Myths About China and India's Africa Race

By Anil K. Gupta and Haiyan Wang

More countries in Africa are joining the global economy. Over the last decade, the continent’s GDP expanded at an average annual rate of 5.1 percent, low compared with emerging giants like China and India but still well above the global growth rate of 2.9 percent. During this period, Africa also became far more globally integrated and saw its merchandise trade grow at an annual rate of 12.9 percent, vs. a global growth rate of 8.9 percent.

Africa’s economic ties with China and India have grown at a particularly rapid pace. This development—when put in the context of Asia’s ongoing march toward becoming the world’s economic center—has led many to believe that China and India have taken over from the West as the new economic powers in Africa. That conclusion, however, hinges on some common misconceptions about China and India’s engagement with Africa.

Myth No. 1: China and India dominate the race for Africa.

During 2000-2010, Africa’s merchandise trade with China grew at an annual rate of 29 percent (from $9 billion to $119 billion) and with India at an annual rate of 18 percent (from $7 billion to $35 billion). While these growth rates are very robust, they are building on a very low base. So far, Africa’s economic partnership with Europe dominates that with China or India. In 2010, Europe received 36 percent of Africa’s exports, compared with 13 percent for China and 4 percent for India. Over 37 percent of Africa’s total imports came from Europe, vs. 12 percent from China and 3 percent from India. In 2010, even the U.S. was ahead of China in terms of total merchandise trade with Africa.

To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. Each accounts for less than 5 percent of the total inbound foreign direct investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.

In short, as newly active players, China and India are making rapid headway in Africa. However, appearances notwithstanding, they are still far behind the developed economies—especially Europe—in terms of economic engagement with Africa.

Myth No. 2: China and India’s engagement with Africa is all about natural resources.

Many Indian companies are looking at opportunities to sell in African markets. In 2010, Indian mobile operator Bharti Airtel paid $9 billion for the African telecom operations of Kuwait-headquartered Zain. Tata Motors, India’s largest automaker, has opened an assembly operation in South Africa. Mumbai-based Essar Group is investing in the African steel sector and Godrej, another Indian conglomerate from Mumbai, is very active in Africa’s consumer goods market. Karuturi Global, the Bangalore company that is the world’s largest rose producer, has become one of Africa’s largest players in commercial agriculture and leases 1,200 square miles of land in Ethiopia. Indian companies are also very active in Africa’s emerging IT services market.

Chinese companies are also not just focused on Africa’s natural resources. China has taken a growing interest in helping build Africa’s infrastructure such as roads, railways, bridges, ports, and power stations. At the 2009 China-Africa Summit, China pledged to build 100 clean energy projects in Africa covering solar, biogas, and hydropower. It also announced the phasing in of zero import tariffs for 95 percent of products from the least developed African countries.

Both China and India are beginning to see Africa not just as a resource supplier but also as a market and as a target for capital investment in many sectors of the economy.

Myth No. 3: China and India are the new neocolonialists in Africa.

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FINRA Drowning In Complaints About Market Manipulation

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

Right? Maybe not:

The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.

FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.

"We're seeing a large number of order misrepresentations, we're seeing problems with our audit trail," DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.

FINRA has asked firms if they have seen some of the problems internally, and whether they've taken steps to address them, DeMaio added.

And while, rhetoric aside, everyone knows that Finra is completely incapable and actively dissuaded from handling anything that could potentially harm any of the real market "manipulators", because after all Finra is a self-regulating organization which in a market that depends on manipulation means it can't really do much if anything, concerns about record plunge in market confidence are pushing regulators to extend the Volcker Rule to overseas banks with US operations to make sure the Kweku Adoboli incident does not spread to the US courtesy of lax internal risk controls such as that exhibited by UBS, and present the optics they are doing at least something:

Regulators writing a rule limiting proprietary trading by U.S. banks are considering extending the restrictions to overseas firms with operations in the country, according to four people familiar with the proposal.

“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”

The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

Well, courtesy of the staged UBS scandal, that will not be the case any longer.

What also won't be the case, is the plan to promote Delta One in replacing and recycling the correlation-cum-prop trading revenue generator that was implicitly eliminated with the Volcker Rule, but was merely morphed over to a new form of correlation desk trade only this time with a fancier name.

The WSJ reports on the imminent demise of yet another form of pseudo-hedged prop trading:

Delta trading has gained momentum in a markets environment in which the mortgage-bond trading business is on the skids and global regulations require banks to set aside expensive capital for loans.

Wall Street is counting on trading large volumes of stocks and derivatives to bolster revenue.

There is nothing inherently improper about such Delta trading. And many large financial institutions employ this strategy, including Société Générale SA, BNP Paribas SA and Goldman Sachs Group Inc. in Europe and Goldman and Morgan Stanley in the U.S., according to a J.P. Morgan Chase & Co. report.

The trading requires state-of-the-art technology systems and can produce as much as $1 billion in annual revenue at top banks, J.P. Morgan said, which noted, "Delta One products in one area of growth in our view, with strong growth in client volumes, resilient margins and untapped potential in emerging markets."

But it earlier gained notoriety in 2008, when French bank Société Générale said that Jérôme Kerviel had worked on a Delta One desk while trying to hide $7.2 billion in losses in another rogue trading scandal. Last year, Mr. Kerviel was sentenced to three years in prison.

It is safe to say that in an attempt to scapegoat their stupidity and to cover up for internal bank risk control lapses, regulators will once again lash out at banks (which they themselves saved and in doing so encouraged them to take any and all risk knowing too well they can never fail again), making "Delta One" a thing of the past. In the meantime, we are confident that Wall Street is already hatching plans of "financial innovation" for the next big "revenue" thing: probably called Vega 100 or Gamma 69. In the same time, we also expect the following chart showing the relentless outflows from US domestic equity mutual funds - the truest indication of what the US investor thinks about the stock market - to continue bleeding mutual funds dry until there is nothing left.

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Portugal Joins Spain And Greece In Lying About Its "Colossal" Deficit

First Spain's Castilla La Mancha region was the first to announce it had "discovered" major debt ceiling holes, now it is Portugal's turn. The Telegraph informs that "Portugal's new leader Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a "colossal" €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists." And while it answers our immediate question "who's next" it certainly does not provide an answer to who's last. Because as more and more governments are changed, more and more such "discoveries" will be announced, but luckily for Europe (and then America), there are far more pressing issues that distract the populace than discoveries than in the past would have led to popular backlash. Concurrently, Portugal joins Greece in indicating that beggars can most certainly be choosers: "Mr Passos Coelho also appeared to caution the European authorities that his government will not tolerate heavy-handed interference in the country. "We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and let Europe govern Portugal," he told a party gathering." And while short-termism reigns across capital markets at least for a few more hours, the reality is that there is simply not enough money out there to plug each and every hole as it is uncovered. But that will take the market a few weeks to months to realize.

More on Portugal demanding equal terms (with who?) in Europe's resolution of the latest bankrupt state:

There is growing rancor in Lisbon over the term of the €78bn rescue by the EU and the International Monetary Fund, and the sweeping powers of the inspectors as they impose a "structural adjustment" on the economy.

The penal rate of interest charged by the EU is expected to top 5.5pc and risks trapping the country in debt-deflation. At the same time fiscal austerity, without offsetting monetary stimulus or devaluation, may tip the economy into an even deeper downturn.

EU officials are pushing hard for a 100 basis points reduction in rates on rescue loans, hoping to win backing from a reluctant Germany at an EU summit on Thursday.

The revelation of a budget hole in Portugal has echoes of what occurred in Greece in late 2009, when an audit by the new Pasok government exposed a budget deficit twice the level previously declared to the European Commission.

To recap: major lies about deficits in Greece, Spain and Portgual. But certainly all is well in Europe's core and, needeless to say, America. And if it isn't, there is always the printing press. So of all things to get sold off today (as predicted), we get the one asset that can not be printed.

Go figure.

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SoMeHiNG To SMiLe ABouT

With all the other excitement in the news, I'm wondering if any of you have noticed the ominous news reports about the immanent round of Wall Street layoffs.

Last weekend it was reported that the Squids are getting ready to let up to 1000 highly paid Squids roll. They are so concerned about the negative publicity that they were making the rounds around Washington to let everyone know how taxpayer funded bailouts and central bank sponsored entitlements foster negative job growth.

They say they are moving the lost head count to Singapore because it is more hospitable (which is a guffaw). South East Asia has no appetite for a repeat of the Asian financial crisis. Singapore is a hedge fund haven for tax reasons and that more than anything else explains why a hedge fund like Goldman Squid might want to move there. 

Today it was reported that they have given formal notice of a coming statutory "mass layoff" to the NYS Department of Labor.

The Squids are not alone, everyone knows that business is shitty for the banksters and I am told the market reflects as much.

Until a new swindle paradigm emerges it will be rough going across the board. This has absolutely nothing to do with Diamond Back Jamie's laughable perception that the US  has over-regulated (yes over-regulated) the financial sector and more to do with the legacy of toxic shit that is still clogging Wall Street's pipes.

It looks like downsizing a perversely bloated non-productive industry is the order of the day. There is a serious shortage of suckers and there is apparently little PhD douche weasels like Greenspan and Bernanke can do about it, with or without augmentation activities by Timmah the Hamp Hump.

So on your way to wherever it is you are driving or taking the subway this weekend, smile and think about the Wall Street assholes who now have to worry like everyone else for a change. And if you happen to know one, tell him or her about...

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