REVIEW INTERVIEW: Can China grow itself out of trouble?

Straits Times - Feb 26, 2009

REVIEW INTERVIEW

Can China grow itself out of trouble?

Andy Ho

Last week, the noted China expert, Professor Woo Wing Thye, testified before the United States Congress on China's role in the crisis. Senior writer Andy Ho asks the University of California at Davis economist, who is also affiliated with Brookings Institution, about China's growth prospects.

Even before the global crisis hit, China's 2008 growth was lower than the two previous years'. Why? From October to December last year, a collapse in exports exacerbated the slowdown in China's growth already in place from January to September. The latter was actually induced by domestic policies per se. Here's how. To help President Hu Jintao consolidate his leadership at the October 2007 Congress of the Chinese Communist Party, credit quotas that every bank was subject to were continually adjusted upwards by the People's Bank of China, the country's central bank. So the 2007 growth was 13 per cent. But after the congress, fighting inflation became paramount. Credit quotas were strictly enforced and growth dropped from 10.8 per cent in the fourth quarter of 2007 to 6.2 per cent in the third quarter of last year. Note that exports in the first nine months remained good, so growth slowed in the period because of domestic policies. With the global crisis, exports plunged in the last quarter of 2008, so exports grew only 9.4 per cent for the whole year compared to the decade's average of 20 per cent. Export growth last month was minus 17.5 per cent, industrial production has dropped, and unemployment is rising. Last month, the International Monetary Fund projected China's 2009 growth at 6.7 per cent. At Davos, Premier Wen Jiabao predicted 8 per cent. Who is correct? I think Mr Wen - because China's 4 trillion yuan (S$890 billion) stimulus should work. Here's why. As they won't be held accountable for any non-performing loans, state-owned banks will now lend freely. Last month, they extended 1.62 trillion yuan in new loans compared to 772 billion yuan in December. And state-owned enterprises will now borrow heavily since future losses will be socialised, while some gains, if any, may be 'privatised' with creative accounting. The undervalued renminbi keeps China's trade surpluses large. Would it be forced to appreciate - to reduce United States trade deficits? Bilateral US-China trade imbalances may be thereby reduced but not US global trade deficits because the US would continue to import from other countries. When yen-dollar rates fell from 239 in 1985 to 128 in 1988, the US current account deficit only fell from 2.1 per cent to 1.7 per cent of GDP. Why? Japanese firms started investing abroad to export to the US from there. Starting a trade war now would mean a disgruntled China and a no happier US. Where do China's current account surpluses come from? When you sell more than you buy abroad, you are putting your savings into foreign assets. China should not do this as domestic investments garner higher rates of return. But it has to because the financial system can't translate savings into investments. China's private savings rates are up to 12.2 per cent higher than that of the US because, first, its financial institutions don't transform savings into education, housing and investment loans. So people just save. Second, it has no financial instruments to pool social risks through medical insurance, pension insurance and unemployment insurance. So people save up for a rainy day. Should China rebalance its economy for less investment-led and more consumption-led growth? That is an oxymoron because growth needs productive capacity to increase, which requires investments. Consuming more may use up savings but the state could also expend more of savings in import-intensive investments, like buying planes or scholarship programmes to send students abroad. If the state provides health insurance, a pension system, and so on, that would also be consuming more without lowering investments. What may cause the Chinese economy to sputter? Any speeding car may suffer hardware, software or fuel supply failures. A hardware failure, like a blown tyre, is an economic mechanism breaking down - like, say, a banking crisis that leads to a credit crunch which dislocates production. A software failure, like people altercating inside a moving car, is something like social upheaval. High growth along with corruption and regulatory failures like the melamine-tainted milk crisis have seen the trickle down dry up, inequality grow and social dislocations rise. China is the most unequal country in Asia. In 2004, the combined income of its top 20 per cent was 11.4 times that of the bottom 20 per cent. Public-disorder incidents rose from 8,700 cases in 1993 to 74,000 in 2004. The average number of persons involved in a mass incident rose from eight in 1993 to 50 in 2004. One 'fuel supply failure' would be protectionism reducing demand for China's goods. Another is bumping up against nature. Is China's development sustainable? China's dirty air is legendary. Less well-known is that 400 of China's 660 cities face water shortages. Lower than normal rainfall in the past 15 years means extended semi-drought in northern China. Combined with population growth, more water has to be pumped from aquifers. So the water table is dropping 3m to 6m a year and deserts are expanding. There are increasingly major sandstorms interrupting aviation, crippling high-tech manufacturing and causing health problems in northern China. To bring water from the south to the north, China began building in 2002 an eastern coastal canal from Jiangsu to Shandong and Tianjin. In 2003, it began a central canal from Hubei to Beijing and Tianjin. Next year, it will start a western one from Tibet to the north-west. The canals, each over 1,000km long, are fraught with environmental risks. The central one has to tunnel through the foot of the huge dyke holding up the elevated Yellow River. The western one will move water through freezing regions.Water temperatures might drop, which may see fish stocks decline. Future urbanisation may have to be located mainly in the south. So China can't grow its way out of trouble by doing more of the same? Its earlier reforms led to providing more jobs, which reduced poverty significantly. But now, the trickle down isn't working so well. What the poor need most now is help with building their human capital through education and health interventions.

CPF-invested stocks and unit trusts fall in value

The Straits Times - Feb 26, 2009
CPF-invested stocks and unit trusts fall in value
By Michelle Tay

LAST year's market meltdown has slashed over a third of the value of the investment of retirement savings in stocks and unit trusts under the Central Provident Fund Investment Scheme (CPFIS).

Their plunging values were roughly in line with a slump that hit bourses around the world. Only the traditionally safe haven of bonds saw investment growth under the CPFIS.

According to Lipper, a fund research and analysis firm, unit trusts available under the CPFIS retreated 40.24 per cent on average, while investment-linked insurance products (ILPs) fell 36.06 per cent.

CPFIS investors who put their cash in bond funds, on the other hand, gained 1.9 per cent over the previous year.

Among the CPFIS-included ILPs, bond global funds and bond Singapore funds have consistently been the best performers over the last three years, said Lipper.

The DWS Lion Bond SGD, for example, is one of five top-performing unit trusts named Lipper Leaders.

Lipper noted that the MSCI World Index shed a total of 40 per cent last year, while the Straits Times Index lost 49 per cent.

The final quarter of last year alone saw CPFIS-included funds lose an average of 16.82 per cent, as global bourses slumped after the failure of Lehman Brothers.

Even before that, nearly half of all CPFIS investors - or 440,000 of them at the time - who sold their Ordinary Account investments in the year ended Sept30 last year had lost money.

Still, figures from the CPF Board show that CPF members remain invested in insurance policies and unit trusts.

As of Sept 30 last year, CPF members had withdrawn $7.8 billion from the CPF Special Account for investments, of which nearly 80 per cent, or $6.19 billion, went into insurance policies. About $1.61 billion went into unit trusts.

As of Dec 31, total investments stood at $7.7 billion - $6.1 billion in insurance policies and $1.5 billion in unit trusts.

Mr Rajeev Baddepudi, Lipper's research analyst of Asean, said: 'The outlook for the global economy continues to look gloomy, while aggressive stimulus measures rolled out by the governments and central banks of most major economies have yet to take root.

'On the positive side, valuations are attractive across most asset classes, and cautiously optimistic, longer-term investing will prove profitable in the coming months.'

Inflation cools to 2.9%

The Straits Times - 23 February 2009

Inflation cools to 2.9%
by Robin Chan

SINGAPORE'S inflation eased significantly in January, continuing its downward trend.

The consumer price index (CPI), which tracks prices of a basket of commonly purchased goods, rose 2.9 per cent in January over a year ago, the Department of Statistics reported on Monday.

This is slower than the 4.3 per cent rise in December, and prices have now eased for the fourth straight month since last October.

Compared to December, inflation was down marginally by 0.1 per cent.

Overall, food prices in January rose 6.2 per cent from a year before, while housing costs rose 7.7 per cent. More expensive holiday travel also pushed up the recreation and others category by 3.2 per cent.

Excluding housing, which makes up 21 per cent of the index, CPI only rose 1.5 per cent.

Transport and communication costs were down 5 per cent due to lower pump and car prices.

Economists had forecast CPI to rise 2.4 per cent from the previous year.

Citigroup economist Kit Wei Zheng said that while inflation is slightly higher than expected, he still expects the Monetary Authority of Singapore (MAS) to ease the Singdollar policy further in its upcoming April meeting.

Lower price levels allow the Government to spend aggressively to stimulate the recession-hit economy through public spending and weakening the Singdollar to make exports cheaper, without fear of driving up inflation.

The Government, which announced a $20.5 billion stimulus package in the Budget, expects inflation to hold steady or fall 1 per cent this year as Singapore battles a recession which could send gross domestic product (GDP) down minus 5 per cent this year.

MEDICAL INSURANCE: A QUICK GUIDE

MEDICAL INSURANCE: A QUICK GUIDE

Hospital and surgical

This type of policy reimburses expenses for inpatient and some outpatient medical treatments.

Buy a plan that reflects your health-care expectations, such as the type of ward you would prefer should you be hospitalised.

Choose a guaranteed-renewable plan that provides lifetime cover.

An 'as-charged' plan, which does away with benefit limits, is desirable as it minimises out-of-pocket expenses.

Critical illness

It pays a lump sum when you are diagnosed with one of 30 designated critical illnesses.

Payouts made under this type of policy serve to replace your income when you are unable to work because you are critically ill.

As a guide, one may insure an amount of about two to five years of income or at least $100,000.

Disability income

This type of policy pays a monthly sum when you are unable to work due to a disability.

As a guide, the payout should be enough to cover all non-discretionary monthly expenses and all monthly contributions towards achieving your financial goals. This is generally 50 per cent to 75 per cent of one's regular monthly income.

Long-term care

This type of policy pays a monthly sum when you suffer from a severe disability.

To estimate the cost of caregiving needed, consider the following:

If caregiving is provided by a family member, about $400 a month is required just for medicine alone;

If a foreign maid is needed, about $1,000 a month is needed to pay for medicine, and the maid's salary and levy;

Caregiving at a basic nursing home (eight-bed ward or more) may cost up to about $1,300 a month.

Those demanding higher standards of caregiving should get a higher level of cover.

Hospital income

It pays a fixed sum based on the number of days of hospitalisation.

Previously, such plans served to supplement the protection of a hospital and surgical plan. However, with improvements to Shield plans, this cover is no longer essential.

Source: Providend

Cover yourself before it's too late

Sunday Times - Feb 22, 2009

Cover yourself before it's too late
Personal medical plans are essential as most group policies are not portable
By Lorna Tan

Relationship manager Stephen Tang never thought of buying a personal medical plan as he has always counted on his employer's insurance programme.

It dawned on him only when he got the pink slip last month that he now faces the gloomy prospect of not having any medical coverage.

To make matters worse, he was diagnosed with high blood pressure last year.

This means that insurers may shy away from covering this condition or they may charge Mr Tang, 37, a higher premium for providing medical cover.

He is not alone. The group medical insurance programmes provided by most firms to their staff are not portable.

The coverage ceases when the person leaves the job.

By that time, he may no longer be considered insurable if he has been diagnosed with certain medical conditions.

Unless you have vast savings to dig into to cover health-care expenses, the majority of us are better off buying a suitable medical plan.

The good news is that it need not burn a big hole in your pockets as the premiums for some plans are payable from your Medisave accounts.

It is easy to get confused by the various health-care insurance plans and jargon.

In fact, many people buy a given medical plan believing it is sufficient when it is not.

For instance, many Singaporeans buy a critical illness plan thinking it will cover hospitalisation expenses, only to find it does not allow such claims.

Here is a quick guide:

Hospitalisation & surgical (H&S) insurance

It covers the expenses for inpatient medical treatment or surgery, including some outpatient charges for day surgery, consultations with specialists and tests before and after hospital stays, as a result of an illness or accident.

You will be paid no more than the actual medical expenses incurred, regardless of the number of plans you own.

And depending on your policy, there are limits on the amount you can claim.

Examples include: MediShield plans, which provide the basic level of H&S cover at class B2 and C wards in restructured hospitals like Tan Tock Seng, and private Shield plans which provide more cover at higher premiums.

While MediShield is administered by the Central Provident Fund Board, Shield plans are provided by private insurers.

The premiums for MediShield and private Shield plans can be paid from one's Medisave, subject to an annual cap of $800.

The downside is that the benefits payable for some H&S plans may be subject to specified limits such as room and board, so it is prudent to shop around and check out the full benefits.

Critical illness insurance

Also known as dread disease insurance, it provides you with a lump- sum payment to tide you over the initial period of being diagnosed or treated for an illness covered by the policy.

This could protect against a loss of income or go towards medical and other expenses.

Do note that only 30 specified illnesses are covered under this plan and benefits are payable only if the disease or surgery exactly meets the policy definition.

The payment is independent of whether you are hospitalised or your actual medical bill.

Early this month, British insurer Prudential introduced a critical illness 'PRUmultiple crisis cover' plan that enables policyholders to claim up to three times the sum assured.

It is also a stand-alone plan which means that it need not be bundled with a whole life, term or endowment plan.

The two features make the cover unique as most critical illness plans will allow just one claim payout once a dread illness is diagnosed.

Mr Gregory Fok, a financial planner at Canadian insurer Manulife, advises customers to understand the definition of each illness before buying the cover.

This is to avoid misunderstandings on what can or cannot be claimed in future.

In 2003, the insurance industry standardised the definitions of the 30 critical illnesses.

As a result, not all cancers are covered. They include pre-cancerous conditions like non-invasive breast cancer or cancers with low risk of metastases like skin cancer.

Disability income insurance

It pays a fixed regular replacement income if you are unable to work due to an illness or accident. This will allow you to continue to pay for your daily expenses and upkeep and that of your dependants.

It typically pays no more than 80 per cent of your average monthly pay.

The definition of disability under this cover is less stringent than that for total and permanent disability, as defined in most life plans. For instance, this policy pays when the insured is partially disabled.

The downside is that the cover is up to age 65 only.

Also, certain occupations are not insurable, such as armed forces personnel, divers and pilots, notes Ms Tang Yin Fong, wealth management firm Providend's risk management specialist.

Long-term care insurance

It pays a fixed sum each month for a specified period, if you are suffering from a debilitating illness that requires long-term care services.

An example of such a product is ElderShield. It provides a monthly sum should you be unable to perform at least three of six so-called 'activities of daily living', such as feeding, washing, dressing, using the toilet, mobility and transferring from a bed to a chair or vice versa.

Customers who are at least 40 years old are eligible to buy ElderShield cover.

Hospital income insurance

It pays a fixed daily amount, say $300, for each day of hospitalisation resulting from an accident or illness.

The coverage is independent of the actual expenses incurred for your hospital stay.

The payment is usually limited to a specified number of days per hospitalisation.

The downside is that the payout under this plan is small relative to the cost of treatment and the cover is limited, says Mr Fok.

Which medical plan should I own?

Financial experts like Ms Tang say that an H&S plan is a 'must' for anyone as it protects against rising health-care costs.

In Mr Fok's opinion, a private Shield plan is a must as it provides more comprehensive cover.

This is particularly so as they are typically 'as charged' plans that do away with the benefit limits.

This means the policyholder is almost covered for the hospital bill, subject to deductible and co-insurance.

The deductible is the portion of a claim that the policyholder has to bear before the insurer pays any benefits, while the co-insurance is a fixed percentage of the claim - what is left after the deductible is accounted for.

What if you have a limited budget? Mr Fok says that one could consider both the MediShield and ElderShield plans as they can be paid for from one's Medisave.

Both Ms Tang and Mr Fok agree that the next medical plan to consider is the critical illness cover, followed by the disability income plan.

Says Mr Fok: 'As a critical illness usually incurs high treatment costs, we should get ourselves covered as early as possible, within affordable premiums.'

He recalls that he recently helped a 29-year-old client make a claim under his critical illness policy after he was diagnosed with lymphoma, or cancer of the lymph nodes.

'In the event of illness, a lump- sum payout from the policy can help to tide over the difficult period and hopefully pay for the best medical care available when one needs it most,' he explains.

'In the case of the young client, his family has no history of cancer or other related illnesses.'

Most financial experts believe that if a comprehensive H&S plan is in place, a hospital income cover is a 'good to have' plan but not essential, mainly because the payout is relatively small.

Planning early for life coverage

Business Times - 16 Feb 2009

Planning early for life coverage

Just why is life insurance so crucial and why is it important to start a policy as early as possible? QUAH CHIN CHIN lays out the basics

BUYING a life insurance policy is a crucial step in financial planning. Such insurance is a long-term commitment that provides financial coverage to the policyholder or his beneficiary in the event of unforeseen circumstances such as critical illness, permanent disability or premature death.

It can also be used as a vehicle to achieve one's financial goals, including income protection, building a retirement fund or saving up for a child's education.

Life insurance policies fall into various classifications. A whole life policy is one in which the premium - money paid for the coverage - remains level for the entire duration of the policyholder's life.

It provides protection and increases cash value (also known as cash surrender value or surrender value), or the cash amount an insurance company will pay a policyholder when he cancels or surrenders his policy prematurely, or savings.

A term policy, meanwhile, provides protection only and is usually renewable annually, while an endowment policy involves an insured sum that is payable upon maturity of the policy (at the end of a fixed term of 20 years, for example) or on prior death of the policyholder.

There are also investment-linked policies, which, as the name suggests, are tied to investments. Policyholders with 'participating' policies are entitled to profits or losses of an insurance company through the distribution of bonuses, while those holding 'non-participating' policies will earn only the guaranteed cash value stated within his contract and not company dividends.

Needs and goals

Determining which policy to get depends on such factors as one's risk appetite, needs and financial goals, according to financial advisers BT spoke with.

For example, traditional whole life policies would appeal to a risk-averse person, while someone with a higher risk appetite could consider investment-linked policies, said Nick Czolak, Manulife (Singapore) senior vice-president and chief marketing officer. 'We'll show the prospective buyer the options available based on his profile, such as his attitude to risk, investment outlook, his considerations in terms of family, and circumstances,' he explained.

One's objectives also play a part, said Joan Lim, a financial planner at PromiseLand Independent, an advisory and insurance brokerage firm.

'We'll find out if they have any special objectives; for example, how much money they want to have in the bank if they wish to retire by 40, and make other suggestions for their consideration, such as disability income and extending their term plans,' she said. 'From there, we'll work backwards and come up with a financial roadmap for them.'

Insurance premiums depend on the amount of cover and type of plans. For instance, premium rates for non-participating policies are lower than those for participating policies.

Another important point new policyholders are often advised on is to consider carefully before terminating or surrendering their policy before the tenure is up, as doing so typically results in losses. Early cancellation may incur not only additional fees, but also causes the holder to lose his benefits.

'Your health status could have changed since you first took out the policy and you may not be able to get a similar level of protection in a new policy, as you'll be required to declare all pre-existing conditions and possibly undertake a medical examination,' according to advice from the Life Insurance Association (LIA) of Singapore's website.

For those unable to continue paying premiums on their current policy, the association suggests looking at other options available or reducing the sum insured, which would in turn lower the premiums.

Start young

Given that one is healthiest when young and that cash values build up over the years, it makes sense to start a policy from young.

'The whole idea of insurance is to start as young as possible,' said Patrick Lim, PromiseLand associate director, adding that this is the reason parents are encouraged to buy coverage for their newborns.

Added Ms Lim: 'When people start young, the premiums are at the lowest and they're at the peak of their health.'

Still, for those unsure of what to look out for when buying insurance for the first time, she suggests low premium, high-cover plans and hospitalisation plans to start off.

'Then as they progress in life, they would develop a clearer picture of what they want,' she said. 'This would be helpful for their financial planning; for example, more cover, returns or savings.'

And as their priorities shift or when they experience significant changes in their lives - such as getting a pay rise, tying the knot or receiving an inheritance - financial advisers would typically have periodic reviews with them.

These views were shared by Mr Czolak, who nevertheless sounded a note of caution: 'The younger you start, the cheaper it is and the more time you have, but of course, if you can't afford it, don't do it. Weigh your priorities.'

Indeed, being clear about one's goals and knowing what to expect are vital before jumping on the bandwagon. This is especially so in light of the current economic turmoil and the recent collapse of insurance giant American International Group, which had to be rescued with American tax dollars.

In the words of LIA: 'As the prospective customer, you still have to play an active role in determining your own financial needs; your financial adviser can help you make the right decisions but not make the decisions for you.'

Going for value stocks pays off in long run

The Sunday Times - Feb 15, 2009

Going for value stocks pays off in long run

Buying underpriced or undervalued stocks is what is termed as a value-oriented investment strategy, and some believe this beats other investment styles over the long term
By Gabriel Chen

It has been a trying time for investors, with stock markets around the world plunging on every indication of trouble.

Indeed, shares of many financially sound companies have been pounded to unreasonably low valuations.

For value investors, bearish times like these spell opportunity and represent a chance to pick up battered stocks at very cheap valuations.

The late Mr Benjamin Graham - widely regarded as the father of value investing - was the quintessential bargain-hunter who would scour the market for good deals.

'Price fluctuations have only one significant meaning for the true investor,' he wrote in his widely acclaimed book The Intelligent Investor, first published in 1949.

'They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.'

Value investors buy stocks that are cheap relative to some measure of intrinsic worth like a company's earnings.

On the other hand, growth investors look for fast earnings growth and will pay a premium for it.

The stocks they buy into come with high price-earnings or price-to-book ratios, as they believe these stocks indicate superior growth prospects.

When markets are trending up and momentum is good, investors tend to do very well with growth or momentum strategies.

'Growth investing works well in times with burgeoning industries riding an economic cycle,' said Mr Lionel Lee, director of equity investment firm IBS.

Technology stocks of the late 1990s are an example. They exhibited above-average earnings growth rates and often beat earnings estimates.

Numerous studies, however, have demonstrated that value stocks can outperform not just growth stocks, but also the overall market.

This is shown to be true in most years, and in most five-year and 10-year periods or longer.

Dr Mark Mobius, executive chairman of Templeton Asset Management, told The Sunday Times that value investing has the best long-term record.

'It is based on actual earnings records and projections. Earnings drive stock prices,' he said.

Research published by Societe Generale strategist James Montier last year found that a value strategy beats a growth-oriented strategy over a long period.

In Mr Montier's analysis, the cheapest 20 per cent of all stocks - regardless of industry or geographical location - delivered an average return of 18 per cent a year over the period from 1985 to 2007.

But the most expensive stocks over the same period generated an average return of less than 3 per cent a year.

Even in emerging markets such as Asia, value investing works.

In the same study, Mr Montier showed that the cheapest emerging market stocks outperformed the most expensive stocks by over 18 per cent a year and beat the broad market by around 11 per cent a year on average from 1985 to 2007.

The validity of the value approach has been borne out repeatedly.

US-based Brandes Institute showed that value outpaced growth over the 28-year period ending December 2006 for stocks of large and small companies in the United States.

The large-capitalisation Russell 1000 Value Index outperformed the Russell 1000 Growth Index in 57 per cent of the years.

The smaller-capitalisation Russell 2000 Value Index also outperformed the growth equivalent in 64 per cent of the years, the Brandes study revealed.

Given that value investing outperforms growth investing over long periods, should you be leaping into the market now to grab a cheaper blue-chip stock or two?

Mr Richard Jones, director and portfolio manager at DWS Investments, believes the time is right.

'Now may be an attractive buying opportunity as the world and Asia's greatest companies are on sale,' he said.

But before you start nibbling on some of these value stocks, it may be worthwhile to know the pitfalls of value investing.

First, beware of 'value traps', where some companies that are cheap stay cheap for a very long time.

'The reason they appear 'undervalued' is that their price fall is outpacing their fundamental deterioration,' said Ms Daphne Roth, head of equity research in Asia at ABN Amro Private Bank.

'As a result, these industries could stay trapped in this category until an external catalyst takes them out.'

Next, value investing is not for those seeking a quick gain.

'After the severe fall in asset prices last year, value has started to emerge and even Warren Buffett has come out to buy,' said Mr Paul Heng, director of investment analysis at Ferrell Asset Management.

'There may be the possibility of a further fall in prices, but if you buy into good and value assets, they will go back to their true value in the next five years.'