Thursday, July 29, 2010


US is in Danger of Japan-Style Financial Crisis
Shared by Shan Saeed

This is a dramatic news that would send ripples in the financial markets. According to St. Louis Federal Reserve Bank President James Bullard said on Thursday he is worried about the risks the United States could fall into a Japan-style quagmire of falling prices and investment that is hard to escape.

What could be the best strategy in this scenario. Federal Reserve should consider buying more Treasury securities, instead of promising an extended period of low rates to support recovery, should inflation drift lower.

The FOMC's extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome. With a little bit weaker numbers on the economy and inflation a little bit low, people are starting to talk about the possibility of a Japanese-style outcome for the U.S.

The Fed's long-running promise to hold benchmark rates exceptionally low for an extended period — which is aimed at spurring growth — could lead businesses and consumers to anticipate slight deflation ahead. Deflation is much more dangerous than inflation with depressed confidence among consumers.

Strategically speaking, that isn't what the government is trying to do with the extended period language, what it is trying to do is encourage output growth and production, and through that channel, get inflation to move higher. Moreover, to view the most likely course for the U.S. economy as a gradual recovery and that more easing of financial conditions will not be necessary. FED should be prepared for further actions if unexpected shocks materialize. The language depicts lot of issues and consumers feel depressed and uncertain about the future.

Fed's strategy to stimulate debate about the effectiveness of the extended period language in achieving its goal of restoring stronger economic growth. Fed's lowered borrowing costs to near zero in December of 2008 and has already flooded the economy with more than $1.7 trillion of credit to boost growth after a painful recession.

The recovery has stumbled in recent weeks, and Fed Chairman Ben Bernanke has said the economy faces unusually uncertain prospects. The Fed could take further steps to bolster growth if needed.

Wednesday, July 28, 2010


Sovereign default strategic choice in Europe: Bail out Vs restructuring vs. Debt Moratorium

By Shan Saeed

I was sitting in Chicago on Monday i.e.15th September 2008 studying at Uni. Of Chicago, Booth School of Business for my second MBA when the news spread about Lehman Brothers going down and on the same day AIG was exploring options to get $75 Billion credit line from Goldman Sachs and JP Morgan for bail out. Bail out is just like giving money to an addicted person to get more addiction. Either he straightens up or he dies. I shared my analogy with Prof Gary Becker, Nobel Laureate of economics in 1992 and he nodded and said yes, you are correct. Europe’s financial mess is perhaps the worst in the last 5 decades. Politician are creating fear that bail out is the only solution to the current problem. These high economics cost bail out transactions are drilled down the throats of tax-payers who suffer the most by bolstering the politician views. The current cost would touch $2 trillion with other European countries getting their fiscal structural adjustment in order to eschew sovereign risk default. The best game plan for the current crisis is restructuring the debt due in order to get a breathing space for these southern European countries.

The bail out phenomenon was started by Henry Paulson—Treasury Secretary after the demise of Lehman with rescue package prepared on war-footing for AIG, Citibank, JP Morgan and Merrill Lynch. The European plagiarized in a more modern fashion with key decision makers involved to save German and French banks to cover their book losses since they took huge exposure in the Greece market. The total exposure of German and French banks was amounting to Euro 28 billion and Euro 50 billion respectively. This accounted for 71% of the total debt of Greece when the trouble started getting out of roof and bond yields going upwards…

Was bail out the only solution to the Greece problem? When politician artfully planted a scenario as a choice between bail-out and catastrophe? Any rational person would prefer to avoid the disaster with an uncontrollable default consequences thus becoming painful for the nation. But there was an excellent option of restructuring the debt which was a feasible option in case of default. Greece would have been much stronger internally and externally had it gone for restructuring of its sovereign debt rather than for bailout in this case…..

If we look at the case of Russia when it defaulted in 1998 and how it has turned around in 12 years time is a success story for all to emulate for economic growth. Russia moved into the market based economic system in 1991. With strong economic reforms, privatization and macro-economics stability brought about due to prudent approach to the economy. It achieved noticeable achievement in 6-7 years time and then the tide went against Russia in 1998, led to series of default and pressure on Russian rubble. On 17th August 1998, Russia was forced to default on its domestic debt,, government devalued the currency and declared moratorium on payment to foreign creditors. Stock market went down by 39% in valuation and bond market weakened to send investors in a panicky situation. Lending rates were trading at 30%, banks risk went high, bonds yields went up and revenue stream was low as oil was trading at $11/barrel in the international market. How did it Russia come out of this situation successfully even today?

Russia restructured its debt and paid off in 3 years time to IMF. This is a pure case of financial restructuring that led to its turn-around. Russia got the oil price advantage windfall and has managed to weather the storm from the European financial mess. Its clearly illustrates one point that debt restructuring is a much better choice than bail out which devours the tax payers money and create moral hazard. Russia is in much better shape now as compare to eastern European countries or Baltic region. But countries in recent crisis did not adopt restructuring option but instead went for bail out because politicians in these countries created fear and apprehension among the masses that bail out was the only option left for people to deliberate upon to get the countries out of structural flawed financial architecture.

How does restructuring work and has better chance to make a smooth transition for the economy without costing the tax payers a single penny?
According to Professor Luigi Zingales at Uni. Of Chicago, Booth School of Buisness, USA, Here’s how it could work. The first thing Greece needs to restructure its public finances is time. So the initial step of a restructuring plan would be a forced extension of debt maturity by three years. This extension, amounting to a partial default, would saddle holders of debt issued by the Greek government with a 15 to 20 percent loss. Temporarily liberated from the need to refinance its debt, Greece would need only the money to finance its budget deficit, which it must bring down dramatically in the next few years. Any credible fiscal policy plan must shrink the budget deficit to €20 billion this year and €5 billion the following year. The International Monetary Fund would be in the best position to extend the €25 billion in loans to cover these deficits. The IMF could make the loans conditional on these deficit cuts’ being reached and could also make the loans senior to all the existing debt—as debtors in financing lending do in U.S. bankruptcy law—which would keep the funds from propping up the existing debt.
Such a plan would admittedly be risky because of the impact it could have on banks in Greece. French and German banks would not be affected in a major way; most of the Greek debt that the two countries hold is owned by insurance companies and mutual funds, which can absorb the shock, rather than by banks, which hold just €18 billion of debt in France and €19 billion in Germany. Thus the worst-case 20 percent loss that Greece’s partial default could impose on debt holders would represent €4 billion for each country’s banks—a significant blow, but not enough to imperil the entire European banking system. The Greek situation is different. According to Barclays’s estimates, Greek banks hold €42 billion of Greek debt. There, a 20 percent loss would equal €8 billion, potentially too much to bear. The failure of Greek banks could then easily spread a panic throughout Europe.
So a restructuring plan would require an IMF intervention in the Greek banking system: not a bailout, but a temporary takeover of insolvent banks. The IMF could act as a receiver, guaranteeing the banks’ systemic obligations [deposits and interbank debt] while wiping out shareholders and also, to the extent the losses require, long-term debt holders. Then it could temporarily recapitalize these banks and sell their shares in the marketplace as soon as the market stabilized. This part of the plan would not require more than €8 billion, and the IMF would be likely to recover all of that (and more) at the time the banks were sold. So the total amount of funds required would not exceed €33 billion, an amount that the IMF could feasibly cover on its own.
This strategic restructuring plan would cost European taxpayers nothing while preserving marketplace incentives. The current bailout plan, by contrast, rewards banks and individuals who invested in risky Greek debt, contributing to moral hazard and distorting future market signals. But the restructuring that I propose would never be discussed in Europe, let alone approved. In Paris and Frankfurt, as in Washington, the will of the banks matters more than the will of the people.

Writer is MBA from Uni. Of Chicago, Booth School of Business, USA in March-2009. And MBA from IBA, Karachi in May-1998.

These views and analyzes are done by Shan Saeed. Financial markets are changing every second. Clients and investors are advised to perform their own Due Diligence before investment. Market risk and country political risk are applicable with each countries. Sovereign debt default risk is with all countries. All investment related research /articles are based on the authors personal views…I strongly advise investors/people/ institutional clients/pensioners to follow their own investment strategy according to their risk appetite and profile.

Tuesday, July 27, 2010

277 will go bankrupt this year in USA----By Shan Saeed

277 banks will go bankrupt in 2010 in USA

By Shan SAEED—Economist

It’s so surprising and total contradiction that banks will continue to go down and US economy will recover. But the question is how? Recovery figures are questionable, economy looks weak and tax rates are improving up gradually [health care bill]. US banking system are following the Canadian banking model of consolidation. Few banks act like oligopoly, safe and peace of mind for clients.

Let me share some statistics
Year Banks went bust in USA
2007 7
2008 25
2009 140
2010 277 [ Expected]

U.S. bank failures reached 103 so far in 2010 on Friday i.e. 23rd July regulators seized seven small banks, a faster pace of closures than last year when the century mark was not reached until October.

Bank failures are expected to peak in the 3rd quarter-2010, with the industry slowly recovering from large portfolios of bad loans, many tied to commercial real estate, slow credit growth and fragile economy.

Banks that became history were Sterling Bank of Lantana, Florida; Crescent Bank and Trust Company of Jasper, Georgia; Williamsburg First National Bank of Kingstree, South Carolina; Thunder Bank of Sylvan Grove, Kansas; Community Security Bank of New Prague, Minnesota; SouthwestUSA Bank of Las Vegas, Nevada and Home Valley Bank of Cave Junction, Oregon, according to the Federal Deposit Insurance Corp.

The largest of the seven banks was Crescent Bank and Trust with 11 branches and about $1.01 billion in total assets and $965.7 million in total deposits. The smallest was Thunder Bank with just two branches and $32.6 million in total assets and $28.5 million in deposits.

The FDIC estimated the seven failures would add about $531 million to the tab for its deposit insurance fund.
Latest update on the overall health of the bank industry in USA according to the industry experts, saying they see little improvements in the economy and threat of sovereign debt on bonds are still lurking.

It clearly illustrates that clients whose individual accounts are insured up to $250,000, updated its estimates of the cost of bank failures, now expecting a $100 billion hit to its insurance fund from 2010 through 2014. The recovery of the community bank industry has lagged the bounce back of Wall Street and the healing in the overall economy.


These views and analyzes are done by Shan Saeed. Financial markets are changing every second. Clients and investors are advised to perform their own Due Diligence before investment. All investment related research /articles are based on the authors personal views…I strongly advise investors/people/ institutional clients/pensioners to follow their own investment strategy according your risk appetite and profile.

Monday, July 26, 2010

Investment Strategies for Smart Investors By Shan Saeed


By Shan Saeed ON 26TH July 2010

Just a short piece of advice for smart and savvy investors with global risk appetite as we navigate through turbulent times to save our future wealth with strategic insights of the financial markets and global economy.


Buy Gold/ Silver physical or ETF OR Invest in Gold mining companies. Invest in PLATINUM, PALLADIUM, COFFEE, OIL, NATURAL GAS in Commodities

If you want insurance of your wealth buy commodities since they will save you in times of uncertainty.


Invest in Coffee, Sugar, Rice, wheat and Cocoa…Population is growing.. there are supplies shortage, bad weather and ever increasing demand will keep these commodities trend bullish…..


In Equities -----invest in Apple, Google, Water Companies like Nestle and Coke...FMCG companies, P&G and Unilever, GDF---Gas company in France....what else and don’t forget Food, Biotech companies which are involved in stem cells and nanotechnology…..


Invest in energy STOCK and RENEWABLE ENERGY PROJECT WHICH ARE BACKED BY THE GOVERNMENT ---LIKE SOLAR, WIND AND BIOMASS...Companies that have government backing for investment will never go down....


Invest in telecoms companies like AT&T, Vodafone, Orange, Spirit, Orascom, Baidu in China


Globally land and real estate prices are down by 40% in dollar terms. Prices are at ¼ of the prices of 2007 and same with real estate. Real estate market is still depressed and will remain for the next 2- years.


Buy Canadian Dollar, Aussie Dollar, Swiss Fran, Swedish Krone or Chinese YUAN

Happy Investment and will catch you later..Thank you and have a blessed day!!!

Shan Saeed
skype: shan-saeed

Friday, July 23, 2010

Global Economy in crisis again

Global economy will be in crisis again.Get ready for the new financial turmoil…..

By Shan Saeed----Economist
Uni of Chicago Graduated

Financial markets will remain volatile for the next 2-years. People, investors and my clients are curious to know what the main reason for this new financial mess.
The main driver to the economy is confidence, which is lacking right now….American consumers are not spending infact they have started to save more…..The danger of deflation is more serious than inflation....Health care bill is a form of tax. I have been sharing this with all my valued clients. I dont rule out the possibility of double dip recession hitting US very soon. U.S. Consumer Credit has declined by $167Bn in the last 19 months. Consumer spending comprises 70% of U.S. GDP. The recovery figures are questionable. It will take 4/5 years for US to recover from the current financial mess. Housing slump atleast 10% will drag the economy further down.The world largest economy is in worse situation than 1930s' the hstory repeating itself?

Global Bank Crisis

Global banks face $4.7 trillion credit squeeze and another crisis is around the corner...Banks across the globe had to raise trillions of dollars in capital as a result of the financial crisis and now the bill for that borrowing is coming due.

It’s not a pretty picture. Banks must repay or roll over $4.7 trillion of debt to bondholders and other creditors through 2012, according to the Bank for International Settlements. Its huge. Its just like a train coming at you and you are not going to stop it by standing in its way!!!!

No one seems to be talking about it that much. However, it’s of first-order importance for lending and output. Of the $4.7 trillion total, European banks owe $2.7 trillion, and U.S. banks $2.0 trillion.

The situation is more precarious in Europe, not only because of the larger number, but also because the sovereign debt crisis is hitting Europe harder than the United States.

Banks that need to roll over their loans and bonds will be competing with their own governments, which also have huge borrowing needs. That could cause a widespread credit crunch, making it even more difficult for consumers and businesses to borrow. European banks may face an added burden, as the stress tests they’re now undergoing could force them to raise still more capital.

Central Banks

Central bank globally are creating another asset bubble by keeping low interest rates…..There are several dangers from low-interest rates…This includes lopsided balance sheets, misallocation of capital and workers resulting in distortion, excessive risk taking and destabilizing surges in the capital flows in the financial markets. They will continue with Quantitative easing policy, zero interest rates, and buying of government debt will remain on cards for very long……Keeping low interest rates with weak fiscal support will continue as natural policy mix moving forward.

US economy is in real mess…its running a deficit of $14 trillion this year and might touch $20 trillion by 2014….Is this the end of the powerful country..Its quite premature to say at this point of time….We might witness dollar consolidation in this phase as Euro is structural flawed since its beginning. But it is possible that US Dollar can get weaker in the near future and thus leading into currency crisis. Currency crisis are always painful for any economy. Look at euro , it was trading at 1.51 in November 2009 and hit 1.19 in June this year in 2010….It lost more than 19% of its value in 7 months……Depressing !!!!Euro might touch parity next year in March -2011…..UK will remain the sick child of Europe for the next 5 years……Europe’s outlook remain uncertain with PIGS financial austerity plans……It won’t work in the long run….

Strategies for investing in Stable Currencies
Investors are looking for stable currencies with bullish outlook..In my humble opinion, Canadian dollar, Aussie dollar, Swiss franc and Chinese Yuan will navigate through these currency crisis and uncertain financial markets with great ease………….

Real Assets
Investors are looking for real assets in times of uncertainty, chaos, risk and unpredictable behavior of the government…The name is Gold and Silver, which are the real assets as we navigate through turbulent times ahead. What are central banks doing globally? .Read this on……Central banks are using their gold supply as collateral to borrow money from each other since they don’t trust other banks balance sheets…it is so risky now!!!!!According to Wall Street Journal, they are technically engaging in swaps with the BIS. The banks give the BIS gold in exchange for cash and agree to buy back the gold at a later date….This is called repo and reverse repo..Securities pledges are not sufficient anymore since they have lost confidence among major players…..
The banks borrowed a record $14 billion in the first three months of this year from the BIS, giving it 349 metric tons of gold in return, according to the latest BIS data I have gathered.
And figures indicate the banks swapped another 33 tons of gold in April 2010. Central banks are eager to buttress their cash supply because of the spreading sovereign debt crisis. Liquidity tightened in the financial system as Europe’s debt woes unfolded. Central bank moves call into question gold’s status as a safe haven investment. Originally sovereign financial troubles were taken as unambiguously bullish for gold.
But some are now rethinking this if the gold that sovereigns hold has been pledged as collateral to someone else who has more ability to liquidate those holdings.
Gold will maintain its upsurge because of the following reasons
1. Developed countries will continue to debase their currencies including dollar and euro
2. Interest rates will stay at near zero till 2011….as Ben Bernanke said..Extended Period
3. Central banks will follow the monetary accommodating policy by using a new drug called quantitative easing tool..Printing more and more money …..
4. Financial markets will run into lot of uncertainty and risky behavior
5. Recovery figures are all questionable and fudged
6. We might see inflation as printing money will lead us to that zone very soon.
7. Market is lacking confidence and investors are shaky…

• Gold prices in the next 3- years
Prices of Gold from 2001 to 2008
Year Price per Ounce
2001 $257
2005 $512
2006 $632
2007 $833
2008 $869
2009 $1096
Next 3-years
2010 $ 1300/ ounce
2011 $ 1400/ ounce
2012 $ 1500/ ounce
Something you haven’t seen in the press much is that, the more fixing the government does, the worst the ultimate result will be. The size of the bailout so far is absolutely unprecedented in all of history. Last November, I did some math and found bailout spending at that time was equal to the inflation-adjusted cost of the Marshall Plan, Louisiana Purchase, Race to the Moon, S&L Crisis, Korean War, New Deal, Iraq Invasion, Vietnam, and NASA—combined. Only World War II rivaled the bailout. And that was back in November-2008.
All that spending originates as borrowing, and there’s no way it’ll ever be repaid. It’ll be inflated away by Federal Reserve’s monopoly on money creation. That will erode the value of the money in your pocket, in your bank account, and, yes, in your stock portfolio, too. That’s why gold is pushing $1,250 per ounce.
We have analyzed about Gold movement in the past 10-years. We foresee Gold could reach $1,300 a troy ounce over the next 12 months. We would recommend that investors stay overweight in Gold, Gold ETF and Gold equities.
At this point of time, the most important driver of the gold price is the ZERO real Fed Funds rate in the USA. The rates will continue to remain zero for the next 14-months till Q-3, 2011. Inflation adjusted rate stays below 2%, and then gold price will rise further to $1,500 per ounce in 2-years period.
Gold is an under-strength asset with just 0.9% of global Assets Under Management held as gold or Exchange Traded Funds or gold equities in private banks, institutions and private investors globally while the inflation adjusted gold price is still 41% below its previous high touching in March-2008.
Chin and Japan together control 42% of global foreign exchange reserves but hold only 1.97% of their reserves as gold as per the latest information. The Bank of Japan and Bank of China want to hold 10% of their reserves in gold (compared with 70% in Europe and 80% in the US). They need to purchase around $250 billion worth of gold, more than double the world’s annual gold production to catch up with Europe and US figures going forward. Don’t write off Russia as well. They are in the main race of the Gold run.
Did you know the President confiscated all the gold of American citizens in 1933??
Its true……all in one quick swoop of the pen: DECREE ISSUED
Issued April 5, 1933
All persons are required to deliver
now owned by them to a Federal Reserve Bank, branch, or agency, or
to any member bank of the Federal Reserve System.
REMEMBER: Note to investors and my valued clients….Think strategically…….
It was at the height of the Great Depression in 1930s. And the US government desperately needed to shore up its financial position. So in a dramatic move, it took everyone’s gold. We have to reach down to the bottom to make sure that you understand the import of GOLD’s HISTORY. GOLD IS REAL CURRENCY AND IMPORTANT ASSET CLASS INVESTMENT. GOLD IS HEDGE AGAINST CHAOS AND UNPREDICATABLE BEHAVIOUR OF THE GOVERNMENTS.

Monday, July 19, 2010

Sovereign Debt Risk by Shan Saeed

By Shan Saeed, Presented on 11th February 2010
The challenge for IMF today is even more severe than it was 40 years ago. Sovereign risk has become every day’s nightmare for IMF with countries confronting mountains of debt including internal and external debt, swollen fiscal deficits, currency depreciation, abysmally low GDP growth and above all poor risk management by financial institutions.
As we navigate through turbulent times, governments in advanced economies and emerging markets are getting wary of countries with huge debt, mismanagement economies and poor ideology of the bad governments in the global economy.
Let’s start by analyzing different countries which were rated according to their sovereign risk and what those countries have achieved in terms of limelight in international papers. So who has got the media attention both press and electronic. CMA-UK based group published a report on 14th Dec 2009 about possibility of countries going bust or down with huge debt.
List of countries with High Sovereign Risk
1. Venezuela 60% Devaluation done and banks nationalized
2. Ukraine 55%
3. Argentina 49% CB Governor resigned. Govt utilizing funds
4. Pakistan 36%
5. Latvia 30%
6. Dubai 29% Already defaulted. Sovereign is not safe.
7. Iceland 23%
8. Lithuania 19%
9. California 18% In a bad shape.

10. Lebanon 17%
CMA, UK Report published 14th Dec-2009
How can you tell which countries are really in trouble? You might look to the country’s ratio of government debt to gross domestic product. Government’s public debt, poor fiscal management, depreciating currency, higher inflation rate, lower GDP growth and weak purchasing power are all indicators of country’s heading towards default. In Latvia, government debt is touching 49% of gross domestic product next year. Vietnam and Venezuela devalued their currencies in December 2009 and January 2010.
2010 would have many governments in trouble in terms of corporate going towards bankruptcy and debt default. . Advanced economies like United States, UK and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again. The important indicators of country heading to default include Increase Public Debt, Increase budget deficit, higher inflation, depreciating currencies, lower productivity and GDP growth rate, low credit growth and money supply in the economy, lower Foreign Direct Investment, banking system under stress , higher discount rate and above all jittery investors who are bearish about the country.
Let’s analyze the advance economies DEBT as % of GDP. In Germany, long the bastion of fiscal rectitude in Europe, government debt is on the rise. All these countries including France, Iceland, Ireland, Bulgaria and Hungary as well as western economies and Baltic republics are massively under debt. They[govt] carrying foreign debt that exceeds 100% of their G.D.P External debt is often held in foreign currency, which means governments. The acceptable level is 25-35% of GDP.
Germany 77% of GDP
UK 80% of GDP
Ireland 83% of GDP
Baltic Republic
Estonia 100% of GDP
Latvia 100% of GDP
Lithuania 100% of GDP
Many factors are working negatively for Euro single currency as Greece problem mounts further. The ECB welcomed Greece's plan to tackle its debt crisis but warned all euro zone countries to get their finances in order, with a danger of similar problems appearing next in Spain, Portugal and Italy. ECB and IMF have showed willingness to help the Greek economy. Against a backdrop of heightened risk aversion and equity market weakness, investors once again sought out the relative 'safe-haven' of the dollar and the yen. However, according to investors who are fretting that social reason may prevent necessary budgetary adjustments. If this was to occur, governments might be unable to fund their deficits and continue to stimulate their economies, especially if the double-dip risk materializes. The situation looks very ideal with current problems in PIGS. Recovery figures are bad and horrible employment data.
I think right now every vulnerable country has one or two symptoms of going in default. There might be many countries in a wave of defaults about two year from now, when the countries now serving as implicit guarantors turn their focus to economic problems at home, thus sending ripples in the financial markets and jittery investors. Sovereign risk will not be safe any more. One feature of the financial crisis is that some governments have taken on increasingly short-term debt. In USA, it’s the Treasury debt that is under microscope examination from many angles. Maturing debt within one year has risen from 33% of total debt two years ago to 44 %.
In the next few years, many industrialized countries’ own debts – in places like Germany, Japan and the United States – get worse, they will become more reluctant to open up their wallets to spendthrift emerging markets, or at least countries they view strategically. Protectionism will emerge from these developed economies.
But while government debt may be a problem, corporate debt may set off a crisis that, in some ways, is already unfolding. Corporate borrowing surged over the last five years. $200 billion of corporate debt is coming due this year or next year. It is estimated that companies in Russia and the United Arab Emirates account for about half of that borrowing. Companies in several countries face immediate tests. Companies in China are estimated to borrow $8.8 billion in 2010; companies in Mexico $11 billion and in Brazil its $17 billion
What’s more, the packages have not really dealt with the problem of excessive debt, but merely transferred it from the private to the public sector. The pain is spread out over a longer period. But pain will be there, in the form of higher taxes, higher bond yields, slower growth or a combination of all three. The economic managers and decision makers face a dilemma. Reduce the stimulus now and they risk plunging the economy back into recession, as happened in America in 1937 and Japan in 1997. But leave the stimulus in place for too long, and they risk damaging long-term growth prospects.
The bulls hope that the economy can escape from this trap by the simple expedient of private-sector growth. That is why they welcomed the rise in manufacturing activity signalled in last week purchasing managers’ indices report. If the private sector rebounds
of its own accord, unemployment will fall and budget deficits will decline.
But hopes for a strong private-sector recovery are undermined by the data on credit growth. In the year to December, the broad measure of money supply fell by 0.2% in the euro zone and grew by just 3.4% in America. In Britain the annual growth rate is higher [6.4% in December-2009]. However, the quantitative easing (QE)**, whereby central banks create money to buy assets, has been boosting the figure by an annualized rate of 10%. If the Bank of England stops QE entirely, the credit-growth rate could collapse. For the stock market rally to resume properly in 2010, economies in the developed world need to show they can stand on their own two feet. S&P500 Index may retreat 20% from a 15-month high because stock are expensive given prospects of economic and profit growth.
Economist Magazine,
Wall Street Journal,
Bloomberg TV
Financial Times
The market has become overbought globally. I don’t see any significant improvement in the world economy. In the new few months would be quite challenging and threatening for the global market place and for decision makers. Global markets might have stabilized but they are not really expanding. With unemployment relatively staying at a high levels and revenue side pretty weak, I don’t think corporate profits would be higher in 2010. Profits would be coming from massive cost cutting and higher unemployment as we move forward in Q-2 or Q-3, 2010.
Countries will be questioned for their monetary manipulations that threaten trade for many countries, giving rise to imbalances. If this will continue, we might witness financial system not tolerating monetary dumping and protectionist policies amid global crisis. Countries that have history of structural fiscal problem, high debt and monetized fiscal deficit would again create havoc for the fragile global recovery.
So how IMF can intervene to provide confidence and sustain level of trust to global investors with its policies? One key lesson to be learned from this global crisis is that good risk management is necessary in banking system. This was said by Emilion Botin, CEO Satander, The Spanish Banker. I cant emphasis enough at this point which ic very relevant to the current financial mess. Make banking good and boring. Vatican advocated to adopt Islamic banking system to end exploitation and speculation in the current system. Robust and solid control systems need to be in place to counter any crisis going forward.
Capital base of big and small banks need to beef up to provide confidence and to investors and markets that banks balance sheet is strong enough to confront any crisis. 140 banks went down in 2009 up from 7 and 25 in 2007 and 2008 respectively. 15 banks have gone bankrupt in 1 month in USA. I foresee 250 banks will go bankrupt in 2010 as most small banks would be wiped out and they would be fewer banks operating in the financial industry. This is the New Game plan in place for the financial markets. Consolidation is necessary for banks to weather the storm and to improve its capital adequacy and asset ratios. Paul Volcker recently said, the root cause of the problem is too big to fail …..
The question is how IMF can control these crises and how to send confidence to global investors and markets as we move strategically to navigate through financial turmoil of the modern era. Thank you

Euro impact on developing countries by Shan Saeed

Previous Story DAWN - the Internet Edition Next Story

February 11, 2002 Monday Ziqa’ad 27, 1422

Euro’s impact on developing countries

By Shan Saeed

JANUARY 1, 2002 was the day which marked the switch over of the euro from a “virtual currency” used by bankers and financiers to real notes and coinage to be used by millions of people. Indeed, the 12-member Euro-zone is a study in diversity.

For more than three decades, Europeans wanted to devise some sort of single currency which could be used all over the Europe. The original proposal set out in the 1972 Werner report foresaw the monetary union by 1980 but its implementation was delayed by the 1970 oil shock and the world-wide move to float exchange rates.

Fifteen billion banknotes in 7-denominations and 50 billion in eight denominations coins have been shipped to banks and retail outlets in December 2001 and January 2002. More recently, a single currency has been seen as a necessary element in order to complete the European Union’s single market. Without such a reform, exchange rate fluctuations and the costs and inefficiencies, the trading between different currencies create major barriers between cross-border trade and investment within the Europe. The decisions to complete the single market, with the signing of the single European Act in 1986, lent a new force to the belief, long held by many Europeans, that a closely-integrated group of economies would have much more to gain from the lack of exchange rate fluctuations than from occasional exchange rate realignments.

However, the Maastricht treaty signed in February 1992 was the document which in the eyes of the European public was the first to define the criteria, needed by Europeans countries to join the (European Monetary Union (EMU). The most important of these was the convergence criteria. It is related to inflation, to public expenditure and to government borrowing in each of the countries. The Maastricht treaty supplemented by the Treaty of Rome, proved to be highly controversial in a number of member’s states. The new currency was christened as the Euro in Madrid (SPAIN) in 1996.

Europe’s impending reaction of a monetary union with a single currency—the Euro—, is the most important change in the global economy well into this century. Perhaps people around the world will remember four things about the present century: Princess Diana’s death, France’s soccer triumph, September 11 or (9/11) and the last but not the least, emergence of a powerful currency named “EURO”. Euro is the a currency that will give tough competition to the US dollar in the foreseeable future and will replace the French franc, German Mark, Italian Lira, Spanish pesetas and other currencies soon. The Euro is also not just another new currency. It has special characteristics which will affect both domestic international users. It will have a more lasting impact than virtually any other economic event, such as the re-emergence of Japan as a powerhouse or the extension of NAFTA throughout the South America. According to Mr Jeffrey E. Garten, Dean of the Yale University, Euro could pose a serious challenge to America’s economic supremacy.

The new economic club would have three categories of members including powerhouses of the global economy the United States of America, the EU and the Japan. At present, the world currency market is dominated by trading between main currency pairs: dollar/mark, dollar/yen and Mark/yen. Euro will become a leading currency very soon, making to a greater degree of symmetry between the major international monetary systems. Clearly, the value of the euro will strongly affect the value of other Europe currencies outside of the EMU including those of the Eastern Europe and many be the former Soviet Union.

Japanese experts say the euro has a good chance to emerge though perhaps quickly as a credible alternative to the dollar investment target. Private Japanese investors as well as the nation central bank may well shift some holding out of the US treasuries into bonds dominated in euros. Or it may place major portion of their reserves in Euros. Already, China has announced that out of $200 billion of her reserves, some portion will be cushion in for euro. Other countries are following the same pattern. Middle East countries are also pondering over to convert some of their reserves in Euro that might be equivalent to $150 billion. America may lose part of the $10 billion to $30 billion it gets annually in (Seigniorage) — the use of dollars by foreigners in their own countries. That’s like a free loan, every year to Washington, which does not have to pay interest on the money.

Euro brings both opportunities and threats for the world’s financial market. There is a mixed feeling about euro. The euro will go down as one of the most ambitious experiments in the EMU but it is by no means the first. In 1863, Napoleon III made a bid to extend French influence in Europe with the creation of the Latin Monetary Union. The EMU may be the greatest European project to come along since 1648 [the peace of Westphalia]. It could foster quasi-unified economy larger than America’s worth $9.6 trillion potentially. There is no doubt that the new Europe is a potential heavy weight. The 15 members of the EU together issue 35 per cent of the world debt securities, compared with 38 per cent for the United States. But the Greenback is now used more than twice as much as all the EU currencies as a portion of global reserves. This imbalance suggests that the euro will quickly elbow its way into banks worldwide. Especially since the European Central Bank — a Bundesbank clone will likely to make the euro sturdy. As a study by economist at Credit Suisse First Boston puts it, “One might well find that, once euro notes and coins re-introduced into circulation, internal and external holders and hoarders of national notes and coins will seek to rebuild their balances in euros quite rapidly.”

Ever since September 11 tragedy, global economy has gone deep into recession and it will take some time to come out of red. However, the investor enthusiasm is awe-struck and bullish. A gall-up poll conducted by Merrill Lynch illustrated that 45 per cent investors feel bullish or optimistic about European equities. On a 12-month view, 72 per cent said they are bullish for the region despite the US economy is in recession. The survey of fund managers who control $800 billion reflects that the Euro will be a strong currency. Meanwhile, 78 per cent of those surveyed said they did not expect the exchange rate between the Euro and the dollar to be more volatile than the Deutsche Mark-dollar rate has been in the past.

Europe-wide capital markets will emerge for the first time, offering colossal cross border opportunities for borrowing and investing. This united capital market will rival that of the United States. The economy of the EU is 22 per cent larger than that of the United States. Its population is 370 million, 112 million more than in the USA. The EU accounts for 21 per cent of the world excluding trade within the EU, versus 18 per cent for the US. Moreover, the EU has a higher saving rate than the USA and runs a smaller current account surplus with the rest of the world, allowing it to export capital. the potential strength of the united European market is a further evidenced by the fact that while the USA capital market is a $17.6 trillion market, the current size of the fragmented European capital market is already $16 trillion. The Euro area, therefore, has the making of one of the world’s principal capital zones.

Why should developing countries care about the European integration and creation of Euro? The Asian Development bank asserts that a Europe with one currency will be very strong and more in demand. The crisis in ASEAN countries in 1997-1998 gives ample proof that dollar dominated economies are in great danger. Argentina is one country to cite. The 1998 Indonesian currency Rupiah was pegged with dollar. This proved to be a big mistake. Basically any nation has three monetary choices: pegged rates, unified currency or (currency board) or a float. In Indonesia not only did it encourage foreign currency borrowing but also the pegged exchange rate also prevented central banks from raising interest rates to curb an explosion in domestic credit. Economy overheated, sucking in more imports. Ninety per cent of the economy was dollar- dominated.

Above all, though Argentina is worth watching because it is a classic case of what economists call, “the curse of resources”. A century ago, thanks to beef, Argentina was a rich nation and granted itself the sort of social-welfare systems that rich nations can afford. In 1990s, sustained by a stable currency and growing world trade, the country had a chance to build a truly modern economy. It blew it. Argentina, says an emerging — markets specialist on the Wall Street has a “European style welfare state in a third world economy”.

Most developing countries have hinted at de-linking their currencies from the dollar and opting for the Euro after taking into the account the allied advantages and disadvantages. The advent of the Euro in the World financial markets could provide an attractive alternative to the weaker economies, notably those that could hardly match the global strength of the dollar and its two-pronged negative impact of the foreign trade.

Mr Owais Kalia, a foreign exchange giving his opinion about the future of euro especially in the context of Pakistan’s economy said that it may be an effective check on the excessive speculative trend, dominating in the money market. With the gap between inter-bank and kerb rates/open market narrowing down signs a positive change for the economy. Speculative trade has damaged Pakistan’s economy enormously. Speculation, due to over-dollarization will be narrowed down to a great extent with the arrival of Euro.

Mr Zafar Aziz Osmani, a senior executive in one of the leading banks said the de-link could provide the much needed psychological boost to the falling Rupee as well as the economy. The deposit base of the Euro will be around $100 billion in the embryonic phase. It could inflate to any highs taking the changes happening around the globe.

Developing countries can foresee three key areas in which the Euro will be advantageous to them. Firstly, it is rapidly becoming currency in which world trade is conducted and invoiced. Most of the multinationals around Asia are switching over from dollar to euro. Companies like the Philips and the Siemens have already announced their intentions to switch their accounting to the Euro and some major European countries have already informed their suppliers and price lists in euro. This is a huge development that is going to affect the economies heavily relying on US dollar.

* Secondly, developing countries predict that the euros credibility, allied to large and very liquid financial market will attract foreign investment. Asian investors and issuers simply can’t ignore the Euro market. This offers good chance for firms to move into the market and raise money with Euro bonds. The EU governments simply won’t be able to keep up with the demand coming from this growth. A gap will be formed in the market and this will be filled by corporates. Many Japanese experts predict that Japanese investors will move their money out of the USA soon. Japanese companies with huge investment in Europe will shift their focus and ponder over their strategy to work out the ways and means to get the practical benefits of the Euro, as transaction costs are reduced and currency exchange risks eliminated.

* Thirdly, euros development will increasingly confer on it the status of an international reserve currency. Central banks worldwide seeking greater diversification in their currency portfolios are looking into it and have already made plans to make euro as an attractive alternative to the dollar and the yen. The Gold prices fluctuating and not being consistent, central bankers around the world have little choices but to switch their reserves in Euro. George Soros the author of Alchemy of Finance predicted an outflow of $500 Billion from the dollar deposits to the Euro and expected that it could lead weaker dollar in the months to come.

According to the survey conducted by the local financial analysts and research houses, euro will have a global deposit base of 40% as compared to 29 per cent of the US dollar and its share in the world trade will be 32 per cent as compared to 23 per cent of the US dollars. Says Gary S. Becker, Nobel Laureate and an economist at Chicago University: “Euro will be strong and in great demand not only in Asia but also in Africa and Latin America. But it remains to be seen that Euro should be tested at more than one front in order to reduce the risk of collapse”.

Commenting on the current situation, Owais Kalia said that so far 12 countries have joined Euro single currency while the reaming three including Britain, Denmark and Sweden are still to make a decision. The most important among them is the UK whose decisions to join or not the euro will make a great difference in Euro status because obviously the prime object of euro is to being a strong rival against dollar. The success of the Euro could be a role model for the economies especially in Asian countries currently trapped in financial turmoil.

There is a more important reason for developing countries to pay attention to the EMU: its emergence shows that a large part of the western world is finally getting both the economies and, with luck the politics right. The EMUnomies is textbook simple. Increased competition is good, protectionism is bad. Mobility of capital and labour is good, hindrance is bad. Less government intervention is better than big government and more transparency is better than less. A truly integrated Europe would hold great promise not only for itself but also for the rest of the world. The result. A euro that will genuinely compete with the dollar as a reserve currency, and a united Europe that could in a decade’s time develop into more than a junior partner for the United States.

The physical introduction of the euros will bring a big change in the hearts and minds of consumers and bankers. My bet is that over the next few years we will see at least half a dozen cross border transactions in the financial services industry.

(The writer is an IBA graduate, working in a foreign bank.)

Shan Saeed comments on Global Economy posted on CNN

April 8, 2009
When do you see the economy rebounding?
Posted: 942 GMT

LONDON, England - Alcoa, the largest U.S. aluminum producer, has kicked off the first quarter earnings season with a loss of nearly $500 million.

Markets haven't taken the news well. Alcoa is a nasty reminder that the sting of the recession continues to bite. There will be plenty of other reminders.

The U.S. earnings decline has now lingered for six straight quarters and it's not over yet. The expectation is that profits for companies in the S&P 500 will decline for three more quarters including the current one, according to Bloomberg data.

Marc Faber, a well-known analyst, predicted this week that the S&P could go back down to 750 - a fall of some 10 percent from its recent high - before rebounding in the summer.

Even though markets are supposed to anticipate recovery, there are still plenty of reasons to be cautious. Nouriel Roubini, who predicted the economic crisis we are now in, remains bearish, and expects the U.S. economy will continue to contract this year.

And Mike Mayo, the banks analyst, is predicting that loan losses at U.S. banks may exceed Great Depression levels.

Mayo, isn't a household name. But anyone who follows Wall Street closely knows his name well. He's the guy who correctly took a bearish stance on banks in 1999, when others remained bullish.

He thinks mortgage-related losses are only about half way to their peak. While credit card and consumer losses are about a third of the way from their worst levels.

George Soros expressed skepticism this week about whether the market rally had legs, pointing to problems in the real economy.

Soros says recently announced changes to fair value accounting rules will keep problem banks in business, and that in turn will only delay any economic recovery.

Confidence of course, plays an important role in any rebound. It was only a matter of time before the reminders of the depth of this downturn hit investors once again.

Alcoa is the first of those fresh reminders - it won't be the last.

Meanwhile, the problems of the banks persist, and as long as that continues, any real recovery will have to wait.

Do you think the recent rally in the market was a bear market trap?

When do you see the economy rebounding?

How much longer do you think it take to work through problems in the banking sector?

Posted by: Financial Analyst, Todd Benjamin
Filed under: Business •Financial crisis •Financial markets •Wall Street

April 8th, 2009 6:02 pm ET

Economy can start to see recovery by Q-1, 2010.....The moderate recession will be officially over by Q-4, 2009.....However growth will remain sluggish in 2010.....So we might see some hustle and bustle in the economy next year.....The global economy will show more resilience to confront future challenges so that financial system does not stall for any reasons. New financial stability procedures would provide buttress to the existing economic system to make it more robust going forward.

With kind regards,

Shan Saeed
Uni. of Chicago
Booth School of Business
MBA 2009 Graduated

Oil crisis in 2008, Comments posted on CNN By Shan Saeed

June 17, 2008
High oil prices here to stay
Posted: 716 GMT

LONDON, England – If you think the price of oil can't go any higher, you could be disappointed. On Monday, oil shot up towards a $140 a barrel, a record, before settling the day at $134 a barrel.

Even word that Saudi Arabia would increase production wasn't enough to keep oil from ratcheting higher. And even though it ended well off its high of the day, we're still above $130 a barrel, with predictions it could hit $150 by year end, and eventually move to $200 a barrel.

Saudi Arabia has called a meeting for June 22 to help stabilize prices. But will that really make any difference. Barring some dramatic announcement, I'm skeptical. I'm in the camp that believes what's going on in the oil market isn't just the result of a weak dollar, or speculation. It's based on the belief that there is a structural shift going on, based on a need for increased oil as developing nations continue to grow their own economies, and not enough supply.

You can point the finger at speculators, as many do, but they aren't the problem. They just follow trends, they don't create them.

Even a CNN quickvote shows the public is skeptical that a production increase by the Saudis will ease prices. 43 percent said yes, 57 percent said No.

Oil producers have lost control over pricing. And while high prices are great for producers' revenues, they always worry that if the price gets too high, it could lead to a sharp slowdown in the global economy, hurting demand, and causing a sharp fall in the price of oil.

I don't think that's a worry for the oil producers right now. The bigger worry is their inability to keep prices from rising, and the political pressures that brings. That's what's triggering the upcoming meeting, the Saudis have to appear like they are doing something.

The problem is, the market has moved beyond their ability to control it.

Tell me what you think.

Posted by: CNN International Finance Editor, Todd Benjamin
Filed under: Business

June 18th, 2008 3:28 am ET

Jason raises a good point above about oil being used in the plastics industry etc. However I do not think anyone says we should stop using oil for everything, but we should look at reducing demand and using alternatives.

If you think the Romans were silly for using lead pipes, then we are even more silly for poisoning ourselves with exhaust fumes from our motor vehicles :) We have alternatives and should know better!
Shan Saeed June 18th, 2008 3:44 am ET

Oil prices will come down very soon. It will come down to US $ 97 per barrel. It is charging a premiu of $ 50 right now. I have number of predictions in 2004. On June 10,2004, I have made a TV appearence on TV and said oil will touch $ 45 after 2-months.You can check he record on August 10, 2004, Oil prices were trading at $ 45 per barrell. I have mentioned in number of artilces that got published in different newspaper that market forces are the best determined of the prices. Today, these high prices levels are not sustainable in the long run and will bring the oil prices down and easing the markets. Reasons:

1. Most countries including developing and developed are going through a slowdown in their economies.
2. China and India consumption will stabilize in the next 9/12 months or so bringing oil prices to market levels
3. Oil supplies are moving into the market quite rapidly with supply concern in Venzuela and Nigeria easing up.
4. Countries like Canada [Alberta Sand], Norway [ Statoil] , Central Asia Repulic [CAR]and Brazil will become move active in the market
5. Middle eastern countries [ Saudi, Kuwait and Qatar] will supply more than the demand


Shan Saeed
University of Chicago
Singapore Campus
Andre DeSimone Alonso June 18th, 2008 9:50 am ET

I am still inclined to believe that speculators are keeping strong hands on oil prices no matter what sort of global conjecture we´ve seen nowadays. Those prices are artificial in many ways and they are unsustainable for even oil produces in the long-term.
I think that as long as we get recuperated the financial markets, these sort of speculations will no longer take place insofar as profits from traditional investiments, as the stock markets, will resurge and the "oil bubble" will lose its raison d'etre.
That is why I cannot embrace Mr. Benjamin's theory at all.

Comments on Commodities on CNN---Posted by Shan Saeed

October 19, 2009
Investing with Jim Rogers
Posted: 511 GMT

Sometimes I think if you want to be a serious investor, you shouldn't become a business journalist. Sure, you learn a lot about various industries and get insightful advice from experts at the top of their game. On the other hand, you know all too well how everything can go terribly awry.

Jim Rogers, the famed commodities investor and author of new book "A Gift to My Children: A Father's Lessons for Life and Investing," admitted to me that he is a horrible short-term investor. However, he says you don't need to be a good trader to make money.

Here are his tips for anyone looking to invest in the current economic crisis:

1) Buy what you know. "You should only buy things that you yourself know a lot about - whether it's cars, sports, hairdressing, fashion, or whatever it is," he told me. "Do some research, do some homework, and if you see something really dramatic changing that is cheap, buy it. You are going to know about it long before I am, long before a broker on Wall Street is, and that is how you are going to make a lot of money. "

2) Don't be cocky. "Being overactive is usually a mistake," Rogers mused. "It always leads to problems. People don't like it. They want to jump around all the time. That's not the way to succeed as an investor."

3) Buy low, sell high. "It's as simple as that," he said. "Nobody likes to hear it. Now that is so simple and so easy, but you cannot believe how difficult it is to buy low and sell high. That is the hard part."

So what is Rogers doing with his money?

He wouldn't buy stocks today - not even in emerging markets. He is selling the U.S. dollar because "it's a flawed currency." Today, he would put new investments into commodities or what he thinks are "sound" currencies such as the Canadian dollar and the Japanese yen. And one of his favorites - farmland. With food prices rising, he believes farmland "may be one of the best investments a person can make in 2010." But get to know the farmer and the industry first, he reminded me.

In other words, be sure to do your homework.

Posted by: CNN Asia Business Editor, Eunice Yoon
Filed under: Biz Clinic •Business •Investment

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A.M. Deist, Fort Walton Beach FL October 21st, 2009 10:42 pm ET

Jim is right-on. The U.S. markets have been going up because the TARP money that was given to investment banks went into the market instead of to borrowers. Too bad we didn't let those investment banks go belly up and take the TARP money directly from the treasury and put it into the market. Instead of giving taxpayers a huge bill, we could have given them a christmas bonus. The U.S. economy is far from being out of trouble, and when the bubble bursts, a lot of people are going to wonder what happened.
Shan Saeed October 31st, 2009 8:49 pm ET

I have the privilege of meeting with Jim Rogers in singapore and have benefited a lot from his knowledge..I am well connected to him thru email now. According to Jim Rogers

1. Buy Commodities
2. Buy Canadian /Aussie Dollar
3. Bullish on China\
4. Learn Mandarin
5. Learn fast and quick in order to make killing with your investment

Great human being and wonderful gentleman. Former Columbia Business School Professor and Ex-Soros Fund employee. He is a guru in commodities and global economy

Shan Saeed
Graduated w/Honor's Roll
Uni. of Chicago
Olatunji Abiodun November 29th, 2009 8:38 am ET

Wil like u 2 me more on resouces of job creativity in d world.

China's Renewable Energy--Comments from Shan Saeed

China’s Renewable Energy
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Aerial View of the Three Gorges Dam
With output up to 17.5 gigawatts
China’s Three Gorges Dam is the most powerful
hydroelectric power complex ever built.

Editor’s Note: As we reported in China, Canals & Coal, if the Chinese wish to develop their economy to the level of the major industrialized nations, they will have to build as many power plants and water diversion projects as they possibly can, and that is exactly what they are doing. The question is just how much of this energy and water will be green, and the prognosis is daunting.

In this assessment of China’s renewable energy initiatives, the unprecedented attention the Chinese government is giving to green energy is only half the story. It is true they now intend to derive 15% of their energy from renewable sources by 2020, but 15% isn’t very much, and within this total is hydroelectric power, and in any case the 15% target may be ambitious.

If one correlates energy production to GNP, even assuming China achieves western levels of energy intensity (units of energy per dollar of GNP), China is going to have to increase their energy production from 50 quadrillion BTU’s per year to over 250 quads. This means that while production of renewable energy in China is set to increase by staggering amounts, the amount of fossil fuel derived energy consumption in China, in absolute terms, is going to quintuple in the next few decades.

This is the message the anti-CO2 crowd doesn’t get. Even if the billion people in the developed world stopped emitting all their CO2 tomorrow, and they won’t, there are over a billion people in China, and another billion people in India, and another few billion elsewhere in the world, who are going to burn quantities of CO2 in the coming decades that easily surpass what the global north burns today. More realistic solutions to global warming, such as releasing benign aerosols in the Arctic spring and summer, had better be considered. It is inspiring to imagine how innovation and global investment will help China and India accelerate their adoption of green energy technology, but a close reading of this report underscores the challenges and complexity of this calling. – Ed “Redwood” Ring
China’s Renewable Energy – Can clean renewables increase their share of China’s rapidly expanding energy sector?
by Gordon Feller, January 30, 2007
A Clear Day in Shanghai
A clear day in Shanghai.

China’s government plans for renewable energy generation to meet 15% of the country’s growing energy needs by 2020.

Renewable energy and energy efficiency look set for a boost as Beijing authorities have now outlined plans to diversify their energy resources in the face of continued price rises, pollution concerns and China’s unquenchable fuel and electricity demands.

In its “alternative oil strategy,” which is part of the China’s 2006-2010 Five-Year Plan, Beijing has called for a doubling in renewable energy generation to 15% of the country’s needs by 2020.

The target is in line with a new renewable energy law requiring grid operators to purchase resources from renewable energy producers. The law, which came into effect in January, also offers financial incentives to foster renewable energy development, including discounted lending and a range of tax breaks.
Tsinghua University Logo

Of the main renewables, wind power is tipped to have the most potential. Professor Wang Weichang, an energy expert at Tsinghua University in Beijing, predicted wind was on course to supplant hydro as the country’s second-largest electricity source, behind coal. Wang said China has the ability to generate up to 100 gigawatts, or 20% of current national capacity.

Beijing also plans to use other alternative energy sources as part of a drive to cut coal dependence from 73% of total generation today to 68% by 2010 and 60% by 2020. Vast investments in new technologies to turn coal into synthetic oil have been announced, and ethanol production will be boosted to create hybrid fuel by mixing it with regular gasoline. With China nearing a deal with Australia on uranium supply, nuclear power is also in the picture, with generation expected to rise 400% by 2020.

But a report released last month by consultants at Capgemini suggests China has underestimated future demand, putting its target at risk. The report estimated an additional 280GW of electricity will be required by 2020 on top of the 950GW already planned, meaning coal-fired power plants would still provide 71% of China’s electricity needs by 2010 and 65% by 2020.

This is good news for energy efficiency proponents, as a reduction in demand will help the government meet its targets. Beijing has said it is looking to relax its tightly controlled energy-pricing system to encourage conservation and energy efficiency plans have also been put in place. The construction ministry announced pans to increase energy-efficient floor space by 2.16 billion square meters by 2010, saving 101 million tonnes of coal.

China is increasing international cooperation with the world’s heavyweight energy producers to address growing demands. The country’s top oil refiner, Sinopec, signed a memorandum of understanding last month with India’s second biggest state-run oil company, Hindustan Petroleum Corp, for energy projects in China, India and other countries. Meanwhile, China National Petroleum Corp (CNPC) was also expected to sign a gas supply agreement with the world’s biggest gas producer, Russia’s monopolist Gazprom. In the US, the chairman of the Senate Foreign Relations Committee said there needed to be greater international co-ordination on energy issues, especially with China and India, to address concerns about growing global competition for energy resources.

The powerful National Development and Reform Commission said that filling of China’s strategic oil reserves at its 16-tank Zhenhai facility in the eastern province of Zhejiang was on schedule to begin by the end of this year. It is the first of four strategic oil reserves to be completed. Reserve facilities in Daishan, Zhejiang province, Huangdao, in Shandong province southeast of Beijing, and Xingang, in northeastern Liaoning province, are due to be completed in 2007 and 2008. Beijing plans to stockpile up to 100 million barrels of petroleum, or the equivalent of almost a month’s national consumption, to cushion against possible disruptions to supplies coming from abroad.

The country’s power-generating capacity will reach a record high this year when new generators producing an additional 75 million kilowatts come on line in 2006. But China Electricity Council secretary-general Wang Yonggan said shortages would still persist in the first half of 2006. Power shortages affected seven provinces at the end of 2005, down from 26 at the beginning of the year, as China’s power supply increased by 66.02 million kW to more than 500 million kW.

China’s rapidly growing economy is pushing energy consumption to new highs as the increasingly affluent populous plugs in and turns on more appliances than ever, adding to the high-voltage factory hum that has long characterized the country’s modernization efforts.

The chief means of meeting this insatiable demand is the domestic coal reserve, which accounts for 74% of China’s 360-gigawatt total annual power output. Oil is a distant second on 13.5%, followed by domestic hydro-power at 8.2%, nuclear energy at 1.1% and natural gas at 0.3%.

But coal presents several problems. Around 70% of the country’s coal is transported by rail from the coal-rich north to the energy-hungry coastal regions. While China accounts for 24% of global rail traffic, it only has 6% of the world’s rail tracks, resulting in bottlenecks in the transport network followed by regional power shortages. Despite US$248 billion being committed to rail expansion over the next 15 years, historical underinvestment means there is much ground to be made up.

A potentially more serious concern is environmental pollution and the related healthcare and clean-up costs, which are adding ever more weight to calls for a diversification away from coal.

Although China’s thirst for fuel means that consumption will still increase in absolute terms, there are plans to reduce coal’s contribution to the power supply to around 60% by 2020, with increased output from gas, nuclear and renewable options.

To this end, official muscle has been put behind alternative power sources. China’s Renewable Energy Law, which came into effect in January, decreed 20% of total national energy consumption should come from renewable sources by 2020.

China is set to spend US$200 billion over the next 15 years to achieve this goal, which would make it the world’s largest consumer of renewable energy.

In solar power, China already leads the world, with a total of 52 million square meters of solar energy heating panels in China representing 40% of the global total. Wind power appears to have incredible growth prospects. Installed capacity was just 1.3GW in 2005, but China aims to increase that to a world-leading 30GW by 2020. Potential installed capacity stands at 250GW onshore and 750GW offshore.

Nuclear power, and the foreign players queuing up to build the 30 new atomic power stations planned over the next 15 years, could also win big as China targets a 400% increase in capacity by 2020.

However, alternative energy sources do not yet produce nearly enough power to replace fossil fuels. It is generally thought within China’s expert community that not only do these sources provide negligible power, but the power they do produce is still prohibitively expensive.

While renewables may be the holy grail for China, oil is increasingly becoming the focus of its geopolitical maneuvrings.

Once a net exporter of oil, China imported 47.3% of its crude in the first half of 2006. Oil will fall as a proportion of total energy consumption with greater efficiency in coal delivery and the growing emphasis on renewables and nuclear power. But – just like coal – actual oil demand will continue to rise, principally through imports.

The US Department of Energy predicts China’s crude imports will represent 75% of national oil consumption by 2025, and domestic oil producers are busy buying foreign assets to meet this need. Beijing’s diplomatic tentacles have spread to Africa, Asia, Australia, the Middle East and the Americas in search of the black stuff.

China National Petroleum Corp (CNPC) acquired PetroKazakhstan for US$4.2 billion, teamed up with an Indian group to buy a stake in Syrian oil assets and secured drilling rights in Sudan in a joint bid with China Petrochemical Corp. It has also struck exploration and supply deals in Venezuela and Peru, and took a 4% stake in Rosneft for US$500 million when the Russian oil giant went public in July.

China Petrochemical has also snared a slice of the Russian pie by forming a 25.1% owned joint venture last year with Rosneft to explore the eastern seaboard of Russia for oil and natural gas. Not to be outdone, China National Offshore Oil Corp (CNOOC) paid US$2.7 billion in April for a 45% stake in a Nigerian oil field.

Escalating consumption has made conservation measures commonplace in China. Factor in an energy market that is becoming ever more volatile in the current geopolitical landscape and the only certainty for China is that as demand keeps rising so will the priority attached to securing energy resources.

But such acquisitions will not be used exclusively to serve the home market, unless Beijing further deregulates energy pricing. China’s retail prices remain among the lowest in the world as authorities seek to protect vulnerable sectors.

Sinopec, the listed arm of China Petrochemical, received a one-off state handout of US$1.17 billion in January to compensate for losses incurred due to caps on domestic oil-product prices. This was a sweetener to stop the company from putting profits before domestic needs – last year’s diesel and gasoline shortages in southern China and Shanghai were created by Sinopec re-exporting refined products to Korea and Japan to maximize profits.

Unless there is a substantial rise in domestic prices, companies will continue to siphon off some of their newly acquired foreign oil assets to use as a source of foreign exchange.

For every tonne that is traded, swapped or sold abroad, another question mark will be placed against China’s energy security.

What is the future of China’s use of fuel ethanol? It is already used in five provinces and Beijing seems ready to bankroll a nationwide roll-out. But is biofuel a viable alternative to gasoline?

China’s oil demands are already the stuff of legend. Urbanization, industrialization and a six-fold increase in private vehicle ownership over a decade have left the country dependant on foreign sources for 40% of its oil. This figure is expected to pass 60% in 2010 and 76% in 2020 as imports go from 4.6 million to 8.5 million barrels per day.

The price is not just financial – the International Energy Agency predicts China will account for 18% of global carbon dioxide emissions by 2025, up from 12% in 2000.

Beijing is taking action. Measures outlined in the 11th Five-Year Plan for 2006-2010 won’t end the dependency on foreign oil and dirty coal, but they should see wind, water, sunlight and nuclear power keeping the lights on for significantly more people than before. Those same people could also be filling their gas tanks with ethanol fuels.

“China needs to import a lot of oil so the government is looking at alternative fuels,” said Christine Pu, energy and chemicals analyst at Deutsche Securities Asia. “The advantage of ethanol is it’s good for the environment.”

Launched in 2000, China’s fuel ethanol industry is still in its infancy. According to GTZ, a German company that advises on energy management on behalf of the German government, total bio-ethanol production is around 4 million tonnes. Three quarters of it is edible ethanol and the remainder fuel ethanol.

“At present it’s largely limited to research institutions and there has yet to be much spillover from the labs into the marketplace,” said Frank Haugwitz of GTZ-China. By the end of 2005, Heilongjiang, Jilin, Liaoning, Henan and Anhui Provinces were wholly dependant on 10% ethanol-90% gasoline fuels (E10), with certain regions in Hubei, Shandong, Hebei and Jiangsu following suit. Studies have shown that using E10 reduces carbon dioxide emissions by up to 3.9%.

GTZ has calculated that a nationwide roll-out of E10 could see fuel ethanol demand reach 8.5 million tonnes per year by 2020.

The government appears ready to meet its goal. Four bio-ethanol plants, with production capacities ranging from 200,000-500,000 million tonnes per year, are under development. In the Jilin Fuel Ethanol plant, China already possesses what is believed to be the world’s largest fuel ethanol facility with a capacity of 600,000 tonnes per annum.

The vice-minister for finance said in July that China is committed to a long-term bio-fuel development program, noted Professor Liu Dehua of Tsinghua University’s chemical engineering department, who has been involved in China’s fuel ethanol program since its inception.

“By 2020, liquid bio-fuel production will be 20 million tonnes a year – comprising 15 million tonnes of ethanol and 5 million tonnes of bio-diesel.”

China has also cast its net wide in search of the key to success with fuel ethanol. Professor Liu has been to Brazil twice – most recently in April, accompanying officials from the National Development and Reform Commission and the Ministry of Science and Technology – to study a system under which all vehicles must run on fuel comprising at least 20% ethanol.
China’s 11th Five Year Plan
Never before has the environment
been such a high priority.

“China wants to learn from Brazil’s experiences in promoting fuel ethanol production and find out what impact using ethanol has on the environment,” said Liu. The officials were also keen to see Brazil’s flex-fuel vehicles that run on varying combinations of gasoline and ethanol.

Thirty years ago, Brazil faced some of the energy challenges that now confront China. It imported 75% of its oil in 1975 and received a series of economic body blows as the price of oil fluctuated during the course of the decade.

The development of fuel ethanol has greatly reduced this vulnerability.

However, experts warn against viewing the two countries as being at separate points on the same developmental path.

“Brazil used to import a lot of crude oil as China does now,” said Deutsche Securities Asia’s Pu. “But the big difference is that Brazil is a large producer of sugar cane while China uses corn for its ethanol.”

The situation is complicated by the high priority China attaches to food security. If it’s a choice between corn for food and corn for ethanol, the food need wins hands down. Three of the four large scale ethanol facilities under development will use sugar-based energy crops or sorghum – not only does this resolve the food-or-energy dilemma, but ethanol can be created more efficiently from these crops.

Based on their extensive work in China’s energy economy, Germany’s premier technical cooperation organization, GTZ, identified potential planting areas in southern provinces such as Guangdong and Guangxi, where the climate is more conducive to growing sugar and sorghum.

“China has multiple choices,” said Professor Liu. “It wants to diversify and can grown corn in the north and sugar cane in the south.”
Mount Tianshan in the highlands of Xinjiang. Will China
preserve the breathtaking beauty of her vast country
as she becomes the world’s leading energy producer?

But the mounting pressure being placed on China’s deteriorating farmland by the growing food demands of an increasingly affluent population means that land use is a sensitive issue. China will be a net grain exporter this year on the back of bumper crops but in the long-term, imports will grow and grow. Despite the food supply pressures, Liu believes farmers will benefit from the fuel ethanol development whether they diversify into sorghum and sugar or stick with corn.

“When the government first started the ethanol program, the price of oil was not high and the attention given to the pollution situation was not great. The reason ethanol production was important was the impact it would have on farmers’ incomes.”

For Beijing-based independent energy analyst Jim Brock, fuel ethanol in China can serve the same purpose it does in the US as far as farmers are concerned – a means of insurance.

Surplus corn that decays before it can be transported elsewhere, or grain that fails to make the grade for human consumption or cattle feed suddenly has an end-use.

“There is not really any conflict between food supply and energy supply,” he said. “In almost all cases, the production value for food is much more. It all comes down to having a supply valve so the corn that cannot be used for food is used for energy.”

Ultimately, the rise of ethanol as a viable alternative fuel hinges on the price of oil. A GTZ price comparison earlier this year put fuel ethanol in the region of US$460 per tonne, although this included a US$175 subsidy per tonne of ethanol. Production costs can be as much as US$617 per tonne, 70% of it spent on raw materials. Gasoline was priced at US$616-654 per tonne, although this too included a state subsidy.

Deutsche Securities Asia’s Pu points to a rise in global oil prices, together with oil price liberalization in China and technological improvements in ethanol production, as factors that could drive the fuel ethanol bandwagon onwards. It would take a sizeable spike in crude prices to make fuel ethanol truly competitive; otherwise, it is a question of how much Beijing is willing to spend to find the key to cost-effective ethanol production.

“Is China willing to subsidize ethanol to the extent that it has been in Brazil and the US?” asked Brock. “My impression is no – the government is willing to incentivize but not subsidize.”

About the Author: Gordon Feller is the CEO of Urban Age Institute ( During the past twenty years he has authored more than 500 magazine articles, journal articles or newspaper articles on the profound changes underway in politics, economics, and ecology – with a special emphasis on sustainable development. Gordon is the editor of Urban Age Magazine, a unique quarterly which serves as a global resource and which was founded in 1990. He can be reached at and he is available for speaking to your organization about the issues raised in this and his other numerous articles published in EcoWorld.
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Pingback by China’s Energy Future: Greener Than You Might Think. Part 1 of 6 - Overview « China Outsider
August 5, 2009 at 7:44 pm - #

[...] regulations and now China is becoming very serious about curbing CO2 emissions. In fact, China is doing more to curb its CO2 emissions than any other counry in the [...]

Comment by algaepreneur
November 12, 2009 at 9:23 pm - #

Algae consumes CO2. With all the coal plants being built in China, algae production plants could be built on site to take their excess CO2 emissions. You may want to check out the National Algae Association for CO2 in-take amounts.

Comment by shan saeed
January 7, 2010 at 2:39 am - #

This is a wonderful piece on renewable energy. Gordon Feller, I have learned alot from your article. I posted my comments about china on CNN. I repeat from that link.

August 28th, 2009 1118 GMT

I would like to add few more in this roster….

S-Shares of Chinese companies listed on singapore stock exchange
L-Shares of Chinese companies listed on london stock exchange
T-Shares of Chinese companies listed on tokyo stock exchange

Apart from A,H whereby some companies are only listed on A and not on H….While some are only listed on H but but on A………..

However, if you analyze the chinese stock market, I think it is more open now and offering great returns to investors in general. Chinese investors are parking billions and billions of yuan eveyday in their stock market with calculated risk. Let me share something with the readers.
Petro China was set up by Goldman Sachs..Investors made a killing and made 1000% return in 4 years time. Whenever, chinese government has backed certain industry, the companies shares have soared.

Look a the Chinese power industry. In 1979, the government rigidly controlled electric power production. Only 60% of the country’s small towns and villages had electricity – leaving 400 million people in pre-industrial conditions.

For the next two decades, the government focused on a massive electric-infrastructure program. Even so, by 1998, 14,000 villages and more than 8.8 million households were still without electricity…
Jim Rogers-the commodity guru, in his book A Bull in China, calls that decision a watershed moment for China’s power industry. The five resulting companies, China Power Investment, China Huaneng Group, China Guodian, China Datang, and China Huadian were huge successes. By 2005, more than 99% of the country’s small towns and villages had electricity.

This went unreported in Wall Street Journal, New york Times and Chicago Tribune. China’s government is providing an enormous boost to its mining industry: In April 2009, the country’s Foreign-Exchange Agency announced the purchase of 16 million ounces of gold for state coffers. It wants to diversify its reserves, replacing some of its U.S. dollars with something tangible – like gold.

Invest in those shares backed by the chinese government which is the richest governments on earth and you can make a profit out of your investment….

Shan Saeed
Uni. of Chicago graduated
MBA with Honor’s Roll

Industrialization in Pakistan by Shan Saeed

Industrialization in Pakistan

By Shan Saeed--Economist/Banker

FOR developing nations like Pakistan, industry occupies a key position in the development of a country.

Its development raises national income, creates employment opportunities and improves the balance of payments position both by producing exportable goods and by substituting imports, but also supports and stimulates development in other sectors of the economy.

In Pakistan, during the past few years, indeed industry has contributed the largest segment to the economy. Self-reliance has been the principal aim of the industrial policy in the five-year programmes. In addition to the public, private sector has been encouraged all along to play a supreme role in the industrialization of the country. It has also been recognized that investment of foreign capital, coupled with technical skill can play an important part in the quick execution of the industrial programme. By virtue of such pragmatic approach, the industrial development in Pakistan has been self-asserting.

As the country possesses the requisite natural and human resources for industrial growth, the industrial policy would continue to be directed towards increasing the share of the manufacturing sector in the total economy.

Emphasis would, however, increasingly be a shift towards deepening the industrial structure through an increase in the weight of high value-added, more sophisticated engineering, chemicals and other basic industries.

It is also imperative to ensure optimum utilization of existing industrial capacities and bring about revival of sick and closed industrial units wherever it is justified by their economic viability and managerial competence.

Over a period of time, a large class of potential entrepreneurs has developed, though with relatively modest resources earned from other economic activities within the country or mobilized by way of savings from employment abroad.

These potential entrepreneurs have the capacity and are keen to take up sizable responsibility in the industrial field. given suitable framework of policies, particularly relative freedom from unnecessary controls and regulation, there appears to be a promising climate for rapid expansion in private investment in Pakistan.

At the same time the public sector has established it management and entrepreneurial foundation. It is in a position to carter its future course in a manner, which would create a mutually supportive relationship between the public and private sector.

Public sector has come to stay in industries like steel, fertilizer, cement, petroleum refining and petrochemical, automotive equipment etc. wherein it would continue to remain active, though mainly concentrating upon rationalization, balancing, modernizing and selective expansion.

These industries are, however, by no means the exclusive presence of the public sector.

As in the past, the government would be willing to admit private sector participation even in these fields and would become concrete proposal in this behalf bolstered by proper feasibility studies and financing plans. Where, however, in the case of an industry considered essential from the overall national point of view, the pirate sector is not forthcoming for reasons either of the requirements of large amount of capital or acquisition of sophisticated technology, or where situation of pirate monopoly is apprehended, the public sector may step in the fill the vacuum.

The public sector has also continued to play its socio-economic role in industrial development of less-developed regions. Most of the investments required by public sector for its programme are, in line with the existing policy; have to be generated by public sector enterprises through their own resources such as retained earnings and provision for depreciation.

With a view to fostering healthy competition in all industrial activities between the public and private sectors, the government would continue to maintain the existing policy of equalizing the conditions and environments and access to financing for both these sectors. The “cost plus” pricing (formula) on which some of the existing industries are based will be avoided as far as possible in setting up new industries.

The government would continue to focus its efforts towards improving the technical and financial performance of public sector enterprises through suitable administrative and institutional measures.

A number of such measures to improve their skills and efficiencies have been introduced.An expert advisory cell has been created to monitor, coordinate and evaluate performance of each enterprise. This has been accompanied by delegation of powers to holding corporations and divestiture of un-profitable units.

The problem of sick units has confronted industrial activities for quite some years. The sick units were inimical to development of financial institutions. the total sick units whose default cases have been taken for adjudication by the creditor banks and DFI’s over the last few years are 868 units with total unpaid loans of Rs 107 billion.

The government has established the Corporate Industrial and Restructuring Corporation (CIRC) to tackle the long-standing problem of sick units to over financial difficulties of NCBs and DFI’s. The corporation has identified the first lot of 90 sick units initially for sale / transfer of ownership.

The CIRC has approved the transfer of ownership with management control of these units. The initiative has been successful in wiping off non-performing loans of worth Rs 12.2 billion from the balance sheet of the financial sector. The revival of sick units would add to the productive capacity of the country and revive the industrial activity in the country.

The job of the CIRC is to liquidate those units, which are unprofitable and are in bad shape. It has been quietly successful in implementing its plan so far and has generated positive results.

The government will continue to encourage close collaboration between public and private sectors in setting up some of the large industrial ventures with management in suitable cases placed in private hands. Area, where collaboration can be possible will include enterprises requiring speedy response in a highly competitive market.

Role of financial institutions: Banks and financial institutions have played a major part in the industrial development of the country. The major objective of these financial institutions was to strengthen the industry and assist the country in industrialization. The development financial institutions (DFIs) have helped the industry to grow despite tough competition in the international market. For this purpose, the government set up different banks and financial institutions to cater specifically to the needs and demands of the industry. These included former NDFC, the IDBP, the PICIC, the ADBP, former the BEL, the SBFC, and the RDFC, etc.

The following chart illustrates the financing done by the DFI’s over the years for the industry:

Role of small industries: The development of small-scale industries has a strong socio-economic imperative for the country. They need smaller amount of capital, generate larger employment opportunities, disseminate the benefit of growth to a larger number, have short gestation period and carry the fruit of industrialization to rural area. Small industries have shown a remarkable resilience even in adversity. It is envisaged that the small industry route will accelerate the export-led growth of the economy.

The small industry is defined as a unit involving fixed capital investment of upto Rs 10 million. The key element in developing small industries is given below:

i) provision of adequate and timely credit at concessional rate;

ii) existing training-cum-service centre for small industry will be strengthened and more will be opened to provide training and common facilities; iii) large-scale industries units, particularly in the engineering sector, will be encouraged to make use of small units sub-contractors. The government will assist them to prepare programme of technical assistance, credit for new investment, provision of designs and moulds with long-term contracts for purchase of the products of small units;

iv) the Small Business Finance Corporation will expand its activities to cover the various small-scale industrial estates and will provide them with technical advice in addition to funds.

Role of SMEs: The small and medium enterprises constitute 90 per cent of businesses in Pakistan the SMEs comprise heterogeneous activities but their active presence in services and manufacturing is felt prominently because of large scale manufacturing and corporate sector’s limitations in catering all national demand for goods and services. The SMEs represent a significant component of Pakistan’s economy in terms of value addition and employment generation. SMEs play critical role in the manufacturing sector by providing 80 per cent of industrial employment, contributing 30 per cent to GDP and generating one-fourth of the sector’s export earning.

Its contribution to value added in the manufacturing sector has risen from 27 per cent in 1980-81 to 35 per cent in 1997-98 but its share in employment in the manufacturing sector declined from 85 per cent in 1980-81 to 83 per cent in 1997-98. This implies productivity improvements in the last two decades. It provides employment at lesser cost and its capital requirement it also low.

There is growing recognition of the importance of the SMEs in economic development but the policy framework remained biased against the sector. The growth of small-scale industry in mainly hampered by the non-availability of credit facility in the past. Realizing this constraint the government has opened a micro credit bank, named the Khushali Bank which plans to disburse Rs 500 million loans to poor people during the current year, first year of its operation. The government has reinvigorated and re-organized the Small and Medium Enterprises Development Authority (SMEDA) to provide technical assistance to potential small investors. SMEs still face difficulties in coping with skilled workers requirement, regulation and business environment issues, infrastructure problems like poor electricity, supply, poor technology, poor access to raw material, especially imported, Rowa and inadequate marketing. Following organizations are involved in promotion of small and medium industries in the provinces:

1. The Punjab Small Industries Corporation 2. The Sindh Small Industries Corporation

3. The NWFP Small Industries Development Board

4. The Directorate of Small Industries Balochistan

These organizations have infrastructure like industrial estates, vocational training institutes and funds. But, unfortunately these provincial organizations have not made any mark in promotion of small industries.

The reduction in the costs of communication and transportation, the emergence of the internet or economy, the frictionless flow of global capital and the widespread acceptance of market liberalism have brought about greater economic interdependence and connectivity. globalization is just a succinct way of announcing this reality and pointing to some of its implications.

A country of Pakistan’s demographic size, with people generally enjoying basic freedom of expression, can never be conveniently insulated from evolving idea, technology and changes in the rest of the world. At present, Pakistan can hardly think of options other than economic integration with rest of the world, even though there can be quite different views on the speed with which such integration can and should take place. For these elite consumers, the traders will bring Christian Dior, Rolex and Bally.

In such a scenarios jobs don’t grow enough to match the demand for them. There will be plenty and poverty side by side. For a chosen few, the country will spread the red carpet while most Pakistanis will see no change very soon.

In this context, it is particularly important to have efficient banks and non-banking financial institutions. Keeping the healthy and free from scam and corruption is essential if the millions of thrifty people were to trust the institutions and hand over their savings for investment purposes. Only then will golbalization for Pakistan be more than just a word. In addition, the future industrialization should focus attention on the following areas:

* defence-related industries should be given priority and special encouragement. Arrangement need to be made to combine both civil and defence demand for various components to enlarge the size of this market that has got lot of potential in the Gulf states;

* industries based on highly sophisticated technology and involving high risk and fast obsolescence and for which no capacity exists at present should, as pioneering industries, be provided with special incentives;

* the private sector will continue to be encouraged through fiscal incentives to set up industrial estates to provide not only land and infrastructure but also standard factory buildings, housing, schools, hospitals, and welfare and recreational facilities. The ministry of industries with the provincial governments and other concerned agencies including the SMEDA and the Export Processing Zone Authority will coordinate the selection of sites for industrial estates and provision for gas, telephones and electricity. These estates will be run by the private sector on self-financing basis.

Another major goal of industrial policy would be to strengthen the linkages of the industrial sector within the economy. this is sought to be achieved by developing on the one hand, agro and mineral based industries, and on the other hand creating domestic capacity to manufacture machinery, equipment and intermediate products required by other sectors of the economy.

Such linkages would be used, in combination with various fiscal and other policy instruments, to purposefully achieve dispersal of industry throughout the country in an economically viable manner. The supplies of scarce infrastructure will have to be converged in future into a limited number of growth though establishment of industrial estates of other such measures.

Given the size of Pakistan’s own domestic market, its industrial future lies not only in terms of an inward-looking domestic market approach, but also in boldly facing the competition and aggressively seeking higher share of the world market. The next phase of industrialization must, therefore, include greater emphasis upon strengthening the basic competitive position of the industries through a process of tariff rationalization, modernization, quality control and standardization rather than providing them excessive protection to survive with their own weaknesses and inefficiencies.

The flow of foreign investment in Pakistan has been quite in tandem, which shows the cautious nature of investors and deep thinking for the policy makers to do. In a world deluge with capital out-flow and in-flow countries have to manage the risk factor and laws and structural reforms and government position is very important.

In Pakistan number of factor contributed to the decline in foreign investment recently including tax documentation drive, lack of working capital, political instability, law and order problem, insecurity of foreigners, power failure, reduction in loans, slowdown of urban transport scheme, mechanical problem, lack of infrastructure, poor communication systems are in list to name a few.

Thus, while emphasizing foreign direct investment, let us not forget that we must create bulk of investment from within the country. The challenges are not just attracting FDI; but it is to create an overall positive environment for growth of investment in general. With the economy currently in a sluggish mood, it is time to take effective steps to promote private investment, both domestic and foreign.

In line with the present government’s economic revival programme (ERP), the Board of Investment (BOI) initiative to industrialization has opened doors of a splendid sector to foreign and local investors. The large-scale manufacturing has recorded growth rate of 7.8 per cent while formal manufacturing and others registered a growth of 7.1 per cent and 3.5 per cent respectively.

The above calculations are nearer to the SBP’s third quarterly report in which the country’s growth rate was depicted as less than 3 per cent of the GDP against projected target of 4.5 per cent for the current fiscal year. When viewed in the perspective of a less than 3 per cent population growth rate per annum, one feels nothing but to admit that our development strategy needs to be given one more thought to show improvement in this sector, which has always played a linchpin role in the country’s progress, and now its share to the national economy is conspicuous.