#LatinAmerica: after a decade of budgets and politics buoyed by high commodity prices, the raw realities of geopolitics are back with a vengeance.

An excellent analysis from Stratfor on the future political landscape shape in Latin America. 

The New Latin America

By Reggie Thompson

Several years into a Chinese economic slowdown, the Latin American economies that relied on China to buy up their key exports are feeling the pain. With less hard currency coming in, governments across the region are rapidly readjusting their spending plans and preparing to govern in an environment in which they will have fewer resources to secure their key constituents' political loyalties.

The Role of Geography

Ever since commodity prices began dropping several years ago, much has been written about how slow economic growth and potential political instability will plague Latin America in coming years. But what will Latin America as a whole look like in a decade as a result of the Chinese economic downturn? What ideologies will dominate in a continent that over the past decade veered toward leftist populism? And what issues will define its relationship with the United States, the hemisphere's undisputed hegemon?

The region's geopolitics hold the beginning of an answer. The first step is to view Latin America's geographic regions and countries as a series of divided islands rather than a united entity. Unlike Western Europe, where the relative absence of natural obstacles eventually gave rise to interconnected political entities, South America is bisected by the dense Amazon rainforest and divided lengthwise by the nearly insurmountable Andean mountain range. Latin American colonies were divided even before the collapse of the Spanish Empire in the Americas more than two centuries ago. After independence, this disconnected geographic landscape created dozens of economies of wildly varying sizes often more linked by trade with partners outside the region than with each other. With few unbroken expanses of arable land and high transport costs across the forests and mountains, Latin America was simply not in a position to create capital on the scale of the United States or Western Europe. Consequently, even major Latin American states such as Brazil or Mexico remain highly reliant on inflows of cash from abroad to keep their economies afloat and rely on exports to China or the United States for a significant part of their foreign trade.

  

Unsurprisingly, the goal of forming institutions that can provide lasting political and economic unity has eluded Latin American statesmen. Numerous attempts have been made to unite the fractious region: Simon Bolivar's ill-fated 19th-century bid to unite South America, a similar attempt at uniting the Central American states into a federation and the more recent creation of separate economic blocs in Latin America. Yet the isolation created by geographic barriers has foiled leaders' attempts to unite the region's countries into a real economic or political union on the scale of the European Union or even the North American Free Trade Agreement. In recent history, the closest that Latin American states came to some sort of unity — besides regional trading blocs such as the Common Market of the South and the Pacific Alliance — was the wave of leftist populist governments that swept the continent beginning in the early 2000s. But after a decade of budgets and politics buoyed by high commodity prices, the raw realities of geopolitics are back with a vengeance.

The Shape of Governments to Come

We cannot define the exact nature of the national governments that will emerge during the next decade; short-term actions are less predictable than long-term trends, and attempting to forecast which people or parties will lead countries such as Brazil after its 2018 elections or Venezuela after its presidential election in 2019 is very risky. However, we have a rough idea of the shape these governments will take. With less revenue available to pacify restive populations, the new governments will likely be more economically pragmatic than their predecessors. This is not to say that populism as a means of governance in Latin America will subside; rather, rulers are likely to take more care in how they relate to their voters and the outside world.

Because the region is so dependent on foreign capital for continued economic growth, and because states' export revenues are so depleted (in Bolivia, for example, export revenue is down by nearly a third compared with last year), leaders are more likely to refrain from mass nationalizations or hostility to foreign companies. During the past decade, leftist governments seized numerous private assets in disputes with private firms. Except for extreme cases such as Venezuela  — which, because of its default risk, economic problems and past expropriations, is already de facto cut off from most foreign lending and many investments — most states will likely now try to encourage investments rather than scare them off. Consequently, Latin America is likely entering an era in which the grand populist gestures of the past decade will no longer yield the same results as before and can, in fact, be counterproductive for leaders trying to restart their faltering economies.

The weakening of the Latin American left is another factor that will shape the coming decade. In the next 10 years, the governments that came to power during the boom times will reach the end of their tenures. The list of states that will evolve from leftist administrations into some other type of government is lengthy. Venezuela will reach the painful point of reckoning in which its ruling United Socialist Party will split apart. And as the party splits, Venezuela will undergo a painful economic restructuring and a political shift away from extreme populism. In Ecuador, leftist President Rafael Correa may not secure even another four-year term. In Bolivia, low export prices for natural gas will put President Evo Morales' ability to secure another decade in office to the test.

Perhaps the only exception will be Colombia, where a possible peace deal with rebel groups could bring the left into the national fold, which could lead other parties to co-opt more leftist ideas. But even Cuba, long the bastion of Latin America's left and its ideological center, will eventually move into the United States' political orbit, likely in exchange for the lifting of the five-decade trade embargo.

The left's decline will give the United States an exceptionally benign climate for managing its relationships and priorities to the south. To be sure, longstanding concerns — such as trade, drug trafficking and illegal migration — guiding the United States' actions in much of Latin America will remain. But the bumper crop of leftist states that were often minor hindrances to U.S. political moves in the region will become less of a factor in the next decade. Washington's new priorities in the region, such as cushioning Venezuela's economic collapse and bringing Cuba into some sort of improved trade relationship, will occupy the United States' time.

Of the states currently undergoing deep economic downturns, several seem poised to make a resurgence. Mexico is an outlier, given than it is so linked to the United States through trade. But those links will ensure that despite problematic public finances, Mexico will remain a major force in Latin American economic growth. For Peru and Colombia, international trade will drop over the next several years, but their stable public finances will likely ensure some degree of social stability. And even Brazil, in the midst of a massive corruption scandal at Petrobras, will ride out the crisis due to its strong (albeit currently strained) domestic manufacturing base and sheer economic size.

Re-Emerging Differences

The rampant populism of the past 15 years — bolstered by rapidly increasing exports to hungry markets abroad — imposed a false appearance of unity among the Latin American leftist states. Superficially, Nestor Kirchner's Argentina appeared to have much in common with Hugo Chavez's Venezuela, even though both countries' individual geographic and political characteristics ultimately dictated the governments' decisions. With the rise of another leftist bloc unlikely in the next decade, the divided nature of Latin America will again become evident.

And the continent's divided nature means that the shortcomings of international bodies there, such as the Common Market of the South (Mercosur) and the Union of South American Nations (Unasur), will become even more self-evident. For example, Brasilia will use Mercosur to do what is in its own immediate benefit: increase trade links with Latin American states outside its immediate neighborhood, such as Mexico. But truly lucrative deals, such as a Mercosur-European Union trade agreement, will remain just out of reach because they require full approval of all the group's members. Mercosur's other key member, Argentina, opposes any such deals lest they harm its domestic industry. Consequently, Brazil will continue looking for small bilateral deals, but it will continue to be hamstrung by Mercosur. Unasur, on the other hand, which was originally conceived of as a sort of South American United Nations, is highly unlikely to progress beyond a regional body that meets a couple of times a year. It is not that there is no political will in Latin America to push toward greater unity, but unlike the European Union, such bodies cannot be superimposed onto a region whose trade ties and key political relationships are focused toward other continents rather than each other.

The next decade will bring with it some political and economic continuity. The region will maintain its fundamental relationship with the rest of the globe, in which its foreign trade is overwhelmingly skewed toward the export of raw materials and its economies are heavily reliant on foreign capital markets. But deeper internal changes are already in motion, and the states of the region will change accordingly. The parties at the helm of these states will be different, and the way these parties relate with the outside world on a political and economic level will be undeniably different. Over the next 10 years, the shortcomings of extreme reliance on the Chinese economy will spur cost-cutting and domestic economic diversification. The trappings of the Cold War will fade in Latin America as leaders are replaced and political institutions evolve, but the new Latin America will continue to be more defined by its divisions than by any idea of unity.

"<a href="https://www.stratfor.com/weekly/new-latin-america">The New Latin America</a> is republished with permission of Stratfor."

The New Latin America | Stratfor

Is BTG Pactual better than Goldman Sachs?

Is BTG Pactual better than Goldman Sachs?


William Wright

17 Apr 2012
In late 2005, André Esteves turned down an offer from Goldman Sachs to buy his investment bank. Instead he decided to sell Pactual to UBS and then buy it back three years later.


Esteves is the power behind BTG Pactual and its biggest asset, which might pose problems for future shareholders

This week Financial News was the first to report that André Esteves, chief executive of the Brazilian investment bank BTG Pactual, was under investigation for trading on his personal account in 2007. With just over a week to go until the bank’s IPO, which is expected to value the company at around $15bn, the Italian regulator Consob has fined Esteves €350,000 for alleged insider trading and frozen €4.2m of his assets. BTG Pactual says Esteves will appeal against the ruling, and that it will have no impact on the bank or on Esteves’ position.

Setting aside this controversy, Financial News takes a look at BTG Pactual to see if it really does live up to all the hype of being “Better than Goldman”.

So, how does the Brazilian bank stack up against its larger American cousin?

One thing we know for sure is that BTG Pactual is better at creating wealth for its partners than Goldman Sachs. Shortly after UBS acquired the bank for $3.1bn plus retention payments in late 2006, Esteves said in an interview: “I like making money. I’m good at making money. It’s exciting to create wealth. Otherwise, I wouldn’t be a banker.”

Esteves has been true to his word. The man who made his first billion when he sold the bank to UBS owns 24.5% of the bank pre-IPO, and assuming a valuation of $15bn (based on an acquisition it made early this year), his stake will be worth around $3.7bn – over $1bn more than Esteves paid for the whole bank when he bought it back from UBS in 2009.

The wealth creation doesn’t stop with Esteves. BTG Pactual’s 163 partners own 84% of the bank between them, which implies an average stake of around $55m each. This pips the average stake each of Goldman Sachs’ 221 partners had in the firm when it went public in 1999 – $52m. But it’s more concentrated at the Brazilian firm. The 35 senior partners at BTG Pactual (excluding Esteves) own just over 45% of the bank, which works out at an average stake of around $195m each.

Not bad when you consider that some of them – such as Huw Jenkins, the former chief executive of UBS Investment Bank, who is now a managing partner at BTG Pactual in London – have only been with the firm for a few years. To put this in perspective, Hank Paulson, who was chief executive of Goldman Sachs when it went public, had a stake worth about $220m in the firm that he had joined in 1974. (The remaining 127 junior partners at BTG Pactual will have to make do with an average stake of just $17m).

In absolute terms, BTG Pactual is still the baby brother when compared with Goldman Sachs in the last fiscal year before it went public. BTG Pactual revenues of $1.7bn last year are just one fifth of the equivalent number for Goldman Sachs in 1998. Pre-tax profits of $1bn are around a third those of Goldman Sachs in its final year as a private partnership, according to the two banks’ IPO filings. BTG Pactual’s balance sheet of about $60bn is one quarter the size of Goldman Sachs before it went public; with just 1,255 employees it has less than 10% of Goldman Sachs’ workforce back in 1998.

To put BTG Pactual in perspective, in 2011 Goldman Sachs made as much in revenues roughly every three weeks as the Brazilian bank made in the whole year.

To understand why people are drawing such excitable comparisons between BTG Pactual and Goldman Sachs, you have to look at BTG Pactual’s profitability, growth, partnership structure, and dominance of the Brazilian market.

A glance at some of the bank’s ratios in 2011 shows that in almost every respect, BTG Pactual is not only better than Goldman Sachs when it was preparing to go public, it is showing its US rival a clean pair of heels.

At a time when most investment banks have struggled to define a profitable business model, BTG Pactual has increased its revenues at a compound annual growth rate of 17.2% since 2009, a little less than Goldman Sachs in the two years running up to its IPO, but a world apart from the 21% annual fall in revenues at Goldman Sachs over the past two years.

BTG Pactual’s cost-to-income ratio was just 42% last year (compared with 66% at Goldman Sachs in 1998 and a painful 79% last year). Its pre-tax return on equity was a best in class 21.8% last year. That compares with a 46% return on partners’ capital at Goldman Sachs in 1998 and a miserable 8.1% underlying pre-tax ROE last year.

And when it comes to valuation, $15bn would give BTG Pactual a healthy price tag of just over three times’ book value – about the same as Goldman Sachs when it went public but five times higher than Goldman Sachs’ price-to-book ratio at the end of 2011.

Carnival in Rio?

The most obvious reason for the apparent decoupling of BTG Pactual’s performance from the rest of the investment banking industry is that the bank dominates the fast-growing Brazilian financial markets (it only has three offices outside of its home market – in New York, London and Hong Kong).

Over the past five years it has been involved in a staggering 69% of all Brazilian equity issues by value. In debt capital markets, it has averaged a more mortal 9% market share over the past five years, while in mergers and acquisitions its share of Brazilian deals since 2009 has been an enviable 26%, according to the prospectus. BTG Pactual is the sixth largest broker in the Brazilian stock market and produces some of the best research on Brazil and Latin America for both equities and fixed income. The Brazilian capital markets ground to halt last year, but few rivals expect BTG Pactual to be a spectator as and when they return.

This strong presence in an exciting market means that BTG Pactual’s employees are unusually productive, generating (on my count) around $1.4m in revenues each last year – more than double the equivalent figure for Goldman Sachs in 1998.

It is at this point that the bank’s partnership structure kicks in to keep costs down. With a high number of partners relative to staff (one in eight employees is a partner), BTG Pactual is able to keep its staff costs down to almost unheard of levels: its compensation ratio last year was less than 24%, compared with 43% at Goldman Sachs. It helped by allocating bonuses as a fixed proportion of revenues.

So, the bank can pay its staff 15% more on average than an employee at Goldman Sachs ($339k versus $295k), yet they generate nearly five times as much pre-tax profit per employee ($792k versus $167k). The partnership structure is complex, with restrictions on partners selling their stakes to anyone but other partners at anything other than book value. This should help the bank retain its ethos after the IPO.

Drill down a little further and you see that BTG Pactual is also more diversified than Goldman Sachs when it went public. It is already tapping into the rapidly developing private equity and wealth management markets in Brazil. Just 32% of its revenues come from sales and trading, and only 8% from investment banking. Goldman Sachs made two thirds of its money from investment banking and sales and trading in 1998, and nearly 70% last year. Other significant businesses at BTG Pactual are corporate lending (11%), asset and wealth management (21%) and private equity (6%), with the balance made up from interest income.

A one-way bet?

On paper BTG Pactual looks set to breeze through its IPO and continue to print money. What could possibly go wrong?

Well, Esteves did not become Brazil’s youngest billionaire and (on paper at least) one of the world’s wealthiest bankers without a highly developed sense of timing. An investment in BTG Pactual’s IPO is a concentrated bet on the Brazilian economy, on BTG Pactual’s ability to maintain its growth and margins in Latin America, and on its ability to successfully export its business model to more competitive markets overseas.

Esteves’s decision to go public now taps into investor excitement about Brazil. But all the indicators are pointing to a less than stellar recovery in the country’s economy. After growth of 7.5% in 2010, the International Monetary Fund expects GDP growth of just 2.9% last year and 3.0% in 2012.
Esteves has rapidly built up BTG Pactual in the past few years in a land grab that on the one hand provides the bank with a strong platform, yet on the other could start testing its margins. Acquisitions include a small Swiss private bank, a commodities broker, a Latin American commercial bank, and a Chilean broker.

It has also launched several real estate ventures. An uncomfortably large chunk of BTG Pactual’s growth last year came from acquisitions (and nearly half of the growth in revenues came from interest income on its own capital), raising questions as to whether its rocket-propelled growth could start running out of fuel.
At the same time, BTG Pactual is looking to export its Brazilian expertise into more developed markets from a low base (it has just 46 registered staff in the UK). In these markets it will face competition unlike anything it has experienced in Brazil. BTG Pactual’s margins in its home market will also come under pressure as Brazil becomes a more stable and attractive long-term prospect for international competitors.

But perhaps the biggest risk for potential new shareholders in BTG Pactual is what has, until now, been its biggest asset: Esteves himself. Esteves is the controlling shareholder and the prospectus makes it clear that many of the decisions at group level are “his and his alone”. It is difficult to imagine BTG Pactual without Esteves. But having this sort of power concentrated in one individual has got many investment banks into trouble before.

-- William Wright is a writer and commentator on investment banking and financial markets. He can be reached at william@william-wright.com or on Twitter on @williamw1

Read the story online here: Is BTG Pactual better than Goldman Sachs?

Batista’s $80 Billion Wealth Target Turns to Colombia IPOs - Businessweek

Batista's $80 Billion Wealth Target Turns to Colombia IPOs

March 15, 2011, 11:18 AM EDT

• 
  

By Juan Pablo Spinetto and Fabiola Moura

(Updates shares in eighth, thirteenth paragraphs.)

March 15 (Bloomberg) -- Billionaire Eike Batista plans initial public offerings for two Colombian companies a year after the flop of his OSX Brasil SA sale, as he seeks to more than double his wealth in the next four years to $80 billion.

Batista, 54, said in an interview he will sell shares in his gold mining unit in Bogota, London and Sao Paulo in the next year. The issuance will show the exploration company is worth at least three times its current value, Batista said. He also aims to raise $1.5 billion by listing his Colombian coal mining unit.

The son of a former Brazilian mines minister who bought his first gold field at age 24, Batista is seeking a return to equity markets after OSX tumbled as much as 50 percent since being listed in March 2010, the biggest failure in the nation's IPO market since 2008. Batista said he isn't concerned about the decline and predicted by 2015 his wealth will surpass that of Mexico's Carlos Slim, who Forbes said last week is the world's richest person with estimated assets of $74 billion. Batista is the world's eighth-richest person with $30 billion, Forbes says.

"I've been telling him he should clean up his right-side mirror and his left and on the top, because I am going to pass through on one of these sides," Batista said yesterday in an interview at Bloomberg's New York headquarters. "Mr. Slim is going to be number two, three, I don't know."

Batista took control of Ventana Gold Corp., a Vancouver- based exploration company with properties in Colombia, through his AUX venture this month, valuing Ventana at C$1.54 billion ($1.58 billion). He will invest about $100 million in Ventana and may consider buying more assets before the IPO of AUX. Ventana will be worth at least $4.5 billion when the assets are listed, Batista said yesterday.

Financial Times: Office rent in Rio is Americas’ dearest

Office rent in Rio is Americas' dearest
February 18 2011 8:18 PM GMT
--
By Joe Leahy and Samantha Pearson in São Paulo
--
Prime office space in Rio de Janeiro has overtaken that of New York for the first time as the most expensive in the Americas
Read the full article at: http://www.ft.com/cms/s/0/1058f3f2-3b98-11e0-a96d-00144feabdc0.html?ftcamp=rss

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Brazil: President To Veto Oil Royalty Distribution Amendment

Brazil: President To Veto Oil Royalty Distribution Amendment
December 7, 2010
Brazilian President Luiz Inacio Lula da Silva said Dec. 7 that he will veto an amendment to a bill passed last week by the Brazilian National Congress that proposes oil royalties be distributed equally among state governments, Reuters reported. After the amendment’s veto, da Silva plans to sign the legislation into law, which will increase government control over the energy industry and reduce competition against Petroleo Brasileiro S.A. (Petrobras) by allowing it to be the be sole operator of oil fields where licenses have not yet been auctioned. The bill states that Petrobras will be able to explore every field in areas designated “strategic” and that Petrobras will receive a minimum 30 percent stake in joint ventures that bid for exploration licenses


Brazil: President To Veto Oil Royalty Distribution Amendment | STRATFOR

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In this 1970 photo released by the Public Archive of Sao Paulo State, Dilma Rousseff is seen in a police photo. Rousseff, who is running for president in Brazil's Oct. 3, 2010 elections, was a key player in an armed militant group that resisted Brazil's 1964-85 military dictatorship, and was imprisoned and tortured for it. She is a cancer survivor and a former minister of energy and chief of staff to the current President Luiz Inacio Lula da Silva. (AP Photo/Public Archive of Sao Paulo State)

Financial Times: China’s cycle turns the world around

World economy: The China cycle

By Geoff Dyer - FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations' commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
●Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

●About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

●Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

●Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.


Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.

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just another walk in the park......

just another walk in the park......

Ed Stafford is first man to walk length of the Amazon

Walking the Amazon

'Loony idea' ... Ed Stafford walked the entire length of Amazon river

ED Stafford had a "loony idea" to do something no one had ever done - and walk the entire 4,000-mile length of the Amazon.

He reckoned the epic journey would take him 12 months... but he was a bit out.

Now, two and a quarter YEARS after setting out, the 34-year-old former Army captain is still walking - but is finally within days of his goal.

On the way Ed has been pursued by machete-wielding tribesmen and detained for murder, as well as outwitting jaguars, pit vipers and a fly that set up home in his head.

Long hard trek ... Ed Stafford wades through the Amazon

Keith Ducatel

He has lived off piranhas and struck fear into local tribes who mistook him for a monster that traded in babies' body parts.

Ed told The Sun from the Brazilian jungle: "I have a week until I arrive at a network of roads around Belem and then ten days on roads.

"It's unavoidable - unfortunately I'm not slipping out of the jungle on to the beach, although there is a little road that looks out on to the Atlantic.

"It will be wonderful. I can't tell you how long it seems to have taken. I was expecting it to be a year, but it seems like a lifetime."

Ed left Britain in March 2008, starting the journey at Camana in Peru with pal Luke Collyer, though they fell out just months into the trip.

Luke came home and Ed found another hiking partner, Peruvian guide Gadiel Rivera, known as "Cho".

Their achievement of walking from the river's source to its mouth has already attracted support from legendary explorer Sir Ranulph Fiennes, and Ed says: "I fully acknowledge it's a loony thing to do. But no one has ever done it on foot."

The pair used inflatable pack rafts to cross and recross the river and its flooded banks and used sat nav to pinpoint their route.

Perserverance ... Ed, here in Peruvian jungle, kept trekking despite unpleasent experiences

Keith Ducatel

Ed adds: "It's great to be so near the end. I'm not whingeing and struggling but physically I'm starting to fall apart. My joints feel funny, my elbow is ridiculously inflamed, my rucksack has been broken for two months and I've had a fly living in my head."

The gruesome insect, called a botfly, lays its eggs on mosquitos which then bite humans, depositing the eggs under the skin, where they start to grow.

In Ed's case it took superglue and a nasty-looking needle to get it out. But he reveals the most dangerous part of the trip was in Peru, where he and Cho crossed drug-trafficking territory.

Ed says: "The native people were telling me, 'You will die' every day. It can get to you after a while.

Whatever floats his boat ... Ed used inflatable rafts to cross the river

Keith Ducatel

"We were in an area that for a long time had been controlled by terrorists from the Shining Path communist group and they are very wary of outsiders.

"We were using high-frequency radios to tell the villages ahead we were coming. But one told us, 'If you come through you will die.'

"We came up with a back-up plan to cross over to an island that was a long sandbank instead.

"But as we were getting back to the shore we saw behind us five canoes with Indians with bows and arrows, shotguns and machetes.

Meeting the locals ... with Ashaninka Indians in Peru

Keith Ducatel

"They were furious and ready to kill us, but we were as persuasive as we could be. We were finally able to calm them down but it took over three hours."

Even so, Ed - who left the Army in 2002 after serving in Afghanistan - reckons the sheer duration of the trip has been the hardest part.

Crossing a continent ... Ed Stafford's amazing adventure

He says: "It's the mosquitos, the humidity, the biting ants, day after day. Things that weren't bothering me at first became a frustration, but I've stuck it out for nearly two and a half years."

At one point he was also detained under suspicion of murder near Contamana, in north-east Peru.

He recalls: "A person had gone missing, and as passing foreigners, people thought we may have done it. The villagers decided we couldn't go anywhere, until eventually the local authorities let us go."

Along the way there have also been dramatic encounters with wildlife and Ed says: "Electric eels were something I hadn't heard about beforehand.

"But as I now know they are dangerous and aggressive and can knock you out and even cause you to drown in the water.

"Luckily we've been through so many swamps and rivers and I think they are far more scared of us than we are of them.

"I've also seen lots of jaguar prints. The locals always say they are manhunters, but they've never been too close.

"Snakes are a real threat but only if you step on one.

Threat ... electric eel

"Cho had a snake fall on his shoulders but it wasn't venomous. We carry 48 hours' worth of anti-venom.

"There are loads of pit vipers, which are probably our main worry.

"Without anti-venom you would bleed from all parts of your body, including your eyes, and would be dead within three hours.

"You are more likely to see them coiled up beneath a stone. If we got bitten it would probably be a defensive strike." Ed says he can sometimes "completely switch off" during the walk but with the finish in sight he has increasingly been dreaming of home.

The food has often been extremely simple, with the pair mostly surviving on rice and beans, and while locals are usually friendly, their attitude to the pair has varied.

Anxiety

Ed says: "In Brazil people are more educated and more accepting, but in Peru they have had 30 years of terrorist activity and they have issues because they live in such high anxiety.

Danger ... pit viper

"They believe in something called a Pelacala - a gringo, or white man, who steals babies and babies' organs.

"All they have is word of mouth and lots of communities were just terrified to see me.

"I was walking with Cho and some Ama Indians who had to explain our presence, and their fear was very real.

"Maybe there have been body-parts traffickers in there in the past - it was hard to know.

"We tended to make ourselves available to communities, because otherwise they wonder why you are avoiding them.

"But I often had men standing around my hammock with guns all night to make sure I didn't steal their children."

The state of the Amazon rainforest on the trip has varied - in Peru the logging was difficult to detect but in the Para region of Brazil there are huge cattle ranches and vast areas that are now clear of trees.

Hazard ... jaguar

Ed, from Mowsley, Leicestershire, says: "You do see that the younger generation here are growing up knowing they need to protect it.

"We should all keep the pressure on, although I think over the next ten years the amount of deforestation will decline rapidly.

"We seem to be at the beginning of a more conscientious era."

Ed says his trip has led to personal sacrifices - "like not having a girlfriend and being poor."

It has cost nearly £70,000 and was only made possible after his mum and a friend launched a flurry of fundraising and sponsorship half-way through.

Unwanted guest ... botfly

Ed also admits he only decided on the epic journey after being dumped by a previous girlfriend in 2007. He adds: "It puts a pause on your love life - there just isn't any."

And he describes his ideal day once he is back in England.

He says: "My perfect day would be to wake up and have breakfast with my family and then play rugby at my club, Stoneygate.

"After that I would go out on the town and have a few beers. I can't wait."

I ask him what he feels he has learned on the trip and he says: "I thought I was one man and his rucksack against the Amazon.

"Instead I found I needed a great team around me.

"I couldn't have done it without Cho, my family or my friends."

For more information go to walkingtheamazon.com.

Ed Stafford is first man to walk length of the Amazon | The Sun |Features - StumbleUpon

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