HSBC: London v Hong Kong

East is Eden

Banking’s longest, and most successful, identity crisis

HSBC—one of the two most pivotal banks in the global financial system, according to regulators, alongside JPMorgan Chase—exudes permanence. Its buildings are guarded by lions cast in bronze which passers-by touch for luck. HSBC has never been bailed out, nationalised or bought, a claim no other mega-bank can make. It has not made a yearly loss since its foundation in 1865. While its peers took emergency loans from central banks in the crisis of 2008-10, HSBC, long on cash, supplied liquidity to the financial system.

Yet behind that invincible aura lurks an insecurity: where is home? When Western and Indian merchants founded the bank in Asia in 1865, they considered basing it in Shanghai before settling on Hong Kong. Faced with wars, revolutions and the threat of nationalisation, the bank has chosen or been compelled to move its headquarters, or debated it, in 1941, 1946, 1981, 1986, 1990, 1993, 2008 and 2009.

HSBC believes its itinerance explains its survival. Countries and regimes come and go. The bank endures. Now it’s decision time again. The results of a ten-month review of its domicile are likely to be announced on February 22nd. The main choice is between staying in London—where HSBC shifted its holding company in 1990-93, in anticipation of the return of Hong Kong to Chinese sovereignty in 1997—or going back to its place of birth.

The decision is partly about technicalities: tax, regulation and other costs. But it also reflects big themes: London’s status as a financial centre, the dominance of the dollar and Hong Kong’s financial, legal and political autonomy from mainland China, which is supposedly protected until 2047 under the pledge of “one country, two systems”. HSBC’s most recent move, from Hong Kong, was announced on the radio by China’s premier of the day, Li Peng. Its return would be news too, a coup for China when its economic credibility is low. For Britain, the departure of its largest firm would be an embarrassment.

That HSBC is considering moving at this moment may seem astonishing; it is knee-deep in a restructuring. Since taking the helm in 2011 Stuart Gulliver has reversed the empire-building that took place in the 2000s to refocus the bank on financing trade. He has sold 78 businesses and almost halved the bank’s exposure to America. Vast sums have been spent on compliance systems after the bank was fined for money-laundering in Mexico.

The group’s return on equity hovers at 8-11%—poor by its standards but on a par with JPMorgan Chase. Outside Asia, returns are about 5%. To raise them, Mr Gulliver is inflicting a new dose of austerity, with big cuts at its investment bank. Retreat from the Western hemisphere has freed resources for Asia, where risk-weighted assets have soared by half since 2010.

HSBC’s seesawing skew towards Asia is one of four factors that explain its 151-year quandary over where it should be based. The others are the ethnicity of its managers, Britain’s love-hate relationship with finance and the status of Hong Kong.

In the 1980s all four pointed to London. The bank was diversifying into America and Europe (by 2004 Asia yielded just a third of profits). London felt natural to the cadre of expatriate Brits that ran it. Britain was welcoming, particularly after HSBC bought Midland, a local lender. And HSBC was cushioned from the danger that China would rip up the agreement over Hong Kong. “As night follows day...we would become a Chinese bank,” the bank’s chairman at the time said about keeping its domicile in the territory after 1997.

Three of the four factors now point back towards Asia. Asia yields 60% of profits. This could rise to 75%. Mr Gulliver plans a big push in the Cantonese-speaking Pearl River delta. Rising interest rates would boost lending margins most in Asia, which has a surplus of deposits, which need not be repriced as quickly as debt. HSBC is far more Asian than its Western rivals (see chart). Not even a hard landing in China, a banking crisis there or a devaluation of the yuan would alter that.

HSBC’s management is now multi-national, although its board has too few Asians on it. (Simon Robertson, its deputy chairman, is also a director of The Economist Group.) AIA, an insurance firm, moved to Hong Kong after it was spun out of American International Group in 2010. It shows it is possible to domicile a big finance firm there that is not Chinese-run.

And Britain has got hostile. Briefly after the crisis public and elite opinion distinguished between the British banks that blew up and those that did not. Having a bank so plugged into emerging markets was seen as strategically helpful. But now HSBC (cumulative profits of $101 billion since 2007) is often lumped in with the likes of Royal Bank of Scotland (cumulative losses of $80 billion), a target of attacks from foaming parliamentary committees and a hatchet-wielding media.

Critics worry that British depositors and taxpayers subsidise the bank by funding its foreign operations and implicitly guaranteeing its liabilities. This is the rationale behind Britain’s levy on banks’ global balance-sheets, which costs HSBC $1.5 billion a year, or about a tenth of profits. It also underpins the requirement that banks ring-fence their British retail arms, which will cost HSBC $2 billion.

Yet these policies duplicate others designed to tackle the same problem, including capital surcharges, stress tests, living wills and a push to “bail in” bondholders when disaster strikes. And they ignore HSBC’s safety-first structure. It has more cash than it owes in debt (bonds and loans from other banks). It is already run in self-reliant geographic silos. And 68% of its deposits are raised outside Britain. Arguably the subsidy flows in the other direction, from Asian savers who are providing cheap funds to Britain’s financial system.

George Osborne, Britain’s chancellor, has belatedly turned on the charm. In July he tweaked the levy and the tax regime—although not by enough to make much difference to HSBC over the next five years. The financial watchdog has been shaken up, and Mark Carney, the boss of the Bank of England, which has ultimate responsibility for the banks, has hinted that they have enough capital.

But unless the government concedes that the size of HSBC’s global balance-sheet is not a gauge of its risk to Britain, HSBC will worry that its size is capped. Asia will grow faster than Britain, and thus so will the bank’s assets. If the bank is too big for Britain today, with assets equivalent to 89% of GDP, what will it look like in 2030? A British exit from the European Union would complicate things further, requiring HSBC to beef up operations in France or Germany (although it would have to do this whether based in London or Hong Kong).

What about the fourth factor, Hong Kong? It has changed a lot since Mr Gulliver first lived there in the 1980s. The skyscrapers of China’s opaque lenders, Bank of China and ICBC, now loom over HSBC’s building, beneath which pro-democracy protesters camped during the Occupy Central movement in 2012.

Hong Kong’s government would welcome the bank back, as would its regulator, the Hong Kong Monetary Authority (HKMA). Moving to Hong Kong would probably cut HSBC’s tax bill and capital requirements a bit and the degree of regulatory and political friction a lot. It might also help HSBC’s ambitions on the mainland, although it already has a privileged spot there—the largest presence of any foreign bank. Like Hong Kong, HSBC wants to be close to China but not integrated with it. Head-to-head competition with the coddled mainland banks would be suicidal.

The logistics of a move would be less daunting than you might think. Half of HSBC’s business already sits in a subsidiary in Hong Kong that the HKMA regulates. HSBC’s shares are listed in Hong Kong as well as London.

But how could the territory safely host a bank nine times as big as its GDP? Hong Kong officials say there are three lines of defence. First, they set more store than Britain on HSBC’s innate strength: its culture, capital and vast pot of surplus cash. Second, they believe that in a crisis its geographical silos would get assistance from the local central bank: the Bank of England would help the British arm, the Federal Reserve the American one, and so on.

Last, there are the HKMA’s foreign reserves of $360 billion. They exist to protect the currency peg with the American dollar and “the stability and integrity” of its financial system. Were HSBC ever to cock up as badly as, say, Citigroup has, it might take $50 billion to re-capitalise it—within Hong Kong’s capacity. A liquidity run so bad that it drained even HSBC’s cash pile could be harder for the HKMA to manage. It runs a currency board so cannot print Hong Kong dollars in unlimited quantities. HSBC largely operates in American dollars, which the HKMA cannot create, and unlike the Bank of England, the HKMA does not have a dollar swap line from the Fed.

Wrinkles like this mean that HSBC would ultimately rely on the unspoken backing of mainland China, with its vast financial resources. Speaking anonymously in August, a mainland official formerly in charge of financial matters said Chinese regulators would expect to have a say over HSBC. China desperately wants a global bank to represent its interests. Mainland officials might be tempted to meddle.

That might annoy American officials, who have become chauvinistic about access to their financial system since the 9/11 attacks and the 2007-08 crisis. HSBC manages about 10% of the world’s cross-border dollar payments. Its ability to do so is essential to the bank’s operations. In the event, say, of a military skirmish between America and China, it is not impossible there would be a backlash from Congress and New York’s populist regulator against a “Chinese” bank having such a privileged role in the dollar system. In 2014 regulators briefly prevented BNP Paribas, a French bank, from clearing dollar transactions.

A move to Hong Kong is thus a risk for HSBC. It is a bet that China will grow, but that its legal and financial systems will remain backward enough that Hong Kong will still have a vital role as the mainland’s first-world entrepot. It is a bet that even as they meddle in Hong Kong’s politics and on occasion break its laws, mainland officials will ultimately respect the principle of “one country, two systems”. It is a gamble that America will resist its worst urges. In Hong Kong HSBC would be a catastrophic mistake away from losing its independence—but then the bank has never made a catastrophic mistake. Viewed from an insular Britain, Hong Kong is dangerous and alluring, just as it was 151 years ago. 

Unintended Consequences

Merkel's Reliance on Turkey Makes Life Worse for Refugees

By Peter Müller, Maximilian Popp and Christoph Schult

The construction of a security wall along the border between Turkey and Syria: Increased controls mean that many trying to escape Assad's barrel bombs are unable to get out of the country.   

AP The construction of a security wall along the border between Turkey and Syria: Increased controls mean that many trying to escape Assad's barrel bombs are unable to get out of the country.

Chancellor Angela Merkel asked Turkey to help reduce the number of refugees coming to Europe. But instead of closing its Aegean coast to migrant smugglers, Ankara shut its border with Syria, making it difficult for those threatened by the war to leave.

Suddenly, the connection breaks off. Nadim Shami* presses the telephone against his ear and cries: "Maryam! Can you hear me?" He calls the number of the smugglers, but nobody answers. Nadim Shami is sitting in a teahouse in the town of Antakya, on the Turkish-Syrian border, and taps his fingers on the table. He's waiting for a sign that his wife is still alive. Four hours earlier, Maryam Shami had set off from a refugee camp in northwestern Syria together with her two sons Yasin and Mohammed and her daughter Samira.* A migrant smuggler brought the family to the Turkish border, where Maryam Shami and her children hid in the bushes until darkness fell. The last words Nadim Shami heard from his wife on the telephone were: "We're heading out."

Nadim Shami, 28, used to work as a mechanic in the northwestern Syrian city of Idlib, but last summer, he fled the violence to Turkey hoping to find work and an apartment in Antakya before bringing his wife and children over to join him. He hadn't thought that Turkey would close off its border with Syria.

That too, though, has become a side effect of Angela Merkel's refugee policies. For months, the chancellor has faced rising pressure to reduce the number of people coming to Germany on the search for security and a bit of prosperity. Recently, in fact, speculation has been mounting in Berlin that Merkel may soon be forced out of office. Large numbers of conservative politicians -- both with Merkel's Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union -- have demanded that the chancellor close the German border to refugees. Merkel, though, has thus far refused, hoping instead for help from her European partners and, in particular, from Turkey.

The chancellor has one main goal she would like to achieve by the beginning of March: The number of refugees coming from Turkey to Greece should drop significantly. If that happens, Merkel is prepared to take in set quotas of refugees from Turkey -- even if not all EU member states agree to help.

Turkey has begun making efforts to combat the refugee crisis, but differently than Merkel had hoped. Rather that increasing patrols on the coast, where many refugees jump on boats heading for the nearby Greek islands, Ankara has closed the border to Syria.

A Two-Fold Failure

The result is that precisely those Syrians for whom survival is the number one priority are being denied the necessary protection. The many other migrants, including those who have left their home countries or third countries primarily for economic reasons, can continue to enter Turkey and travel onwards to Europe. Merkel's Turkey strategy is thus in danger of two-fold failure: It could make it more difficult for Syrians to flee the Assad regime's barrel bombs while at the same time failing to prevent the continued arrival of migrants to Europe.

The European border control agency Frontex has its headquarters on the 11th floor of the Warsaw Spire, located in the heart of the Polish capital. On the computer screens in the "Situation Center," the fate of refugees in the Aegean are reduced to a row of green dots.

Border officials can monitor the routes of individual boats and keep an eye on the situation on the EU's external border.

Frontex head Fabrice Leggeri believes that the refugee drama between Turkey and the European Union will continue. "Despite the bad weather, between 2,000 and 3,000 people are arriving in Greece each day," he says. Leggeri is of the opinion that Ankara needs to do more.

"Turkey has to make it more difficult for the migrant smugglers," he says.

But is that possible? Since the EU-Turkey summit at the end of November, Turkish President Recep Tayyip Erdogan has sent more security personnel to the Aegean coast and increased the number of raids on migrant smugglers. In 2015, Turkish police arrested 341 smugglers, almost four times the number taken into custody in 2014. But Turkey's Aegean coast is around 2,800 kilometers (1,740 miles) long, making it a virtual impossibility to completely close it off to the smugglers.

"Who cares about the controls?" says Ibrahim Hamza.* The men in the lobby of Izmir's Palast Hotel laugh. It smells like sweat and cigarette smoke. Hamza swipes the display of his mobile phone and sees that Turkey's weather service forecasts a night without rain or wind. "In a few hours," says Hamza, "we'll start the next tour."

Hamza, 30, is a handyman from the southern Syria city of Daraa who now smuggles refugees from Izmir, located on Turkey's Aegean coast. The port town is a hub for migrants from around the world. Hamza is wearing a hoodie and a beard, and has a tattoo on his forearm. He once fought for the Free Syrian Army against the regime of Syrian dictator Bashar Assad, but two years ago, after his two brothers were killed in battle, he left Syria for Turkey.

Turkish government controls, Hamza says, haven't had much of an impact on his business. The smuggling ring that he works for, he says, has contacts within the police and government agencies. For each tour, Hamza pays €3,000 to the police so that his group can pass without being checked -- and he simply avoids the military posts on the coast. Since January, the smugglers have preferred new, more remote routes, to the sea. Once the refugees have reached the coast, it's too late: It takes but a few minutes to inflate the rafts. "We will always find a way to smuggle refugees to Europe," says Hamza.

Disturbing Trend

The problem for Merkel, however, is not only to be found on the long, difficult-to-monitor coastline. In recent months, an increasing number of North Africans have been coming to Germany via Turkey.

Whereas around 100 Moroccans reached Greece last September, for example, by December the number had risen to 2,800. The same trend can likewise be seen with the Algerians. Citizens of Maghreb states don't need a visa to travel to Turkey and simply fly to Istanbul. Indeed, one of the primary beneficiaries of the trend is the partially state-owned Turkish Airlines.

Refugees from Afghanistan, who now make up 20 percent of those arriving in Greece, represent a completely different problem. They arrive to Turkey by land, particularly from Iran, where around 2 million Afghans have fled. Officially, they need a visa to enter Turkey, but the mountainous border region is poorly monitored. Furthermore, it is part of the Kurdish areas, where the Turkish army is doing battle with the Kurdish rebel group PKK.

Officials in Berlin and Brussels are concerned that Turkey's military operation in the southeast is taking away financial and personnel resources that could otherwise be used to combat migrant smuggling on its west coast. But there are no indications that fighting with the Kurdish rebels will subside anytime soon. Turkish Prime Minister Ahmet Davutoglu made it clear during his recent visit to Berlin that President Erdogan has no interest in de-escalation. On the contrary: Erdogan has announced his intention to "annihilate" the separatists.

That puts Merkel in the uncomfortable position of being dependent on a man who is not only leading a brutal war against the Kurds, but who is also systematically eroding press freedoms.

During talks a week ago Friday, Merkel requested that Turkey finally fulfill its part of the agreement regarding the reduction of refugee numbers. Time is of the essence, Merkel said, with an eye to the growing resistance to her policies. It sounded almost imploring. Davutoglu responded pleasantly that he reads the German papers every day and is aware of the domestic political situation in Germany. But he made no concessions.

Ankara, in fact, has discovered the migrant issue as a lever in dealings with Merkel and the EU.

In addition to financial assistance, Erdogan would like to force the Europeans into concessions when it comes to his country's EU accession negotiations.

'We Shouldn't Expect Any Miracles'

Yet even if such concessions were made, it doesn't change the fact that Turkey has little interest in having the refugees remain in their country in the long term. "We shouldn't expect any miracles from Ankara," says one German diplomat.

At the same time, it's also not as if Turkey has done nothing. Since the beginning of the year, Syrian refugees have had the right to work legally in the country. Plus, Ankara introduced a requirement on Jan. 8 that Syrians coming from third states such as Jordan or Lebanon must have a visa to enter Turkey. From one day to the next, the German Embassy in Beirut cabled to Berlin, the number of flights from Beirut to Istanbul plunged from 25 to fewer than 10.

Whereas 41,000 Syrians traveled to Turkey in the first week after the introduction of the visa requirement, in the second week, the number had fallen to 1,000.

Indeed, there have been positive steps, says EU Enlargement Commissioner Johannes Hahn, who was just recently in Turkey. "But we have made extremely clear that the EU expects very rapid and very involved actions by Turkey when it comes to the reduction of the refugee numbers: better controls on entry and exit, further steps on the visa front and last but not least, fighting the smugglers."

But the visa requirement has negative consequences as well. Because only very few Syrians receive a visa, the majority of refugees are now forced to enter Turkey by land. That, though, is becoming increasingly difficult. Turkey is extending its border wall with Syria by the day.

Ankara has said that the border will remain open to Syrian refugees, but the official border crossings have been de facto closed. Refugees instead use alternative routes through the forests.

Nadim Shami says his wife has been stopped twice by Turkish soldiers during attempts to cross the border and sent back into Syria. Many refugees that SPIEGEL has spoken with report similar experiences: They claim to have been taken into custody by Turkish security forces and deported to Syria. Some say they suffered abuse.

Trying Again the Next Day

An engineering student from Deir-al-Zor in eastern Syria says he was locked up for two days in a military barracks near the Turkish border city of Reyhanli and claims he was given nothing to eat or drink during the ordeal. Instead, Turkish soldiers beat him, robbed him and finally put him on a bus with other refugees back across the border to Syria, he reports.

International law forbids the deportation of people into countries suffering from civil war if their lives may be at risk. In December, Amnesty International documented 130 cases of illegal deportations of refugees from Turkey to Syria and Iraq. The victims, according to Amnesty, were held in Turkish prisons for several weeks until they agreed to leave the country. Turkey has denied the accusations.

In the Antakya teahouse, Nadim Shamit buries his face in his hands. He hasn't slept for days and is consumed by self-doubt. Why did he leave for Turkey? Why did he leave his family behind? Late that night, he gets a call from his wife Maryam. She and the kids had to turn back at the Turkish border because of a storm. They plan to try again the next day.

* Names have been changed.

Terror: The globalisation of extremism

A surge in Isis-claimed attacks suggests the ideology is extending its influence to Asia
Indonesian armed police clear the area near a Starbucks after a series of blasts hit Jakarta on January 14, 2016. An attack on Jakarta is over and no more perpertators are at large, police said on January 14, after gunfire and explosions left seven dead in the Indonesian capital. AFP PHOTO / Bay ISMOYO / AFP / BAY ISMOYO (Photo credit should read BAY ISMOYO/AFP/Getty Images)©AFP
Indonesian armed police secure Jakarta after attacks on the capital in mid-January
Gunmen hunting foreigners kill a Japanese farm expert in northern Bangladesh and an Italian aid worker in the capital Dhaka. Shia Muslims are targeted in a bomb blast in Pakistan that kills 24. In Indonesia, eight people are slain in an assault on civilians around a Starbucks café at a Jakarta shopping mall. A bomb explodes at a popular Hindu shrine in Bangkok, leaving 20 dead, including five Chinese tourists.

Terror attacks such as these in recent months — some claimed by Isis or its adherents — suggest that the Sunni Islamist extremist group and its violent, ultra-conservative ideology are successfully extending their influence to Asia from the Middle East and Europe.

In a world of instant connections via the internet and social media, the growing popularity of the Isis brand among young Asian Islamists should be no surprise.

Asia is home to about 1bn Muslims, nearly two-thirds of the world total, and has undergone waves of radicalisation in earlier decades.

The jihad that drove Soviet forces out of Afghanistan in 1989, backed by the US and Saudi Arabia, notoriously spawned the Islamist Taliban regime in Afghanistan and Osama bin Laden’s al-Qaeda.
The first decade of the new millennium saw the Indonesian Bali bombings of 2002, which killed more than 200, and the attack launched from Pakistan on the Indian city of Mumbai in 2008.

The fact that it has happened before, however, only heightens the anxiety among Asian and western governments about the latest, continent-wide surge in Islamist militancy — fuelled as it is by online recruitment campaigns and backed by a plethora of local extremist groups whose leaders are impressed by Isis and its wars in Syria and Iraq.
A risk analysis by consultancy IHS said the Isis terror attacks in Paris last November are continuing to drive south Asian Islamist factions, including the remnants of al-Qaeda, the Pakistani Taliban and the Jamaat ul-Mujahideen Bangladesh, into the arms of Isis.
Such groups would not receive much direct help from Isis and would rely on their own capabilities to keep attacking foreigners, government and military installations and religious minorities, Omar Hamid wrote in the report.

“However, due to the enthusiasm generated by the Paris attacks among jihadis, an increase in the number of attacks on these targets is highly likely over the next six months,” he said.

Western governments are particularly concerned about Russia and central Asia, an important source of the foreign fighters who join Isis in the Middle East, and see radicalisation in other parts of Asia as well.
“Asia-wide, it’s more of a concern than people think for the governments concerned,” says one western official. “You’ve essentially had the globalisation of Islamic radicalisation, the Daesh [Isis] brand . . . though you still have a range of local brands.”

The slew of terrorist killings, including the Jakarta attacks and the hacking to death of liberal writers on the streets of Bangladesh, may finally lay to rest the notion that Asian Muslims are somehow less prone to radicalisation than their co-religionists in the Middle East.
While it is true that Indonesian Islam, for example, is often coloured by Hindu and other pre-Islamic traditions, that has not stopped puritanical Sunni groups such as al-Qaeda and Isis from finding eager recruits to murder innocents of any age or religion.

South Asia, with Hindu-majority India at its heart, is home to millions of mystical, music-loving Sufis and has Muslim traditions as varied, tolerant and syncretic as those of Indonesia.

Yet in Pakistan, nearly 60,000 civilians, security force personnel and militants have been killed in terror attacks and government crackdowns since 2003. Almost all the victims were Muslims.

Equally, it is hard to think of any country in Asia — except perhaps the Himalayan kingdom of Bhutan — that has not been affected by the rise of Isis and seen at least some of its citizens migrate to Syria or Iraq to fight for the organisation.

The Indian Ocean archipelago of the Maldives, a destination for wealthy tourists, is thought to have contributed about 200 Isis fighters, one of the largest contingents as a share of national population, according to the Soufan Group.
Domestic factors
Radicalisation is probably made easier by the tendency of Asia’s Muslim-majority governments and societies such as Malaysia and Pakistan to impose or adopt progressively more conservative rules. Neither increased conservatism nor the novel appeal of Isis, however, mean that Asian Muslims are a monolithic group fated to become ever more radical.

An examination of leading Asian countries shows they are buffeted by an array of influences, including ethnic separatism and political disputes as well as Islamism, religious bigotry and deep-rooted anti-western sentiment.

In some, Isis is only the latest actor to join in long-running extremist campaigns. In Afghanistan, for example, where a western-backed government under President Ashraf Ghani is struggling to ensure security, Isis is vying for influence with the Taliban, al-Qaeda and other Sunni groups.

There are signs that established groups in Pakistan have sought to form alliances with Isis. Had a militant group not cited revenge for “the killings of innocent Muslims in Syria” as the reason for its December 13 bomb in the mainly Shia town of Parachinar, the attack would have been just another example of sectarian carnage. But Lashkar-e-Jhangvi has for months been suspected of trying to become a branch of Isis.

“LeJ is trying hard to become enrolled in Daesh. They want money and weapons,” says one intelligence official.

SRINAGAR, JAMMU AND KASHMIR, INDIA - 2015/11/20: Kashmiri Muslim protesters display ISIS flag during pro-freedom demonstrations in old Srinagar the summer capital of Indian controlled Kashmir. Angry protesters took to the main street of Nowhatta area of old Srinagar and shouted anti India slogans soon after the Friday congregation prayers ended in Srinagars Grand mosque ,Police later fired numerous tear smoke shells and stun grenades to disperse pro freedom protesters. (Photo by Faisal Khan/Pacific Press/LightRocket via Getty Images)©Getty
Kashmiri Muslim protesters display the Isis flag during november rallies in Srinagar

India detained 14 suspected Isis sympathisers shortly before the arrival of François Hollande, the French president, in New Delhi last week. With 170m Muslims India has one of the religion’s largest national populations, but they are rarely regarded as extremists and only a few dozen are thought to have left for Syria.

“Most of the Indians whom we know were attracted to Daesh were brought to our attention by their own family or community,” Shivshankar Menon, a former national security adviser, said in a recent speech. “What should worry us is the fact that 10 years ago we could say proudly that there was no Indian in al-Qaeda. Today we can no longer say so.”

And in Bangladesh, two strands of Islamic militancy have been prominent over the past year.

First, a group known as Ansarullah Bangla Team, an al-Qaeda affiliate, has murdered five liberal writers and atheists and circulated a hit list with many more names. Second, Isis claimed various shootings and bombings that killed foreigners, policemen and Shia Muslims and boasted of “the revival of jihad in Bengal”.

Last month, Singapore announced it had arrested 27 Bangladeshi men who were working on construction sites for supporting the ideology of al-Qaeda and Isis.

Onlookers gather following a suicide bomb blast at a Ahmadiyya mosque during Friday prayers in Rajshahi, some 250 kms from Dhaka on December 25, 2015. A blast in a mosque of Ahmadiyya Muslim Community at Rajshahis Baghmara Upazila killed at least one person and injured several others, police said. AFP PHOTO / AFP / STR (Photo credit should read STR/AFP/Getty Images)©AFP
Onlookers gather following a December suicide bomb blast at an Ahmadiyya mosque in Bangladesh

Meanwhile, Malaysian authorities say they have frustrated several plots and are concerned by the number of nationals who have gone to fight with Isis. The ruling United Malays National Organisation has also sought to bolster support among rural voters by emphasising its Islamic credentials.

Eager Alliance

In short, Isis may indeed have Asia in its sights. The latest issue of its magazine Dabiq talks of Islam conquering or reconquering “the cow-worshipping Hindus and atheist Chinese” from “Khurasan”, an imagined Islamic land centred on Afghanistan and western Pakistan.

But Asia is not yet as important for Isis as its embattled Middle East heartland or the temptingly vulnerable and nearby nations of Europe.

Asian militants, in fact, sometimes seem more eager to associate themselves with Isis than overburdened Isis leaders are to co-opt them. Isis is only one of many extremist Sunni groups in Asia, and its ideologues spend much of their time attacking organisations such as the Taliban that are ideologically almost indistinguishable from itself.

“Extremism is a spectrum in this part of the world and it is very difficult to draw the line,” says Sidney Jones of the International Crisis Group. “I don’t think Isis central is interested in Southeast Asia. I think Indonesians in Isis based in Syria are interested in showing they can put the region on the map.”

Few analysts think Asian countries face immediate threats to their existence from Islamist radicals. Indeed, it was just such a threat to the stability of Pakistan from its homegrown Sunni extremists that persuaded the armed forces to launch operations against the militant groups they had helped to establish. Islamabad has, however, been less willing to abandon the jihadis it finds useful: those destabilising neighbouring India and Afghanistan.

Like Indonesia and several other Asian countries, Pakistan can now boast of some successes in suppressing violent radicals who want to attack their fellow citizens . And, with the notable exception of Afghans and Pakistanis, most Asians can assume they are as safe as Europeans from attacks by Isis or its fellow extremists. Unfortunately — after the attacks of Paris, Istanbul, Bangkok and Jakarta — that is small comfort.

Regional picture: Local groups are being influenced by Islamist networks


Groups include: East Turkestan Islamic Movement

Beijing has stepped up its response to an insurgency in the northwestern region of Xinjiang, home to 10m Muslim Uighurs, since a 2014 knife attack in Kunming. It blames such attacks on ‘separatists’


Pakistani firefighters extinguish a fire in a vechile at the site of a bomb explosion at a market in Parachinar, the capital of Kurram tribal district on December 13, 2015. A bomb hidden in a bag ripped through a crowded bazaar in a mainly Shiite area of Pakistan's northwestern tribal region, killing at least 23 people and wounding more than 30, officials said. AFP PHOTO / M SAQLAIN / AFP / M SAQLAIN (Photo credit should read M SAQLAIN/AFP/Getty Images)©AFP
The aftermath of a December attack in Parachinar, northern Pakistan

Groups include: Lashkar-e-Jhangvi, Jaish-e-Mohammad, Tehreek-e Taliban Pakistan

TTP works directly to carry out attacks as well as through many affiliated groups; one intelligence official says LeJ is trying ‘very hard to become enrolled in Daesh [Isis]’


Groups include: Afghan Taliban, Haqqani network, Islamic Movement of Uzbekistan

The government is struggling to rein in lawlessness, with the spillover felt in Pakistan to the south, and central Asia and China to the north and east


Groups include: Indian Mujahideen

Only a few dozen of the country’s 170m Muslims are thought to have travelled to Syria to fight. But India detained 14 suspected Isis sympathisers in New Delhi last week


Groups include: Ansarullah Bangla Team, Jam’atul Mujaheddin Bangladesh

Ansarullah Bangla Team, an al-Qaeda affiliate, has killed liberal writers and atheists while groups linked to Isis have claimed responsibility for a spate of recent attacks


Foreign suspect in the August 17 Erawan shrine bombing identified by the ruling junta as Adem Karadag (C) is escorted by Thai commando units as he takes part in a reenactment outside the shrine in Bangkok on September 26, 2015. Thai police on September 26 said Karadag, who was detained over last month's deadly Bangkok attack, was the main yellow-shirted suspect seen on CCTV leaving a rucksack at the shrine moments before the blast. AFP PHOTO / Christophe ARCHAMBAULT (Photo credit should read CHRISTOPHE ARCHAMBAULT/AFP/Getty Images)
A suspect in August’s Bangkok shrine attack is escorted by Thai commandos

Groups include: National Revolutionary Front

A long-running insurgency by predominantly Muslim ethnic Malays has claimed thousands of lives. Ethnic Uighurs from China were suspected of involvement in an August attack on a shrine in Bangkok


Groups include: Jemaah Islamiyah, East Indonesia Mujahidin

Despite the recent Jakarta attack the number of serious terrorist incidents remains small. But the authorities fear that returning fighters could revive local extremist groups


Groups include: Katiba Nusantara

Malaysian authorities say they have frustrated a spate of terror plots but are concerned by the number of nationals who have left the self-styled moderate Muslim country to fight with Isis in Syria and Iraq


Groups include: Abu Sayyaf, Moro Islamic Liberation Front

There are fears the restive southern island group of Mindanao will ‘become a safe haven for everybody else in the region fleeing and an arms supplier’, says a security analyst

Additional reporting by Farhan Bokhari in Islamabad, Joseph Allchin in Dhaka, Michael Peel in Bangkok, Jeevan Vasagar in Kuala Lumpur and Tom Mitchell in Beijing

Elites Set to Wipe Out Shorts Before Next Downwave...

By: Clive Maund

The recovery rally in the US stockmarket that we have been expecting for a week or two started on Friday with a robust advance that gathered strength into the close. The trigger was Japan's announcement that it is going into NIRP (Negative Interest Rate Policy) in a big way, which means that as they slip deeper into the abyss of bankruptcy they are going to resort to robbing savers. This is real "endgame stuff" - another milestone on the road to ruin, and it looks like it was the result of the Japanese attendees at Davos being taken to one side and given their "marching orders". The US stockmarket reveled in this news of course, because it means that the Fed's proposed interest rate rises will never happen and instead they will get ready to launch a massive QE blitz, in concert with Central Banks around the world, in a desperate effort to fend off the gathering forces of deflation.

The end result of this QE blitz will be hyperinflation and chaos. At some point the penny will drop with investors and there will be a stampede into gold and silver, although latest COTs suggest that this is still some way off.

On the 6-month chart for the S&P500 index, we can see how the index finally broke out upside from an intermediate base pattern on Friday, with a big bullish white candle appearing. The large white candle portends a continuation of the rally. First stop should be the resistance shown in the 2000 area, and it may well rise further, as we will see on other charts, with a fairly precise target for the move provided by the chart for the Dow Jones Transports, which we will look at later.

S&P500 Index 6-Month Chart

On the 2-year chart for the S&P500 index we can see more clearly how far this countertrend rally is likely to get. The first stop will be the resistance shown in the 2000 area, as pointed out above, but the vigor of Friday's advance suggests that it is quite likely that it will push on higher to the Dome boundary again, as it did after the August plunge. That the market is rallying here should hardly be surprising, given that it had dropped to become extremely oversold on its MACD indicator and at a zone of support at the lower boundary of its large Head-and-Shoulders top.

S&P500 Index 2-Year Chart

The 5-year chart shows the big picture, and what is likely to happen after the index reaches the Dome boundary again, if it gets that far.

S&P500 Index 5-Year Chart

Whilst it is rather tricky to determine how far this countertrend rally will get on the charts for the S&P500 index, happily this is not the case with the chart for the Dow Jones Transports, which provides us with a fairly precise target, as we will now see.

On the 2-year chart for the Transports, we can see that after it broke down from the clear Head-and-Shoulders top right at the start of the month, it plunged to become extremely oversold. Now, it is very common after a breakdown from a Head-and-Shoulders top for a pullback to the neckline of the pattern to occur, before the bearmarket that it portends gets underway in earnest. After the basing action of the past couple of weeks that is what it looks like we are now going to see, in which case the Transports will rally back up to the 7300 - 7400 area in coming weeks, where we will offload our short-term long positions and probably go heavily short. That's the plan - let's see what happens.

Dow Transports 2-Year Chart

Now here are some other indicators that back up our contention that a sizeable countertrend rally has just started.

First we have the latest Odd Lot Short Sales chart, which shows that almost everyone has been piling in on the short side in recent weeks, and since "that many people can't be right" it follows that Big Money will now fleece these shorts by engineering a sizeable short-covering rally. Once they have been wiped out the market will be free to drop again.

Odd Lot Short sales
Chart courtesy of

The extremely low appetite for risk of the past couple of weeks is another indication that the market is ripe for a rally, as we can see on the latest Risk Appetite Index shown below.

Risk Appetite Index
Chart courtesy of

Since 2008 we have been traversing the eye of a gigantic financial hurricane, and you may recall that it was pointed out on the site back in November that the eyewall at the back side of this storm was about to hit, as we can see to advantage on this photo from the International Space Station, and we can also see how NIRP will precede the final acts of desperation of a broken system - bail-ins and the brazen looting of pension funds...

Wall Street Vortex

In a separate article we will be looking at some vehicles for making money on the long side during the expected rally in coming weeks, before piling on the shorts again.

In Search of Growth Strategies

Michael Spence

Skyscraper windows and city in reflection

MILAN – In 2008, the Commission on Growth and Development, which I had the privilege of chairing, produced a report updating our knowledge about sustainable growth patterns. Then, as now, one thing is clear: the policies that underpin multi-decade periods of high growth, structural transformation, rising employment and incomes, and dramatic reductions in poverty are mutually reinforcing. The impact of each is amplified by the others. They are ingredients in recipes that work – and, as with recipes, missing items can substantially undermine the outcome.
To understand the weak, deteriorating, and fragile growth patterns seen today in many countries and in the global economy as a whole, one should compare what is actually happening with what reasonably comprehensive growth strategies might look like. Of course, there are many policies that sustain high growth, and to some extent they are country-specific. But a few key ingredients are common to all known successful cases.
The first is high levels of public and private investment. In successful developing countries, investment is at or above 30% of GDP. The public-sector component (infrastructure, human capital, and the economy’s knowledge and technology base) is in the 5-7% range. And the public- and private-sector investments are complementary: The former raises the rate of return to the latter, and hence its level.
Private domestic and foreign investment is influenced by a host of other factors that affect risks and returns. These include the skills of the workforce, the security of property rights and related legal institutions, ease of doing business (for example, the process and time required for starting a business), and the absence of rigidities in its product and factor markets (those for labor, capital, and raw materials).
Above all, the investment climate is positively influenced by stability – both competent and alert macroeconomic management and political effectiveness and continuity. Conversely, uncertainty about growth, or the commitment to a reasonably coherent reform agenda, will produce adverse impacts on investment.
A second common ingredient of sustainable growth strategies is that financing these relatively high levels of investment comes from domestic savings. Substantial reliance on external savings (as reflected in persistent high current-account deficits) seems to end badly – in debt crises and major growth setbacks.
Openness to the global economy with respect to trade and investment is critical as well. Foreign direct investment, for example, is a key channel for transmitting and adapting the accumulated stock of global technology and knowhow. And export competitiveness is raised as investment pours into the construction of links in global supply chains.
The capital account is a more complicated story. Generally, successful developing economies have managed it to prevent excessive volatility, including volatility resulting from external shocks or imbalances and from excessive reliance on external financing. In addition, most successful countries manage the exchange rate to keep it in line with productivity growth, using a combination of capital controls, monetary policy, and reserve accumulation or decumulation.
Both over- and undervalued currencies have different adverse effects, though persistent overvaluation is more problematic for stability and growth.
Finally, inclusiveness is also a key component of successful development strategies. Growth patterns that systematically exclude subgroups founder on the loss of political and social cohesion and, ultimately, on the loss of support for the strategy. By contrast, income inequality that is not too extreme, and that does not arise from corruption or privileged access to markets, is understood and accepted. The provision of high-quality basic services like education and health care is viewed as crucial for equality of opportunity and intergenerational mobility.
Against that backdrop, one can assess current growth patterns in the global economy and its various parts.
For starters, public-sector investment is broadly below levels needed to restore and sustain growth, partly owing to fiscal constraints in overly indebted countries. Absent defaults, the normal way to reduce sovereign-debt overhangs is with nominal growth. But growth-oriented policies have been absent, beyond whatever monetary policy can contribute, and inflation is broadly below targets. And large pools of savings in sovereign wealth funds, pension funds, and insurance companies have not yet been successfully deployed at scale on the public-sector side, presumably because of blockages in the intermediation channels related to risk and incentives.
Private-sector investment (in tangible and intangible assets) is also below growth-sustaining levels (though there are contrary trends in some high-growth technology sectors). Contributing factors include a shortage of aggregate demand, high levels of uncertainty about policies and regulatory agendas, and growing doubts about key drivers of global growth like China. In addition, depending on the economy in question, stalled tax reform and policy-induced structural rigidities in product and factor markets are having adverse effects.
With respect to inclusiveness, much useful recent analysis focuses on technology-driven shifts in economic structure and labor markets on the demand side, and globalization, which has left education and skills mismatches on the slower-moving supply side. Job polarization and rising patterns of income inequality are in part the result of these forces, with adverse effects on final demand and, more important, on the resources that individuals and families have to invest in their own human capital.
In short, a reasonably comprehensive strategy for restoring country-level and global growth would include measures to elevate and remove obstacles to public and private investment, thereby contributing to aggregate demand. It would also include a variety of reforms to strengthen private investment incentives. And it would include an inclusiveness agenda directed at structural disequilibrium in labor markets and potentially destructive income inequality.
Thus far, with few exceptions, such comprehensive growth strategies have been missing.
If those strategies were not just implemented, but also synchronized across major economies, each would be amplified through positive international spillovers via trade – a clear role for the G-20. In the absence of such an approach, one can foresee an extended period of low and fragile growth, at best, with downside risks stemming from increased leverage in a prolonged low-interest-rate and deflationary environment. A worse outcome – and all too plausible – is further deterioration in the political and social cohesion that forms the foundation for vigorous policy responses. At that point, stagnation becomes a trap.

domingo, febrero 07, 2016




Partying on a precipice

The holiday provides no respite from economic and political woe

JANUARY is a languid month in Brazil. Beyond the hullabaloo at samba schools—practising for their bawdy annual face-off during Carnival, which starts on February 5th—business pauses while Brazilians go on holiday in the scorching southern summer. Fewer cars clog streets; more bodies throng the beaches.

Politicians customarily switch off along with everyone else. Congressmen return from their Christmas break on February 2nd, but will probably do little until after Mardi Gras a week later.

Neither they nor the president, Dilma Rousseff, will be able to relax, though. A frightening mosquito-borne disease has put the health authorities on high alert (see page 42). Meanwhile, Brazil’s political and economic crises are deepening. When politicians return to work they may regret the time they took off from attempting to solve them.

The economic slide continues. The number of jobs in the formal sector fell by 1.5m in 2015, the fastest pace of job destruction since comparable records began in 1992. Another 1m could be lost this year, analysts reckon. Sales of vehicles dropped by a fifth last year. The IMF now predicts that GDP will shrink by 3.5% in 2016, more than three times as much as it expected in October. Despite the recession, inflation has risen to nearly 11%, its highest level since 2002 (see chart).

Male breadwinners make up a higher proportion of the newly unemployed than in previous downturns, which mainly affected female and young workers, notes Naercio Menezes of Insper, a university in São Paulo. That means that the hardship caused by the current recession will be greater. For the relatively young, joblessness is a novelty. Many entered the formal labour market during the commodity boom of 2003-13. No one knows how they will react to their misfortune, warns Fernando Henrique Cardoso, a former Brazilian president who is also a sociologist.

As misery grows, the government’s capacity to tackle its causes is diminishing. Prosecutors investigating the vast bribery scandal centred on Petrobras, the state-controlled oil-and-gas giant, are expected to file additional charges against senior figures in Ms Rousseff’s Workers’ Party (PT), which has already been badly tarnished by the affair. An even bigger worry for Ms Rousseff is the threat of impeachment against her on unrelated allegations that she assented to the use of accounting tricks to hide the true size of Brazil’s fiscal deficit.

Her weakness makes her more dependent on the goodwill of the PT and trade unions aligned with it, which are viscerally opposed to the reforms needed to steady the economy. This month Ms Rousseff dared to acknowledge that Brazilians retire too early (at 55 for men, on average).

In effect she admitted that the government cannot stabilise its finances if it continues to devote 40% of (non-interest) spending to pensions. But she backtracked in the face of resistance from her party and the unions. Raising the retirement age would be unacceptable, declared the PT this week.

This will make it much harder for Nelson Barbosa, the newly appointed finance minister, to contain the budget deficit, which is close to 10% of GDP. His main idea is to reintroduce a financial-transactions tax, which is loathed by business but popular among Ms Rousseff’s left-wing allies. But this would raise just 10 billion reais ($2.5 billion) in extra revenue, a fraction of net government borrowing, expected to be 500 billion reais this year. Ms Rousseff wants to summon back a council of wise men and women, which she disbanded during her first term, to suggest reforms. That looks like a delaying tactic. 

While fiscal policy wobbles, economists are starting to fret about monetary policy, too. After weeks of hinting that it would raise interest rates to fight inflation, the Central Bank decided on January 20th to hold them steady at 14.25%. The decision may have been justified: higher rates would weaken the economy further and make it still harder to control the fiscal deficit. But it looked like a surrender to political pressure. The Central Bank’s president, Alexandre Tombini, met Ms Rousseff two days before the interest-rate decision. Then he foreshadowed the bank’s U-turn by pointing to the IMF’s gloomier predictions of Brazilian and global growth, which by that point should have been no surprise. Rather than shoring up Brazil’s financial credibility, the Central Bank thus damaged it all the more.

There is little prospect that congressmen will take measures to repair it when they return to work. Those who are pushing for Ms Rousseff’s impeachment concede privately that they are unlikely to muster the two-thirds majority needed in the lower house to send the motion to the Senate. But they plan to drag out the proceeding as long as the (vague) legal deadlines permit. That will accomplish their goal of undermining the president. It will do nothing to buck up Brazil.