Wednesday, February 15, 2017

Asia Stocks At 19-Month High, Dollar Up As Yellen Puts March Rate Hike In Play

By Shinichi Saoshiro 
February 15, 2017

Asian stocks scaled 19-month peaks on Wednesday, helped by a record-setting night on Wall Street after Federal Reserve Chair Janet Yellen flagged a possible interest rate rise next month, keeping the dollar near three-week highs.

Spreadbetters saw the boon for equities continuing in Europe, predicting a higher open for Britain's FTSE .FTSE, Germany's DAX .GDAXI and France's CAC .FCHI.

Yellen said on Tuesday the Fed would probably need to raise interest rates at an upcoming meeting, and that delaying rate increases could leave the central bank's policymaking committee behind the curve.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.9 percent, rising to its highest since July 2015.

Australian stocks climbed 0.9 percent, South Korea's KOSPI .KS11 tacked on 0.5 percent and Hong Kong's Hang Seng .HSI advanced 1.4 percent. Japan's Nikkei .N225added more than 1 percent, buoyed by a weaker yen.

"The market took heart from Yellen's comments and such positive sentiment will likely last throughout the day," said Takuya Takahashi, a strategist at Daiwa Securities.

Yellen's remarks helped push Wall Street indexes to record highs overnight by boosting U.S. bank stocks.

"Fundamentally, the U.S. banks are simply being used as a vehicle to express reflation and 'Trumponomics'," wrote Chris Weston, chief market strategist at IG in Melbourne.

"Although last night really belonged to Janet Yellen whose prepared comments that waiting too long to tighten would be 'unwise' and a further review of its policy stance will take place at its upcoming meetings."

In currencies, the dollar index against a basket of major currencies stood at 101.220 .DXY, near a three-week high of 101.380 scaled overnight following Yellen's comments.

Yellen's remarks rekindled prospects in some quarters for the Fed to raise rates three times in 2017 rather than twice. The futures market, however, did not exactly share such a view amid lingering doubts toward the U.S. economy's ability to sustain three rate increases.

According to CME Group's FedWatch data, the chance for the Fed implementing at least three rate increases in 2017, as implied by U.S. interest rate futures FFZ7, stood at around 30 percent, little changed from the previous day.

The greenback was a shade higher at 114.400 yen JPY= after rising to a two-week high of 114.500 the previous day. The euro was virtually flat at $1.0579 EUR= after slipping to a one-month trough of $1.0561 overnight.

The dollar was supported as U.S. Treasury yields rose on the Fed Chair's comments, with the benchmark 10-year note yield US10YT=RR climbing about four basis points to an 11-day high the previous day.

The South Korean won slipped early against the dollar but managed to trim a bulk of its losses. Other emerging market currencies such as the Thai baht, Singapore dollar and Malaysian ringgit also eased earlier but retraced most of their losses.

The stronger dollar, which puts non-U.S. buyers of dollar-denominated commodities at a disadvantage, weighed on crude oil prices.

U.S. crude CLc1 was down 0.7 percent at $52.83 a barrel and Brent shed 0.6 percent to $55.64 a barrel LCOc1. Crude already came under pressure the previous day on evidence of surging U.S. stockpiles. [O/R]

Spot gold XAU= was off 0.15 percent at $1,225.91 an ounce. [GOL/]

Copper on the London Metal Exchange CMCU3 rose 0.8 percent to $6,068 a tonne. The metal has enjoyed support recently following a strike at the world's biggest copper mine in Chile that took it to a 1-1/2-year high above $6,200 a tonne on Monday. [MET/L]

Article Link To Reuters:

The Market May Be Guilty Of Gambler's Fallacy On Fed Rate Hikes

‘Trump runs the risk of overstimulating,’ Perpetual says; History of undershooting on rate rises looms over investors.

By Ruth Liew and Emma O'Brien
February 15, 2017

When successive coin flips turn up heads, a gambler’s instinct would dictate the next toss results in tails -- even if the odds are still 50-50.

That’s the so-called gambler’s fallacy, and financial markets are at risk of making the same mistake of emphasizing past precedent when it comes to Federal Reserve interest-rate hikes, some investors warn. While traders have been lulled by a record of the Fed proving less hawkish than expected, things could change over the coming year.

The scenario some are eyeing: the Trump administration’s coming fiscal stimulus spurs a rapid pick-up in inflation, given the lack of slack in the U.S. economy, with unemployment historically low. Fed Chair Janet Yellen, who has overseen just two rate rises since taking the helm three years ago, then might need to move faster, triggering a surge in the dollar.

“Trump will be inflationary,” Vimal Gor, head of income and fixed interest at BT Investment Management, which has about $67 billion under management, said at a conference in Sydney Tuesday. “The curve out for the next couple of years looks woefully” low in its interest-rate expectations given the likelihood of a Fed response to changing fundamentals, he said.

Though Yellen on Tuesday underscored that the Fed should avoid waiting too long to remove policy accommodation, and flagged that March would be a “live” meeting to consider raising the benchmark rate, markets still are discounting just two hikes this year. Looming in investor memories: the Fed at one point anticipated four moves in 2016, only to enact one.

It has been rare for the Fed to surprise on the tighter side of policy, though under Ben S. Bernanke it was charged with moving too slowly to ease as credit markets seized up in the summer of 2007. The dollar climbed briefly in May 2013 when Bernanke warned of the potential to taper quantitative easing, and advanced in January 2005 when the Fed unexpectedly said rates were “below the level” needed to slow inflation.

“Trump runs the risk of overstimulating the economy,” said Matthew Sherwood, head of investment strategy at Perpetual Ltd. in Sydney, which manages about $21 billion. “At basically full employment, an injection of fiscal stimulus soaks up spare capacity, and that’s associated with rising inflation. The Fed at the moment is very dovish and they’ll only change their spots if inflation supports doing so.”

The experience of other developed nations shows what can happen when central banks turn hawkish. Australia’s dollar jumped almost 50 percent during 2009 and 2010 as a mining investment boom saw the Reserve Bank boost rates by 1.75 percentage points. The Canadian dollar climbed more than 5 percent in 2010 as the Bank of Canada bolstered its benchmark to 1 percent. Both countries, and New Zealand, saw policy makers reverse course after currency strength contributed to undermining economic growth.

“The Fed could actually turn hawkish and tighten policy too much,” Joachim Fels, chief economic adviser at Pacific Investment Management Co., told the Sydney conference via a video link on Tuesday.

One wild card on Fed policy is the makeup of its board. Two of the seven positions are open, and a third member’s pending resignation gives Trump almost half the slots to fill. And later this year, markets may be caught up in speculation on a successor to Yellen, whose term as chair ends in February 2018.

Michael Every, head of financial markets research at Rabobank Group in Hong Kong, encapsulated investors’ premise about the outlook, in a note after Yellen’s first of two semiannual congressional hearings on the economy:

“It is not like the Fed we all know (and love?) to ever dare to surprise us with a hike” that investors weren’t certain was coming.

Article Link To Bloomberg:

Will Amazon Revolutionize Shipping?

By Adam Minter
The Bloomberg View
February 15, 2017

For consumers, Amazon's made shipping easy: Just choose the desired delivery date for your goodies and click. For the manufacturers who have to get those products to you, however, shipping remains a troublesome, inefficient, stubbornly analog business. Your "one-click" often translates into multiple phone calls, emails, faxes and reams of paperwork -- all coordinated by a knowledgeable and well-connected professional.

So Amazon, which prides itself on upending old ways of doing business, is now looking to transform the shipping industry as it has the retail industry. Between October and January, it arranged for the shipping of at least 150 containers of goods from China to the U.S. That’s an infinitesimal proportion of the millions of containers sailing between the two countries every year. But Amazon is just getting started -- and the company isn't alone. Last month, Alibaba started booking space for its suppliers on Maersk container ships, joining a growing wave of e-commerce companies looking to bring greater efficiency and transparency to the $160 billion business of arranging cargo shipments.

Amazon's interest in the arcane world of freight forwarding dates back to 2012, when the Seattle-based company first allowed Chinese suppliers to sell goods in Amazon's online marketplaces. Sellers can either ship products directly to customers or to Amazon, which then packs and delivers the products on their behalf. Already, 62 percent of Chinese e-tailers sell on Amazon platforms. Making shipping more straightforward -- and, hopefully, cheaper -- would in theory make Amazon a more attractive platform for these companies than, say, Alibaba or eBay.

At the moment, there's nothing easy about shipping, at least not for the kind of small- and medium-sized companies that tend to sell on Amazon. Large appliance brands and other major manufacturers have the scale to arrange and negotiate good rates for shipments directly. Everyone else has to engage the services of a freight forwarder. The role of the forwarder is all-encompassing. The job includes negotiating the best rates and most efficient use of multiple modes of transport, including trucks, rail and ocean-going vessels. The forwarder has to prepare all the accompanying paperwork as well, including customs documentation. When a problem arises -- say, a container is delayed at port -- the freight forwarder is expected to have the longstanding relationships needed to get it moving again.

The customer-service aspect of freight forwarding in particular has long resisted automation; there's no easy way to replicate relationships with shipping companies and port officials. But that doesn't change the fact that freight forwarding is opaque and highly inefficient. For example, the ability of forwarders to determine the best rates and speeds for shipping is oftentimes limited to a proverbial (and sometimes real) rolodex. Online portals where manufacturers can track their shipments are largely unknown. Stop by one of the many freight forwarders who offer their services in a port city like Shenzhen and you're almost certain to see a fax machine humming.

Amazon thinks technology can eliminate many of these inefficiencies. For example, determining the fastest and most cost-effective shipping rate is really a question of data collection and analytics -- two things Amazon does very well (and smaller startups are already doing successfully). Amazon's size and data capacities should allow the company to buy up many more containers and coordinate more shipments than any individual freight forwarder could.

More efficient logistics would also help Amazon cut down on various transaction costs, including booking fees and government filings. And finally, Amazon, perhaps more than any other company, has the ability to create a one-stop, one-click shipping portal that would vastly simplify the process for manufacturers, while making it easier for them to track shipments. That's a considerable competitive advantage. Eventually, Amazon could offer the service to any manufacturer, even those not selling on its platforms.

Indeed, for companies such as Amazon and Alibaba -- whose OneTouch service has been helping Chinese manufacturers arrange air freight and customs clearances since 2010 -- freight forwarding represents a side business that helps them extend their reach deeper into the global supply chain. But as their efforts begin to lift the industry out of the dark ages, technology should make the process of shipping cheaper and more accessible to more companies than ever before. That's good news for consumers and a globalizing economy that could use a fresh wind in its sails.

Article Link To The Bloomberg View:

Oil Dips Over Doubts High OPEC Compliance With Agreed Cuts Will Last

By Henning Gloystein 
February 15, 2017

Oil prices dipped on Wednesday over concerns that OPEC producers would not be able to maintain their high compliance so far with output cuts aimed at reining in a global fuel supply overhang.

Brent crude LCOc1 was trading at $55.62 per barrel, down 35 cents, or 0.63 percent, from its last close.

U.S. West Texas Intermediate (WTI) crude CLc1 was down 37 cents, or 0.73 percent, at $52.83 per barrel.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia agreed in December to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017.

BMI Research said that, based on an estimated compliance with planned production cuts of 92.8 percent by OPEC alone, output was down 1.08 million bpd.

But BMI warned that a compliance rate of just 40 percent by Iraq, OPEC's second-biggest producer, "could prove problematic to group cohesion" as others will have to go beyond their targets to meet the overall goal for the first half of 2017.

Some traders said upcoming oil field maintenance across the Middle East might help the group achieve production cuts.

Yet overall, analysts said oil markets remain well supplied despite the OPEC-led cuts, in part due to a 6.5 percent rise in U.S. oil output since mid-2016 to 8.98 million bpd. [C-OUT-T-EIA]

U.S. bank Citi said that it was lowering its 2Q 2018 and 4Q 2018 oil price forecasts by $1 a barrel.

"Our ICE Brent forecasts for 2Q'18 will now be $63 per barrel and for 4Q'18 will be $58 per barrel to give a calendar average of $60 per barrel," it said.

Outside physical oil markets, a rising correlation between crude futures and the U.S. dollar .DXY has caught market attention.

Oil prices and the dollar are typically in an inverse correlation. A strong greenback weighs on crude as it makes fuel purchases more expensive, potentially crimping demand. A weaker dollar supports oil by making fuel imports cheaper.

That inverse correlation has been recently upended, and the price link between Brent and the dollar is now at its highest since 2005, Thomson Reuters Eikon data shows.

This has come as oil was lifted by the production cuts, while the dollar received support from rising interest rates.

Should a strong dollar and rising oil prices persist, traders say that would be a driver for higher inflation.

In Britain last month, a strong dollar and firm oil prices contributed to the fastest rise in consumer prices since June 2014.

Article Link To Reuters:

Humana To Pull Out Of Obamacare Exchanges In 2018

By Bertha Coombs
February 15, 2017

While Republicans continue to grapple with plans to repeal and replace Obamacare and stabilize health insurance rates, Humana is the first major insurer to say it is dropping out of the individual market for 2018.

"Based on our initial analysis of data associated with the company's health-care exchange membership following the 2017 open enrollment period, we continue to see further signs of an unbalanced risk pool," said Humana CEO Bruce Broussard, on a conference call with analysts Tuesday. "Therefore, the company has decided that it cannot continue to offer this coverage for 2018."

In the wake of the news, President Donald Trump tweeted that the insurer's decision was another example of the failure of the Affordable Care Act, and he reiterated his plan to "repeal, replace & save healthcare for ALL Americans."

The health insurer made the announcement with its earnings update, following the mutual termination of its $34 billion merger agreement with Aetna earlier in the day. The two insurers agreed to part ways, after a federal court judge blocked the deal on antitrust grounds.

Humana now expects to earn $10.80 to $11.00 per share for 2017, excluding anticipated losses on its exchange business.

Humana cut back its Affordable Care Act exchange participation to 11 states last July, when the Department Of Justice sued to block its deal with Aetna. The insurer said that despite efforts to mitigate losses on its exchange plans in 2017 through narrower networks and selective market participation, it is seeing early signs of high pharmacy utilization among its new members.

Right now, the insurer estimated that it will lose a modest $45 million on ACA exchange plans, but it cautioned that this is an early estimate and "a number… that we're going to have to evaluate."

Other health insurers have threatened to pull out of the individual market if there is no clarity from Capitol Hill or Trump's health officials on stabilizing the markets, but Humana is the first to say that it will pull out altogether.

Leading up to 2017 open enrollment, the exchange markets experienced tremendous turbulence last year, after most major insurers, including Humana, cut back on participation after suffering big losses on exchange plans.

Humana is a leading Medicare Advantage plan provider, and executives said that they don't believe that they can achieve the same kind of health-care models on the Obamacare exchanges that they achieve with health plans for seniors.

The company does not hold out hope for more detail on Republican "repeal and replace" plans in the near term.

"We're really feeling that this organization needs to stay focused on what we do well," Broussard said, and the company can't do that with Obamacare plans. "I think with that particular program, the way it is designed today and most likely the way it is designed in the future, will limit our ability… to get back into that marketplace."

Article Link To CNBC:

Pharma Industry Shuns Trump Push For Radical Shift At FDA

By Deena Beasley
February 15, 2017

U.S. President Donald Trump's vow to roll back government regulations at least 75 percent is causing anxiety for some pharmaceutical executives that a less robust Food and Drug Administration would make it harder to secure insurance coverage for pricey new medicines.

The prospect of big change at the regulatory agency comes as drugmakers are under fire for high prices, including Marathon Pharmaceuticals LLC, which said Monday it was "pausing" the launch of its Duchenne muscular dystrophy drug after U.S. lawmakers questioned its $89,000 a year price.

Industry trade group Biotechnology Innovation Organization told Reuters that during high-level discussions with Trump advisors, lobbyists urged the administration not to name a new commissioner of the Food and Drug Administration who would act rashly to speed up the agency’s approval of new medicines.

That sentiment was echoed by executives at more than a dozen pharmaceutical and biotechnology firms, who told Reuters that the FDA is already adopting new drug development models and warned that a looser review process would put patients at risk.

"People often argue that the FDA is too restrictive," said Roger Perlmutter, head of research and development at Merck & Co Inc (MRK.N). "We have the sense that the balance is pretty right ... you have to have a well-characterized risk/benefit profile."

That stance underscores the unique position the drug industry finds itself in when it comes to regulating its products. While most sectors welcome less oversight, drugmakers say a robust review process is critical in convincing physicians and insurers that a pricey new medicine has value.

Otherwise, the time and money it takes to get a new drug to market - estimates run as high as $2.6 billion - would be lost if insurers are not willing to pay for the product.

"It is great that the administration is seeking deregulation ... to make sure the private sector can be more competitive," said John Maraganore, chief executive officer at Alnylam Pharmaceuticals Inc (ALNY.O) and co-chair of BIO's regulatory committee. "But payers are looking for evidence of value."

He said the FDA should speed the approval of lower cost generic versions of drugs that have lost patent protection, but warned that allowing novel products to be launched without extensive testing could be dangerous.

"Any change at the FDA that allows drugs to be tried out on patients without clinical evidence is a damaging approach," said Jeremy Levin, chief executive officer at Ovid Therapeutics Inc., which is developing drugs for rare diseases.

Health insurers are pushing back against high-priced drugs. Sales of expensive new cholesterol drugs from Amgen Inc (AMGN.O) and Regeneron Pharmaceuticals Inc (REGN.O) have stalled as insurers limit coverage until they see results of trials designed to prove that the drugs significantly lower the risk of heart attack and other cardiovascular crises.

"It is one thing to get a drug approved, but you have got to get reimbursed," said Paul Perreault, CEO at biotech company CSL Ltd (CSL.AX), adding that won't happen unless payers see proof that a new drug is better than what is already available.

To be sure, some pharmaceutical executives have been vocal about the need for deregulation. Reducing regulation "will help with drug prices, because it will induce more competition," Pfizer Inc (PFE.N) CEO Ian Read said on a recent conference call.

After top executives at Merck, Johnson & Johnson (JNJ.N) and others met at the White House last month with Trump, who pledged to “streamline” the FDA, industry trade group Pharmaceutical Research and Manufacturers of America said the meeting found common ground such as tax reform, and removal of outdated regulations. The trade group declined to comment on changes at the FDA.

The prospect of a shake-up at the FDA is being welcomed by a new class of investor with ambitions to disrupt the current drug development model, in which larger pharmaceutical players often buy or license early-stage medicines, and reap the bigger rewards if they succeed.

"The system we have now has its roots 50, 60 even 70 years ago ... it has become incredibly expensive," said Tim Shannon, of venture capital firm Canaan Partners.

He supports the notion that some prescription medications could reach the market, possibly at discounted prices, once testing shows they are safe. If such controlled usage indicates that they are also effective, prices could then be raised.

"We want to make healthcare itself more efficient," he said. "Let the marketplace decide how valuable a drug is."

The fate of deregulating the FDA will be driven by its next commissioner. President Trump said last month he has a "fantastic person" lined up for the role.

Candidates, according to sources close to the administration, include former FDA staffer Scott Gottlieb, and Jim O'Neill, a colleague of Trump supporter Peter Thiel who has advocated for allowing some medicines to reach the market once they are shown to be safe, even if there is scant evidence that they work.

A recent survey of drug company executives conducted by Mizuho Securities found that 72 percent said Gottlieb should be Trump's pick to head the FDA.

"There is no groundswell of movement for change," said attorney Jim Shehan, head of Lowenstein Sandler's FDA regulatory practice. "The industry likes certainty."

Article Link To Reuters:

Berkshire Takes Huge Bite Of Apple, Boosts Airline Stakes

By Jonathan Stempel 
February 15, 2017

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) was an aggressive buyer of stocks in last year's fourth quarter, nearly quadrupling its stake in Apple Inc (AAPL.O) and increasing its stake sevenfold in the four biggest U.S. airlines.

In a regulatory filing, Berkshire reported owning 57.4 million shares of Apple as of Dec. 31, which would now be worth $7.74 billion, up from just from 15.2 million shares in the iPhone maker three months earlier.

Berkshire also reported a $9.3 billion airline stake, with investments topping $2.1 billion in each of American Airlines Group Inc (AAL.O), Delta Air Lines Inc (DAL.N), Southwest Airlines Co (LUV.N) and United Continental Holdings Inc (UAL.N).

It also disclosed new stakes in satellite radio company Sirius XM Holdings Inc (SIRI.O) and seed company Monsanto Co (MON.N), which is being bought by Germany's Bayer AG (BAYGn.DE).

Though it is unclear who make which investments, the filing appears to reflect much of the $12 billion of stock that Buffett said he had bought between the Nov. 8 Presidential election and the end of January.

Larger Berkshire investments such as Wells Fargo & Co (WFC.N), Coca-Cola Co (KO.N) and International Business Machines Corp (IBM.N) are normally Buffett's, but the 86-year-old billionaire has given his deputies Todd Combs and Ted Weschler more to invest over the years.

Berkshire's initial investment in Apple got attention last year, given Buffett's usual aversion to technology companies - apart from IBM - which he considers outside his zone of competence.

The new, larger stake makes Berkshire one of Apple's 10 biggest investors.

"I'm stunned to see the size of that Apple position," said Thomas Russo, who oversees $11 billion of assets, including 12 percent in Berkshire, at Gardner Russo & Gardner in Lancaster, Pennsylvania.

Berkshire did not respond to a request for comment.

The Omaha, Nebraska-based conglomerate also owns roughly 90 companies such as the BNSF railroad, Geico car insurance and Dairy Queen ice cream.

Its Class A shares closed on Tuesday up $2,078.95 at $250,419, a record high closing price and less than 0.2 percentage points below its all-time high on Dec. 14.

Apple Becomes Core Holding

The plunge into Apple appears particularly well-timed.

Shares of Apple closed on Tuesday up $1.73 at $135.02, also a record closing high.

Assuming Berkshire has not sold its stake, Apple's 16.6 percent gain this year would leave it with a $1.1 billion paper profit in 2017 alone.

It had been widely believed that Berkshire's initial investment came from Combs or Weschler.

But their decisions have sometimes influenced Buffett, as when Berkshire last year paid $32.1 billion for aircraft parts maker Precision Castparts Corp, once a Combs investment.

"It's quite possible that Warren woke up and began to understand the virtues of Apple that he had been neglecting or, like with Precision Castparts, Todd or Ted had an affinity for Apple that sparked interest from Warren," Russo said.

Combs and Weschler are the leading candidates to eventually succeed Buffett as Berkshire's chief investment officer.

The airline investments, meanwhile, suggest that Buffett has overcome his two-decade aversion to the sector after an unhappy - though, he has said, profitable - investment in US Air Group.

Buffett told talk show host Charlie Rose in an interview last month that it was "in large part" his decision to dive back into airlines.

"The industry was once balkanized, but now it is bulking up, and has come to realize that an empty seat is a perishable asset," Russo said. "More planes are traveling more full."

Shares of American, Delta, Southwest and United, as well as Apple, Monsanto and Sirius, rose in after-hours trading.

Such increases often occur when investors perceive that Berkshire has given a company its imprimatur.

Monsanto and Sirius did not immediately respond to requests for comment.

To make room for new investments, Berkshire appeared to have shed a $1.8 billion stake in agricultural equipment maker Deere & Co (DE.N) and nearly all of what remained from a more than decade-old stake in retailer Wal-Mart Stores Inc (WMT.N).

Article Link To Reuters:

U.S. Business In China Warms To Possible Trump Trade Policy Shake-Up

By Michael Martina and Matthew Miller 
February 15, 2017

"Reciprocity" has become the new buzzword in the U.S. business community in China, with some industry leaders saying they would welcome a tougher approach from the Trump administration in opening up the markets of the world's second-largest economy.

It's a striking shift within the American community here, which had long lobbied Washington against taking more aggressive policies, fearing they could draw retribution from China's leaders.

President Donald Trump's picks for Commerce Secretary and Trade Representative, Wilbur Ross and Robert Lighthizer, have in the past backed the reciprocity principle when it comes to China: that Beijing should provide the same access and benefits to American business in China that Washington gives the Chinese in the United States.

"Our membership has moved to some extent in that direction as well, in advocating a firmer posture with respect to China," said Lester Ross, chairman of the American Chamber of Commerce in China's policy committee.

He made the remarks in January after the group issued a report that found over 60 percent of the chamber's members had "little or no confidence that the Chinese government is committed to opening markets further in the next three years".

Many sectors of China's economy are either off limits or severely restricted to foreign investors.

Foreign banks in China, for example, account for less than 2 percent of total assets, according to the China Banking Regulatory Commission.

A 50-percent ownership cap for foreign life insurers, despite China's 2001 World Trade Organization commitments to lift it, has helped limit their market share to about 6 percent.

China's Anbang Insurance Group ANBANG.UL, on the other hand, has spent more than $8 billion acquiring U.S. assets, including the Waldorf Astoria Hotel and Strategic Hotels & Resorts. It is still waiting for regulatory approval to buy U.S. life insurer Fidelity & Guaranty Life (FGL.N) for $1.6 billion.

"China Has Overreached"

The same imbalances can be seen in sectors such as automotives, payment cards and technology.

China's Geely Holding Group [GEELY.UL] bought Volvo from Ford Motor Co. (F.N) in 2010, but foreign companies are required to set up joint ventures to assemble vehicles in China, often transferring technology in the process.

While China's UnionPay has grown to become the world's largest payment card, according to the number of cards issued, U.S. credit card operators Visa (V.N) and MasterCard (MA.N) have yet to be independently licensed to clear transactions in China, despite a 2012 WTO ruling mandating that Beijing open the sector.

Foreign technology hardware and service providers are bristling at requirements to meet the restrictive terms of newly minted cyber security regulations. Beijing's "Made in China 2025" plan also calls for a progressive increase in domestic parts used in priority sectors, such as advanced information technology and robotics to 70 percent by 2025.

James McGregor, Chairman of APCO Worldwide, Greater China, said the idea of some form of reciprocity is gaining traction, particularly in combating "techno-nationalism". "You've got Chinese companies that have protected markets and make loads of money and then they are going out and doing international acquisitions that could destroy other companies," McGregor said. "Now China has overreached so much they have alienated much of the business community."

McGregor said U.S. policy makers had to figure out how to use America's openness and rule of law to deal with China, instead of allowing them to become vulnerabilities. The question is how to craft a reciprocity policy without destabilizing bilateral relations or triggering a retaliatory backlash against U.S. businesses in China.

Chinese state media has warned that U.S. businesses could be targets in any trade war that Trump may unleash - he has threatened to label China a currency manipulator and slap heavy tariffs on Chinese goods.

China's Ministry of Commerce did not respond to a request for comment on the issue of reciprocity.

But Tu Xinquan, a trade expert at Beijing's University of International Business and Economics, said Trump's options would be limited by his promises to create jobs.

"If you close the door to Chinese investments, that's not good for American employment," Tu said.

Bad Policy

One way to achieve reciprocity would be to use the Committee on Foreign Investment in the United States (CFIUS) security review process to wall off industries where U.S. businesses face discrimination in China. But most experts see that as straying too far from the free market orthodoxy that has drawn investment and jobs to the United States for decades.

James Zimmerman, a Beijing-based lawyer with Sheppard Mullin and a former chairman of the American Chamber of Commerce in China, said strict reciprocity would be bad policy and against the U.S. system of open investment.

"We need to be very careful what we ask for," Zimmerman said.

Proponents argue reciprocity does not violate free market principles, but is a needed intervention due to a market failure, much as the government uses antitrust policy to crack down on cartels.

Thilo Hanemann, in a Rhodium Group report to the U.S.-China Economic and Security Review Commission, said simple calls for reciprocity are "misguided". But, he added, if China's "commingling of commercial and political motives is not resolved, then a new chapter in U.S. – and global – competition policy activism may be required."

Article Link To Reuters:

Goldman Sachs Warns Of China Economy Risks During Year Of The Rooster

Relative calm seen coming at cost of credit surge, imbalances; Base case remains for modest slowdown even as risks remain.

By Enda Curran
February 15, 2017

China’s economy may have slipped down the global worry list, but significant risks remain, including an abrupt end to a massive credit boom or an overly aggressive policy response if inflation should speed up, according to Goldman Sachs Group Inc.

While a hard landing isn’t the New York-based bank’s base case for 2017 -- it expects only a modest slowdown -- economists warn that a push to rein in cheap loans will weigh on key sectors such as housing. Officials are trying to keep a lid on frothy house prices without harming the wider economy, where growth remains heavily reliant on government spending.

The scale of the lending boom was laid bare in data Tuesday showing China added more credit in January than the equivalent of Swedish or Polish economic output, fueling worries about the spree’s sustainability. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion). Despite the headline number, the growth of total credit continues to ease moderately, according to Bloomberg Intelligence.

Policy makers have begun to tighten money market rates and analysts expect further measures to cool lending without choking the wider economy, especially amid important political changes with a major Communist Party leadership reshuffle set for later this year.

Economic threats aren’t all home grown. External risks include a sharp drop in exports due to slowing demand or rising trade barriers -- U.S. President Donald Trump has promised tariffs on Chinese goods -- and faster-than-expected rate hikes by the Federal Reserve.

“We see the biggest risks in China centering on the country’s rising credit imbalances, with mis-calibration of policy or a sharp external shock as possible triggers of a sharp tightening in credit conditions and hard landing in growth,” economists led by Andrew Tilton wrote.

A slowing China would have spillover consequences for all of Asia, especially smaller open economies that rely heavily on trade. Commodity prices would suffer with knock-on effects for producers such as Indonesia and Australia. A combination of decelerating Chinese growth and financial market volatility would also reverberate around the world through pushing the dollar higher and knocking equity prices, the analysts cautioned.

“Open Asian economies, particularly those with commodity exposure and/or dollar indebtedness, remain the most vulnerable to a hard landing in China,” they said.

To be sure, China has buffers to offset any shock including a large current account surplus, robust net international investment position, low external debt and still-substantial foreign exchange reserves, the economists noted.

Article Link To Bloomberg:

Japan's Abe: Trump Shares View That Monetary Policy Not Forex Manipulation

By Stanley White
February 15, 2017

Japanese Prime Minister Shinzo Abe said on Wednesday U.S. President Donald Trump shared his view at last week's summit that Japan's monetary policy was not currency manipulation but to end deflation.

Abe's comments about the Feb. 10 summit suggest Trump may be softening his criticism that Japan was manipulating its currency to gain a trade advantage.

"I think Trump shared the view that our monetary policy is not for currency manipulation but for ending deflation," Abe said in the upper house of parliament.

Abe also said he explained how Japanese automakers with factories in the United States contributed to job creation in the world's largest economy. Trump did not make any demands for Japan to further open its economy to imports, Abe added.

Trump has questioned the small number of U.S. auto exports to Japan, raising concerns he could pursue protectionist trade policies to lower the U.S. trade deficit.

Trump won the presidency with promises to put America first by renegotiating bilateral trade agreements to bring jobs back to the United States, which has raised concerns that global trade could suffer as a result.

However, when Abe visited the United States last week, his summit meeting with Trump proceeded in a fairly cooperative manner.

Not only did Abe avoid criticism of his economic policies, he also held a joint press conference with Trump in response to a sudden missile launch from North Korea, which demonstrated the strength of the U.S.-Japan alliance.

Article Link To Reuters: