Foreign Demand for US Assets Rebounds

Despite Russia and China having trimmed their US assets, there has been an increased demand to gain American long-term securities holdings. The US Treasury Department reported that foreigners purchased $90.7 billion more in long-term U.S. securities than the Treasury Department sold in June. This is a significant change from May when the department sold $19.4 billion more than was purchased by foreign countries and investors. This shows that there may be increased confidence in the US economy from abroad than there previously has been.

Volkswagen to Raise $5.7billion for Porsche Acquistion

Volkswagen said that it would work to raise approximately $5.7 billion to acquire a stake in Porsche. Volkswagen is currently planning to acquire a 42% stake in Porsche's sports car division. Porsche said on Friday that Qatar Holding LLC will acquire 10% of the Porsche holding company's shares. This move would thus free up more than €1 billion for Porsche. Porsche has already noted that it has decided to write down the value of its options structure so as to prepare for the sale.

Republic Wins Frontier

Republic Airways Holdings won a bid to gain Frontier Airlines. Republic paid $108.75 million for the airlines. Frontier had had another bid from Southwest Airlines worth $170 million but ultimately turned down the offer because of union conflicts. Frontier had filled for Chapter 11 back in April of 2008 and had to be auctioned off.

Tougher Anti-trust Regulations for M&A Deals

Since the Obama administration took office it has been noted that scrutiny of major M&A deals has become a lot tougher and more restrictive. This happens as M&A is looking to make some headway, thus possibly causing some slow down. These changes come after a series of deals were let through by the Bush administration that came under fire, like the merging of Sirius and XM Radio as well as Whirlpool Corp and Maytag.

M&A Activity Should Increase in the Private Sector

It is being predicted that American M&A activity will begin to skyrocket sometime between now and the next year. Dennis Roberts of the McLean Group attributes this rise to four factors. He tells that the burnout in the ranks of baby-boomer business owners, rapid technology advances, long-term growth in the appetite of foreigners for United States companies and a buildup of cash at the U.S.’s private equity groups will converge to help the M&A market. We're hopeful that he's right, such a boom could be of great help to the economy.

Hope for the EU

France and Germany are showing signs of growth, prompting hopes that the EU will recover quicker than expected. Both countries saw growth of 0.3 percent from the previous three-month period, something that surprised most experts who believed that the economies would continue to fail. France's finance minister has credited their "cash for clunkers" program as one of the major reasons that the economy is starting to improve.

China’s Interior Development and Competition to Low-Cost Asia

From our friends at CH-ina.com

The Inland Coast –
China’s Interior Development and Competition to Low-Cost Asia

The recent crisis has made it even more important for China to depend less on the rest of the world for growth and to develop quickly the interior markets. While exports contribute to only 20% of China’s GDP, export growth accounted for half of 2008’s economic growth.

Yet, due to difficult or expensive logistics, over 90% of China’s exports are produced within 250 km of the seashore. These exports, the foreign investments and the know-how that foreign enterprises brought have been the growth engines of the coastal regions of China. Meanwhile, the interior has mostly developed through infrastructure financed by the government and consumption growth, partially fueled by the income that migrants working on the coast send back home.
As a result, disparities between regions are quite extraordinary. Shanghai’s average salaries are twice those of neighboring Anhui province. Minimum salaries in Hefei, Anhui’s capital city, are 35% lower than those of Suzhou (the international manufacturing center of choice, next to Shanghai).

One could imagine a development model where the coastal areas’ continued growth generates enough wealth to drive the development of the interior. However, in this case the wealth gap between regions will not be reduced, or will even increase. Besides, China’s middle class is only about 2 to 300 Mio. strong. To count on their consumption to raise the living standard of the Inland’s 800 Mio. low income citizens will take too long.

On the other hand, the direct Inland’s development is also an opportunity to maintain exports levels: while the coast has become expensive, minimum wages in Anhui and Hebei (the Chinese provinces along the Yangtze River West of Shanghai) are competitive with those of Indonesia.
Besides, Vietnam’s minimum wages are catching up with this region’s too. This is mainly due to very high inflation in Vietnam in 2008 (23%), and an expected 10.5% price increase in 2009 while China’s CPI will stay around zero this year. As a result, Vietnam’s labor cots are not low enough to give it an important production competitive advantage, particularly when one takes into consideration China’s superior supply chain. (The range of components and materials available domestically is close to what is available in Europe. Additionally, their quality/price ratio is most competitive.)

To make good on the opportunity, large container ports are being built along the Yangtze River that will make shipping of goods almost as convenient as they are from the coastal cities. Wuhan (capital of Hebei) already has one while Chongqing (1’500km inland!) is building its own.

In addition, to ensure access to all the soft skills (management, knowledge of international markets and cultures, financial and insurance services), Shanghai, at the mouth of the Yangtze River, is building one of the largest people transportation hubs in the world. It will bundle conventional and magnetic levitation very high speed trains (up to 400 Km/h), 5 metro lines, and the newly expanded Hongqiao airport. The hub will start operating for the World Expo in May 2010 and, by 2020, it is planned to handle the extraordinary amount of 400 Mio. passengers per year!

In addition to linking Beijing to Shanghai by rail in under 5 hours, Chengdu (in the far west of China, at the end of the Yangtze valley) will be reached in just 7 hours. Hefei and Wuhan, now too far to be considered as part of the Shanghai area, will be within 3.5 and 1.5 hours reach of Hongqiao. The new trains will allow day trips and actually make these large cities of almost 5 and 7 Mio. inhabitants part of the Yangtze Delta. Alone, these two Yangtze River capital cities and their provinces will add populations of 130 Mio. inhabitants to the Greater Shanghai area.

As it develops, the Yangtze valley will add an inland coast of more than 1’500km, with Shanghai as its bridge head to the world.

In the coming decade, the Shanghai Greater area will become a formidable region gathering populations the size of the USA or Western Europe and be able to compete internationally both in the low-cost and high-tech exports.

Watch out for China’s interior development and the new opportunities that the Inland Coast emergence will bring in the coming years!

Nicolas Musy

US Deficit Getting Bigger and Bigger

The United States deficit grew $180 billion in July. This brings the fiscal year-to-date deficit to $1.267 trillion, which is triple what it was this time last year.

American Labor More Efficient than Chinese?

According to Bill Waddell, Apple should be having a hard time justifying why they would rather manufacture IPod's in China than in the States. Although the cost of labor is obviously skewed in China's favor, technology and time efficiency would make it so that it is actually more efficient both time and money wise for Apple to simply manufacture IPods in the United States. So what other companies are out there, using cheap Chinese labor when they could be making more of a profit by just manufacturing in America? Is this an adequate way of explaining why labor should be brought back to the States?

DSME to Buy Composite Tech's Turbine Business

In a deal worth $46 million, South Korean company, Daewoo Shipbuilding & Marine Engineering Co., Ltd has bought nearly all of the operating assets and operating liabilities of DeWind Inc