Author Archives: haozhao

(revised) Good news for labor market?

Thanks to the stopped beneficial plan, we witnessed a decreasing unemployment rate ever since last December. But this can never be a good news since the true reason behind all this is more and more people ceasing to spend any effort to find a job in the labor market. As mentioned in my past post, the participation rate in labor market has been reduced to 63.2%, according to the data from WSJ.

Nearly 1.4 million people lost payments when the federal benefits expired on Dec. 28, which directly caused 347,000 people to quit the competition of labor market, according to CNN. Last Friday, the Bureau of Labor updated its latest data for unemployment rate, it seems the rate remained at 6.7% which is same as last update. The peculiar thing here is that as over 192,000 new jobs were created, there is no sign of any change in the unemployment rate, the only explanation is that more people entered job market and got average result. As mentioned by Phil Izzo in WSJ, after many months of people giving up the job search, that could be an indication more people are coming off the sidelines and back into the labor force.

However, the way I interpret this issue is not that optimistic. Below is the graph generated in FRED:

age

In the graph, the middle orange line is the total trend of participation rate, we can see that it’s been declining much (about 5%-6%) since the recession. It is clear that participation rate at age 25-54 does not changed much (about 2%-3%), and the participation rate at age over 55 has been improving even after the recession. From the graph, we can see that the main forces that dragged the total participation rate down is from the age 20-24 and age 16-19 parts. That’s totally reasonable since both the red line (age 20-24) and blue line (age 16-19) have two same characteristics: volatility and cyclicity. People at that age are mostly students, and for students their participation in job market will raise in June and July and decline in other months. We can see that the trends for both lines are in the rising cycle, this explains why we experienced a boost in job market participation recently.

Now it is clear that the situation is not exactly like what Phil thought, we can have an optimistic anticipation now because more and more student are looking for or already found their jobs. And I would say that after this July the participation rate will suffer from another loss. From the trends showed in the graph, we are still losing more and more job market participation because the main trends of both lines are still downward.

If there is any good news that even exist, it will be that those downward trends are slowing down compares to years before. We can see more update about this in the future.

 

 

 

Why economy of scale failed?

Economy of scale is the advantage that firms obtained though increasing the scale of production or operation. Under economy of scale, enterprises have less product marginal cost and more outputs, thus there will be less fixed cost per unit because the fixed costs will be separated to more products. This advantage helps firms to improve efficiency and earn more profit.

However, this rule in economy is not fit in natural gas industry in US.

Reported in WSJ, A new breed of Energy Company is a hit with investors using a mantra long scorned in the oil-and-gas business: Small is beautiful. Actually many years ago, energy firms in US still believed in the economy of scale. At that time the Shale Boom happened thus gas extractors hunted for more and more large scale gas fields. They believed that more reserves and production they owned, the lower their marginal cost and more profits would they have. However, we all know what happened next, the huge amount of natural gas reduce the prices dramatically without much changes in marginal cost. Those big gas companies earned revenues that cannot even cover their marginal costs.

Now the investment opinion is reversed. Investors trust that the “quality” is more important than “sheer number”. This is to say, they gave up the old believes of economy of scale, now the cost of certain gas extractor is more notable. “It’s quality over quantity. We don’t have one million acres and we don’t strive to have one million acres,” says Daniel Rice IV, the 33-year-old chief executive of Rice Energy Inc.

The good news is that US government is preparing for its natural gas export terminals. According to WSJ, the Obama administration’s approval of a seventh application to export natural gas. Some lawmakers agreed with such a decision because the domestic natural gas companies are hungering for increasing in natural gas prices. The exportation can decrease the domestic supply thus raise the prices. Others who disagree this decision said that some jobs could be affected, also the domestic electricity price could also raise.

The reason why economy of scale failed in this market is that supply exceeded demand, so the effective choice for gas companies is to reduce their supply. Reported in WSJ, natural-gas prices on Thursday posted their biggest one-day gain in two months after a smaller-than-expected increase in U.S. inventories reignited fears that supplies are too low. This fear was caused by two reasons: first after this long winter, the gas supplies appeared to be scarce; second the export plan made gas supplies to be less than expected.

It’s essential for those firms to find a way to earn profits and make their business sustainable. We can wait to what will happen in the future about this industry.

Chinese real estate market start to collapse (Part 2)

The local governments relay on the prices and sales of houses to increase their GPD target, so they have incentive to support the real estate bubble and maintain the house prices. However, the new Chinese centre government limited loans provided by bank to those developers, this policy was determined by the centre bank in Beijing and no other local branches can disobey that. Thus the local government can’t help the real estate firms much even if they wished to.

However, a large scale bankruptcy of real estate development firms may not be acceptable. Reported in WSJ, (the current number bankruptcy) this is acceptable as long as not too many companies go broke at the same time and doesn’t result too much disruption, Mr. Chan added. In other words, they don’t want a “Lehman Brothers” moment. The real estate regulation is sure to be more influential to those developers who don’t have much fund support. Said by John Allen, chief executive officer of private investment firm Greater China Corporation in a later speech. “Bankruptcy is one of the healthiest things around. You want to get rid of the weak players.”

The current goal of Chinese centre government is to regulate real estate market and try to “shrink” the bubble, no one wants to cause a larger bubble or burst the bubble so early. The current situation is favored by Beijing, small real estate firms go bankruptcy in a moderate rate. According to WSJ, now that measures by Beijing to rein in the availability of credit and cool the housing market are beginning to bite, some developers are feeling pinched.

In 2010, Beijing start its curbing on lending to real estate developers, the centre government trust that the house market will be cooled in several years. For real estate property developers, the fund is most important thing for their sustainability. With enough fund, the house prices can stay high, without enough fund, the developers must sell their houses at a lower price because they must recollect the fund and pay the debt. The actual effect of policies from Beijing was quite effective. According to the chart from WSJ below, the difference between sold and construction has becoming larger. And the surging number of constructed houses stopped and went down at from the end of 2011.

No doubt that the downward trend of house market has already began, but there will still be few more years before the market returns to its normal health. The next question for Beijing is: how to minimize the harm caused by the burst of bubble.

Chinese real estate market start to collapse (Part 1)

Last month, one real estate developer Zhejiang Xingrun Real Estate Co. experienced an insolvency. It couldn’t pay 2.4 billion Yuan to bank and nearly 1.1 billion Yuan to other creditors, which was almost $600 million. This was the biggest ever real estate firm default since 2008. The local government in Fenghua hold a meeting to determine what to do with a default of such a huge amount of money. As reported in WSJ:

While China has seen developers default before, government officials have arranged bailouts for troubled firms that allow their underlying financial problems to fester. On Thursday, analysts argued that authorities have to be willing to address the other option: Let the companies go broke, and send a warning to markets, even if it leads to some financial turmoil in the near term.

It’s not a news that Chinese real estate market is slowing down, more and more people start to wait for a lower price. More potential house purchasers anticipated that the rapid growth of house market in China has comes to an end, as the new centre government carried out executions rigorously, now more and more small real estate developers can’t get enough support fund from bank, either they will go bankruptcy or refer to usury.

There are many reasons why more and more real estate firms in china are suffer from default. Few years ago, as Chinese house market start its surging in scale and price, more and more small real estate developers without much fund thought they could win a tons of money from the market. Some houses were built without enough fund support, so the properties developers thought of a new strategy: they sell the houses first, and use those huge amount of money from house purchasers to build their projects. Because the cost of construction is far lower than the price, this is a win-for-free strategy. However, now they are suffering from the risks they buried years before. With less and less people willing to buy houses at such a historical high price, now the properties developers can’t get enough fund to support their construction, which turns out to be “unfinished residential flats”. That is, the building projects are far away from available, developers has no money to continue construction, and those who already paid for their houses can’t either get the house or their money back, and they still have to pay their mortgage loans to bank. Witnessed more and more “unfinished residential flats” in China, Chinese house purchasers have more incentives to stop their purchase plan.

Rio’s lesson from history

With two months to go before the World Cup hold by Brazil, the government of Rio de Janeiro has made every effort to pacify violent slums with community police forces, according to the report on WSJ.

In history, Rio is famous for its beautiful landscape and informal settlements (known as favelas). The wealth gap between poor and rich was huge, when the high income citizen settled around the sea, favelas community was set up on the hills. Few decades ago, the favelas was governed by drug dealers and gangs, the dangerous environment kept all the formal basic daily services – electricity, water and healthcare – out of the door.

At that time, households in favelas figured out of a way to access to those services. In fact, many households improvised their own connections to the electricity grid, which is, steal directly from the hot wire with the risk of getting electrocution. The result of this were that electricity companies suffered from loss because they got no revenue from those electricity usage, and the people risked their life to steal energy because they were not considered as normal users and had no electricity supply. The conflict between those two groups went into a dead-end, there was no trust among all of them so the social contract was broken.

According to this article, as a result of the energy theft so common in the favelas, its level of non-technical losses and default reached 64.1% and 90.4%, respectively, calling for the development of a new and sustainable business solution. The first reaction from the Rio government was to strike against gangsters and restore the order to this land. With the help from outside, Rio’s favelas was taken control under the police.

The next step from the government was directly targeted at the feasible electricity usage contract between energy companies and low income people. In order to make the energy bill affordable to those poor, a regulation was forced by the center government so that local companies had to invest 0.5% of the annual operating income into “energy efficiency programs”. The aim of this action was not only providing cheap bills. Actually, those old, inefficient home appliance like bulbs, refrigerators were replaced with energy-saving ones. This not only utilized energy usage but also educated people with awareness of energy conservation.

After the social contract was rebuild, favelas people started to open their first bank account because they have to pay for the electricity bills every month. All of these turned into a virtuous cycle, which benefit both energy companies and favelas people.

There are much things to be learned from this history by the current Brazil government, instead of using more violent to stop violent, it’s better to give people more benefits and education to start a reliable social contract. Working on a virtuous cycle instead of a vicious one.

Wal-Mart and Chinese food security

Food security issue is getting more and more attention in China now. Recently, WSJ reported a news about Wal-Mart calling for Chinese authorities to clean up their own acts. It’s quite a rare case for western companies in China cry on Chinese government.

In fact, as one of the largest food retailers in the world, Wal-Mart has been fined by Chinese authorities for a total amount of $9.8 million in recent years. The reasons include unqualified font on the product label, untrue ingredients in the foods, misleading pricing, etc. In the most famous case, Wal-Mart was charged for labeling fox meat as donkey meat.

Started from few years ago, Chinese authorities picked on those foreign food retailers for food security problems and charge huge fines on them. In 2012, the French retailer Carrefour was fined for it sold expired even rotten chicken to customers and labeled ordinary chicken as pricey organic chicken.

This is not so surprising since those food retailers really did wrong things. Their food security standards in China were different from that they used in other countries. But are they the only one to be blamed? At least I don’t think so. In the U.S. and most other countries, it is usually manufacturers, rather than retailers, that have primary responsibility for the quality of the products they sell. But in China, food manufactures are not the first to blamed, however those big retailers would be fined because of food security problems.

There are several reasons behind all this, including pros and cons:

1, Food security situation is harder to control in China. Compares to the relatively good food security in other countries, China has too much problems. And thanks to a weak law enforcement department, those small food manufacturers are impossible to be regulated.

2, Big food retailers are easy to be controlled. Retailers like Wal-Mart and Carrefour are too easy to be found, and the Chinese authorities found it’s easy to collect huge amount of fine from them. Who don’t want make easy money? This seems disgusting but it’s quite effective. For Chinese authorities, even if you catch all the small food manufactures who sell expired meat, you will find more of them and there is never an end to this. But if you ensure the food sold from big food retailers are safe enough, then at least Chinese people know where they can buy safe food.

By charge a huge fine to food retailers, they will act positively to set up a sound food security control system. So the Chinese authorities actually used the market power to solve the food problem in China. Wal-Mart says it ended relationships with 300 suppliers last year because they didn’t pass the retailer’s testing and safety standards, which seems to be very effective.

Just like said by Loïc Frouart, Carrefour’s Shanghai director of risk prevention, “Food safety in China is complicated, far more complicated than in other countries”. Yes, in China, things must be handled in a special way.

Some finding of labor market changes

There are something interesting issues about labor market that I didn’t mentioned in my last post. Last time I talked about my guess about the reason why participation rate has been increasing in recent months. In fact, I believe those increases in participation were temporary, compares to the total downward trend of labor market participation.

From FRED, I found something more data related to this topic, below is the historical graph of different gender’s participation rates:

participation f m

We can see clearly that male’s participation rate has been declining ever since 1950, from nearly 90% to today’s below 70%. While the participation rate of female is different, is had been increasing before 2000 and stayed at 60% level until the 2008 recession. Ever since then the female participation rate started declining at the same rate as that for male, that is to say, these two lines are parallel after 2008. This is to say that same amount of female and male quitted job market over those years, so the recession has the same effect on male and female who gave up searching for jobs.

However, one remarkable thing is that female are suffered less from unemployment problem then male in this recession. The following graph depicts the unemployment rate for male and female: fredgraphWe can see that the line stands for women is always below the line for male, and the gap between two lines was maximized during the recession, so from this point of view, actually female workers were not suffered from employment discrimination in this case. Compares to male workers, female workers were far more likely to find and keep their jobs.

Beside that, I also want to refer to the actual impact of this recession on unemployment, from my point of view, this recession is far more destructive then we thought before.

As showed in the above two graphs, we can see that both female and male unemployment rate hit their historical apexes. And from the graph below: fredgdfraphthe unemployment period is extremely long compares to previous recessions. Before this recession, the average unemployment duration was about 15 weeks, however, the duration period of unemployment of 2008 recession hit astonishing 40 weeks. This is to say that in former recessions, people on average speed about 3-4 months to regain their jobs while now, they must spend almost a year to find a new job. I think this must be one main reason why we witnessed lower participation rate according to WSJ, pathetically, people lost faith in finding jobs so more chose to quit rather than stay.

So what about those who stayed in job market? Many of them who found a job actually got only a part-time instead of a full-time. From the graph below: p and fwe can see the different between 2008 recession and former recessions: in the past, the part-time unemployment rate would surpass the full-time unemployment rate, but this time we see a surging full-time unemployment rate and a very low part-time unemployment rate-far lower than full-time unemployment. So, even some people found a job, it more likely to be a part-time rather than a full-time, which suggest that he/she will earn less and has more risk to loss the job again. Also, this suggests getting jobs are not so profitable, no wonder people are quitting job market.

From the data, the labor market is far away from healthy, actually it is way more deformative than we expected.

Good news in the labor market?

Thanks to the stopped beneficial plan, we witnessed a decreasing unemployment rate ever since last December. But this can never be a good news since the true reason behind all this is more and more people ceasing to spend any effort to find a job in the labor market. As mentioned in my past post, the participation rate in labor market has been reduced to 63.2%, according to the data from WSJ.

Nearly 1.4 million people lost payments when the federal benefits expired on Dec. 28, which directly caused 347,000 people to quit the competition of labor market, according to CNN. Last Friday, the Bureau of Labor updated its latest data for unemployment rate, it seems the rate remained at 6.7% which is same as last update. The peculiar thing here is that as over 192,000 new jobs were created, there is no sign of any change in the unemployment rate, the only explanation is that more people entered job market and got average result. As mentioned by Phil Izzo in WSJ, after many months of people giving up the job search, that could be an indication more people are coming off the sidelines and back into the labor force.

However, the way I interpret this issue is not that optimistic. Below is the graph generated in FRED:

age

In the graph, the middle orange line is the total trend of participation rate, we can see that it’s been declining much (about 5%-6%) since the recession. It is clear that participation rate at age 25-54 does not changed much (about 2%-3%), and the participation rate at age over 55 has been improving even after the recession. From the graph, we can see that the main forces that dragged the total participation rate down is from the age 20-24 and age 16-19 parts. That’s totally reasonable since both the red line (age 20-24) and blue line (age 16-19) have two same characteristics: volatility and cyclicity. People at that age are mostly students, and for students their participation in job market will raise in June and July and decline in other months. We can see that the trends for both lines are in the rising cycle, this explains why we experienced a boost in job market participation recently.

Now it is clear that the situation is not exactly like what Phil thought, we can have an optimistic anticipation now because more and more student are looking for or already found their jobs. And I would say that after this July the participation rate will suffer from another loss. From the trends showed in the graph, we are still losing more and more job market participation because the main trends of both lines are still downward.

If there is any good news that even exist, it will be that those downward trends are slowing down compares to years before. We can see more update about this in the future.

 

 

 

(Revised) Why there is no world-class CEO in China?

After read this WSJ article Why China Doesn’t Export World-Class CEOs, I have to admit that it is true China has no great CEO in the world-wide. The current Microsoft CEO is from India and he has done great job ever since his succession. Japan also has many great CEOs like Konosuke Matsushita and Akio Morita. But as one of the largest economies in the world, China has over 30 million CEOs, but few can be counted as world-class CEO. I believe there are several main reasons for this “weird” situation.

Reason 1: No world-class private enterprise

The government controls too much of key branches of economy, almost all big companies are state-owned instead of private-owned. There are many large enterprises like China National Petroleum Corporation, China Mobile Communications Corporation, Bank of China, etc. Those big enterprises gather most national resources and are not allowed to be controlled by private. This admittedly ensure the national security issue, but on the other hand, small firms have no capabilities to compete with those who support by the government. And finally, Chinese private enterprises have few worldwide competitiveness.

Reason 2: limited innovation ability

Not like consuming-oriented economies, Chinese economy is an exporting and investment-oriented economy. This decides that Chinese firms don’t need to spend a lot on R&D, because they are not compete in differentiation but prices. The Chinese-type innovation is a procedure of learning and modifying. After soaking up great ideas from existing products, Chinese firms can make a cheaper and better version of those production then export them in a large-scale. Outsourcing and product processing are also common in China’s firms. With few enterprises with core competitiveness of their products, there is no such a business environment that can breed world-class CEOs who are responsible for the strategic planning of firms. The heads of most Chinese firms are only good regulators but no great tacticians.

Reason 3: Different culture

I think this is the most convincible one among all reasons. Unlike India, China is not an English-speaking nation, even Japan is more geared to west culture. Chinese has a very different way of thinking as people in the west. It had been many years before many western firms figure out this point and hire Chinese as executives inside China. Many may not understand, in China, a good relationship with local government is more vital for CEO than a good professional ability. For the same reason, Chinese culture cannot breed CEOs that can deal with western enterprises proficiently and precisely.

Beside those points, WSJ listed others such as high salaries attraction for CEOs in China and China suffers from a shortage of top talent. I think those also make sense.

Japan seeks more control over gas pricing

LNG, short for Liquefied Natural Gas, is the artificial-converted liquid form of methane for convenience of storage and transportation. Over long-distance transmission, LNG is more efficient and economical than pipelines. After transported to certain destination, LNG will be retransformed into gas form and used directly or transported through pipelines.

As the world largest LNG importer, Japan inlets about 40% of total global LNG production, primarily from Malaysia and Indonesia. Last year the number hits a new record to 87.49 million tonnes, which is a reflection of soaring demand of LNG under the calamitous Fukushima nuclear plants failure in 2011. As a result, natural gas in Asia also hit a record last year.

Under situation like this, Japanese firms acted positively to seek for more say over the pricing of this crucial fuel. Comparatively, as I said before in my past blog, Japanese firms paid about $18 per million British thermal units, almost 5 times as that in the U.S. ($4 per mmBtu). One reason of this, as mentioned above, is the ever-rising demand for LNG in Asia (Korea is the second largest LNG import nation while China lies in the third). Another reason is the unsound spot market for LNG. According to WSJ, Japan’s government sees the creation of an accurate measure of the fuel’s value as a necessary step in making progress toward launching futures contracts by March 2015, a goal it announced last April.

As a clever move favored by Japan government, this plan has several potential benefits:

Benefit 1: help to smoothing price fluctuation. This is the main reason behind. Currently the natural gas prices expectations are uneven among suppliers and consumers. From the suppliers’ point of view, the impact of Fukushima disaster has its long-lasting effect over the domestic demand of LNG import. Also for security reason, Korea is shifting its reliance on nuclear generation plants to more LNG exporting. Thus the prices of natural gas have a strong upward trend. However, the recent launched natural gas exporting plan in US acts opposite to it. As I mentioned in my past post, US natural gas generators has less profitability now, so they have to increase export to reduce domestic shale gas supply. Also an Australia LNG project is under construction by Inpex, the largest Japanese gas distributor. If this planned LNG projects in Australia come on stream as scheduled, Australia will overtake Qatar as the world’s largest LNG supplier by 2020. All suggesting a future boost of natural gas supply in Asia, which implies a downward prices trend. Binding the downward trend and upward trend could cause a fiercer price fluctuation and loss for both suppliers and consumers. The establishment of LNG future market could flatten such volatility with the power of gas contract.

Benefit 2: With higher demand for LNG, surging gas prices drag consumers away to alternatives. Under that, coal import and consumption has been increased over the recent years, causing a serious environmental pollution in Japan. The development of new spot and future gas market can help to reduce price and then air pollution from burning of coal.

Benefit 3: The final goal is a healthy global natural gas market like crude oil market. It will definitely benefit world-wide consumers and global environment.