World Economic News

Are Investment Banks heading for New LTCM Crisis?

Hedge funds paid up to $50 billion in fees and interest to investment banks last year, which contributed a quarter of investment banking pre-tax profits, "eclipsing traditional activity such as dealmaking," according to research by Dresdener Kleinwort, and reported in the Financial Times Feb. 8. The DK analyst warned that the investment banks "were certain to hit another Long Term Capital Management-style crisis," that LTCM was the blueprint.

China's Maglev Speeds to Completion

China will soon begin construction on a 170 kilometer (106 mile) maglev system that will run between Shanghai and Hangzhou, the capital of Zhejiang province. The plan is that the system will be operating by the start of the World Expo/World's Fair to be held in Shanghai in 2010.

The new 170-km route (which the Chinese authorities tentatively approved on March 6, 2006) has two stages. The first stage would begin at the financial district station in Shanghai, which is the head-point for the existing maglev line, and, heading westward, would connect to a station at the planned World Expo 2010 site (in Shanghai), and then connect to a station at Hongqiao Airport, which is Shanghai's domestic airport. A Transrapid-USA official told EIR Feb. 8, that while there has been no official announcement, this stage started the active building process at the beginning of February, as the Shanghai municipal government is moving to relocate people, to free up the right of way.

The second stage of the new route would run from Hongqiao Airport to the city of Hangzhou. According to the Transrapid-USA official, the final formal terms of agreement for stage two are being worked out, and could be signed within three weeks. When completed, the maglev system would cover the 170 km route in 27 minutes; i.e., people would zoom over the route at an average speed of 378 kmph (236 mph).

Finally, the new route would be connected to the existing 30-km line from Shanghai to Pudong Airport, creating a seamless 200 km route.

Drastic Yuan Revaluation Could Set Off Financial Crisis

A drastic revaluation of the yuan could set off a financial crisis in China, but this is not what international speculators may be doing, stated Lin Yifu, director of the China Center for Economic Research at Beijing University on Feb. 4. Lin's view is that the yuan is not seriously undervalued, according to China Daily Feb. 6.

Lin said that international speculators hope the Japanese and U.S. governments will pressure China to revalue the yuan. This would profit the speculators, but take a toll on China's trade, which could exacerbate internal economic problems, and "could even trigger a financial crisis."

HSBC Announces Rise in Bad Debt Provisions

HSBC announced Feb. 7, that it would increase its bad debt provisions by $1.7 billion because of bad loans tied to the subprime mortgage game. According to Bloomberg Feb. 8, "The perceived risk of owning low-rated subprime mortgage bonds surged today after the two largest U.S. lenders reported growing problems stemming from the loans...." Those lenders are HSBC Holdings LLC (a unit of Hong Kong Shanghai Bank Corp., the third-largest bank in the world, and Britain's largest) and California-based New Century Financial Corp.

HSBC's increase would raise its bad debt provisions beyond the $8.8 billion which had been projected by analysts, to $10.6 billion. New Century Financial Corp. announced that it would post a fourth-quarter loss based on a 20% decline in "loan production," restate other 2006 earnings lower, and make fewer loans this year.