Managing joint ventures and alliances

40% of joint ventures and strategic alliances result in divorce within five years. Making them work is about going beyond best practice, says Dr Alan Barlow, former CEO international engineering group and former partner at PricewaterhouseCoopers.

The world economy is emerging from its biggest ever global recession. Organisations' approach to growth in the 2010s will be very different. Management’s mantra will be how to optimise what’s already in place, at minimum marginal cost with returns over the near term and at low risk.

However management will also be cautiously taking steps to secure growth opportunities. Some cash rich companies will benefit from bottom fishing with acquisition of under-valued companies.

Joint ventures and strategic alliances
Joint ventures and strategic alliances are a proven tactic for management to secure faster and lower risk growth. The alternatives are to grow organically (100% control but generally slower growth); or with acquisitions (faster growth but demanding on capital and challenging to integrate post-acquisition and secure the forecast benefits).

Benefits
Joint ventures and strategic alliances allow faster growth by accessing markets and technology, and sharing and controlling risks. The main catalysts for the growth in such alliances are: the increasing internationalisation of markets; the growing importance of innovation management (with rapid technology transfer and shorter product lives); and, the increasing costs of R&D (with the complexity of technology and convergence of it).

Downsides
With such benefits, there are also potential downsides. 40% of joint ventures result in divorce within three years – which is not necessarily a sign of failure. But, when joint ventures are not properly managed over their life time, then the exit costs can be huge.

For example, after ten years of operating in China with its local partner, the French company Danone accepted an exit settlement of 21% below its book value as payment by its local partner of $450m for the 51% majority ownership of their joint venture*. The divorce took place because Danone accused its joint venture partner (Wahaha) of setting up at least 96 parallel companies, with production and sales networks, that competed with the joint venture.

Danone also believed its local partner was in breach of confidentiality agreements. While Danone ‘controlled’ the joint venture at board level, the Chinese partner had almost total day-to-day control.

Best practice for success
For success at joint ventures and strategic alliances, there is a strong body of best practice. This includes:

• plan, plan and plan - objectives, operations, resources and contingency
• balance trust with self-interest - avoid being selfish or naïve
• anticipate strategic conflict in advance and continuously - avoid the tendency to gloss over conflict
• establish clear strategic leadership - the vision and purpose of the venture with unambiguous and unbiased authority
• learn flexible management - recognise the evolution of the venture, understand all partners’ intents and roles, and communicate effectively
• allow for and gain from cultural differences - the law of requisite variety, and components of culture
• manage strategic asset transfer - including technology and understanding
• learn from the partner and the venture.

Negotiating framework
These are basic, generic requirements. It is important to go beyond them, particularly in three distinct areas. Firstly, it is vital to prepare your own negotiating framework, that is, what is important to you in and from the joint venture. Similarly, it is exceedingly useful to draft what you believe to be the important considerations for your prospective partner. They are likely to be considerably different to yours, as both of you are contributing and requiring different ‘returns’ from the joint venture. Such a framework and assessment then becomes a tool for comparative assessment of what you are achieving and/or acceding in the negotiation, and that of your prospective partner.

Managing differences in organisation structures and business drivers
It is also increasingly important to understand and manage the differences between the parents’ decision making structures and its business drivers. Both of these two considerations vary tremendously between corporations. Organisation structures for western corporations can, for example, vary from centralised-hierarchical to decentralised-federal, with a wide range of variations.

Likewise the four main causes of growth are: cash, market share, growth and profit. It is impossible to maximise all four concurrently, which is another reason for the generally big differences between the businesses forming a joint venture. Again, a clearer understanding of your partner’s mix will greatly help both successful negotiation and subsequent ongoing operations.

The problems above are exacerbated when, for example, western and Asia Pacific organisations form a joint venture. The difference and the impact of factors affecting their business growth and organisational decision making can be dramatic. These must be managed for success.

Joint ventures and strategic alliances only exist because each party has something the other party wants at a point in time. Hence, in the face of changing market circumstances and as corporate learning takes place over time, divergence between the joint venture partners should not be unexpected.

Mastercourse - Joint ventures and strategic alliances
In recognition of the importance of joint ventures and strategic alliances to businesses, CIMA has introduced a new Mastercourse - Joint ventures and strategic alliances presented by Dr Alan Barlow. Through a series of case studies, the Masterclass delivers best practice and proven frameworks for initial and ongoing negotiation and management of joint ventures and strategic alliances for ensuring greater success.

*Source: Financial Times, 10 November 2009.

Links
Join CIMA Professional Development group on CIMAsphere

New Financial Architecture

From www.weforum.org On January 15, 2009, the World Economic Forum released its initial report from the New Financial Architecture project, “The Future of the Global Financial System: A Near-Term Outlook and Long-Term Scenarios.” The effort was mandated by the World Economic Forum’s investors and financial services communities in January 2008 to explore the driving forces that are shaping the global financial system and how these forces might affect governance and industry structure. Press release Project Steering Committee and executive summary of report (PDF 1.6 MB) Full report “The Future of the Global Financial System” (PDF 11.8 MB) Compendium - Driving Forces (PDF 1.7MB) Key conclusions from phase one report – “The Future of the Global Financial System” The phase one report identifies a near-term industry outlook characterized by an expanded scope for regulatory oversight, back to basics in the banking sector, some restructuring by alternative investment firms and the emergence of a new set of winners and losers. Over the long-term, a range of external forces and critical uncertainties will further shape the industry. In particular, our study found that the pace of power shifts from today’s advanced economies to the emerging world and the degree of international coordination on financial policy are the two most critical uncertainties for the future of the global financial system. The report therefore explores four challenging scenarios. Driving forces and critical uncertainties In phase one of the New Financial Architecture project, the World Economic Forum engaged more than 250 industry practitioners, policy-makers and academics in workshops, interviews and participation in a survey to identify and prioritize the key driving forces expected to shape the future of the global financial system between today and 2020. The engagement process resulted in an inventory of 34 prioritized driving forces (Figure 1). Figure 1: Survey results: prioritization of key driving forces on the future of wholesale financial markets The phase one long-term scenarios were developed using industry facts, figures and forecasts for key underlying driving forces, which are summarized in the following compendium: Key driving forces on the future of the wholesale financial markets Four scenarious for the future of the global financial system Financial regionalism is a world in which post-crisis blame-shifting and the threat of further economic contagion create three major blocs on trade and financial policy, forcing global companies to construct tripartite strategies to operate globally. Fragmented protectionism is a world characterized by division, conflict, currency controls and a race-to-the bottom dynamic that only serves to deepen the long-term effects of the financial crisis. Re-engineered Western-centrism is a highly coordinated and financially homogenous world that has yet to face up to the realities of shifting power and the dangers of regulating for the last crisis rather than the next. Rebalanced multilateralism is a world in which initial barriers to coordination and disagreement over effective risk management approaches are overcome in the context of rapidly shifting geo-economic power. Phase two priorities In phase two of the New Financial Architecture project, the World Economic Forum will work closely with industry stakeholders to delve deeper into the implications of this analysis, with the goal of exploring collaborative strategies and areas of systemic improvement. This will involve an examination of the potential future sources of systemic risk, as well as opportunities to reposition the industry for sustainable, long-term growth in ways that maximize the stability and prosperity of both the financial and real economies. Figure 2: Transition from phase one to phase two The World Economic Forum will be hosting workshops with key stakeholders throughout 2009 January 28 - February 1: Davos-Klosters, Switzerland March (TBC), London, United Kingdom May 14, Dead Sea, Jordan September 10, Dalian, China September (TBC), New York, United States For more information, please contact: Max von Bismarck, Director and Head of Investor Industries, max.vonbismarck@weforum.org Bernd Jan Sikken, Associate Director and Head of Emerging Markets Finance, berndjan.sikken@weforum.org Nicholas Davis, Associate Director, Scenario Planning, nicholas.davis@weforum.org

How to Manage Uncertainty

Managing Uncertainty by Nicholas Davis

A blog about complexity, decision-making, scenario thinking and bias… with the odd comment or two on the global financial crisis

Management Accountants are key players in shared service centres

Management accountants can be crucial participants in shared service centres - if they can adopt an outward facing role at the nexus of information flows. This discussion between a group FD and a management accountant shows how it can happen. By Ian Herbert, lecturer, and Will Seal, professor, at Loughborough University Business School. Read original article.

Much has been written about the power of financial shared service centres (FSSC) - lower costs, clearer focus, better IT, new location, new people, scaleability, standardisation, and so on.

Our aim in this article is to discuss a common frustration from shared services managers that, when things go right, shared services are invisible, but otherwise, they are simply a cost to the business.

Management accountants can be key players in FSSCs, either as managers of the financial shared services or as in-house customers of the FSSC.

How can they adopt an outward, front office, role, at the nexus of organisational information flows and supply chain relationship with divisions, rather than the inward looking, back office, role that accountants might have been traditionally used to?

Niggling directors

The scene is set in the office of a hypothetical group finance director. He is in discussion with financial shared services centre manager Josie Lockhart - a management accountant who has been with the group for 12 years. She worked in the corporate head office until the FSSC was set up three years ago.

GFD: I keep getting niggled about shared services from the divisional directors. They are not saying the service is bad, but that they don’t like paying for it. When I press them, they say that they aren’t sure if they’re getting value for money.

JL: Our problem is that, while everybody accepts the rationale for shared services, I seem to be engaged in a constant PR campaign. I should be spending more time improving the service, but instead I feel more like a sales rep.

GFD: OK - let’s stand back for a moment. What do you think the purpose of the FSSC is? I buy the arguments that it’s saving money, it makes commercial sense, and everyone is doing it, so it can’t be that bad! But, tell me why we should do it? Why don’t we just contract the whole thing out - now, of course, that we understand it?

JL: The FSSC was originally conceived to reduce headcount and increase efficiency through using better IT, business process re-engineering and cutting out duplication between divisions.

The initial revolutionary change developed into a culture of continuous improvement within the FSSC and, as the FSSC became established, the confidence of the business unit management has largely been won.

More recently, we have started to reflect on what else shared services represent. In one sense it has become the glue that binds the company together. If you think for a moment what is difficult about this business it comes down to pleasing customers, and keeping the support of our stakeholders.

Now to put that into perspective, we live in a globalised world and many companies can do what we do technically. But they can’t do it on the scale that we do and in the way that we do it. To put the question the other way around ‘Why don’t our technical staff set up in competition?’ The answer is that they would be denied the oxygen of the support services that they presently rely on (and take for granted)!

GFD: And the bottom line is?

JL: That shared services make a commercial logic beyond the individual tasks that we do. No doubt a third party outsourcing specialist could also do those tasks, but taken together, shared services define and preserve what we do. Moreover, to stakeholders, shared services define how we do it.

Let me explain.

Stakeholders want to be assured that we look after their interests. This means making decisions in their best interests and protecting the value of the company. In essence, this is corporate governance. In other words, accountability, visibility and transparency - all the things that a shared service centre enhances.

By placing the common support services outside of the strategic business units, we are creating visibility of those processes, while the business units focus on their core competencies. We know what’s going on without interfering. Control is improved.

Best of both worlds

GFD: But 20 years ago we had most of the support functions in head office and everybody said ‘That’s bad - it’s all too remote, ivory tower thinking. Now the gurus exhort us to think local, get close to the customer, to choose solutions that are ‘best of breed’ not simply some homogenous global standard. Are you telling me that we’ve moved backwards?

JL: In the past 20 years there has been a trend in both the public and private sectors towards outsourcing and marketisation such that market forces then determine the best price. Running a business becomes a case of satisfying customer needs by packaging a bundle of bought in services around a core expertise. The outsourcing model assumes that the market can’t be wrong, or at least, it’s difficult to criticise the notion of market forces as a control mechanism. The alternative model is not to trust anyone and to do everything in house - that is, within the hierarchy of the firm.

Both approaches have advantages and drawbacks. Indeed, both can result in reduced control by ceding power either to divisional management, who might have their own agendas, or third parties, who might seek to exploit the contract.

Thus the FSSC can be seen as the best of both worlds. An arm’s length, quasi-commercial business model, combined with a customer focus centred on in-house business partnering.

GFD: But I’m now confused. Are you saying that the FSSC is standardising everything or not? We have put a lot of work into becoming more efficient through the ‘joined up company’ initiative. How can we simply have the best of both worlds?

JL: The FSSC has a basic premise of standardisation and there are certain hard points in the system in terms of input/output formats and the monthly reporting time line. But around that we can accommodate a certain amount of customisation around divisional business protocols and commercial expediencies. The FSSC was never intended to be a one size fits all approach - that’s one of the chief advantages over using a third party outsourcer. But neither can it do everything differently.

Bigger picture

GFD: So why then do some divisional managers keep challenging the role of shared services? Why don’t you just explain things to them?

JL: Because the monthly service level agreement monitoring meetings tend to get bogged down in detail. We don’t get the opportunity to step back and appreciate the bigger picture. Often divisional managers complain about things they know we can do nothing about because the policy is set at board level.

GFD: OK, but to be fair to the divisions, shared services need to ensure that they’re doing the right things for people at the right time. This is marketing. We can all be too introspective. A friend of mine recently stayed at a hotel and gave scores of either four or five out of five for all the questions on the room feedback form. However, under ‘any other comments’ she wrote 'I’ll never stay in this hotel again!' The hotel had simply not understood the needs of customers and thus had asked the wrong questions – at least as far as my friend was concerned.

Next there is the day-to-day role of selling - that is, communicating the product offering and getting feedback on your performance. Selling is about getting face to face and sorting the service before it becomes a problem. Service level agreements will always be an ideal. It’s also important to have a close personal understanding between parties.

To summarise, a shared service is not just about operational expediency - it has a real purpose, a mission. It goes beyond simply cutting headcount and being a halfway house to third party outsourcing. It underpins our corporate governance model by operating as a quasi-commercial business with clear SLAs. But it also adds value by uncluttering our frontline divisions. The constant tension between the FSSC and divisional directors is natural. It’s a part of normal business communication and understanding - we could say internal marketing. Without it, services would not be continually improved and would ultimately become misaligned with the business.

Now tell me what your recommendations are?

JL:

1. The overall rationale and value of shared services needs to be defined and articulated more clearly by the board

2. We need to revisit the performance measures now that the FSSC has achieved steady state and separate them into controllable and uncontrollable factors. The SLAs can then focus on the ongoing relationship.

3. We need to improve communication and understanding between the FSSC and business units. We have something to learn from our colleagues in marketing staff and maybe staff secondments between the shared services and the divisions could help to foster deeper understanding in the long term. For example, some companies use shared services as a corporate training ground.

I will write a discussion paper for the next meeting.

GFD: Sounds good. Fancy lunch?

This article is a part of a CIMA funded research project. Ian Herbert and Will Seal would like to hear from anyone who is involved with shared services and is having to rationalise the overall role and relationships with business customers. For a copy of their latest research paper on shared services, email: i.p.herbert@lboro.ac.uk

Links
European Shared Services and Outsourcing Week
Shared services mastercourse

Video Advice on Surviving the Recession

From the Economist

Google has launched a new channel on its YouTube video site, dubbed “Survival of the Fastest”. Among the corporate executives, business-school professors and London mayors providing “bite-sized insights” for managers to help them navigate the downturn is Jason Karaian of CFO Europe. He discusses how the recession will reshape relationships among board members and why companies will focus much more on cash in the years to come.

World Check - Global i Report April 2009

Financial Management in Turbulent Times

INTERNATIONAL FINANCIAL MANAGEMENT ASSOCIATION SUISSE ROMANDE
Geneva Switzerland

http://www.ifma-geneva.org

IFMA in conjunction with CIMA, are pleased to inform you of a full day workshop:

Financial Management in Turbulent Times
28th April 2009 from 8:00 until 17.15

SWISSOTEL METROPOLE HOTEL, 34 Quai du Général Guisan, Geneva.
The event qualifies for CPE credits. Programme attached.

This one-day workshop enables financial managers to focus on the most valuable tasks in business during the downturn. Understand the background to the current economic climate, likely future events and how they will impact upon business and grasp what actions finance departments can take to benefit the business as a whole, and what opportunities are created by the downturn.
___________________________________________________________________________________________________________

Tim Luscombe
Associate Member of the Chartered Institute of Management Accountants (ACMA), management consultant & speaker, presenter of seminars, workshops and training courses on financial management, corporate strategy and the financial challenges faced by organisations during both upswings and downswings in the economy.
With a background in financial and general management in industries from manufacturing to oil & gas distribution, Tim has the ability to distil complex situations and explain them in everyday plain English.

___________________________________________________________________________________________________________

Who will benefit
•Finance managers responsible for teams or departments
•Finance professionals wanting to add value & assist in their strategic decision-making
•Business advisors providing financial services to corporations

___________________________________________________________________________________________________________
What you will gain
•Understanding of the current economic climate, likely future events & their impact on business.
•A toolkit of actions that finance professionals can take to benefit their business as a whole
•View of opportunities created by downturn for smart organisations.
•Working capital management;
•Asset management,
•Forecasting and planning in a down turn.
___________________________________________________________________________________________________________

Admittance is by registration only and limited to 25, first come first served.
Please register by email by 22nd April to signup.ifma@gmail.com.
The event costs CHF 700; CHF 600 for IFMA Members. Payment in advance should be received by 22nd April, failing which we will open the reservation to people on the waiting list.

More management ideas

“The Economist Guide to Management Ideas and Gurus”, by Tim Hindle
(Profile Books; 322 pages; £20).

The guide has the low-down on over 100 of the most influential business-management ideas and more than 50 of the world’s most influential management thinkers. To buy this book, please visit our online shop

China’s Fistful of Dollars

By Geoff Dyer in Beijing

The flotation of Blackstone in June 2007 has already gone down as one of the symbolic events in America’s financial bubble – the end-of-an-era deal when some of Wall Street’s savviest insiders decided to cash out.

Yet the listing of the private equity group could also be the turning point in another chapter of financial history; one that will shape the world that emerges from the current crisis: the moment when China really began to question its deep financial entanglement with the US.

China Investment Corporation, the country’s sovereign wealth fund, had not even begun formally operating when it spent $3bn on a 9.9 per cent stake in the private equity group. With Blackstone’s shares down 84 per cent since flotation, CIC’s new executives have become the target of furious attacks by bloggers who think China was conned. “They are worse than wartime traitors,” says one recent chat-room posting. “Blind worship of the US by so-called ‘experts’,” complains another.

China’s near $2,000bn (£1,380bn, €1,560bn) in reserves, the world’s largest, are often viewed outside the country as a great strength – an insurance policy against economic turbulence. But within China, they are increasingly seen by the public and even some policymakers as something of an albatross – a huge pool of resources not being used at home that will plunge in value if the US dollar collapses. Why, people ask, should such a relatively poor country bankroll such a rich one?

Even at the elite level, the sense of frustration occasionally bubbles over. “We hate you guys,” Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), complained last week on a visit to New York. “Once you start issuing $1-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

As China’s economy slows sharply, the debate on how to manage its reserves is intensifying. Some propose spending the money at home; others want more diversification of investments. But the consensus behind recycling foreign currency into US government securities is coming under attack.

The discussion is hugely important for the Obama administration. At the very least, the Chinese government is likely to become much more forceful in trying to influence US economic policy. “There should be more give and take; some sort of guarantee that our interests will be defended,” says Yu Yongding, a leading economist at the Chinese Academy of Social Sciences. Given the vital role that China has played in financing US deficits, Washington “should at least be a little nicer”, he says.

The explosion in China’s foreign exchange reserves has been one of the more remarkable episodes in recent financial history. The official total is $1,950bn, but Brad Setser, of the Council on Foreign Relations, a New York-based think-tank, who tracks China’s foreign assets, puts the real figure at nearer $2,300bn – equivalent to more than $1,600 for every Chinese citizen.

Below: Beijing’s key role in the american debt mountain

From that total, Mr Setser calculates that about $1,700bn is invested in dollar assets, making the Chinese government by far the largest creditor of the US. Last year, when its economy was under extreme stress, China lent the US more than $400bn – equivalent to more than 10 per cent of Chinese gross domestic product. “Day after day, China is the single biggest buyer of Treasury bonds in the market,” he wrote in a recent report. “Never before has the US relied so heavily on another country’s government for financing.”

MR RENMINBI:

Tough talker

China’s point man for financial issues is Wang Qishan, a former banker and mayor of Beijing who became a vice-premier last year. Tough-talking and blunt, he has a record of pushing though difficult reforms and led a dialogue between China and the US last year.

But like most senior leaders, he rarely talks publicly about the Chinese currency. Analysts say any significant shift in policy either on the exchange rate or on foreign reserves would have to be approved by the nine-member standing committee of the Communist party political bureau.

Within China, a popular backlash against the scale of these investments in the US has been building for some time. Founded in 2007, CIC controls assets equivalent to only about 10 per cent of the total reserves, yet it has become a lightning rod for criticism. Not only has its Blackstone investment gone sour, but CIC also invested $5bn in Morgan Stanley before the bank’s shares slumped. CIC also had money in Reserve Primary Fund, the US money market fund which froze redemptions after the collapse of Lehman Brothers.

A European banker who has been advising CIC on its overseas strategy says: “This is a completely unique situation for Chinese bureaucrats to face – having their every decision debated, analysed and often attacked in the media and on the internet. I get the feeling that they are all shell-shocked.”

Almost every week, a new proposal is launched to find a better way of investing the money. State media reported this week that a fund might be set up using reserves to back overseas investments by oil companies. Such ideas follow a flurry of recent natural-resources deals involving Chinese companies – most notably Chinalco’s planned investment in Rio Tinto – although none of these deals has directly involved foreign exchange reserves.

Another much-touted plan is for China’s finance ministry to “borrow” dollar reserves from the central bank, which would be swapped into local currency and spent on social projects.

Even the body that manages the bulk of the reserves, the State Administration of Foreign Exchange (Safe), admitted last week that it was debating new approaches. “We will actively expand channels and ways to use the foreign exchange reserves. In particular, we will explore how the reserves can better serve domestic economic development,” said Deng Xianhong, deputy director of Safe.

Yet officials recognise that there are still powerful reasons for China to keep buying Treasury bonds. If the authorities want to maintain most of their vast holdings in liquid assets, there are few options that match the depth of the US government bond market. And if China did not want to accumulate so many reserves, it would have to let its currency strengthen – exactly what the government does not want at a time when exports are crumbling.

China’s leaders have made it clear that, in the short-term at least, they will keep supporting US markets. They want to be thought of as responsible global citizens during the crisis. They also know that a strong signal that China was backing away from dollar investments would damage the value of the enormous holdings it already has.

“We believe that to maintain a stable international financial market is in the interests of shoring up market confidence ... and facilitating early recovery of the international markets,” said Wen Jiabao, the Chinese premier, in a recent interview with the Financial Times, although he hinted at a shift in strategy when the crisis was over. As Arthur Kroeber, managing editor of the China Economic Quarterly, puts it: “China’s default policy is to pursue stability at all costs. They do not want to rock the boat when things are unstable.”

Yet if China has few options but to keep buying US Treasuries, it can still try to turn its investments into some sort of leverage. Think-tanks close to the government have been given the task of devising concessions that China can seek in recognition of its bigger role in international economic affairs. Zha Xiaogang, of the Shanghai Institute for International Studies, has published an “economic wish-list”, which includes a relaxation of US restrictions on exports of sophisticated technology to China.

Chinese policymakers are also becoming increasingly critical of US financial policies. Last week’s barbed comments from Mr Luo of CBRC were the most colourful indication of Chinese fears of a dollar crisis (see above right). But there have been other hints from senior leaders. “We hope the US side will ... guarantee the safety of China’s assets and investments in the US,” Wang Qishan, a vice-premier, told Hank Paulson when the former US Treasury secretary visited Beijing in December. Given public scepticism over the reserves, a tougher approach from Beijing would be well-received at home.

One of the ideas being discussed in Beijing is pushing for the International Monetary Fund to have greater authority to issue critical judgments about the health of the US economy and its financial system. Officials also hope to use purchases of US debt as a diplomatic weapon against protectionist measures in the US.

Arguably, China has already shown it can influence US decisions. One of the reasons the Bush administration was forced to recapitalise Fannie Mae and Freddie Mac last year, economists say, was because China had started to sell its bond holdings in the US agencies in favour of Treasuries. “China is beginning to behave like a normal creditor,” says Mr Setser.

Ultimately, China’s influence on US policy faces two big constraints. The dollar’s status as the world’s reserve currency gives the US huge flexibility that other countries with large deficits do not enjoy, much to the frustration of many Chinese officials. China’s unwillingness to let its currency appreciate more also limits its leverage.

But the political debate is likely to be very different. The Sino-US relationship used to involve lectures from Washington about China’s undervalued currency and its closed financial markets. Now they will include Chinese warnings on the risks of inflation in the US and dollar weakness. Fiscal conservatives in the US, worried about the country’s impending borrowing binge, have an unlikely new ally: Beijing.

BEIJING’S KEY ROLE IN THE AMERICAN DEBT MOUNTAIN

The level of Chinese demand for US Treasury paper could play a crucial role in determining the interest rates the US government has to pay for its rapidly growing debt pile.

In the past year, Chinese investors – mainly its central bank – have become the biggest foreign holders of US Treasuries, increasing their holdings 15 per cent last year to nearly $700bn (€545bn, £485bn).

Foreign investors now own about $3,000bn of US Treasuries, or more than half of the amount publicly available. Whether Chinese buying continues to increase this year at the same pace could be an important factor in the outlook for the Treasury market.

In turn, the level of demand from China depends on the health of the US economy. The fewer Chinese goods Americans buy, the fewer dollars China will have to invest in dollar-denominated assets.

“China has become such an important player in US Treasury holdings that it will be critical to the direction of yields whether new money continues to be invested by China in US government debt,” says Alex Li, a strategist at Credit Suisse.

Chinese buying cannot be taken for granted. For example, in November, China sold $9.2bn of Treasury debt, the first month of net selling from the country since June 2008. By December, the last month for which data exist, China was a buyer again – highlighting the potential for swings.

Officially, China remains committed to the US Treasury market. But at a recent conference in New York, Luo Ping, a senior official of the China Banking Regulatory Commission (CBRC), expressed an ambivalence that is shared by senior officials from Saudi Arabia to Japan, also big buyers.

“US Treasuries are the safe haven; it is the only option,” said Mr Luo. “Once you start issuing $1-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Although these remarks were made with a smile, the CBRC quickly sent a note to the foreign press saying that China’s policies remained unchanged.

In addition, analysts are becoming conscious of growing opposition within China to the policy of investing so much wealth in low-yielding dollar assets.

“This is an area of criticism [China] will increasingly be sensitive to as it seeks to reduce its reliance on export-led growth,” said Chris Wood in his weekly publication for CLSA, the regional brokerage.

“It may all be a giant game of chicken. But it cannot be taken for granted that China will be willing to buy US paper for ever.”

See also:

• Opinion: This is not the time to attack China

• G7 softens tone on China

• China urged to boost domestic demand
  

• Short View: Why hopes of decoupling could be premature
  

• Wen looks at fresh Chinese stimulus
  

• China to go on European spending spree
  

This puts it in perspective

More than a billion people are using the internet

THE number of people going online has passed one billion for the first time, according to comScore, an online metrics company. Almost 180m internet users—over one in six of the world's online population—live in China, more than any other country. Until a few months ago America had most web users, but with 163m people online, or over half of its total population, it has reached saturation point. More populous countries such as China, Brazil and India have many more potential users and will eventually overtake those western countries with already high penetration rates. ComScore counts only unique users above the age of 15 and excludes access in internet cafes and via mobile devices.

Early Adoption of IFRS may win investor confidence

A voluntary, early adoption of the International Financial Reporting Standard (IFRS) by Indian companies would help allay concerns of overseas investors, particularly in the wake of the Satyam scam, a senior Infosys executive said.

India has agreed to use IFRS as its accounting standard from fiscal 2011-12.

"It’s very important for India to reiterate commitment to IFRS and ask large companies to adopt it a year earlier. It will send a very strong signal that India stands for the highest standards in the world."

TV Mohandas Pai, Infosys director for HR, education & research and administration.

Read more...

IFRS 'facing a critical year'...

The prospect of a global accounting language is a welcome one, but 2009 will be a critical year for the adoption of International Financial Reporting Standards (IFRS), according to one expert.

Will Rainy, global head of IFRS at Ernst and Young, explained that as an International Accounting Standards Board moratorium on the issuing of new standards has now come to an end, companies using IFRS face a wave of new standards and interpretations.

He said: "With almost 500 pages of new or revised standards and interpretations, companies face a major challenge getting up to speed on and correctly applying the new requirements."

The changes could have an impact on things such as IT systems, merger deals and share-based payment plans as well as accounting, Mr Rainey added.

Yesterday, Fitch Ratings claimed that 2009 will be a pivotal year for accounting. Fair value will be a particular focus, the firm stated.

Will reducing interest rates help?

• by Robert Peston

There is a good deal in Evan Davis's remarks this morning on Today that all the fuss about whether the Bank of England should cut interest rates may be the equivalent of bald men arguing over who should have the comb - and his apology to my old friend Roger Bootle, a follicularly challenged economist, was priceless.

To return to my boring refrain of the past 18 months, the biggest problem for our economy is not the price of money but the availability of it. Banks are contracting the amount they lend. So the question is whether a cut in the Bank of England's policy rate to a historic low would increase the supply of credit.

In normal times, a cut in the Bank Rate would help to boost the flow of new lending. But right now it's not clear that a reduction would have much positive impact

The reason is that the main headache for the banks is that both regulators and markets are forcing them to hold more capital relative to their loans, their assets.

The risks of lending are perceived to have increased. So lenders to banks and also the FSA officials paid to stop banks falling over want them to hold more capital as a cushion against future credit losses.

Capital is scarce. The main source of it right now is us, taxpayers. Banks aren't keen to be nationalised to any greater extent than happened last year. So the route the banks are taking to boost the ratio of their capital to assets is to lend less, to deleverage (to use that ghastly euphemism).

Here's the good news. When interest rates are cut, that provides an opportunity for banks to generate capital. How so?

Well if banks fail to pass on the reduced cost of funds to borrowers, such as companies and those with mortgages, banks' profits increase, which in turn boosts capital (so long as banks don't pay out the profits as dividends). To put it another way, if banks make greater profits from lending that's one of the best incentives for them to lend more.

Here's the less good news. With interest rates so low, banks are under intense and understandable political and populist pressure to maintain interest rates for savers while still passing on the rate cut to borrowers.

In other words, they are under massive pressure to generate reduced profits from lending - which of course serves as a disincentive to lend.

And as the Bank of England's Bank Rate moves closer to zero, the louder is the clamour for the banks to keep rewarding savers while charging next-to-nothing for loans.

Which would squeeze profit margins till the pips squeak.

And there's a further drain on their profit margin as interest rates fall, which is that there's an unstoppable shrinkage in the margin between their average lending rate and the 0% rate banks always pay to the millions of us who keep some of our money in current accounts that never pay interest.

All of which is to say that cutting the Bank Rate now that rates are so low won't cure the disease that's afflicting the economy - the shortage of credit. And there's a risk that cutting rates to almost zero could make the illness worse.

Which is why it won't be too many weeks before we see policies that would be the equivalent of giving a comb to a hairy economist.

These, as I've been saying for some time, would involve taxpayers lending more to businesses and households, the further nationalisation of the credit-creation system.

What's still unclear is what form this nationalisation will take.

It could involve taxpayer guarantees for some bank loans. It could involve extracting loss-making assets or toxic loans from banks, to give the banks greater confidence that their capital won't be eroded. It could involve the state taking direct control of the provision of some credit to the real economy.

There's a massive amount of work on all this going on in the Treasury. And ministers are doing a great deal of agonizing about it all. The results of that agonising matter a great deal more than whatever decision is taken today by the Bank of England on interest rates.

China overtakes Germany

Many Chinese people have not benefited from the boom

The Chinese government has increased its estimate of how much the economy grew during 2007. Read original article.

The revision means China's economy overtook Germany's to become the world's third largest in 2007.

Gross domestic product expanded 13%, up from an earlier estimate of 11.9%, to 25.7 trillion yuan ($3.5 trillion).

The figures underscore China's emergence as an economic superpower, although the country's growth rate is expected to have dropped to 9% in 2008.

China's government is taking measures to try and ease the slowdown.

The government has launched a 4 trillion yuan ($586bn) stimulus package and has promised measures to help struggling exporters and vehicle and steel makers.

Individually, most of China's more than one billion people remain poor.

Germany's GDP per person was $38,800 in 2007 compared with $2,800 in China, which has wide disparities between rich and poor.

China's economy has grown tenfold in the past 30 years.

Merrill Lynch economist Ting Lu predicted that it will overtake Japan as the world's second largest economy in "only three or four years".

Trade credit insurance tightens

• by Robert Peston

An essential element in the government's forthcoming package to stem the pernicious shrinkage of credit in the economy will be measures to compensate for the devastating impact on many companies of the withdrawal of trade credit insurance.

That probably sounds deeply dull and technical. But please read on, because this stuff matters to all of us.

For smaller companies, the importance of trade credit insurance is often that they can't borrow from banks, unless they've insured their sales to corporate customers.

The banks make this stipulation because it absolves them from having to assess the credit-worthiness of their borrowers in detail - because at least part of the credit risk has been laid off to an insurance company.

So the availability of such insurance is literally a matter of life and death for many businesses.

Woolworths is one of the more extreme examples.

When insurers would no longer provide cover to Woolies' suppliers in the autumn, that was the penultimate nail in the coffin of the ailing general retailer - because suppliers insisted that Woolworths pay cash upfront to them for orders, which meant that Woolies was forced to draw on its borrowing facilities, which in turn took the retailer up to the limit of what its bankers were prepared to lend.

And the rest is the sorry story you know: the demise of a historic high street name that was forced to liquidate everything so that the bankers could get their money back.

The point is that trade credit insurance is central to hundreds of billions of pounds in trade and the provision of finance to companies of all sizes.

When it's withdrawn, as has been happening for months, small companies are unable to fulfil valuable orders placed by big companies and those bigger companies lose access to vital supplies.

So a rational decision by insurers to scale back their cover on sales to companies perceived as vulnerable to our economic contraction is rippling through the economy in a damaging way: cover is being withdrawn because we appear to be in a sharp recession, and its withdrawal is making that recession significantly worse.

Part of the problem is that the insurers seem to me to have massively underpriced the cover they provide. Just as banks charged ludicrously low rates of interest during the years of the credit bubble, so the trade credit insurers insured hundreds of billions of pounds of trade for tiny premiums.

According to statistics from the Association of British Insurers, there were £334m of premiums written by the insurers in 2007, covering £282bn of sales by British companies.

Or, to put it another way: insurers were receiving premiums equivalent to the turnover of a medium-size business to protect more than 20% of the output of the entire British economy.

Scary or what?

Those aggregated premiums were equivalent to a minute 0.1% of the sum insured - down from 0.26% in 1995. Which would only make economic sense in a world where there are never recessions.

One illustration that the premium was too low is that claims received by insurers in 2008 are likely to have been rather more than total aggregated gross premiums received in the previous year, extrapolating from trends in the first nine months of the year.

But the insurers have been protecting themselves from the worst losses by simply withdrawing cover for new orders to companies seen as weak. In other words, unlike insurance provided to you and me on our homes, for example, the trade credit insurers have been able to withhold protection as soon as they detected stormy conditions.

To restate the painful paradox: insurance designed to give confidence to companies that they would be paid by corporate customers is being scaled back in a way that's magnifying the woes of businesses big and small.

What's to be done?

Well, in France, a new system is being implemented whereby taxpayers are sharing the insurance risk with private-sector insurers on supplies to viable companies.

And I would expect the Business Department and the Treasury to implement a similar system of co-insurance by taxpayers.

But that can only be a short-term solution.

In the longer term, the supply of finance to small and medium-size businesses has to be overhauled, so that the viability of those businesses is no longer dependent on insurance that's only available when the sun is shining.

New US Travel rules

The Foreign Office is warning that thousands of tourists could be turned away at US airports and ports, as a new online entry system comes into effect.

Read original article here.

Esta Website

From 12 January, visitors from countries which do not need visas will need to fill in an electronic form at least 72 hours before they travel.

Those who have not registered risk being detained and sent back home.

The Foreign Office fears some people do not know about it and critics say it might put people off visiting the US.

The new online registration scheme replaces the green I-94 forms that people on short term visits to the US had to fill in on the flight and hand to customs on arrival.

Security approval

America welcomes nearly 60 million tourists a year and about 50 million of those travel without the formality of a visa.

Britain is one of the countries that signed up to the visa waiver programme, but from Monday, new rules apply.

Electronic applications - known as Esta (Electronic System for Travel Authorisation) - have to be approved by the US Department of Homeland Security.

The Foreign Office is concerned that people who may not have heard of Esta and booked their trip before enforcement of the new rule may be caught out FO spokesperson

Once an application is approved, it will be valid for all visits to the US for a two-year period.

The US Embassy in London said so far 99.6% of the applications have been approved - most within four seconds.

Michael Restovich, from the US Department of Homeland Security, said: "We want to keep the bad people out. We don't want to restrict commerce, we don't want to restrict tourism.

"We want to make sure the people getting on that aircraft or that sea vessel are clear to come to the United States and are risk-free."

The Foreign Office said it was "particularly concerned that people who may not have heard of Esta and booked their trip before enforcement of the new rule may be caught out".

Andrew Spice, of Post Office Travel Services, said: "Problems may also occur if UK tourists travel to the US via another country - like Canada or the Caribbean Islands - and don't realise they will need the Esta to gain entry."

Neal Weston from the British Air Transport Association, which represents UK-registered airlines, such as British Airways and Virgin Atlantic, said its members who fly to the US were fully prepared for the new system.

No charge

Abta - the Travel Association - believes it will help speed up the immigration process.

Frances Tuke, from Abta, said it had been reminding members about the Esta deadline for several months.

"We would advise people thinking about going to the US to fill in Esta before booking or as soon as they book because if it is rejected, it can take up to six weeks to get an appointment at the US embassy for a visa," she said.

She recalled British singer Yusuf Islam, formerly known as Cat Stevens, who was sent back to London from the US after his name was found on a "watchlist" in 2004, and said the new system should help prevent such incidents.

With an extra layer of intrusive bureaucracy, I think a lot of people will be deterred, if not simply confused Travel expert Simon Calder

Esta is free but she warned that searches for Esta online brought up numerous websites offering to process the application in return for personal details and a fee.

Critics say it will be an inconvenience for business travellers and could prove a disincentive to people who like to travel spontaneously and book last-minute weekend breaks to US cities.

Simon Calder, travel editor of the Independent, said: "There are many, many draws the United States has but with an extra layer of very intrusive bureaucracy, I think a lot of people will be deterred, if not simply confused."

The Credit crunch in Numbers

More or Less BBC Radio 4 and iPlayer Subscribe to the podcast

As the downturn takes hold, BBC Radio 4's More or Less programme looks at the maths behind the credit crunch. Read original article.

Since 2007, presenter and economist Tim Harford has been exploring and explaining the numbers which have contributed to - and have characterised - the global economic downturn.

He met the mathematicians at the heart of the City - and found out why some say they are to blame for the financial crisis.

He uncovered the flaws of the bankers' bonus system, and discovered a mathematical error which might have led the banks into trouble.

He interviewed quantitative finance expert Paul Wilmott and The Financial Times journalist Gillian Tett.

And he met the guardians of what could be the financial world's most important number.

You can listen to all of Tim's reports here.

PAUL WILMOTT, QUANTITATIVE FINANCE EXPERT

Paul Wilmott is a lecturer in financial mathematics and runs the profession's most popular website.

He is a fan of quantitative finance - but he thinks that its misuse has played a part in creating the current banking crisis.

In November 2007, More or Less asked whether the financial mathematicians known as "quants" - short for quantitative analysts - were to blame for what was then being termed "the credit squeeze".

WHO ARE THE QUANTS?

Paul Wilmott discussed his concerns with Professor William Perraudin of the Tanaka Business School at Imperial College London.

Tim Harford chaired the discussion.

The risks of risk management

In December 2008, Tim invited Paul Wilmott back to talk about the problems in more detail.

Banks and hedge funds rely on highly-paid mathematicians and economists - "quants" - to evaluate risk.

So why did they not they see the credit crunch coming?

Paul Wilmott says some mathematicians have a tendency to get fixated on the numbers, failing to think about the big picture.

RISKY RISK MANAGEMENT

He posed a scenario.

Imagine you are at a magic show. The magician takes an ordinary pack of 52 playing cards, and gives it to a man in the audience to shuffle. He then asks a volunteer to think of a card. "The ace of spades," she replies.

The magician turns to the man with the pack of cards and removes a single card from the deck. What is the probability that the card is the ace of spaces?

To hear the answer listen to the interview, or read Paul Wilmott's article on the risks of risk management.

A fundamental mathematical error

Paul Wilmott says an additional cause of the credit crunch is that people simply got their sums wrong.

GETTING THE SUMS WRONG

He told More or Less these errors might have contributed to the mispricing of financial derivatives, and thus to the travails of the banks, the credit crunch, and the economic downturn.

The maths of the bonus system

Many traders were paid bonuses if they made money.

And yet, collectively, their trades bankrupted some banks and nearly bankrupted many more.

THE TRADER'S DILEMMA

Why did traders, paid for performance, all make the same mistake at the same time?

Paul Wilmott set out the trader's dilemma.

AT HOME WITH THE QUANTS

In October 2007, Tim Harford got a glimpse into the world of the quants.

The most successful of these talented mathematicians will come up with mathematical formulae that make them and their bank or hedge fund employers millions of pounds per year.

They are highly secretive about their work, not wanting others to know the details of their systems.

MEET THE QUANTS

But one of them, William Hooper, invited Tim Harford into his beautiful London home.

Read more about quantitative analysts

A trader's apology

William Hooper has since left the world of finance to start his own business.

He has been reflecting on the global economic problems and the question of who is to blame - read A trader's apology.

GILLIAN TETT, THE FINANCIAL TIMES

Gillian Tett is an assistant editor of the Financial Times and oversees the global coverage of the financial markets.

Five years ago, she was shocked to discover what she says could best be described as an iceberg in the middle of the City.

The role of the media

She was studying media coverage of the City and began to realise journalists were doing lots of stories on stocks and shares, mergers and acquisitions, but nothing on what had become a much bigger part of finance - the credit and derivative markets.

She says business journalists were simply not covering the City in a representative way.

THE FINANCIAL ICEBERG

You had a small part of the financial system bobbing above the water but a vast shadowy mass of activity pretty much hidden beneath the waves.

And hidden not just from ordinary people, but hidden from politicians, from many regulators, and unfortunately from much of the media too.

UNDERSTANDING LIBOR

The London Interbank Offered Rate - LIBOR - has been dubbed the financial world's most important number.

Published each day in the UK, it is the rate at which the banks lend to each other and it influences over $150 trillion (£100 trillion) of funds worldwide.

The Libor number is compiled by putting together the estimates of the cost of borrowing from at least eight banks, and then discarding the highest and lowest of the sample to leave an average rate which then becomes the daily 'Libor Fix'.

LIBOR

But the figure's validity is being questioned, with critics dubbing it "the rate at which banks won't lend".

Tim Harford was granted exclusive access to the operations centre where the daily rate is compiled.

More or Less is broadcast on BBC Radio 4. To find out more, visit the programme website, or subscribe to the More or Lesspodcast.