“No hard landing” promised as China unveils 5-year economic growth plan

BY Fraser Tennant

A 2016 growth target of between 6.5 and 7 percent and a major reduction in unemployment are the main aims of China’s new Five-Year Plan – the achievement of which the government hopes will help address the country’s deepening economic problems.

Unveiled by prime minister Li Keqiang during the opening of China's 12-day annual national parliament on 5 March, the Five-Year Plan (the country’s thirteenth) is essentially a roadmap for the nation’s development from 2016 to 2020 and will be a “tough battle” to achieve, said Mr Keqiang, requiring China to face “more and greater difficulties".

Further key components of the Plan include the requirement for China to cap its energy consumption (for the first time ever), tackle rising inflation, and introduce an effective job creation programme. However, when announcing the Plan at the opening session of the legislature, the prime minister was noticeably less forthcoming with details of how the targets contained in the Five-Year-Plan will actually be met.

Also in the Chinese government’s sights is the restructuring of inefficient industries, in particular dealing with zombie companies (known as Jiangshi in China) – organisations that are unable to pay their bills and are reliant on government assistance to meet their financial obligations.

Perhaps inevitably, there has been much criticism of the Plan from many quarters with economists and investors raising concerns that the fiscal target outlined (a fiscal deficit equivalent to 3 percent of GDP) is not ‘aggressive’ enough. Critics have also said that the national growth target itself may cause problems, as under pressure central government officials may be tempted to obscure or even falsify data.  

In response, Xu Shaoshi, head of the National Development and Reform Commission (NDRC), said that the government wanted to improve the efficiency of its investments with a strategy of more targeted spending being adopted. "China will absolutely not experience a hard landing," said Mr Shaoshi at the opening of parliament. “These predictions of a hard landing are destined to come to nothing."

With China being the only major world economy (the second biggest) to announce an annual growth target, the pressure is now on the Chinese government to deliver its extensive economic reform programme to guarantee sustainable growth.

News: Economic reforms are crucial if China is to meet its growth target

International lenders expected in Greece to conclude bailout review

BY Fraser Tennant

Beleaguered Greek prime minister Alexis Tspiras has announced that he expects international lenders to return to Greece soon to conclude a review of how the country has complied with reforms agreed as part of a eurozone bailout.

The bailout, signed up to by Greece in August 2015, was worth in the region of €86bn (£67.2bn) and allowed the country to stay within the eurozone as well as avoiding the much-discussed and much-feared ‘Grexit'.

During an interview with Greece’s Star TV channel earlier this week, Mr Tspiras (who possesses a small parliamentary majority) stated his belief that official lenders will “return in the first 10 days of March” to conclude the review so that he can begin debt relief talks designed to assuage the Greek public and encourage investment.

The plans of the prime minister’s left-wing Syriza party have been frustrated thus far by the reluctance of lenders to return due to disagreements over the likely size of Greece’s fiscal shortfall by 2018. The Greek government says 1 percent of GDP, EU lenders say 3 percent and the International Monetary Fund (IMF) forecasts a gap of at least 4.5 percent.

Calling on the likes of the IMF to “return to realism”, Mr Tspiras added that there had to be agreement among lenders before Greece could continue with its recovery programme, which includes tackling the crippling effects of corporate tax avoidance and widespread corruption.

"The Greek government is implementing the fiscal consolidation program abiding by its commitment,” said Dimitris Papadimoulis, vice president of the European Parliament. “It is putting forth a broad reform agenda, including media, public administration and pension reform, wrapping up the chaos previous governments left behind after 30 years of corruption and clientelism. In this respect, the fight against tax evasion is crucial and it is evolving dynamically.

“The firm determination of the Greek government to pull Greece outside the financial struggle is proved by a specific program destined to provide millions of citizens with health coverage and basic safety nets. This is of paramount importance for the government and one of the major, critical aspects for bringing back, step by step, social justice.

“Following Greece's very important progress, the institutions should also implement what has been agreed and conclude with the first review of the program as soon as possible.”  

The Greek MEP also stated that the conclusion of the bailout review is vital so that sky-rocketing unemployment can be addressed and growth brought back, allowing Greece to leave behind one of the hardest periods in its history.

News: Greek PM says lenders could return for bailout review in early March

Structural reform needed now – OECD

BY Richard Summerfield

Though we are eight years removed from the last financial crisis, growth in the global economy has remained patchy at best. Improvements in advanced economies have remained subdued and the world’s emerging economies, once engines for growth, have also begun to splutter and fail. Global trade remains sluggish and overall investment has been weak. The stuttering Chinese economy in particular has hindered global growth over the last year or so, increasing global volatility.

With global growth prospects likely to remain cloudy for some time, the Organisation for Economic Cooperation and Development (OECD) has called upon the world’s 20 biggest economies to rise to the challenge and act quickly in order to improve growth. According to a recent report from the OECD – the 2016 Going for Growth Interim Report – the G20 nations must improve the pace of structural reform to boost global economic growth.

As it stands, the G20 countries will likely miss their 2014 pledge to boost their combined GDP by 2 percent by 2018. “According to the joint assessment by the International Monetary Fund, OECD and World Bank…more effort is needed for the full and timely implementation that would be needed to meet the GDP objective", says the report.

Two years ago the countries had promised to implement around 800 reforms in total; however delivery of those reforms to date has been substandard, according to the OECD.

Though some progress has been made in terms of recent structural reform, countries must do more to quicken the pace of change. "Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment," the OECD says. "The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation."

According to the report, the pace of reform was generally higher in Southern European countries like Italy and Spain, than among Northern European countries. Outside Europe, the reform leaders were Japan, China, India and Mexico.

The OECD has called upon the G20 nations to improve their policy coordination moving forward, as policy synergies will help stimulate growth.

Report: Going for Growth Interim Report

The Internet of Threats

BY Richard Summerfield

Much has been made of the Internet of Things (IoT) over the last few years. Heralded as the dawning of a new technological era, or perhaps the next industrial revolution, the IoT will see smart devices of all shapes and sizes combine to create a network of connected devices communicating and sharing vast quantities of highly valuable data.

Although the technology is still in something of a nascent state, it is slowly beginning to live up to its reputation. Smart or connected devices are becoming more common, and generating considerable amounts of data. The IoT will, and is, changing the way firms do business, making new capabilities possible and introducing efficiencies to companies to help them remain competitive in an increasingly crowded marketplace.

For many companies, these predicted data flows are seemingly too good an opportunity to pass up, and firms are rushing headlong into the burgeoning IoT space. According to a report from AT&T, 'Exploring IoT Security', which surveyed 500 companies around the world with more than 1000 employees, 85 percent of organisations are exploring the prospect of implementing connected devices across their enterprises.

However, the scramble to gain a part of the IoT market is not without risks; indeed, for companies hoping to incorporate the IoT into their wider operations, the proliferation of connected devices will expose their businesses to considerable cyber security risks. AT&T’s data suggests that just 10 percent of the firms surveyed are confident in the security of connected devices. With more and more companies marrying their products with connected technology, the importance of effective and efficient cyber security is obvious. According to AT&T, by 2020 there will be around 50 billion smart devices ‘in the wild’. With smart technology finding its way into everything from home heating systems to cars, organisations cannot afford to neglect their cyber security obligations.

Given that the cost of a cyber attack can run into the millions, organisations must be prepared - yet data suggests that many companies are still scrambling to get their houses in order. Alarmingly, the report notes that only 47 percent of respondents say their organisations analyse connected device security logs and alerts more than once a day. Furthermore, only 14 percent of companies have instituted a formal auditing process to help understand whether their devices are secure and how many devices they have; only 17 percent of companies involve their boards in decision-making around IoT security.Obviously, improvement is needed. 

Efforts are underway to improve cyber security provisions. The report recommends that companies: (i) assess their risk; (ii) secure both information and devices; (iii) align their organisation and governance for IoT; and (iv) define their legal and regulatory issues.

Clearly, these measures would be a good starting point for any firm; however, more must be done - and quickly, if the IoT is to fulfil its potential as a true technological game changer.

Report: Exploring IoT Security

Big banks take multi-billion dollar hit after 9 percent FICC revenue drop in 2015

BY Fraser Tennant

Big banks took a multi-billion dollar hit last year with a new snapshot of earnings and volumes revealing that revenue from fixed income, currencies and commodities (FICC) trading was down 9 percent in 2015 for the world’s 12 largest investment banks.

In its ‘IB Index – FY15’ report published this week, which analyses the public disclosures of the aforementioned banks, Coalition confirms that FICC trading revenue was $69.9bn for FY2015 compared to $76.7bn in FY2014 (the figure was $109.1bn in 2010).

Much of this decline, according to the report, can be attributed to the impact of regulatory changes (Basel III) which require banks to hold higher levels of capital and liquidity. In addition, trends such as high litigation costs and volatile markets have led to job losses and business line exits which have substantially impacted the banks’ FICC activities (usually one of the most profitable areas).

The Coalition analysis tracks the public disclosures of Bank of America Merrill Lynch; Barclays; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; HSBC; JPMorgan; Morgan Stanley; Societe Generale; and UBS.

Additional key findings in the report include: (i) commodities revenues dropped by 18 percent, due mainly to slow business in metals and investor products; (ii) investment banking divisions (IBD) saw a 5 percent fall in revenue to $40.5bn due to a surge in M&A activity being offset by declines in equity and debt capital markets activity; (iii) return on equity (RoE) declined slightly to 9.2 percent from 9.3 percent, due to both increased capital requirements and weak performance; and (iv) poor trading results and low client activity in the second half of 2015 contributed to an overall 3 percent decline (to $160.2bn) compared to a year ago in investment banking revenue across the world's major banks.

However, in contrast to the above litany of gloom, Coalition reported that the banks' equity businesses - including cash equities, equity derivatives, prime services and futures and options – did well in 2015, with revenue rising 10 percent to $49.8bn.

“Poor trading results and low client activity in 2H led to a marginal decline in IB revenues for FY15”, said Coalition in summation. “Equities outperformed at the start of the year, but Fixed Income struggled throughout, especially in Credit, Securitisation and Commodity related activities. IBD declined as improvements in M&A were more than offset by declines in ECM and DCM volumes.”

Report: Coalition IB Index – FY15 February 2016