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Eat Your Heart Out, London!

Kitty Miv, Editor
15 August, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

Competition is the number one operating principle between countries as between species, individuals and companies, so Switzerland and Luxembourg are demonstrating their evolutionary fitness by seizing leadership of the continental European Renminbi market. Of course, the very assets that have allowed them to become two of the most successful "offshore" jurisdictions are the ones that are making it easy for them to make the running in renminbis: low tax rates, flexible corporate forms, openness to international business flows and a high level of financial expertise. It might have been expected that London would emerge as the preeminent European location for renminbi activity, especially given its historical links with Hong Kong, but this doesn't appear to be the case: renminbi deposits in London in June, 2013 appear to have been largely static at about RMB14bn, compared to Luxembourg's RMB40bn and Switzerland's RMB10bn. Trade-related renminbi transactions in London were running at RMB20bn annually in mid-2013, however. Luxembourg's success probably owes something to the fact that the three top Chinese banks have all chosen to locate their European headquarters there.

But these European renminbi volumes are dwarfed into insignificance by those in Hong Kong. HSBC’s forecast for renminbi-denominated bond issuance in Hong Kong in 2013 is in the region of RMB280bn to RMB360bn. Taiwan and Singapore have both launched challenges, with the former boasting deposits of RMN70bn just four months after opening for renminbi business; but Hong Kong has easily fended them off, with deposits of RMB677bn last April. Hong Kong settled 85 percent of China's external renminbi-denominated trade (worth a total of RMB1.7 trillion) in 2012. Eat your heart out, London! As with Luxembourg and Switzerland, but even more so, Hong Kong has built-in advantages when it comes to renminbi business, and has been fully supported by China (of which it is after all a part) in developing it. And it was Hong Kong, rather than London, that launched a HIBOR fixing, just a month ago. Mind you, after the LIBOR scandal, it would have been a stretch for London to have had a shot at that. Given China's large and growing trading involvement with the Middle-East and Africa, Dubai, another low-tax location, is the other place we shouldn't disregard in terms of renminbi usage – volumes are minimal so far, but that is probably just a temporary situation. Anyway, for now, Hong Kong rules the Yuan, in international terms at least.

The Vodafone affair drags on. The company evidently doesn't believe it will get a fair hearing from the Indian Government, and who can blame it after India simply changed the rules when Vodafone had won fair and square in the courts. It's difficult to understand the Government's motivation: the Vodafone case is worth a fair slab of change in itself (USD2.2bn), but surely the Government isn't being driven simply by cupidity? Recent news about tax collections seemed to be mildly positive, although it won't have much of an impact on the budget deficit, which is running at about 5 percent and doesn't seem likely to fall in the near future. Debt has shot up over recent years – it is not high in relation to GDP, but the maturity profile is worrying. Anyway, that is beside the point: with elections imminent, the current, ineffectual government is not going to do anything about the country's poor economic situation. Why then continue to persecute foreign investors? At least the Government is consistent in that sport, as is shown by its long-running dispute with Mauritius over their tax treaty, although the underlying motive in that case was to try to stop "round-tripping" by Indian investors. The result, however, is the same as with the Vodafone case (and other foreign investor tax spats) – to deter foreign investment. Heaven knows there are enough barriers – bureaucratic, fiscal and unmentionable – to foreign investment already, without adding uncertainty to the mix. Yet the Government persists. Perhaps, in the rarefied atmosphere of the governing circles of the world's largest democracy, foreign investment simply doesn't signify.

I suppose that the EU thinks it should be congratulated in having escaped from a major trade confrontation with China over its anti-dumping and countervailing measures in the solar panel sector. But this was a disaster of its own making, and the game is not over yet. The mad jumble of EU trade policy is also demonstrated this week by the UK pottery affair, in which, as with the solar panel dispute, a small coterie of inefficient producers has "captured" the naive arbiters of trade at the Commission and bullied them into applying penal duties to competing products. Excellently, the Chairman of the (British) company being hurt by the pottery duties said that one "can't sit at home being a little European hiding behind tariffs and duties." Of course that's exactly what the protectionist complainants are doing. The rules underlying the protective actions that are taken by the Commission are mind-bendingly complex. You can prove anything with statistics, indeed, and in its rush to appear responsive to the supposed imminent demise of European producers (a frenzy calculatedly whipped up by the lobbyists who line the rue de la Loi – hah! – in Brussels) the Commission simply reaches for the nearest instrument to hand. It's the amazingly high level of the protective duties that really gets to me: 36 percent in the case of the pottery, and up to 60 percent in the case of the panels. In a modern world, with out-sourcing available for virtually every step in the manufacturing process, how can it possibly be true that a Chinese producer can sell goods for less than half of what it costs a European producer to make the self-same objects? Why isn't the European producer using a Chinese supplier, as was the British pottery producer? Nonetheless, in their dream-world in Brussels the bureaucrats shake the statistical kaleidoscope and come up with nonsense.

The real problem is that the trade protection process is opaque and totally undemocratic, both in Europe and in the US, where the odious Commerce Department completely matches the EU Commission in its capacity to be taken in by producer lobbies. Neither in Europe nor in the USA is there any mechanism by which democratic oversight is applied to the process. Arguably, the Congress could interfere, but in reality that is unfeasible, and how would it expect to overturn a ruling which has been made under the President's administrative fiat? In Europe the process could be slightly more direct, via the European Parliament, but that body is about as democratic as my little finger. If anything it's captured just as thoroughly as the Commission: it was a British MEP who was responsible for the pottery debacle. My proposal is that a completely independent auditing body should be set up, staffed by non-political trade experts recruited from the real world, and that any "anti-dumping" or "countervailing" ruling should be subject to approval by that body. And I would ban those weasel words, anyway.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 65th) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is on + 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Three weeks ago it dropped a place, though.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Hong Kong wins the yuan race

Luxembourg backs China

Switzerland adds a currency

And Kitty's Execrations:

European Union doesn't get it

India doesn't understand



Tags: Euro | Dubai

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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