Lloyds TSB’s recent opportunity & challenge

In September, Lloyds TSB proposed the takeover of HBOS bank in a ￡12.2 billion deal. Shareholders of Lloyds TSB voted on it in recent days and HBOS’s investors will vote in December. The deal comes as crisis of confidence on global financial markets. The word of “crisis” has two meanings in Chinese: One is danger or risk; the other is opportunity.

Recent opportunity
For Lloyds TSB, it has great opportunity to go and be the Tesco of the banking world in Britain. The new bank is huge. It will be the biggest bank in current accounts, the biggest in mortgages, the biggest in savings, the biggest in household insurance, and the biggest personal loans and credit cards. Thus, Lloyds TSB will increase financial products & service so that increase market share.
Also, according to the announcement of Lloyds TSB, the two companies will be able to broaden their activities while lowering their cost structures.
Analysts once said that the combined bank would be too big for UK competition regulators and politicians to allow a merger to proceed. However, Prime Minster GB helped to secure the deal by rewriting Competition Laws. So it is also a beneficial factor for the process of the deal.

Recent challenge
Although most investors accepted the deal, a few shareholders accused the Lloyds TSB board of using their investment by taking on HBOS’s problems. They argued that the ￡12.2 million was too high in light of its potential problems.
1. Share price fell heavily. Lloyds TSB shares lost 15% of their value as the market digested the news of the takeover. Because there exist fears that Lloyds TSB will be weakened by the takeover.
2. The ratings agencies, such as Moody and S&P put both banks on “negative” watch after the announcement. It reflected concerns over the potential impact of Lloyds owning lower-rated HBOS as well. Moody considers the merger of two large financial institutions, which poses significant integration risks.
3. Economic theory (Economics of scale) tells us that greater size delivers benefits-greater market power, financial operations, risk reduction, lower costs, etc. But it is pretty complicated in reality. Various kinds of environmental factors should be taken into consideration.
4. The takeover deal will be completed at the mid-January. Once the announcement has been made, the combination businesses can become unstable. According to Lloyds TSB’s cost savings plan, the retail branches will be cut, while human resources, finance and other departments will also face cut. Analysts have suggested that up to 40,000 jobs could go. During the waiting period, employees become anxious and valued staff may leave. A business director argues that “When there is threat - fears of job security- the effect is to forget about the team spirit and worries become No.1.”
5. Macroeconomic situations: With the rapid changing environment, even the strongest and least exposure to risky lending banks, have been affected by the financial crisis. Investors lack confidence in the markets, which results reduced lending by households and businesses. It would be a big threat to the banking system. Lloyds TSB will face additional challenges given the difficult conditions in the global financial markets and the economic environment in the UK.

An effective communication process can be helpful to address the problems in Lloyds TSB’s takeover:
1. Transparency: making the objectives, process of the merger visible, so that it can help employees, shareholders, customers feel involved in what is happening. No news is bad news, especially during the waiting period. So to be transparent is extremely important.
2. Co-ordination & co-operation: to create opportunities for people to voice their thoughts and concerns and solve or relieve the problems together.
3. Commitment: to help people to see that they have a position where they want in the business and know how to make a contribution towards its success. In addition, the communication process should be done as soon as possible.

Hope & Challenge

Obama is the recent focus on mass media without doubt.

Chinese press reported that Obama wrote a new page in the history of black participation in politics. The presidential election and accompanying financial crisis have spurred a transformation in the thinking of Americans. Also, the American people hope that Obama can honor his campaign promise.

It was a momentous event, but the world media also consider many obstacles should be overcome by president elect Obama. A comment on Russian media impressed us: How did the black candidate, who is not yet 50, ensure such support? I hazard a guess that the answer lies in two words: “American dream.”

Obama once said China must stop manipulating the currency. So he may exert pressure on China’s foreign exchange policy to boost U.S. exports and control unemployment. American lawmakers are calling for measures to let the Yuan rise to stop the China’s competitive exports. Once President elect Obama enters the White House, immediate action probably will be taken to ensure a release of the Yuan from Chinese governmental intervention.

“China is also facing a significant slowdown of itself,” said Los Angeles-based vice chairman of Roth capital. The global slowdown will “unavoidably”hurt China's real economy. China’s labor market tightens in recent months. It is difficult to find a job in some cities in south China which was known for worker shortages in the past. It is widely acknowledged that the credit crunch has a global impact. All responsible countries need to cooperate with each other.

Taking the above factors into consideration, the U.S. president elect Obama will face a series of challenges both at home and abroad. It may take a long time to realize his promise of “change”& “hope”.

China announces $586 billion stimulus package

On 10th November, “China unveils 4 trillion Yuan spending as world faces recession” became the breaking news on Bloomberg. The funds approximately equal to a fifth of China’s GDP last year.

Because the spending will focus on 10 areas in the next two years, such as rural infrastructure, disaster areas, health care, education, environmental protection, etc. Thus, it can not only spur the economy against the financial crisis, but also improve social welfare. The stimulus plan shows that it connects well with the government’s aim to create a “harmonious society”.

In fact, the Chinese government never stopped to take some actions to provide the improvement of the employment and incomes in recent months. Also, the central bank would pursue a “moderately loose” monetary policy. For instance, the central bank has already cut interest rates three times in two months, reducing the one-year lending rate.

China is taking steps to bolster its economy, especially to boost spending at home. China is the fourth largest economy and the biggest contributor to global expansion as well. China’s huge stimulus may help domestic growth along with world economy. According to an article on the Wall Street Journal, news of China’s stimulus plan published immediately helped push crude oil price higher on the New York Mercantile Exchange.

Some analysts pointed out that how quickly the effects of the stimulus package will be felt in the real economy. In other words, some lag is unavoidable. However, under the contemporary situation, it is difficult to find some measures which can have a great impact on it straight away. The government has to bolster real economy step by step.

China's growth rate of GDP decreases to 9% in the third quarter

It shocked the government and the masses that China’s growth rate of gross domestic product (GDP) in the third quarter is only 9%. It is a fast speed for America or European countries. However, it becomes the lowest point in the past five years.
It is widely acknowledged that products made in China are comparatively cheap. It is related to its inexpensive and sufficient labour. And China is a export-oriented country indeed. Thus, China accumulated a great deal of foreign currency reserves in dollar. Aggregate demand weakens rapidly recently due to the global credit crunch.
Export corporations spread out of the east part of China, especially in GuangDong province. There exists lots of toys factories in DongGuan- a city in GuangDong. While the most of them went bankruptcy in recent months. As a result, thousands of workers there are unemployed. Many of them are unsatisfied with the local government. A series of problems, such as social safety may occur. In response, government worried and attaches importance to it now.
In addition, Chinese central government make great efforts to stimulate economy, including rate cutting. High inflation was thought as the biggest problem at the beginning of 2008. So the tight policy become useless now due to the volatile situations. Chinese central government tries to focus on stimulating the domestic customer spending, instead of U.S. and European markets. Anyway, it is quite a difficult issue.
Nevertheless, the market should rally, even if without the financial crisis. It is not ideal to be too dependent on foreign markets. We benefit a lot from the “open policy”. While, as soon as a thing reaches its extremity, it reserves its course.
It was reported that Olympic Games in Beijing was thought as the turn point. But what is the next one, which can boost China’s economic growth?Not only China, but also the whole Asia meet with the serious situations.
According to an article on《Wall Street Journal》, analysts forecast Chinese growth rate of gross domestic product will below 8% in 2009. And many economists believe that the whole Asia is already on the brink of recession. But an economist at Moody’s Economist.com said that “China still has the greatest potential among major economies”, which is also the expectation of the Chinese government.

Brazil vs. China

I will probably go to Sao Paulo, Brazil—another financial city—to spend the 2009’s New year, so I am quite interested in what happened in the Brazilian market recently.
Brazil and China,both of them are major developing countries. Brazil’s develops well, with its gross domestic product growth of 5%. While, it is slow compared to China. Some economists predict Brazil’s GDP would decline to 3.5 percent. Many analysts hold negative opinions now, due to the financial crisis worsened over the past month.
While, the most of countries were in tough time in recent months. Within Brazil,the financial newspapers are beginning to feature more headlines forecasting the potential threats.On October 20, 2008, Brazil’s central bank issued 1.62 billion dollars in six-month loans in an attempt to aid the exporters by falling demand. Economists and business leaders in Brazil suggested reforms to release more money to finance investment and consumption through credit in the past. The central bank has reduced its reserve requirements to release more to the economy. Brazil’s situations are similar to China. Actually,many banks in Brazil prefer to buy high-yield government bonds, instead of using the money to lend to the companies with risk.
However, other analysts said they are not deeply affected by the global turmoil than China because Brazil is less dependent on American and European markets.
In addition, some newspapers also said Brazil’s low involving may ease up the financial situations. And Brazilian companies are less indebted than their foreign competitors. As for the whole country,it is a net creditor to the rest of the world. So it feels fortunate in the current circumstances.
Anyway, I think it is not a good symbol in the long run. Chinese “reform and open” policy in the 1980s changed China totally. China was a absolutely conservative country before that.

It’s extraordinarily cold in Iceland this season

A friend of mine told me several weeks ago that her friend—a guy who is from Iceland,was upset these days and would go back home.Because not only his family,and the whole country as well may go bankruptcy.
Due to the global financial crisis,the small economy was great influenced,even the strength of the whole country.The three main banks have collapsed and weakened currency has ceased trading.And the cost of hedging against the default by the Icelandic government has reached a peak—948 basic points.
Actually,Iceland’s financial situation was unstable a few times in the recent years.But few people can predict the speed and the severity of the problem.The country’s banking system,currency,credit rating crash,and people become aware of it from then on.In my point of view,this country lacks awareness of risk.
Besides,the cash flow freeze makes it worse these days.The flow of money in & outside of Iceland is controlled by government,thus the importers and exporters suffer it.As we know,Iceland is full of fishery resources.As a consequence, some seafood companies,which are the major exporters, are all in the hard time.
Furthermore,one of the vicious cycles in this crisis is that it threatens the nation’s bid for seat on the United Nations Security Council.The five countries,including China hold the permanent seats and veto power over their decisions.According to Iceland’s recent situation,it would be disadvantageous.
There exist some reasons behind the serious crisis.Iceland has been growing rapidly in the past years.It is reported that this country has low unemployment and income per person is above the average in the European Union.And there are huge investments on green energy&aluminum smelting.However,Iceland has also built a financial hole on the sound foundations superficially. Other countries were also involved in it,more or less. So it is bitter lesson for them,too.Iceland’s three largest banks have expanded headlong.On the other hand,its households racked up debts adding up to 213 percentage of disposable income.Anyway,it is a potential threat to this country.There is a joke that the Iceland’s fishermen borrowed too much before,and now it’s the time to pay the price. The country’s rapid rise and faster fall has been seen as the result of greed.
It is the high time that governments and banks took some efficient measures now.On October 15,Iceland’s central bank cut the interest rate from 15.5 percent to 12 percent. Although some critics said it would induce the bank’s overseas borrowing.The central bank had raised interest rate to 15.5 percent this year in an attempt to prohibit serious inflation and cool its economy.In addition,an delegation arrived in Russia to get a loan,in order to stabilize its finance.
It seems to us that the financial media have covered the whole process of the meltdown of Iceland’s banking system.However, an analyst from Denmark comments that media’s role really counts,while the British media failed to highlight certain facts.If it is true,I think it should be some political causes,having something to do with the relationships between the two countries.Sincerely hope that Iceland’s financial situations will recover soon,so that Icelanders can live peacefully as usual.

China’s interest rate cut

Recently,the highest frequent covered financial news of China should be its rate cutting.On October 15, China’s central bank--People’s Bank of China made a decision of cutting both the interest rate by 0.27 percentage and the bank reserve requirement ratio by 0.5 percentage.
Actually,it is the second moving in three weeks as an effort to enhance the market’s liquidity and confidence.Because,according to the basic economic theory,the goal of cutting rate is stimulating investing. At the same time,it was thought an action to coordinate with US,European Central Bank,the Bank of England, the National Bank of Switzerland,and so on.

The problems exist in China
Due to the traditional custom,the majority of Chinese people tend to save the surplus, instead of consuming.So China’s economy is a export-oriented one.Exports account for more than a third of gross domestic product.Years of trade surpluses and FDI(Foreign Direct Investment) have left it holding a large amount of foreign exchange reserves.While,recent slowing global demand has a great influence on Chinese growth,including the employment.With the downturn deepening,the GDP is widely expected to fall to between 8 and 9 percentage in the year of 2009.And China probably would face its first economic slowdown in the recent years.The Beijing Olympic Games was considered to be a turning point.

The positive market comments
Chinese investors are afraid that the overseas financial crisis will hurt the real economy.Lenders are afraid to lend,while investors are afraid to invest.They are still very cautious and expect good news to come out.While lower interest rates would decrease firm’s borrowing costs and stimulating investing,thus accelerate economic growth in the long term. The chairman of China’s equities at JP Morgan said that “We expect government to continue loosening of monetary policy and draw on its fiscal resources to bolster investments in infrastructure.”An analyst in Construction Bank of China assesses that “ An interest rate cut is a signal suggesting the government’s resolution to sustain the development of the economy.” “Although it may not take effect on the sustainable economy immediately,it helps to boost confidence in the whole financial market.”And investors hope that there will be more policy announcements in the coming days.Tomorrow is another day.

The negative market comments
In regard to the Chinese banking system,there are some negative assessments.The constant interest cuts leave a large challenge for banks to sustain high profit growth.The interest spread of banks would become limited.And wide inflation is another concern.

Anyway,Chinese government tries its best to stimulate domestic economy now,including a trial program for margin trading(last week).Besides,regulators claim that China will cooperate with other countries to fight the financial crisis and restore international economic stability through joint efforts.