts to turn in earnings before interest, taxation, depreciation and amortisation of about $9bn this year, well down on the comparable $24.5bn for 2008.

Michael Shillaker, an analyst at Credit Suisse, said he thought the projection of a 15 per cent fall in demand “far more realistic” that the 10 per cent decline that many steel industry observers have been pencilling in.

“I expect some kind of upturn from around September onwards, but it will be very mild,” said Mr Shillaker.

According to the new WSA figures, India will be the only major country to have an increase in steel demand this year – by about 1.7 per cent. Total world production and consumption in 2009 is expected to be slightly above 1bn tonnes, down from nearly 1.2bn tonnes in 2008.

In 2010, the WSA, based in Brussels, expects steel demand to climb marginally.

Steel demand has risen at a robust rate in the past few years, led by rapacious consumption in China. This led to a big increase in steel prices, pushing up profits for the world’s leading steelmakers.

The last time the world recorded a fall in steel demand was in 1997 when consumption fell 2.7 per cent.

In 1945, steel demand plummeted 27.3 per cent. The biggest year on year fall since then was the 8.7 per cent decline recorded in 1987.

Between 1930 and 1932, steel demand for three years in succession fell more than 20 per cent – the worst period for consumption of the metal since records began in 1900.

■ US Steel Corp announced drastic measures to shore up its balance sheet on Monday, including slashing its dividend by more than 80 percent, offering new shares of common stock and delaying payments to a retiree healthcare trust.

The company’s shares slumped more than 6 percent following the announcement, in which the steelmaker said it had amended the terms of its credit facility and term loans to eliminate existing financial covenants.

U.S. Steel also posted a first-quarter loss that was much bigger than analysts expected and said it expected to record an operating loss in the second quarter.

”We continue to face an extremely difficult global economic environment,” Chief Executive John Surma said in a statement. ”Extremely short lead times coupled with the uncertainty surrounding financial markets and key steel-consuming industries such as automotive and construction make it difficult to forecast beyond a very short horizon.”

To boost liquidity, US Steel said it was cutting its quarterly dividend to 5 cents a share from 30 cents a share, a move that will save $116m a year.

Lionel Barber with Charlie Rose

http://www.charlierose.com/view/content/10252

FT Editor Lionel Barber's view on Media's role

A flawed first draft of history

By Lionel Barber

Published: April 21 2009 20:17 | Last updated: April 21 2009 20:17

These are the best of times and the worst of times to be a financial journalist. The best, because we have a once-in-a-lifetime opportunity to report and analyse the most serious financial crisis since the Great Crash of 1929. The worst, because the newspaper and television industries are suffering, not only from the shock of a recession but also from the structural shock of the internet revolution.

Now comes a third shock. The financial media are accused of mis sing the global financial crisis. Asleep at the wheel. Head in the clouds. No cliché has been left unturned as reporters, commentators – yes, even editors – have been castigated for failing to warn an unsuspecting public of impending disaster. Do these charges add up? To paraphrase the killer question from the Watergate hearings: what did the press know and when did it know it?

First, by way of mitigation, journalists were not the only ones to fall down on the job. Political leaders were happy to break open the champagne at the credit party; many lingered long after the fizz had gone. Regulators in the US, UK and continental Europe all failed to identify and contain the risks building within the system. Many economists, too, fell short. Only a few – such as Nouriel Roubini, now celebrated as the thinking man’s prophet of doom – identified pieces of the puzzle, even if they failed to piece them together.

Why did financial journalists not pay more attention to these warnings? First, the financial crisis started as a highly technical story that took months to go mainstream. Its origins lie in the credit markets, coverage of which in most news organisations counted as a backwater. Most reporters working in this so-called “shadow banking system” found it hard to interest their superiors who controlled space and who were more interested in broadcasting the “good news” story of rising property prices and economic growth.

A second related problem with the credit derivatives story was that it took place in an over-the-counter market with little disclosure and very little day-to-day news. Inevitably, the temptation was – and still is – to run with the stories that are much less opaque such as public company earnings. Yet the big innovations and the big money came in the credit markets.

The second criticism is that the media were too interested in building up a good news story. The comedian Jon Stewart’s on-air demolition of the booster-turned-doomster Jim Cramer shows there is a case to answer. Mr Stewart went so far as to suggest that CNBC, which hosts Mr Cramer’s Mad Money show, overlooked market shenanigans as it was too close to its core community: Wall Street traders and investment bankers. Danny Schechter, writing in the British Journalism Review, is equally critical alleging that newspapers had no interest in pursuing scandals in mortgage lending for fear of alienating property advertisers.

Journalists routinely face tensions between relying on their sources and burning them with critical coverage. Think of the White House press corps, the British “lobby” press that covers parliament or sports journalists assigned to a team. The incentive to “go along” to “get along” is always present, in competition with a journalist’s instinct to speak truth to power.

In the final resort, there can be little debate that the financial media could have done a better job. In this spirit of self-criticism, I identify four weaknesses in the coverage.

First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.

Second, journalists, with a few notable exceptions, failed to understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac, the mortgage finance giants. Here, we should tip our hats to the now much-maligned Mr Greenspan. He raised alarms early about the risks. Of course, it was hard for journalists to attack the ideal of broader home ownership in America, but that is no excuse.

Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, its relationship with the pro-cyclical Basle II rules on capital ratios, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.

Fourth, financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. The same applies to regulators and economists. For too long, too many experts treated the financial sector and the wider economy as parallel universes. This was fundamentally wrong.

Many of the most important developments of the past decade – the rise of radical Islamic terrorism, the opening of the Chinese economy as well as two credit bubbles – have largely been unanticipated or failed to attract the attention they deserved. Journalists, in this respect, have a crucial role to play. Flawed they may be, but they still have the capacity to be the canaries in the mine. Long may it be so.

The writer is editor of the Financial Times. This is an abridged version of a speech he gave at Yale University this week

Credit market to thaw: part 1

Borrowing costs hit fresh low

By Aline van Duyn in New York

Published: April 27 2009 20:02 | Last updated: April 27 2009 20:02

The cost of borrowing for the riskiest companies has fallen to its lowest level in more than six months and prompted a surge in new debt issues, increasing hopes that the worst stage of the financial crisis may be over.

The ability of a growing number of companies – including those seen as having a higher risk of default and whose debt is classified as “junk” or “high yield” – to raise money signals an increased willingness by investors to lend money.

For many months, private investors have shied away from lending money to risky companies and banks amid concerns that financial markets might again revert to crisis mode and that the value of investments would fall sharply.

But in recent weeks the stabilisation of parts of the banking sector, following huge injections of government funds, has allowed parts of the capital markets to thaw.

Companies with high credit ratings and low risks of default have been able to borrow in the debt markets for most of this year, but riskier companies have only returned in recent weeks.

The rally in the equity markets has been further fuelled by this development, as access to funding is an important factor in potential future growth.

The amount of new debt borrowed in the US junk bond market has risen to more than $7bn so far in April, its highest level since July last year, according to Dealogic data. However, analysts said the improvements did not yet signal a complete turnround in the credit markets, which will still be affected by the economic environment and the probable further deterioration in economic fundamentals.

Default rates are also expected to keep rising for much of 2009.

“Economic growth is still deeply negative, which translates into very negative cash flows,” said analysts at Goldman Sachs.

“And despite improvements in the high-yield, new-issue market on the back of this rally, funding prospects remain very challenging,” the Goldman Sachs analysts continued.

Specifically, it remains very difficult for the riskiest companies – those whose credit ratings signal a very high chance of default – to borrow money from investors.

Until there is a shift in the ability of these companies to raise money needed to avoid defaulting on their debts, or to complete debt exchanges which can be vital for their survival, it is too early for the credit markets to be given the “all clear”.

“The ability for more levered credits in high yield to access the markets will be a clear signal that credit rationing has waned,” said Greg Peters, global head of fixed income research. “While we have seen a meaningful rally in the lower quality credits, there are clear signs of credit differentiation that we expect to persist.”

Carbon Trading: $2,000bn by 2020

Carbon trading activity doubles over year in spite of price falls

By Fiona Harvey, Environment Correspondent

Published: April 28 2009 

The carbon market showed a remarkable growth spurt in the first quarter of this year, with trading volumes up 37 per cent, new data show.

Trading was driven by price volatility and companies selling carbon permits to raise short-term cash.

However, low prices meant the market's value had fallen by 16 per cent to $28bn by the end of March, according to New Carbon Finance, a carbon data specialist.

Nearly 2bn carbon credits were traded in the first quarter, an increase of 37 per cent on the previous quarter and more than double the amount traded in the first quarter of 2008.

Guy Turner, director of New Carbon Finance, said: "In spite of the recession, a decline in carbon prices and uncertainty over what will happen after 2012 [when the current provisions of the Kyoto protocol expire], traders are taking this market seriously and trading more actively."

The bulk of the international market - about 84 per cent by value - is the European Union's emissions trading scheme, under which energy-intensive companies are issued a quota of carbon permits they may trade with one another. Trading in this market rose by 54 per cent, compared with the last quarter of 2008.

Prices for EU permits are nearly €14 ($18.4), up from a low of about €8 in February. Traders have priced in the effects of the recession driving down industrial production, and companies have largely stopped selling off permits to raise cash.

But volumes in the other main part of the market, the trade in carbon credits issued by the United Nations - 9 per cent of the market by value - fell about a third.

Trading in this market has been affected by uncertainty over what will replace the Kyoto protocol. The UN issues credits to carboncutting projects under the protocol, and these can be used by companies in the EU scheme to top up quotas.

The stream of finance for such projects is drying up, according to New Carbon Finance: the last new carbon fund, of $95m, was set up last year and no new money was raised in the first quarter of 2009.

The company forecast the carbon market would be worth about $120bn by the end of the year, broadly on a par with last year.

However, if the US introduced a federal cap-and-trade system the market would reach more than $2,000bn by 2020.

The case for rescuing banking system

Overdue credit

The Lex Column, 04/27/09

One fact even the darkest prophets of doom must concede is that the economy will pick up eventually. When it does, however, do not expect credit growth to join the party straight away. Analysing US recoveries following financial crises going back to 1970, the International Monetary Fund shows that, on average, credit growth does not become positive for almost two years after output turns.That suggests two things: first, that a lack of credit may temper the early stages of a recovery. Second, companies with a heavy reliance on debt funding may suffer for longer than they think.

To test this, the IMF looked at production data across manufacturing sectors. It found that a typical company that uses high levels of outside financing grows 1.5 percentage points more slowly than one that funds itself via retained earnings following a crisis. Worst affected are industries whose products are less internationally traded – almost another 2 percentage points is lopped off growth for companies dealing less with imports or exports. Having highly shipped products, on the other hand, cancels out the drag from an over-reliance on debt funding.

Counter-intuitively, companies reliant on debt are not helped by having a higher proportion of tangible assets on which to secure financing. However, having relatively fewer tangible assets, as one would expect, exacerbates the drag. The conclusion for investors hoping to play a recovery is obvious: buy companies making tradable goods, but check out their funding mix first.

This analysis shows governments are dead right to be prioritising the health of the banking system. As more industries begin squealing for increasingly limited resources, policymakers must keep their focus on repairing bank balance sheets and credit markets. It will be tough love. But everyone will benefit more rapidly when the good times return.

Rio deal will ‘have to evolve’

By William MacNamara
Published: April 27 2009 22:40 Last updated: April 27 2009 22:40

The $20bn question circulating in the mining industry is how willing is Rio Tinto to change or drop its proposed fundraising deal with Chinalco? And if it does make changes, how receptive would Chinalco be?
As the Anglo-Australian miner and the Chinese metals group endure a third month of trying to seal their proposal – in which Chinalco will make a $19.5bn capital investment in Rio – it appears that no-one has an answer to these questions.
The uncertainty is summed up in Rio’s divided investors, many of whom are prepared to vote “no” on the proposal because they believe the cash-for-mines-and-shares deal tramples on their rights as shareholders.
It is difficult to predict how much of the deal architecture will remain this summer, when a vote is likely. All sides appear to be adopting a “wait and see” attitude that, while keeping options open, also prevents Rio from knowing how it will resolve its debt problems.
But the questions have been raised as the world changes from the one in which the deal was hatched.
In early February Rio announced it would raise $19.5bn by selling chunks of mines, smelters and power plants to Chinalco, the Chinese state-owned mining group that is its largest shareholder, as well as offering Chinalco an exclusive bond that would eventually double its stake in Rio to 18 per cent. At the time of the announcement debt markets were frozen and commodity prices were depressed. Rio faced $19bn in debt repayments over the coming two years, which stemmed from its $38bn purchase of Alcan in 2007, a defining moment of the commodities boom.
In early 2009 the board was divided on how to repair Rio’s balance sheet. It drew up plans for a rights issue that would raise close to $10bn, as well as for the $20bn Chinalco option. The larger looked the best idea, as the market was pessimistic about demand for iron ore, copper and the raw materials that are the basis of Rio’s revenues.
Since then a fragile recovery has gained momentum. On Friday Cazenove upgraded the entire European mining sector and said commodity prices had probably seen the worst. Copper prices have gained more than 38 per cent this year, carrying Rio’s shares higher.
In the past six weeks, blue-chip miners BHP Billiton, Anglo American and Rio have raised billions of dollars in the bond markets. Demand for Anglo’s $1.7bn convertible bond pushed the coupon rate down to 4 per cent, compared with 9 per cent on the convertible bond Rio is offering Chinalco.
That has strengthened the argument for “optionality” in Rio’s fundraising efforts. Does Rio really need $19.5bn all at once? One alternative would be to go ahead with the sale of $13.2bn in asset stakes to Chinalco but scrap the convertible bond – which has enraged shareholders by ensuring that they will be diluted – and instead launch a modest-sized rights issue.
“The deal will have to evolve,” said a fund manager at one of Rio’s largest institutional investors. He claims Rio’s management is still describing the Chinalco package as “an option”. He is one of several people involved in the deal who say Rio is more receptive to alternatives – including an arrangement with once-hostile bidder BHP Billiton – than its public commitment to Chinalco implies. Asked two weeks ago whether there was room for compromise on the deal, Paul Skinner, the soon-to-be-retired chairman said: “Let’s see where we get down the track.”
But for the moment Rio is trapped by its own rhetoric of commitment to Chinalco and is not able to prepare investors for a “Plan B”. Nor can it yet gauge the necessity for a “Plan B”.
The company’s fortunes are tied to fickle things such as the copper price which, although it has risen almost 40 per cent this year, dropped 8 per cent in the past week. What will demand for copper or iron ore be in June? If prices continue to oscillate at low levels, investors might well come round to the idea that $19.5bn from Chinalco is a prudent solution.
But Rio’s rising share price is making the deal look imperfect to many shareholders. The shares closed on Monday at £26.86 in London, close to the conversion price of £30 for the first tranche of convertible bonds offered Chinalco. It is possible that the share price will have risen past both conversion thresholds – the second at £41 a share, at today’s exchange rates – by the time the deal comes to a vote.
Events in the next two months might embolden Rio to walk away from the Chinalco deal – for a $195m break fee. Complicating that decision, however, are the politics involved. China is Rio’s largest customer – a fact that Tom Albanese, chief executive, likes to cite as a rationale for the deal. The Chinese government sees the deal winning international prestige for state-owned companies and reviews it on a weekly basis at the highest level of the politburo, according to sources. There would be consequences for Rio if the Chinese government “lost face”.
Amid all the possibilities there is one rarely considered: that the deal passes without a hitch in its current form and in several years, with demand for commodities nowhere near 2008 levels, it is considered a masterstroke.

Jackie Chan Strikes a Chinese Nerve

April 24, 2009

By ANDREW JACOBS

BEIJING — Jackie Chan, the Hong Kong martial arts star well known for showing his own failed stunts at the end of his films, may have another blooper to his credit.

When Mr. Chan told a high-level gathering of Chinese government officials and business leaders last weekend that Chinese people were ill equipped to handle liberty, he found himself on the receiving end of a verbal thrashing from across the Chinese-speaking world that is still reverberating.

“I’m gradually beginning to feel that we Chinese need to be controlled,” Mr. Chan said during the Boao Forum, the annual economic conference held on Hainan Island with a keynote speech by Prime Minister Wen Jiabao. “If we are not being controlled, we’ll just do what we want.”

The response was strongest in Hong Kong and Taiwan, which Mr. Chan, one of Asia’s wealthiest and best-known entertainers, held out as particularly “chaotic.” But even some intellectuals in mainland China spoke out against stereotyping Chinese as people who crave authoritarian leadership.

Apple Daily, one of Hong Kong’s biggest newspapers, used its front page to anoint him “a knave.” Politicians in Taiwan, the self-governing democratic island that China claims as sovereign territory, described him as “idiotic” and “ignorant.” Albert Ho, a Hong Kong legislator, called Mr. Chan a “racist,” adding: “People around the world are running their own countries. Why can’t Chinese do the same?”

Here on the mainland, a writer published online by The People’s Daily, the Communist Party’s mouthpiece, gave him a thumbs down. “I guess Jackie Chan has never experienced the lack of freedom, and has not been cruelly controlled,” the commentator, Li Hongbing, wrote.

As the storm gathered, words turned to action: the mayor of Taipei, Taiwan’s capital, dropped Mr. Chan as an ambassador for the 2009 Summer Deaflympics in Taiwan. The Hong Kong Tourism Board said it would reconsider his role as its most high-profile spokesman. On Facebook, more than 9,700 people threw their weight behind a tongue-in-cheek effort to dispatch Mr. Chan to hypercontrolled North Korea.

“I wouldn’t watch his movies again unless he apologizes,” said Shing Hiu-yi, vice president of the Students’ Union Council at Hong Kong University, one of many groups that have been issuing condemnations and calling for boycotts. “What he said was insulting to the Chinese people.”

On the other hand, few have publicly acknowledged that Mr. Chan’s sentiments, even if “taken out of context,” as his spokesman insisted, are quietly accepted or embraced by many Chinese. The Communist Party has long argued that the people of China are ill suited for Western-style democracy. Even many educated Chinese unabashedly insist that the bulk of their brethren are too unschooled or unsophisticated to participate in matters of politics and governing.

Give the people too long a leash, the thinking goes, and everyone will end up strangled.

Russell Leigh Moses, a Beijing-based analyst of Chinese politics, said that there was a prevailing sentiment in the Chinese-speaking world that too much freedom could only fuel disharmony and instability, viewed as archenemies of China’s drive to put economic development first.

“Jackie Chan said those things because he thinks they are true, and there are major sections of society who couldn’t agree with him more,” Mr. Moses said. “But such thinking is increasingly out of touch with this simmering debate about what the extent of state authority should be.”

Mr. Chan’s remarks provoked some navel-gazing, especially on the Internet. In a subtle subversion, Yan Lieshan, one of China’s best-known writers, suggested that no amount of government control could help a nation lacking manners and morals. Writing in Southern Weekend, a liberal-leaning newspaper in Guangzhou, Mr. Yan bemoaned the neighbors who dump trash on his sidewalk and the cars that speed down his narrow street. “How I wish the relevant authorities would come and enforce the rules, but there is no one to control them,” he wrote. “When you lodge a complaint, no one responds.”

Although he was reared in Hong Kong by parents who fled mainland China, Mr. Chan, 55, has been an unalloyed Chinese patriot. He sang during the closing ceremony of the Beijing Olympics, and he angrily denounced protesters who sought to interrupt the torch relay. During an earlier swat at electoral politics, he called the 2004 presidential elections in Taiwan “the biggest joke in the world.”

Even if he believes that Chinese people need more control, many observers suggested that Mr. Chan was simply seeking to stroke the authoritarian government that recently banned his latest film, “Shinjuku Incident,” because of excessive violence.

Hu Xingdou, an economics professor at the Beijing Institute of Technology, said he was so infuriated by what he described as Mr. Chan’s pandering that he was organizing a boycott of a May 1 concert Mr. Chan had scheduled at the Bird’s Nest in Beijing.

“It’s easy to sacrifice freedom when you’re treated like a V.I.P. or some high-level official every time you come to China,” said Mr. Hu, who is known for his tart criticisms. “I’m sure Jackie Chan has never thought about the suffering of the little people who have no power.”