BEIJING NIGHT LIFE

To be quite honest, I never like going out to bars at night. Although as an insomniac I usually sleep late, I rarely stayed out late at night. I prefer to stay up at night reading books than go bar hopping. Not that I totally dislike staying out late and go bar hopping rather that I am a boring “couch potato” who felt much more comfortable staying home. As such, I “normally” don’t have a night life either during my foreign trips even when during my backpacking trips to Hong Kong, Taiwan, and Singapore. Well, aside from the fact that I don’t have a habit of staying out late at night, almost all of the guided tour trips I had in the past are packed with “old” people, who shun the night life. At the other end of the spectrum like the backpacking trips, I simply don’t have anyone to accompany me to “chill out” at nights. However, this last trip of mine is different in the sense that there are more “hippie youngsters” in the bunch. All in all, there are about 7 of us “youngsters” including me and my sister (and I happen to be the “big brother” literally). Anyway, it was the second day of your trip to Beijing when one of the “youngsters” propose to literally “chill out” in the freezing night (-8OC) right after the day tour ended. He proposes to go to Hou Hai (後海, literally “the back sea”), a lakeside bar – entertainment complex close to the place we are staying at the Grand Mercure Hotel (the former Beijing Marco Polo Hotel) at Xi Dan avenue (西單街). Anyway, I really don’t have much to say about the night life scene in Beijing because of my “limited experience”. However, according to the Wikipedia, “Hou Hai is a famous night life spot because it is the home to several popular restaurant, bars, and cafes. The area is especially popular with foreign tourists visiting Beijing as well as the expatriate community and younger locals”. In spite of what is being said in Wikipedia, I honestly don’t see the so – called “popularity” of the place, i.e., I didn’t see any foreigners either expatriate or tourists (as if I could tell the difference) except for us (me, my sister and my 5 “little brother and sister”) although I do see a lot of the younger locals patronizing the place. Well, it could be that we end up at the “wrong side of the lake”, i.e., the “boring” side of the lake and therefore I wasn’t able to witness the “popularity” of the place. It is that or the weather is simply too horribly cold for any “functioning” night life to exist. At any rate, before we set out to Hou Hai, I had my younger “brothers and sisters” get my phone number as well as Lionel’s, our tour guide (by that time, he already had retired to his home) and the emergency police number in Beijing, 110 just in case everything went terribly wrong and of course, the hotels, address and phone number. I had to do this because I had this feeling that one of the major reason that the parents of these youngsters allowed them to go out in the first place is because they are with me, “the big brother”. Even so, I wasn’t the “leader” of the pack since I was hands down the most boring of the bunch. Somebody else fill that shoe. I was just simply a “chaperon” of sort. Aside from handing out contact numbers to everyone involved, I also brief them about some “rules” of engagement like never leaving somebody behind and going together as a group. Having done that, we all took the cab to Hou Hai. Speaking of cabs, Chinese taxi drivers are a notorious bunch. My very limited experience in dealing with them is simply unpleasant. Chinese taxi drivers are known to overcharge their customers and unless “reminded” upon (or insisted upon depending on the intransigence of the driver), they would seldom flag down the meter. It is probably due to this notoriety of Chinese taxis that the government has required them to install a receipt issuing meter complete with the taxi’s general information so that the riding public can use the receipt as proof when filling a complaint against a taxi driver (so asking for a receipt is a must when taking a cab in Beijing). Also, Chinese regulation allows taxi cab to carry only a maximum of 4 people. Since, there are 7 of us in the group. We are “force” to take 2 separate cabs to Hou Hai. The flag down rate for Beijing taxis is at a minimum of 10 or 11 RMB with additional surcharges after midnight (verification needed). It was around 930 pm I supposed when we got to Hou Hai and boy! The weather is simply freezing cold! My 4 layer of clothing barely kept me warm! The lake at Hou Hai is actually frozen rock solid due to the “mild” cold weather (that is according to Beijing residents, a harsh cold weather would see temperatures at around -20 degrees Celsius) so much so that we saw a lot activities literally over the frozen lake such as skating and “ice football”. My first impression about Hou Hai and probably Beijing’s night life in general is that the night life is not an “exclusive right” of the mid 20s to 30 something yuppies. At the “entrance” of the Hou Hai area, I saw a lot of “old” people, generally those above 50 years old doing some dance lessons with a dance ribbon. Kids are also around the area playing and they don’t look like from the neighborhood (just a hunch). Surrounding the lake on all sides except the front are bars and cafes, and the most prominent establishment (and the one right in front at the entrance) is the ubiquitous Starbucks. Most of the establishment seemed “small”, the biggest I think is just about 100 sq meters in lot area. Some establishments are two floors but most are single story. The streets in Hou Hai (at least in the place that we “landed”) are filled with hawkers and side walk vendors peddling everything from souvenirs to laser point pen. Included in this crowd are the employees of the different bars trying to lure or entice passersby to visit their bars. They are generally young, well – groomed, pretty (the ladies of course), and quite fashionable themselves. To me, they don’t seem to be bar employees at all but rather sales people/models. And oh by the way, these are people are quite pesky and insistent! They would follow you all the way trying to convince you to go their bars to the point that you felt that they are quite harassing already. Most of the bars are empty with only a handful being jam packed. I don’t know as to why is that the case but it could be that we are at the “boring side of the lake” or that we are early for the “formal” start of the night life (it was around 930pm then) or it was because the economy is bad and people are just avoiding spending altogether or it was because the weather is too cold for any functioning night life to exist. At any rate, we straddled through about half of the perimeter of the lake in search for a “nice” spot before we all decided to return to the front and picked the most “popular” bar nearest to the entrance of the lake. It so happened that the bar we chose has a Filipino band singing English songs. The bar was cozy but not “posh”. It looks so – so rather than “groovy” (that is if I understood the term, groovy at all). The drinks are well I don’t know expensive? I mean the cheapest drinks, which included bottled water, shakes, and juices (which me and my sister and the youngest in our group ordered) and beer cost 50 RMB or roughly, Php350 or US $7. Aside from me, my sister and the youngest in the group (I don’t drink. I’m no teetotaler but I definitely don’t drink. I only drink when very, very close friend of mine ask me to, otherwise nobody can get me to drink), the other youngsters ordered beer, Tsingtao beer, one of China’s popular beer brand. The bar also carries the more expensive wines like Jack Daniels and the likes, tequila. The price tag I think is around 1500 RMB (?, verification needed) upwards (Php10500 or US $250). We sat at the table directly in front of the rather “small” stage. At first, the Filipino band (they are 3 of them in the band, 2 lovely young ladies and a middle age guy in his late 30s perhaps) didn’t realized who we are but after overhearing us speak in Filipino, I could see their face grinned and they acknowledge us at the stage in Filipino (apparently, they so missed the Philippines that it’s a welcome sight for sore eyes to “see” us there). About this Filipino band, I was surprised to learn (and actually hear them) that they can speak phrases of fairly accurate Chinese Putonghua (普通話, the official Chinese language). They speak in “Chinese” whenever they are asked by the staff to acknowledge or “special mention” some bar guests (and who said Chinese is difficult to learn). This band is fairly popular I guess among the patrons of the bar because Chinese or more specifically, Beijing Chinese dig American music and this Filipino band sang quite well. One of the youngsters actually caught a few patrons “attempting” to sing along with the band. During the break in the performance, we got to chat with the band members and I was surprised to learn that there are many Filipinos who are working in Beijing and many like them worked as band musicians in Beijing bars and I thought Shanghai has the most number of Filipino bands “rocking” the town. Anyway, about the patrons of the bar, I observed that most of the patrons are in their 20s and 30s. They are mostly white collar workers who probably came by to unwind after a stressful day at work (it is only but logical to see such a demographic crowd in a place like this given the price tag of the liquors). Most of the patrons came by in small groups of somewhere between 2 – 5 people. Surprisingly, a number of the patrons actually came to the bar alone! Too many lonely people in Beijing perhaps? The crowd is quiet, not boisterous, although some of the younger patrons do get a bit noisy when drunk but generally, the atmosphere is pretty quiet save of course for the song that band is singing. It is as if everybody in the bar is paying close attention to the music except for “me and my group” (apparently, we’re the noisiest in the bar). Most people in the bar are in my point of view, don’t really care about who is sitting beside you, i.e., they’re not that nosy and they simply don’t care. I mean I saw a couple probably in their late 20s engage in a steamy “make out” session right inside the bar beside the window and totally oblivious of the crowd around them. I mean the couple has been going on with their steamy session like for an hour of our duration of stay in the bar. In fact, they’re still at it by the time we left. Yet, nobody seemed to feel “scandalized” or even remotely felt “uncomfortable” with it. Public display of affection isn’t a common “thing” in Asian countries like the Philippines. The same thing goes with China. I mean I never seen couples in China “kissing” in public before. However, inside the bar, things seemed to be less “inhibited”. Probably, it’s the alcohol or maybe, bars are the principal place for a make out session in China, well, at least in Beijing. It is just a guess though. We left after an hour or so of fun, light conversations, and good music. My impression of the bar scene in Beijing though this is no expert opinion since I’m no expert at all when it comes to bar hopping is that the place is small and cozy, the music is good, the place is generally quiet, the crowd usually just mind their own business, and the beverages are expensive. Not of much of a party atmosphere, I would dare say (as if I knew what a party atmosphere remotely looked like).

21ST CENTURY PEKING OPERA: A NEW OR RENEWED ART FORM?

On the evening of the first day of my stay in Beijing, Lionel took us all (the entire tour group) to watch a “Kung Fu” show at the Red Theater right after a rather “tasteless” dinner (that is according to the opinion of one of the tour members which most likely reflect the sentiment of virtually everybody else). My first thought about the “Kung Fu” show was that of a Chinese martial arts exhibition but it turned out to be completely different. The so – called “Kung Fu” show was in actuality a “westernized” version of the “old” Peking opera (京劇). The use of the word Kung Fu (功夫) was just a marketing ploy to pique the interest of foreign tourists since most of us are just simply agog over Chinese martial arts. Anyway, Peking opera (or the modern word, Beijing opera) is actually an old Chinese opera theater invented some 400 years ago during the Ming dynasty (明朝). Before the advent of films and the television, the Peking opera was the single most popular entertainment medium for both the masses and the nobility including the imperial family. Its popularity still continues during the republican period (民國時代, ca 1911 – 1947) right before the Japanese invasion in 1939. At any rate, with the introduction of the movies and television, such “ancient” art form began to decline as people prefer much “colorful” entertainment media. It would have gone the way of the dinosaurs if weren’t for the recent “reinvention” of the medium. “Old” Peking operas is a play utilizing popular Chinese stories and legends such the “Monkey King or the Stories of the Travel to the West (西遊記)”, the “Romance of the Three Kingdom (三國演義)”, and others. Within the play, there is high pitch singing (similar to European operas), witty conversations (highly poetic in their sentence construction in some instance just like their European counterpart), drama (again similar to their Shakespearean cousins), and plenty of fighting scenes a.k.a. the “Kung Fu” part of the show (which our European counterpart lacks). Actually, the Kung Fu aspect of the Peking operas aren’t really Chinese martial arts fighting (ok, the Kung Fu fighting as the song goes) at all. Instead, it looks more like a choreographed “dance” or “acrobatic stunts” with actions (arm actions and legworks) that we all associate and identify as Chinese martial arts moves. In short, it is a dance that masquerade as true Kung Fu. The Kung Fu show that we saw that night was a true blue Peking opera in every aspect of it except that it comes with huge twists and major renovations that makes one rethink that whether or not that this show is an upgraded, “modernized” version of the Old Peking opera or simply an entirely new art form, one that is a successor to Peking opera’s illustrious past. The show we saw that night was titled, “The Legend of Ching I”. The story is about a boy who was send by his poverty stricken mother to the Shao Lin Temple(?) to become a monk and escape from poverty. The boy was very afraid and refuses to leave his mother’s side not until he became enthralled by the fighting prowess of monks displaying their Kung Fu. At which point, ching I resolved to become one of them. He became a monk and labored hard to become the best Kung Fu fighter. As time went on, Ching I grew up and became more enamored to Kung Fu to such an extent he became such an excellent practitioner of Kung Fu at a very young age. However, his very success waylaid him from the path of true enlightenment. He became arrogant and corrupt and drawn to temptation to such an extent his way in life. As such, the abbey of the temple refuses to give Ching I the permission to partake the “test” in order to become a true Kung Fu master. The “test” was actually physical combat with the best Kung Fu fighters of the temple. Disappointed, Ching I actually thought of giving up his quest until he discovered the true meaning of enlightenment (as in the Buddhist sense of enlightenment). He regain his composure and was soon allowed to take the “test”, which he manages to pass albeit all the hardship and challenge. After that, Ching I became a true master not only of martial arts but also of the spirit. He eventually succeeded the old abbey in latter’s role and had a young disciple himself. He uses his life story as a lesson for his young apprentice on matters of humility, patience, perseverance, and enlightenment. The story sounds familiar, right? Strangely, that’s the feeling I got after watching the play. The story seemed to resemble a lot like a popular Hollywood movie, Star Wars or to be more exact, the story strongly resembles much like the story of Anakin Skywalker a.k.a. Darth Vader. One could say that the Legend of Ching I is actually a 16th century Chinese version of the story of Anakin Skywalker. The only difference is that our hero, Ching I returned to the path of enlightenment while Anakin Skywalker was seduced by the Dark Side of the force and metamorphosize into Darth Vader. And this is actually one of the interesting innovations and twists that I am talking about, a “western” style plot. Another major change in this “deviant” art form is the language used. All throughout the more or less 2 hour play, the language used during conversations and narrations are in English! Not only that, it is in FLAWLESS English! The Chinese language are used sparingly and only during the singing part of the play. The use of English is actually not a surprise since this is again due to marketing reasons. I mean this play is meant for foreigners/tourists who couldn’t understand a word of Chinese (quite ironic because the majority of those in the theater that evening are either Hong Kong Chinese or Filipino Chinese; only a handful are actually westerners). What is surprising here is intention behind the use of the English language during the play. It meant that the producers of the show are planning to go “international” and become an international Chinese opera, not just merely your everyday, neighborhood Peking opera. As a matter of fact, according to the show introduction, the play had already stage outside of China on some occasions. Another “renovated” feature of this opera compared to the “old” Peking opera is in the use of the props. The “old” Peking opera doesn’t use much props if not any at all except for the costumes and the background (which is just a painted picture of the story’s setting). This modern incarnation however uses plenty of props as well as a clever manipulation of stage light to the extent one has a feeling that this is more of an extravagant Broadway musical rather than a “staid” Peking opera. Furthermore, there are some scenes in the play that display ballet dances and acrobatic moves reminiscences of the acrobat show that I’ve watched also in Beijing during my first trip some 1 ½ years back (see the blog article “Old” Beijing dated May 11,2006). So there it is. We have an art form that combines elements of the “old” Peking opera, European ballet, American Broadway musical, western plot devices and lots of Kung Fu. Despite that, make no mistake about the nature of this play. This is a Chinese play hands down because the theme and the philosophy behind the play are unequivocally Chinese. Themes like the Sino – Buddhist idea of futility of worldly life, and the meaningless of existence permeates throughout the play. Overall, I say the play is quite entertaining and good. I don’t know about how others specifically the westerners perceived the story however judging by the show’s longetivity, which according to the introduction is already on its 2600 + runs already since late 2006. I say the show must be quite popular among foreigners/tourists. Although, it could be argued that tourists are generally “forced” to watch the show because it is a “standard” part of the tour itineraries, I would dare say otherwise, that it’s popularity are genuine. My reasoning behind my observation has lot to do with recent “trends” in another entertainment medium, that of Hollywood movies. The recent trend among Hollywood movies, if one is perceptive enough is the “seeming” proliferation of Chinese elements in recent popular Hollywood movies. If you carefully look at Hollywood movies nowadays, you would notice the appearance of “Chinese” faces in the casts, the connection of events and things related to China as if the general sub – conscience are abound of it, and lastly, the subtle addition of Kung Fu in any fight scene. Now if such “trends” in movies are popular with western moviegoers, I don’t see any reason as to why a “westernize” Peking opera such as this one who is quite attune to western preferences and taste wouldn’t be popular at all. After everything that is said about this play, something kept nagging me until now. Have I witness an emergence of a new art form? Or I just merely witness an aberration of what looks like a new art form but which in fact is just a mangled westernized modernized 21st century upgrade of an old art form? Whatever it is, I had a sense that “this” art form would blossom further in the future.

AN HONORED GIFT

The morning after the shopping expedition at Wangfujing (王府井) in Beijing wherein I bought 7 books, I received a surprise gift from of all people, Lionel Wang, our Beijing tour guide. Well, it started the night before when Lionel saw the books I’ve bought and was impressed that I could actually read Chinese and is also a book lover as well as a history enthusiast. And at the following day, he presented to me as gift, the manuscript of his written work, part one of his historical fiction/romance short story. You see, Lionel is not your typical tour guide. He is actually an amateur writer. Ok, he is a writer wannabe. He probably liked fiction, the historical romantic type with settings in China (judging from the topic of his choice). And he writes during his free time, which in itself is a tough act considering that he is married and he has a day job. Writing is no easy stuff. Anyone who likes to write can attest to that. Inspiration to write can’t be turned on as pleased like that of turning the tap water faucet on. There are many a times when one would be staring blank at the screen and can’t figure out what to write much less how to. This is further aggravated when you’re tired from working your ass off the whole day taking a bunch of giddy and demanding tourists around Beijing and coming home having to fulfill familial responsibilities. Anyway, a bit about Lionel. He is probably in his early 40s. He is a Manchu (滿族), the ethnic group that constitutes the ruling elites during the Qing dynasty (清朝), China’s last imperial dynasty. His ancestors belong to the blue banner (正藍旗), one of the Eight Banners (八旗), a socio – politico – military organization of the Manchu during the Qing era. Since his surname is Wang (王, the Fookien – Chinese pronunciation is Ong) and he is a Manchu, I surmised that he is probably of royal decent since Wang is a Han Chinese (漢族, the ethnic majority) surname and not an ethnic Manchu surname and in many cases in the past, the imperial descendants of former dynasties usually adopted the surname Wang as an emphasis that they are of royal lineage. It is either that or that his ancestor maybe actually a Han Chinese surnamed Wang and that they are “incorporated” into the Manchu Banner system during its early phase of conquest of China sometime in the 17th century. At any rate, it is safe to say that his forebears are of aristocratic descent. Lionel is actually quite fluent in English and he could actually speak a few words in Filipino, which is very rare. He would always belt out the words, “Dito Tayo” whenever he wants the tour group to assemble. At times, he would call out, “Kain Tayo”, to enthuse the group to either lunch or dinner. A perennially jolly guy, Lionel would always amuse us with his wise cracks about his “tigress” of a wife (we actually have the opportunity to meet his wife and inform her about his wise cracks about her, hehehehe). He is a Catholic and is a native of HeBei (河北省, the province wherein Beijing is situated), which is only logical given that his banner ancestry (most of the Banner people lives in and around Beijing for the most part of the 200 year Qing rule) and he lives in Beijing for a long time now. Anyway, the very instance that I received the manuscript of his work, I was to be quite honest dumb struck. I simply don’t know what to do. It is then I remembered my history (that I studied). In times past, aristocrats (the only ones who can afford a good education in ancient times) both in China and in Europe would host a party and invite friends and peers to the party and hand out his latest written works be it, a poem, a prose to everyone in the gathering. It is a marked sign of honor to actually receive such a personal gift from the gracious host and the guests would go about reading “the work” of the host and offer their opinions and suggestions on the latter’s work. Although time has passed and things have undoubtedly changed over the years, this practice is still being continued in literary circles. Having remembered this, I graciously accept his “gift”, set aside the book I was reading that morning and began to assiduously read his work. Lionel’s work is a 12 page historical romance fictional short story. Though historical fiction/romance short story is not really my forte or more aptly, a book that I don’t want to be caught dead with, I nevertheless plough through (my favorite fiction books are all Science Fiction and a few Wuxia novels, 武俠小説, a.k.a. Kung Fu novels and the books that I like the most are those laden with analysis, scholarly works of immense knowledge). Lionel’s short story is all about concubinage, a detestable practice; illegal because Chinese family laws throughout history doesn’t recognize it but is socially and morally acceptable in Chinese societies. The historical setting of the fiction is set right after the fall of the Qing dynasty and into the early period of the Republican era. The title of the fictional story is 暖被窩兒, which loosely translates to as “Warming the Bed and Blankets”. The protagonist of the story is a sweet, young innocent girl from the province who is never named in the story. Lionel told me the reason that the protagonist is not named is because he wants to put emphasis on the lowly status of women like her in Chinese society at that time (that however would prove to be a weak point in his writing because one has difficulty to ascertain as to when the protagonist is in the conversation or has entered the picture). The story begins with the protagonist being “bought” by a wealthy but childless jade merchant in Beijing who also happens to have 2 wives (still living), ostensibly to “warm” his bed at night (to be unambiguous about it, the protagonist is his sex slave) whenever he is on business trips away from home. Eventually, the relationship evolved and became one of affection and love. Later in the story, the protagonist bore the wealthy, childless lover of hers, 2 sons. The wealthy guy dies near the end of the story and she is left with the care of their 2 children, which she successfully manage to rear to adulthood. The story ends when the children turned into teens. Well, at least that is the first part of the story. Due to the nature of the story, the content is a bit sensual. Ok, sexually explicit at times (graphic in some parts?) but the idea of the story, the theme is pretty rich and powerful. As such, it could be elaborated further into a novel instead of a simple short story. Too bad, Lionel, the author probably don’t have enough free time to write because though the piece is well written, it needs further development, I mean, the story needs further development to become much more vivid than it is. Anyway, in keeping with the literary tradition, I gave a few suggestions and comments of mine to Lionel in a polite and nice way of course. Not that I’m a literary critic of some sort but as a responsibility that comes attached to the receipt of the gift of his manuscript, I felt I had to. Whether or not he accepts my suggestions and comments, well, that is his prerogative. At the least, I fulfill my part. Besides, I don’t have plans to take up literary criticism as a career. Well, it is my hope that someday I would be able to read a complete version of the story written by Lionel as he plans to publish his work sometime in the future. By then, I’ll probably ask his permission to translate and publish it in English, perhaps; that is of course, if I have time to write at all by then.
POST SCRIPT
It is during the time when I was reading Lionel’s work that I came to realize how much I owe my readers (of my blog) my sincerest gratitude for their patronage. I write to share my thoughts, my ideas, my views, my feelings. And honestly, I never well, didn’t care much if somebody actually read what I am writing. I just publish it. If people want to read it, so they read it, it’s free anyway. I never went out of my way to track the readership of my blog nor promote it nor advertise it. However, over time, I do get responses in the form of messages and comments from friends and strangers alike indicating their appreciation of what I’ve written on my blog and I felt I’ve haven’t thanked them at all. So here it is, I want to thank everybody who read my blog, those who have send me messages expressing their appreciation of my writings, those who posted their comments on my blog, their very helpful and to all those who just silently read my blog over the years. I thank you all. You may never know it but it feels GREAT to be appreciated. Thank you again.

BRANDING “MADE IN CHINA”

Exchange rate:
1 USD = 7.3 RenMinBi (RMB) or Chinese Yuan
1 RMB = PhP 6.67
I soooooooooooooooooo hate shopping! And it so happen that in my recent vacation trip to Beijing, the tour guide set us out to not one but FOUR shopping tours in and around Beijing! The first expedition is to a 168 like tiangge type of mall, the second and the last shopping expeditions is at WangFujing (王府井), Beijing’s premier shopping district and the second most popular shopping district in all of China next to Shanghai’s Nanjing East Road while the third shopping destination is to a Jade Factory en route going to the Great Wall. Anyway, good thing for me is that I am an avid book lover and Wangfujing has one of the largest Chinese book store in Beijing, Xin Hua Bookstore (新華書店, which happened to have a branch here in Manila however, their book collection here in the Philippines sucks). The book store is also one of my favorite places in Beijing. In spite of that, I didn’t spend all of my “allotted” shopping time in the book store. This is because my sister is with me and like most women, she do like to shop, or more precisely, window shop. So, I struck a deal with her (on our second shopping expedition). I get to spend the first half of the allotted 2 hours of shopping time to buy my books (which I did! Bought 7 books for 341 RMB; Great deal!). Other than that, in most shopping expeditions where there is no book store in sight, I had to “endure” shopping. It is not that I dread shopping so much because it is “shopping” (as in the act itself) rather one of the reasons that I don’t like shopping at all aside from the fact that it is quite boring, (I really wonder why some people would find shopping an enjoyable experience, in fact, I strongly doubted that the word “enjoyable” is by any means a proper adjective for shopping) is the fact that I tend to “analyze” the business. Unlike most mortals who see the glittering store front, the merchandise on sale, and the price tag, I on the other hand, see business models, marketing positioning, merchandising policy, and overall business strategy (and of course, the beautiful sales ladies but that is a different matter). As a matter of fact, this window – shopping spree in Beijing has afforded me an insight into the Made in China products and brands (mostly fashion apparels). On our first shopping expedition right after landing in Beijing, the tour guide, Lionel bought us to San Li Tun Yashow Clothing Market (三里屯雅秀服裝市場?), a tiangge like mall near the San Li Tun Embassy Area. At that time, I really don’t have any appetite to endure the 2 hour shopping spree at the tiangge mall, so my siobe (little sister) and I decided to skip the tiangge or the bargain mall in favor of window shopping at the next door, ultra “modern” shopping mall. Incidentally, speaking of bargain hunting in one of China’s tiangge, this activity isn’t for everybody especially not for the faint – hearted ones. Bargain hunting in China is only for the prodigious ones. This is because bargain hunting in China is so incredulous and damn outright, a rip – off! Take for instance one of our fellow tour mates, she bought a hand bag in the San Li Tun Mall that is selling for 300RMB, which is very expensive but she was able to bargain it to 50RMB! Despite that, that particular tour mate of ours felt that she was cheated because she felt that she could have bought it for 30RMB. In another incident, I pick up this 2 set music CDs of Chinese classical music in a boutique shop. The sales lady quoted me a price of 200RMB but immediately and voluntarily lowered it to 150RMB. At 150RMB, that is something like PhP1000. Naturally, I balked at lofty price tag and had the good sense to back out from it and during my brief stopover at Shanghai on my way back to Manila, I discovered that the same CD set is selling at 88RMB right inside the airport! Outrageous, simply, outrageous! It seems that the bargaining’s rule of thumb (in China) of offered price divided by 2 and then less 10% afterwards in order to get the fair price is no longer reliable at all. Anyway, back at the next door, ultra modern shopping mall. I find the place really nice and it should be, considering the huge number of expensive brand - stores that had opened shop in it. And this is what really surprises me. It is not the sheer number of expensive brands – outlet store that I’d seen in this mall and in some other places in Beijing (most notably Wangfujing) and the rest of China as well that surprise me but the fact that this huge number of expensive brands could co – exist! I mean in a “small” market, one expensive luxury brand is just one too many in a crowd but having ALL the major luxury brands to co – exist in China speaks volume about the size of the luxury market here. It is said that the Chinese are zealous consumer of luxury since ancient time. This is due in large part of the cultural concept of “Face” (面子). As the saying goes, one can lose everything but not the “Face”. If your peers drives a car, you better have one as well else you stand to lose face. Furthermore, you don’t simply just going to have a car. You must have a car brand that matches with your peers’ car brands as well if not better. No wonder, China is the world’s fastest growing luxury market. It is funny however because a few years back during my last trip to Shanghai – Beijing. My tour guide then told me that the Chinese government imposes a hefty 40% consumption tax on luxury goods (verification needed). It was so hefty that local Shanghai Chinese felt that it is much cheaper to actually take a plane to Hong Kong and buy the luxury item in question and came back home right after the shopping spree. I don’t know if that anecdote is true or even still applicable but judging from the proliferation of luxury goods stores in China, I say that myth rings a bit hollow. Apparently, sales must have been good for foreign branded goods (both mid and high end) that finally, I saw local Chinese brands coming out in the market (most notably in Wangfujing district and in other places like Xian). Local brands especially the mid – end and the high – end ones are conspicuously absent during my several trips to China over the years (it is that or maybe I just so hated shopping that I avoided shopping altogether and may have missed the “change” altogether). It came to a point wherein when one thinks of brand in China, it usually means foreign brands and luxury brands and Chinese products are usually seen as cheap “stuffs” bought in tiangge. Funny, how such a predicament should have come to exist in the first place. I mean China is the world’s factory and most of the luxury items sold in China are most likely “Made in China”. Yet, there is no Chinese brand that purveys the top of the line, superior quality Chinese made products until recently. Hazarding a guess as to the reason behind this rather “late” conversion, I had to say that this has to do with the sputtering Chinese export being felt the past couple of years due to an appreciating RMB. As export markets become less lucrative to local Chinese companies over time, it is only logical for them to start to look for greener pastures and nothing is more convenient than the domestic scene. As the saying goes, better late than never. Chinese brands however aren’t exactly popular even to the local consumers. A friend of mine who happens to frequently shuttle between the Mainland and the Philippines mentions that Chinese brands are perceived by the local Chinese as “inferior” in every category compared to its foreign counterpart, which is quite ironic since the foreign brands might also be made in China. In spite of this, local Chinese brands do have a following among locals if judging from the fact that they are still “standing” however, I suspect that locals would almost always prefer foreign brands that is if they could afford it. It is probably due to this “fetish” for foreign brands among the Chinese buyers that local brands almost always adopt a “foreign” sounding brand name to the extent that they look practically similar to their foreign competitors. Furthermore, majority of the Chinese brand names are in ENGLISH without a Chinese name counterpart! What this reveal is that Chinese brands are exhibiting some degree of sophistication here however their ideas are far from original and creative. The few brands that sports a Chinese brand name counterpart along with their English brand names has English brand names that sounds well, how should I say, hilarious and totally “beyond this world”? For example, I’ve seen a pizza parlor whose name is PALATABLE PIZZA. Geez! With that name, I won’t even come 10 feet near it unless of course, I’m dying of hunger and there is no other alternative within a 100 mile radius. Other than that, I won’t travel thousand of mile just to eat a “palatable” pizza! If I am to ever to eat a pizza in China, it should be a GREAT pizza not just a palatable one! Another example, a hotel in Beijing (3 stars maybe) is named Yi Bi Si (宜必思), which could be loosely translated to “unforgettable”. Yet, the English name of the hotel is written as IBIS, which in Arabic is the word for “Satan”. Talk about cultural bobos. Even with purely Chinese name brands, some of the names are left to be desired. There is one shop in Xian which apparently sells clothes to “plump” women calls itself 肥太太, literally “fat wives”. I can’t really imagine seeing any decent women be caught dead in that kind of joint. Excellent marketing strategy (on targeting plump women as a market), really bad branding. It is quite clear that Chinese brands are in need of hardcore professional brand consultants that would help improve their image from just simply an imitation or from being lame. It is also just as apparent that Chinese brands are far from being international brands of note. To date, the only Chinese brand of international renown to my knowledge is Lenovo, the 4th world’s largest PC maker that bought out IBM PC some years back. Other than that, I can’t think of any. However, in my point of view, it would be only a matter of time, say 10 years perhaps before Chinese brands began “invading” the world just like the Japanese brands during the 80s and they would, given the manufacturing muscle of China, the fast technological evolution of it’s factories, and the growing sophistication of it’s marketers.

“NEW” BEIJING

Note: To better understand this article, please read first my previous article, “Old Beijing”, dated May 11,2006.

It was 2 ½ years ago when I first visited Beijing. Back then, Beijing was just an “old” romantic city in the midst of a construction frenzy in time for the 2008 Olympic. My latest visit however had astounded me beyond my imagination. Beijing has changed so radically that I could barely recognize it. So much so, that I even thought that I was in fact in a different city altogether. However, I wasn’t in a different city. This is Beijing – post Olympic. It is a Mega City filled with tall buildings, glittering Shopping Malls, new Apartment Building Complexes, wide boulevards, and paved avenues. In addition to that, the buildings here in Beijing are well “aligned” and looked neat, most likely, a product of well thought-out urban planning. In fact, looking from the window of a plane several thousand feet in the air, one could easily recognize the geometric neatness of the cityscape. It seemed that all the construction frenzy that I saw 2 ½ years ago had not only been completed but several dozen more structures must have been added to Beijing, embellishing a proud capital eager to show to the world. One of such structures is the conspicuous sub – way stations that dotted around the city. Also, unlike before, one can no longer see the bicycles roaming the city streets instead, cars literally choked the streets. There are so many cars out in the street that the traffic is already as bad as those in Manila (I was getting a bit impatient waiting for the traffic, which I didn’t felt during my trip in 2006) even though Manila has lesser roads and highways within the city limits. Even the sanitation facilities received a massive upgrade. Long gone are the stinking neighborhood toilets that cater to the locals and in its place are malls and fast food joints, hotels, and fancy restaurants with supposedly clean and modern sanitation facilities (they still stink though because it wasn’t properly maintained). Even the star rating system of public sanitation facilities are fast disappearing, leaving only popular ancient tourist spots like the Forbidden City complex to sport such an “ancient” relic. Speaking of the Forbidden City, in the “Old” Beijing, the center of Beijing is the grand Tiananmen Square (天安門廣場) and the resplendently colossal Forbidden City (紫禁城) including its environs. In the New Beijing, the center of this universe is the Olympic village represented by the massive Bird Nest and the breathtaking Water Cube. While both landmarks provided dignity to such an august place like Beijing, the Olympic Village ostensibly lacks the romantic atmosphere of the old wonder that it replaces. Clearly, modernity has triumphed over history. The enormous facelift that Beijing has undergone has left it unrecognizable to an occasional traveler like me but strangely, the New Beijing looked so familiar to me not because of the ancient jewels that are left standing in the midst of this modern jungle rather the post – Olympic Beijing looked surprisingly like another Chinese city, Beijing is beginning to resemble Shanghai. In fact, one can say that Beijing has been thoroughly Shanghai – nized. Except that, in Shanghai, the architectural structures are more stylish and imposing while in Beijing, the buildings are less towering and a lot more staid. Even so, it is quite easy to see the shadow of Shanghai in Beijing. With this huge burst of modernization in the characterization of Beijing, Beijing has definitely joined the ranks of the great world cities of the modern age. It can now be compared to cities like London, New York, Shanghai, Taipei, and Hong Kong. Despite that, the New Beijing seemed to lose something that old one had. It no longer looked romantic. Call me a romantic fool but I liked the “Old” Beijing better. Outside what used to be the old city walls is that great battlefield of the old where together the invaders and the defenders consecrated the ground with their blood……….. That same spot now is inhibited by huge malls and fancy hotels. KFC and McDonalds, parking lots now stands in the ground of those who have fallen some centuries past. Sigh. The old Hutong (胡同), Beijing’s back alleys where one could see the low lying tiled houses of the old is fast vanishing like an endangered species. These ancient houses are actually an eye sore (and I definitely agree) but their disappearance to give way to newer buildings seemed to have permanently altered the character of the “Old” Beijing more than anything else. And the haze, that toxic cloud of pollution; it used to look romantic and picturesque whence the sun sets or rises among the trees and the old houses. Now, the same haze, the smog that covered the skyline emanating from tall chimney stacks in and around Beijing has become an irritating symbol of the “New” Beijing. Alas, what can I say. This is Beijing.

BACK FOR THE NEW YEAR

It was drizzling when I got back to Manila last night (December 31,2008) but that is way, way much “cozier” than the freezing cold temperature (-8oC) that I’ve experienced in Beijing (北京) and in Xian (西安). Besides, there is something about Philippine New Year celebration that I always liked. There is the noise, more noise, a heck lot of more noise and the dangerous neighborhood firecracker spree that one can’t find anywhere like it in any other places in the world. Anyway, I took a vacation this yuletide holiday with a tour to Beijing and Xian (December 26 – 31). It was the second time that I’ve been to Beijing in 2½ years and my first to Xian. It was also the first time that I got to spend winter in China though there, I didn’t get to see any snow during my trip. Nevertheless, it was damn freezing cold even with 3 – 4 layers of thick clothing, 2 socks, thermal clothing, and gloves. The wind is especially harsh. For not only the wind aggravated the coldness, it was also dry and abrasive. In fact, the wind was so abrasive that I felt I’ve undergone a diamond peeling session every time I’m out in the open (which is quite a lot during the trip). And the fact is, I’d never asked for one nor been to one (diamond peeling). I was traveling with my sister during the trip along with 16 others, mostly families. The food during the trip was not really good unlike during my first trip to Beijing except of course for the long waited for Peking Duck at Quan Ju De (全聚德), which I really dig and missed. Don’t get me wrong, we were treated to five star hotels and restaurants every meal during the stay except that our meals are strictly under budget to the extent that we (me and everybody else in the tour group) felt that we are in a 5 star restaurant eating a one star meal. In fact, we are damn sure that the local KFC in Beijing or the Dad’s Buffet Restaurant in the Philippines could have been better than the food we had during the trip. Well, regardless of the disappointing food, my trip in Beijing – Xian is generally enjoyable and exciting except that whence before during my first trip, I was more of an adventurer and an explorer; in this trip, I was like everybody else, a tourist. Not that I’m less enthusiastic in my recent trip than my first trip, it’s rather that I felt less inspired and eager. Probably, it’s the weather, or maybe the food, or maybe it’s because of the fact that I had something else in my mind lately, or maybe, it’s because I’m “older” or maybe, it’s because I don’t have a little girl named Megan to bring cheers and add fond memories to my trip. Despite that, I had an added novelty in my recent trip. I actually had a “night life”, well, two to be exact. Whence before in my first trip, I was in my hotel room by 9 pm and be already asleep by 10. In this trip, I got to “stay out” or more aptly, “chill out” till 11pm. It helps that we have more youngsters in this trip (almost all of them are born in the early to mid 1980s except for me of course) and that they are a bunch of “gimikeros”. It was a nice vacation, a fitting end to 2008.

CRYSTAL BALLING 2009 – THE SLOWING PHILIPPINE ECONOMY – IS IT LUCKY?

Disclaimer: This is an article based on research and on my own opinion and analysis. Use this information on your own risk. I will not be held liable for any loses that might arise from the use of the information from this article. However, I would very much appreciate if people who manage to profit from the use of the information contained in this article to share their “profit” with me. “ )

If you were to read the business section of any newspaper nowadays, all you could read are bad news, more bad news, and much more bad news about the global economy. And this you get to read every day and every hour (if you follow the news channels and the internet). Almost every day, there is news about the on – going recession, the free – falling commodity prices, the depressed corporate earnings resulting into stock prices hitting multi – year lows and employment and other economic data hitting multi – decade lows. The reports are so negative that as if there is no longer any good news out there about the economy. So it is rather surprising actually to hear from some quarters that the Philippines is actually “lucky” for being rather mildly affected by the contagion that is the Global Financial Crisis of 2008. Is this assertion true and well founded or rather, this is just a political spin let out by an unpopular administration to score some brownie points? If the Philippine economy isn’t really immune to the global crisis, then exactly, how bad is it? Well, I’ve managed through diligent research to cobble together some figures to try to portray the economic future of the Philippines in 2009 and 2010. But before everything else, a few points should be noted first. As much as I’d tried to get the latest figures for the forecast, I’m hampered by two things. First is the dearth of the forecasts available since most forecasts are actually internal research of companies (and as such, I took pains to acknowledge my sources in the reference section). It is difficult therefore to get as much data as I would have wanted much less the concise analysis behind the figures. Second, some of the forecasts listed are in my opinion outdated already. This is due to the extreme volatility happening in the world markets today. To say that most analysts are caught surprise by the steep and rapid deterioration of the world economy is a huge understatement. The markets are just simply too unstable and unpredictable for the moment. An example is the fact that most of the forecasters I’ve researched kept constantly revising their forecasts every month based on the latest evidence available. I included these “outdated” forecasts as well in my analysis because of the scarcity of the data. Anyway, a good forecast is always better than a bad forecast and a bad forecast is invariably better than having no forecast or guidance at all. Another point need to be noted here is that the analysis are Philippine specific, i.e., one cannot apply the same analysis on another country. A case in point is the GDP growth rate. A 3 – 4% growth maybe pathetic by Philippine standards but is considered a huge improvement in an advance economy like the US. On the same account, a 7% growth rate is a huge reason to celebrate in the Philippines but the same growth figure is a cause for sleepless nights in China.
TABLE 1. PHILIPPINE ECONOMIC FORECAST
INSTITUTIONS/2009 GDP/2010 DP/2009 INFLATION/2010 INFLATION
IMF1/ 3.5%13/ 4.5%/ 4.3 – 7.0%/ 3.5%
ADB2/ 3.5%13/NONE/ 8.0%/NONE
State Street Global Advisor3/ 3.8%/NONE/ 7.0%/NONE
UN4/ 3.5%/ NONE/ 7.2%/ NONE
WB5/ 3.0%13/ 4.0 – 4.5%/ 8.5%/ 5.5%
DBS6/ 3.8%/ NONE/ 3.2%/ NONE
ATR Kim Eng Securities7/ 6.0%/ NONE/ NONE/ NONE
BDO7/ NONE/ NONE/ 8.6%/ NONE

Bank Of America7/ NONE/ NONE/ 5.0%/NONE
BPI7/ 4.0%/ NONE/ 6.0 – 7.0%/NONE
CITIBANK/ 3.0%10/ 4.6%/ 6.5%7/ NONE
Deutche Bank7/ NONE/ NONE/ 7.0%/ NONE
EIU12/ 1.8%/ 3.2%/ 6.0%/ 4.5%
Forecast Pte Ltd7/ NONE/ NONE/ 6.4%/ NONE
HSBC7/ 3.9%/ NONE/ 5.9%/NONE
IDEA7/ 3.7%/ NONE/ 10.0%/ NONE
ING Bank7/ NONE/ NONE/ 6.4%/ NONE
Nomura Securities7/ NONE/ NONE/ 6.7%/ NONE
Philippine Equity Partners7/ 3.1%/ NONE/ 6.6%/ NONE
RCBC7/ NONE/ NONE/ 5.7%/ NONE
Standard Chartered Bank7/ 3.1%/ NONE/ 3.2%/ NONE
DBCC8/ 3.7 – 4.7%/ NONE/ 6 – 8%/ 3.5 – 5.5%
UBS9/ 1.8%/ NONE/ 3%/ 3.8%
Fitch Ratings11/ 2.5%/ NONE/ NONE/ NONE
Global Source/ 3.5 – 4.0%/ NONE/ NONE/ NONE
JP Morgan/ NONE/ NONE/ 2.5 – 4.5%/ NONE
S&P/ 3.3 – 3.8%/ NONE/ NONE/ NONE
UOB/ 4.0%/ NONE/ 7.0%/ NONE
RANGE/ 1.8 – 4.7%/ 3.2 – 4.8%/ 2.5 – 10.0%/ 3.5 – 5.5%
AVERAGE/ 3.29 – 3.39%/ 4.08 – 4.20%/ 6.11 – 6.39%/ 4.16 – 4.56%

The above table list the various forecasts made by different institutions. It showed a forecast range of 1.8 – 4.7% for the 2009 GDP growth rate, which is quite a wide range. The various forecasts actually posit 2 differing views about the Philippine economy in 2009. Those whose forecast GDP growth rate of below 3% actually viewed the Philippines experiencing a sharp slowdown due to a prolonged and deep recession among the advance economies led by the US, which translates into lesser demand for exports from countries like the Philippines. This is collaborated by government forecast through the DBCC which sees export growth at 1 – 3% in 2009. Also, the economic downturn in the advance economies would result in lay – offs among the OFWs where a majority are located. This in turn would lead to diminish remittances from OFWs, which in the past 5 or so years is actually the main growth driver in the Philippine economy since remittances from OFW fuels domestic consumption. Again, this is collaborated by forecast such as the WB, who predicted remittance growth for 2009 would only be at 4% and 5% in 2010 (the remittance growth so far in 2008 is 15%). On the other hand, those forecasting a GDP growth of above 3% are more optimistic though they also acknowledge a slowdown from 2008 (which churn out 4.6% based on the latest figure) but not that much. Though these forecasters think that export would be severely trashed by the ongoing financial crisis in 2009, they held the belief that remittances wouldn’t be that bad. This is shown by the rather optimistic forecast of 6 - 10% remittance growth in 2009 by the government. It is also noteworthy to point out that of all the forecasts listed, the government’s figure through the DBCC are the most optimistic of the lot. In fact, the government’s forecast are so optimistic that it would seem unrealistic compared to the majority of the forecasts. And in the past, government most often downgrades their GDP growth forecasts to conform to “reality”. Despite this, government’s forecast cannot be simply ignored no matter how “unrealistic” it may seem. This is because the government’s GDP growth forecasts aren’t really forecast at all but more of a performance target. While the rest of the forecasters are simply “guessing” what the 2009 picture might be using their complex mathematical models, the government on the other hand is in a position to “realize” their targets. Nevertheless, it is but only prudent to place just the right amount of trust on government forecasts. So having said that, the next question is “would the economy be in a good or bad shape in 2009”? What does 1.8% or 4.7% GDP growth rate actually mean? Well, to understand that, we need to make a few comparisons but first thing first. The first thing we need to understand is what is GDP? A GDP is a measure of the total domestic output of an economy minus foreign receipts such as income of multi – nationals from other countries, earnings of OFW in other countries, etc. A positive GDP growth rate “may” signify that the economy is growing or expanding while a negative figure points to a shrinking or contracting economy and two consecutive negative GDP growth rate is by definition, a recession. A prolonged economic contraction (like more than a year) indicates that the economy is in a depression. The more prolonged, the deeper is the economic depression. Moving along, the first significant comparison that could be used for analysis is to compare the forecast growth figure with past performances most especially the current year, 2008. The GDP growth rate as of the 3rd quarter of 2008 is at 4.6%. Now comparing this figure with the average forecast for 2009 of 3.29 – 3.39%, the forecast growth rate is just down by 1.21 – 1.31% however, if the current GDP rate is compared to the lower end of the forecast growth range, which in this case is 1.8%, the difference is a whopping 2.8%. To conceptualize the magnitude of the “slowdown” and get a feel of what is it like. Imagine driving a car at 80 kmh. A 1% or less drop – off would be like gently applying the brakes such that one would have a smooth stop. It is therefore a slight slowdown with business volume likely down from the previous year. Depending on how badly hit a company is, a few might begin to downsize. A 1 - 2% drop – off in GDP growth rate is akin to stepping the brake a little harder in such a way that the halt is a bit sudden. That is what we call a major slowdown or a soft landing (depending of course of the magnitude). Expect some business to downsize either mildly or drastically depending on the magnitude of the loss of demand loss. Expect also some business to close though it wouldn’t be that many. Now, more than 2% fall off from the GDP is very much similar to the Motorlite commercial of “Kagat Agad” wherein you virtually “kicked” the brake and felt the force of the brake hurling you out of the windshield and into the street if not for the restraint of the seatbelt you’re wearing. That in economist’s parlance is called a hard landing. In this case, expect bankruptcies and closure to happen. Beyond that, it is a total collapse. Just use your imagination to conjure what the scenario would look like. A second comparison that could made for the forecast GDP growth rate is to compare the forecast GDP growth rate with the population growth rate. The Philippine population growth rate according to the 2007 census is at 2.04% and the current population size is at around 90 million, making the Philippines the 12th most populous country in the world. So what does population growth rate have to do with GDP? Picture this, a moderate size family of say 5 earning a respectable income as a result of taking advantage of the opportunity that is abound in the economy would have sufficient resources to not only provide the basic needs for the family but to also manage to live in some level of comfort. Now, if a new baby is born to the family, strains on the family finances would be surely felt. However, this would be mitigated if economic opportunities are readily available such that the family could easily exploit it and thus alleviate their financial condition but if the opposite happens, i.e., the rate of increase in income cannot sufficiently cope with the rate of increase in financial burden as a result of the addition of a new member. Deterioration in the quality of life for the family would be felt. This is the logic behind the comparison between the GDP and the population growth rate. Now at the current rate of 4.6%, the figure is grudgingly acceptable. A 3% GDP rate is a real cause of concern while a 1.8% GDP rate is for all practical purpose pure hardship. The third comparison that could be made with the forecast GDP is with the forecast inflation rate. The relationship between inflation rate and the GDP rate can be discern from understanding the total sales revenue equation. To calculate a company’s total sales (assuming that the company is selling a single product only), we use the equation: TOTAL SALES REVENUE (R) = SELLING PRICE (SP) x SALES VOLUME (V). To compute for the sales growth rate, SALES GROWTH RATE (GR) = R2 – R1 = (SP2 x V2) – (SP1 x V1). Assuming that the selling price is constant, the total sales equation can now be simplified into GR = SP x (V2 – V1). What this meant is that we could increase our sales growth rate by simply increasing our sales volume without increasing the selling price. Conversely, if the sales volume were to remain constant, the only way we could increase our growth is through increasing our sales price or GR = V x (SP2 – SP1). Since the economy is just the aggregate sum of all businesses/ companies within the country, we could expand the sales equation applicable to a single company by a million fold and apply it to the economy as a whole and instead of Sales Growth Rate, we use GDP. Instead of Selling Price, we use Price level and replace Volume with Economic Activity Level (GDP = (P2 x AL2) – (P1 x AL1)). What this tells us is that an economy could “apparently expand” without creating much jobs and opportunities simply by inflation (of course, in reality, GDP driven purely by inflation doesn’t exist). Therefore, one shouldn’t be overtly ecstatic just because of the GDP figure registered positive. Inflation should also be taken into consideration. It is for this reason (and along with the population growth rate issue) that Celito Habito, the former NEDA director under President Ramos said that in order for the economic growth to have a significant, real impact on the lives of the ordinary Filipinos, the Philippine GDP has to grow by an average of 7% annually. With that in mind, we could come up with a fair idea about what the GDP numbers meant. For GDP rate below 1%, the economy is contracting. Expect demand for goods and services to fall resulting in business closures and high unemployment rates. Between 1 – 2% growth, depending on population growth rate and inflation rate, the economy could either be stagnant or worst, shrinking as well. The same thing would happen, poor sales, business closure and high jobless rate. Growth between 2 – 4%, again depending on inflation and population growth rate, the economy could be either stagnant or chugging along sluggishly. At this point, demand could be described as either paltry, or pathetic, or thriving demanding on the magnitude. Furthermore, this is only applicable to basic commodities. Sales of luxury items or durable goods like automobiles and real estate could be pretty limited. With 4 – 5% GDP, growth is decent, fairly moderate. At this rate, basic necessities could be doing well while luxury goods are doing so – so. At 5 – 6% rate, the rate is respectable and one could expect consumption (including luxury goods) in the economy to be fairly robust. By the time the GDP hits 6 – 7%, better take that bottle of champagne out, uncork it and celebrate. Good times are here but unfortunately, it is unsustainable on the long run in the Philippines’ case because inflation would hit near 10% at that point (due to “structural problems”). Some years back, I remember my economics professor in MBA used to say that there is one particular Philippine product whose consumption perfectly mirrors the economic growth of the country and that is the sale of San Miguel Beer (not condoms as one of my classmate loudly answered). So if I were to venture to create a scenario using that logic, less than 1% growth, nobody is drinking SMB because they don’t have money to keep their stomach full. 1 – 2%, probably a beer once in a full moon. 2 – 4%, a beer every week. 3 – 4%, a case of beer every weekend. 4 – 5%, a beer every day. 5 – 6%, beer drinking session every weekend on top of beer every day. 6 – 7%, why drink beer when you can have gin or rum instead. So, in assessing the 2009 Philippine GDP, the economy is definitely slowing down and rather abruptly perhaps with demand contracting if not stagnant or sluggish. Things would start to only brighten up however from 2010 onwards assuming that the worst of the global financial crisis would be over by mid 2009.
TABLE 2. ECONOMIC SECTOR FORECAST

INSTITUTION/ AGRICULTURE/ INDUSTRY/ SERVICE / PCE / GOV’T EXP
/ 2009/ 2010 / 2009 / 2010 / 2009/ 2010 / 2009/ 2010 / 2009/ 2010
I.D.E.A /4.6%/ 4.3% /5.6% / 5.6% /3.6% /4.6% /1.8%/ 2.4% /1.8%/ 2.4%
DBS / / / / / / /3.4%
The GDP growth rate is a very broad measure and at times companies might find it too unwieldy for use in forecasting and planning. This is precisely the reason why economic sector forecasts are more useful. An example would be that retailers would rather used PCE as gauge in assessing the demand for the next year while agro – industrial companies would look at agricultural growth rate for planning their sales strategies for 2009. Sadly, however, economic sector forecast data are very difficult to come by if it wasn’t paid for. Luckily, I manage to garner some numbers for “free”. According to economic theory, the economy can be described from two perspectives, the supply side and the demand side. The supply side of the GDP refers to the production output of each individual “sector”, which in this case refers to INDUSTRY, SERVICE, and AGRICULTURE. The idea of using the demand equation for GDP is to understand which of the sectors contributed more to the output in the economy. Take note that by Industry, the definition used in economics refers to the economic sector encompassing MANUFACTURING, CONSTRUCTION, and MINING. SERVICE on the other hand comprised of that part of the economy engage in BANKING and FINANCE, TRADE, TRANSPORTATION, and SERVICES like business outsourcing, restaurant etc. AGRICULTURE is comprised of CROP like rice and corn, POULTRY, FISHERY, and FORESTRY like lumber. The demand side of the GDP refers to the consumption pattern or the spending behavior of the economy by the 3 major spenders in an economy, namely: Government, Consumers, and Private Businesses. The idea of scrutinizing the GDP into its make – up component is to discover what “drives” the economic growth. By Government Spending, what is referred here is the money spent on infrastructure projects like roads. It also includes money spent on defense and into the built up of a war machine as well as national public healthcare system. Personal Consumption Expenditures (PCE) of consumers refers to money spent by any kind of consumer be it in class A, B, C, D or E on practically everything under the sun. Private Investments of businesses do not refer to stock investments at all by these entities rather it refers to the investments of businesses in productive capacities that can be used to create products and services to satisfy consumer needs. This also includes investments on inventories for eventual sale. It quite apparent from the ongoing description of the above that though each account are separate, the three (Gov’t spending, PCE, Private Investments) are actually interrelated to each other. Increase government spending could create economic opportunities for the general populace and this would in turn put more money in their pockets, which could boost PCE. With increased PCE, businesses would be “motivated” to increase their investments to meet the increasing demand. Economic theories also hold that the both sides of the equation (the demand and the supply sides) should be equal since the economy only consumes what it produces. The story of the Philippines for the past few years is that the GDP is buoyed by two growth drivers; private consumption on the demand side and services on the production side. The two however have lost momentum in 2008. Private consumption last year grew at about 6% every quarter. This year, its growth eased to 5.2% in the first quarter and pulled back to 3.4% in the second as inflation accelerated and consumer spending sentiment cooled. For next year, PCE is expected to grow by a measly 1.8% while SERVICE sector growth rate would slow considerably as well to 3.6% from 4.3% in the 2nd quarter of 2008. By the way, the service sector contributed 46% of the GDP. The rather dismal forecast of PCE for 2009 is largely attributed to the projected slowing of remittances from OFWs, since they might be severely affected by the mounting job losses due to the ongoing global financial crisis. The service sector, which largely caters to the domestic clientele (which in turn derive their spending power from remittances) would thus be dragged down by the spending slowdown. In addition to that, there are some unconfirmed reports of lay – offs from the BPO (business process outsourcing, aka, call centers) sectors. This is due to the fact that the majority of the BPO’s clients are banks based in the US (the worst affected sector in the US currently). On the other hand, the more optimist forecasters are saying that remittances may not be that badly hit. Besides, the depreciating peso in 2009 may actually be a boon because remittances would be worth more in peso terms and these could potentially crop up consumer spending. Looking at the other numbers, agriculture is forecast to do better in 2009 but this is after that sector took a severe beating in 2008 due to the high crude oil prices. As a result of high crude oil prices, fertilizer prices increase by leaps and bounds “forcing” some farmers to go “organic farming”. This unfortunately had the effect of decreasing crop yields. In addition to that, the fishery sector also got hit by the high oil prices since fishing vessels are power by diesel oil derive from crude. Fishermen got reluctant to go out fishing if they felt the yield wouldn’t be enough to break – even. Apparently, paddling was never considered an option. In short, the forecast figures for agriculture in 2009 represent more of a recovery from 2008 lows rather than actual growth. The 2009 industry growth forecast is also seem to be fairly steady considering that industry is growing more or less around 4% for years. Well, this is because the industry sector is recently buoyed by the construction sub – sector. There are actually numerous construction projects going on right now, mostly catering to OFWs residential needs and to the booming BPO demand for commercial space. Over the spending side, the most surprising figure here is actually the forecast for government expenditures, which is a pittance at 1.8%. I mean with the looming passage of the 2009 national budget of 1.4 trillion peso, which is 15% higher than 2008 and with infrastructure spending also 20% higher plus the fact that 2010 is a presidential election year, 1.8% is too low a forecast. Well, maybe the forecast is outdated as some of the figures are. Speaking of presidential election, the election is just 18 months away and campaigning at this time is not in any way early by Philippine standard. By historical precedents, politicians would try every means to get government to spend on their pet projects so as to ingratiate themselves with the electorates in the hopes that they would get re – elected come payday. If that is the case, what more could you expect in a slowing economy wherein conventional economic theory would strongly support massive government spending? Expect unbridled, aggressive, irresponsible spending by the government, which would naturally bloats the budget deficit and could probably send the Philippine economy in a downward spiral in the future (after 2010) but would do miracles in 2009. Looking at the inflation forecasts, we could discern a huge disparity in the forecasts varying from 2.5% to 10%. Granted that some of the figures are already outdated and thus, obsolete, the figures still varied widely. Again, the forecasts revealed two widely divergent views on inflation picture in 2009. On one hand, some forecasters are one in saying that with the free fall in commodity prices in the global market the past few months, it is only but natural for inflation to move slowly in 2009. Inflation by the way is the rate of increase in the general price level within an economy. On the other side of the divide, some forecasters are telling a different story, that the inflation would remain high in 2009 especially the early part. This is because they believe that businesses still hold expensive stocks in their inventory, which they bought when the prices of goods sky rocketed in July of 2008 in anticipation of further increases. And these inventories haven’t been flushed out of the system yet. As a result, businesses saddled with high cost inventories are less likely to sell them at cheaper price otherwise they would incur losses (maybe they would if the economy sputters even more in 2009). A case in point is the oil companies. International crude oil prices has plunged by 60% since their July peak into 4 year lows, yet, the prices of gasoline in the Philippines haven’t fallen to their levels at the start of the year yet, much less to their price level 4 years ago. Another factor in the works in 2009 that affects inflation is the potential depreciation of the peso as a result of “deleveraging” or the massive pull out of US funds from non – cash assets and into near cash assets like the US treasury notes. By average, using the collected forecast data, inflation in 2009 is expected to be around 6%. To appreciate what 6% means, picture this. Inflation rate of less than 2% and even though the number maybe positive, the economy is experiencing deflation. Deflation by definition means that prices are falling and to consumers, it is good news however, far from it, deflation is a bad news. Using the logic of demand and supply theory, an increasing demand and a stagnant supply, prices would increase as buyers competitively bid for dwindling supplies whereas a falling demand and increasing supply situation would force prices to fall as suppliers saddled with high fixed costs would be tempted to shade their prices just in order to incur sales and break – even. In an economy, price rise and fell regularly over a period but not simultaneously or “all” at the same time or even prolonged like during a deflationary spiral. In a deflation, there is so much demand destruction that virtually nobody is buying and business trying to stave off impending doom would cast off prudence and engaged in an indiscriminate fire sale trying to get hold of cash just to survive through the bleak period. However, as business gets more pessimistic over their future, they would also withheld further investments and scale down production, which would in turn affects employment and with bleak employment prospects, consumers would crimp further their spending creating a debilitating spiral that would get worst over time. An inflation rate of between 2 – 4% is for all intent, mild. Consumer would barely felt the hurt in their pocket. Between 4 – 6%, inflation is moderate. Consumer would notice the increase in prices but in general wouldn’t feel much. Some might feel the pinch more than others but their numbers are few. Inflation of 7 – 9% is somewhat high. Consumer would definitely notice and more would feel the pinch. From 9% to 10%, inflation is high and the pockets of a large majority would feel the pain of relentless price increase resulting in a marked change in spending behavior. Above 10%, inflation is relentless and raging and nearly everybody would feel the pressure, drastically altering established spending behavior into a crisis mode spending focusing on daily essentials. Above 20%, very high inflation, demand would drastically halt on virtually every item except bare necessities. Beyond that level, ditch the peso for there is no point in holding “those worthless pieces of paper” in a hyper inflationary regime. Also, it is likely that we would be in the midst of a war to experience such extremities. So base on this line of thinking, prognosis on inflation in 2009 is a bit high but not much too drastic as to seriously alter spending pattern like the one seen this year. Overall, to proclaim that the Philippines is “lucky” is to my view, an unfounded optimism. It is not hell either but definitely hardship will be felt in 2009, which could be worst than 2008. However, recovery could be expected in late 2009 and in 2010. In short, 2009 will not be a year of the raging bull as one would dream of but rather the year of the snoring bull. Hopefully, 2009 would lay the foundation for 2010, the year of the roaring tiger!

LIST OF ACRONYMS AND ABBREVIATIONS
1. ADB = Asian Development Bank
2. BDO = Banco De Oro Philippines
3. BPI = Bank of Philippine Island
4. DBS = Development Bank of Singapore
5. DBCC = Development Budget Coordinating Committee, Department of Budget, Philippines
6. EIU = Economist Intelligence Unit
7. FAO = United Nations Food and Agriculture Organization
8. GDP = Gross Domestic Product
9. GEO = Global Economic Outlook
10. GNP = Gross National Product
11. Gov’t Exp = Government Expenditures
12. IMF = International Monetary Fund
13. IEA = International Energy Agency
14. OFW = Overseas Filipino Workers
15. OPEC = Organization of Petroleum Exporting Countries
16. PCE = Personal Consumption Expenditures
17. RCBC = Rizal Commercial Banking Company, Philippines
18. S&P = Standard and Poors
19. UBS = Union Bank of Switzerland
20. UN = United Nations
21. UOB = United Overseas Bank of Singapore
22. WB = WorldBank
REFERENCE
1. World Economic Outlook Update, IMF, November 6, 2008.
2. Asian Development Outlook Update, October 2008.
3. Asia Economic and Bond Outlook – Q42008, State Street Global Advisor.
4. Global Economic Outlook; United Nations, Department of Economic and Social Affairs, Expert Group Meeting on the World Economy. October 2008.
5. Quarterly Update, The World Bank, November 2008.
6. Philippine Daily Inquirer, November 22,2008
7. Inflation Report, 3rd Quarter, 2008. Bangko Sentral ng Pilipinas.
8. Philippine Daily Inquirer, November 14,2008.
9. Philippine Daily Inquirer, November 18,2008.
10. Philippine Daily Inquirer, December 3,2008
11. BusinessWorld, December 4,2008
12. BusinessWorld, December 5,2008
13. BusinessWorld, December 12 – 13,2008

PERHAPS I AM LAZY

Lazy (adjective)
1. Unwilling to do work or make an effort. (Wikipedia)
2. Disinclined to activity or exertion : not energetic or vigorous (Merriam – Webster)
3. A disinclination to work or to take trouble (Merriam – Webster)
I’ve been taking stock of my life thus far the past few days and I suddenly came to realization that perhaps I am lazy! I’m not lazy as in lazy, lazy but rather I’m lazy in terms of taking charge of my life. I just go about doing the same thing again and again and again, over and over and over, day in and day out without taking charge of the direction of where I’m going towards the direction I wanted to go. It’s quite a paradox on how one could be working 12 – 18 hours a day from Monday till Saturday and almost always focused on work even when not working to be actually lazy! Perhaps, I’ve grown accustomed and comfortable with what I am doing now to actually risk venturing into an alternative. Maybe so. If that is the case, I may just be risk – averse. But then again, is the implied risk of taking an alternative that insurmountable or nearly impossible? Maybe the risk is not that great and in which case, I am definitely “lazy” (see definition) for not taking the alternative and challenge the risk associated with it. I just merely took the excuse of risk in rejecting the alternative. Or perhaps, I maybe too engrossed with my everyday “rituals” to actually care for a better alternative to the one I have. I’m too busy with fixing what is wrong on Earth and too distracted by it to dream for the star and actually reach for it. In which case, I am still “lazy” for not breaking the routine once in a while and giving an effort to make the alternative real. I just took being busy as an excuse. Or perhaps, I’m just too boring, too close minded, too unimaginative, too myopic to see past what is before me and look for alternatives around me. I’m just not thinking about alternatives. Definitely, I’m just being lazy for not even opening my eyes and see the possibilities of what the alternatives got to offer. In which case, there is no excuse. I’m just being dumb and lazy. Regardless of the reasoning, my little mental exercise the past few days yielded me one conclusion, that I am lazy! Then again, I just wondered. Am I the only one? Is there anyone like me? Perhaps I am not at all “lazy”. Instead, I just to belong to a generation of people or maybe a group of people who are just:
1. Comfortable with what they have and what they’re doing and put up an excuse of risk to reject an alternative even if the associated risk is that not great.
2. Too busy with their daily “routine” to actually pursue an alternative however better it might be and claim being busy as an excuse for not considering an alternative.
3. Plain boring, unimaginative, close – minded and myopic to even figure out a better alternative to what is existing.
Now, that is a tough call. Perhaps, I am ……………..

CRISIS OF CAPITALISM

The two most talked about issues that are hogging the headlines nowadays aside from the upcoming American election are the Global Financial Crisis and the Melamine Milk Scare, two different and independent issues but in reality, the two are connected. Both issues are actually symptoms of a greater malaise that is affecting our lives today and that malaise is the crisis of capitalism. For starters, this isn’t the first time that capitalism is mired in crisis. Over the course of centuries, capitalism has spawned many crises and perils of its own doing but somehow, capitalism as a socio – economic system had not only survived the many crises. It even manages to come out stronger and even weathered the challenges of other socio – economic systems to the point that it outlasts other systems that threatened to replace it as the dominant way of life. From the exploitation of labor that led to the rise of communism and the resultant cold war to the exploitation of the resources of third world countries leading to the 19th century colonialism and the World Wars to the exploitation of the environment that threatens human survival for the next hundred years, capitalism has more than once pushed human civilization to the brink of extinction. From the first stock market crash during the Holland Tulip Mania in 1637 to the Global Depression of the 1930s to the Asian Financial Crisis of 1997 to latest Global Financial Crisis of 2008, capitalism has authored one too many of a banking and financial crisis that destroyed the wealth of many and dashed their dream of prosperity. From the Foot and Mouth Disease to the Mad Cow Disease to the Salmonella Scare to the latest Melamine Milk Scare, capitalism had more than once toyed our health and played a cruel and sadistic joke with our lives. All of these are committed under the system that is known as capitalism and the reason for it lies in the very nature of capitalism – that of a system based on the individual’s boundless pursuit of profit to the extent of insatiability – greed. Too often than not, human beings under the capitalist system has systematically undervalued the “cost” (not simply the financial cost as in the cost of production) versus the profit to be derived. Most of the time, humans turned a blind eye to the “cost” or more bluntly, blinded by the dazzling profit to even care for the “cost”. Although, it could be argued that capitalism doesn’t have a monopoly on greed and that other socio – economic system is as guilty as capitalism but the fact is, greed has found its greatest expression under capitalism in a scale unrivaled by any other system. However, capitalism is not without its merit. Because of the emphasis on individual’s right to pursue profit based on their own volition rather than based on some whimsical authority figure, capitalism has manage to bring forth prosperity to a large number of people worldwide, creating a entire new social class – the middle class out of the vast number of poor. It has succeeded what no other socio – economic system could have done in “spreading the wealth” to the greatest number of people. So in the final analysis of what is good and what is bad about capitalism, the conclusion drawn would find capitalism superior compared to the other system that have been known so far but somewhat lacking and that a better alternative would be a welcome change. Unfortunately, such alternative are nowhere to be find. There is no emergent system, no “better version” of an old system that could sufficiently replace capitalism. Therefore, for the time being, it seems that capitalism would again survive. Even so, capitalism would have to undergo changes much like the changes it was forced to accept with the onslaught of communism and socialism – that of regulation– reining in its greed and which at the same time, constraining its dynamism as well. There are actually two fundamentally different approaches to regulation. The first one involves government regulation with it’s over burdening, time consuming, and slow moving bureaucracy. The other involves voluntary self – regulation, i.e., business ethics, corporate social responsibility, corporate citizenship, which might not be effective considering that not everybody would subscribe to it. At any rate, whatever form would it takes, there is no escaping the fact that the future of capitalism is in more regulation but not too much hopefully.

DISHONORABLE PROFIT

Sick Corny Joke of the Day:
1. Avoid “Fortified Milk”, because melamine maybe used to “fortify” the milk.

One of the biggest news that is hogging the headlines lately is the Chinese Melamine Tainted Milk Scandal. Actually, it is one of the biggest news globally because of the far – ranging reach of the Chinese export machinery. A lot of milk and milk – derived products, confectionery, and milk – based beverages of both big name companies and little known producers are affected by this scandal causing panic among buyers and inducing an aversion to milk based products among consumers. And they are rightly to be afraid, for the melamine tainted milk has so far claimed the lives of 4 babies and sickened some 53,000 more in China. It has become a nightmare for parents with babies and toddlers, for these parents do not know what “safe” brand of milk to buy for their babies, i.e., safe as in a milk formula with no trace of melamine. Melamine based on my research is a nitrogen based macro – molecule with a formula of (NH2)n. It is a highly toxic substance in large dosage and is used as raw materials in the production of melamine resins plastic, which in turn is used in the manufacture of melamine wares (plates, cups, saucers). It is used in building construction as a super – plasticizer. And in the 1950s, melamine was also used as fertilizer due to its nitrogen based chemical structure as well as a non – protein nitrogen source for feed to cattle. However, melamine use in fertilizer and in feeds was largely discontinued (not totally, I surmised) by the 60s basically due to the fact that melamine doesn’t easily break down into its useful nitrogen form during the digestive process in cattle and during photosynthesis in plants. There is however no indication of toxicity being the reason for its discontinued used. It is very probable that the fact that melamine is used in cattle feeds may have prompted it’s use in “watering down” the milk. I mean melamine is readily available to dairy farmers who are using melamine as cattle feeds and because of its nitrogen structure, addition of melamine in milk would produce a high nitrogen yield during laboratory test suggesting that the milk is “rich” in protein, which is in fact the opposite since the “fortified” milk has already been watered down in the first place. Milk is watered down to artificially increase the output from the same inputs and therefore fatten the profitability of whoever is the culprit behind this despicable scheme. Anyway, aside from melamine, another compound used as non – protein nitrogen for cattle feeds is cyanuric acid. Now, when melamine and cyanuric acid enters the bloodstream, it reacts to form melamine cyanurate which is a crystalline compound and once these crystals entered the kidney, it damages the cells resulting into kidney malfunction, which ultimately led to the deaths of those poor babies. As previously mentioned, melamine is added solely to increase the profitability of the milk producers. And this illustrate a very disturbing point, that some people can be highly ingenious and would go great lengths and at the same time, being unscrupulous enough to do something such as lacing milk with melamine just to earn more. And this is the crux of the problem, the greed for more profit. Taken in this light, it’s not only the producers of melamine tainted milk that are “blinded” by this greed for more profit. There are others like them and melamine tainted milk is just simply the tip of the ice berg and one of the latest case in the long lists of tainted product cases (although not all of them are as toxic as the melamine laced milk, some may even be considered “safe”). Furthermore, this is not limited to food products only. As a businessman and an MBA graduate, I’m all for profit, the more, the merrier however, I and many business people like me draw the line between what’s honorable and what’s not. Being honorable means you don’t “cheat” your customer just to earn a few quick bucks, you earn it the hard way, which is providing what the customer paid for even if that means ultra thin profit. Unfortunately, there are a few of these unscrupulous business people who are not bound by this code of honor. A case in point would be adding extenders to food products. Adding extenders is a common practice among food processors. It is not only a fact but a way of life as this could reduce cost in a price competitive environment and help shore up profit. Even so, there is a limit for adding extenders and in most cases; it is likely in the vicinity of 5 – 20%. It is not surprising however to see that the most unscrupulous ones would use extenders up to say 60% or more to the extent that they practically substituted the product with something entirely different (adding melamine to milk actually started out as simply adding extenders to milk). Adding extenders is just but one of the tricks. Another trick usually resorted to by unscrupulous business people of whom they are in the minority, is size reduction. So instead of 1/8” thickness, these unscrupulous ones would offer products that are thinner say maybe 1/16” and still sell it as 1/8” thick but with huge discount from the regular price. As I mentioned before, a majority of businesses are honorable and we don’t cheat. We even balked at cheating because we care much for the welfare of our customers and that our ethical beliefs prevented us from committing such a grave act. As such, we couldn’t really imagine that somebody could actually do that or gone to that great length but apparently, we are wrong in our assumption. As a result, we are usually caught off guard by the actions of these unscrupulous business people especially since these very same people are engaged in predatory selling, which drive some of the honorable ones out of business. In short, honorable business people are also victims, not just the buyers. I remember this lesson I had in business school. It’s about a firm’s competitive advantage. According to my professor, competitive advantage is that firm’s capability, or organizational ability, or assets that help provide an edge to a company versus other competing firms in attracting customers in the market. So if a company could produce their goods more efficiently than others and maintain superior quality as well and they are able to parlay such efficiency into a reduced price for the consumer, it is only but natural for such a company to attract a great deal of buyers from the market and with the expanding revenues as a result, such company would not only stay afloat but would grow substantially as well. Conversely, a firm who fails to deliver what the consumer want because it lacks the skills, the abilities, the capabilities, and the material resources to do so, it would eventually fail because it wouldn’t be able to attract any would – be buyers from the market. That is what the theory says. Reality however has a different take and this is what they didn’t teach us at business school; that unethical practices and unscrupulous attitudes can be and has proven to be a source of competitive advantage as well. If one doesn’t play fair, one always have an advantage no matter what. Well, one could always argue that customers are not stupid and that sooner or later, they would have discovered the hoax and drive these unscrupulous businesses out of business. Though that is true but the problem is that by the time, these unscrupulous businesses went bankrupt, the damage is already done for some of the “honorable” businesses would not be around by then as the latter were “priced out of the market” by these unscrupulous firms in the first place. So what then? What are we going to do? Well, the most effective solution to punish these unscrupulous businesses is for the buyer to exercise vigilance. Remember, the ultimate decider in the marketplace is not the competing firms nor the government regulators but the consumers and only you, the consumers. If the consumers demanded only the best quality before price, I don’t see how these unscrupulous businesses would succeed in the first place. Remember, the customer is always right.

Reference:
1. Wikipedia

REWARDING RULE BREAKERS

It is one of those usual rainy afternoons in Manila; heavy downpour causing flash floods during rush hour followed by traffic mayhem afterwards as people tried to get a ride after the rain and cars barely get moving at all due to both the floods and as well as due to public transports blocking the road. At any rate, in the worst of this kind of situations, monstrous traffic could extend for kilometers and a normally 30 minute travel could take as long as two to three hours. Traffic was so slow that one felt that it would be faster just to leave your car in the middle of the road and just walk home. Just when you think that you’re in a traffic nightmare already, you suddenly noticed vehicles usually jeepneys and tricycles but also other vehicles as well breaking from the “established traffic column”, overtaking virtually everybody else by travelling at the opposite lane and before you know it, what was once a 4 – lane 2 – way traffic (with no concrete barrier in the middle) has now in effect become a 4 – lane one – way traffic, which completely blocked the flow of the opposing traffic. As a result, somewhere down that lane, the same thing happened with the opposing traffic and whala! We have a gridlock! And what was expected to be a 2 – 3 hour traffic nightmare has now morphed into a traffic hell wherein cars barely crawl from their place. It take some time before a traffic cop came along and untangle the mess and guess what he did to solve the “crisis”? He lets the overtaking vehicles occupying the opposite lane to go first so as to “create an opening” for the opposing traffic to “flow” and eventually, traffic “normalizes” (as in reverting back to the “old” 4 – lane 2 – way traffic) and the flow “smoothens”. The traffic cop never even bothered about confiscating the licenses of these “rule breakers” and yet alone punishing them for creating the mess in the first place. What this story illustrate to us is that once a “rule breaker” or a “trouble maker” acting upon their self – serving interest and trying to grab a “fleeting” opportunity manages to “clog” the system to such an extent that the system breaks down entirely and that these “clog” of a rule breakers are so vital and strategic that they became the “key” to the solution to the mess that they created in the first place. As such, it became practical to reward these “clog” of a rule breakers by giving to them the gain they so desired (which in this case, getting to go first ahead of everybody else who diligently lined up in traffic) just in order to get the system back up running again. Of course, such scenario aren’t exclusively seen in Manila’s traffic during the rainy season, for the recent financial crisis plaguing the world is also an exemplary case in point. Here, we have a handful of financial institutions whose unbridled greed has managed to bring the entire global financial system to it’s knees and yet, instead of going the way of dinosaurs for being similarly “stupid”, we have to bail them out from the mess that they single handedly created because failure to do so would spell “the end of the world” as we know it (by “the end of the world”, think of it as the 21st century version of the Great Depression of the 1930s). Under “normal” market conditions, a company that makes a big mistake has to pay for it’s mistake big time; a company that commits a costly error has to pay dearly for that error and a company that happens to make a huge, momentous, and critically mortal “bubu” has to pay for it with every cents it had to the extent of going belly up. That’s, the law of the market. Well, at least that is true for “small” companies that don’t cause critical “strain” to the well – being of the economy. For companies that are too large, too vital, too strategic, too “important” to fail, the laws of the market are simply inapplicable. Being too large however, doesn’t necessarily exempt them from the laws of the market, a company must also be a “vital clog” as well as in the case in point. If AIG were allowed to fail, then, we would see the unwinding of derivative positions worldwide precipitating a catastrophe of incalculable proportions as funds from bank deposits, from retirement savings, from governments would just disappear. Or if the US government failed to bailout Wall Street, the credit market would be utterly destroyed forcing us to pay everything in cash (including global trade) and thus, drastically reduce the scale of economies worldwide (one reason why economy grows is because of credit as one can purchase and eventually sell more from what little capital they have). Yet, it is these very same companies that are the very reason why we’re in such a mess in the first place. And therefore, we “reward” these companies by bailing them out without “punishing” them in the way we punish lesser companies with little clout. Rewarding rule breakers are not really fair nor right but in scenarios wherein they are the “vital clog” to the smooth functioning of the system, “rewarding” these rule breakers are the most pragmatic thing to do if not the best solution to the problem. Even so, it is still hard to swallow and is still distasteful.

THE GLOBAL FINANCIAL CRISIS OF 2008

Quote for the day:

1. Cash is King – anonymous.

The biggest news hogging the headlines for the past 10 months or so is the total unraveling of the global financial system that till now has wiped out trillions of dollars (one new stories gave a figure of $12 trillion) and requires trillions more in bailout money. What started out as an American sub – prime mortgage crisis has now officially become a global financial crisis engulfing every nation on earth. And why has this happened? It is because of 3 things: (1) The creation of the derivatives market, (2) over – leverage of the typical working middle class, and (3) the globalization of finance. Derivatives are securities on a security (a security is a financial instrument indicating ownership or claim on a property or asset, be it an equity like common stock or debt such as bonds that has financial value and is tradable). To illustrate, imagine a 5 year tenor bond that pays 5% per annum quarterly that is bought by a financial entity. The financial entity in turn issues 5 – one year tenor bonds based on the 5 year tenor bond (obviously the two should have the same maturity). The interest to be paid for the 5 – one year bonds is derived from the interest income coming from the original 5 year bond. The financial entity makes money by pocketing the difference between the interest payout to the one year bonds and the income derived from the 5 year bond. Using the illustration, supposed that the interest rate of those one year bonds is set at 4% per annum, then by calculation, the financial entity makes a profit of 1% every year from the difference between the interest payout and income. The original 5 year bond is the security, while the 5 – one year bonds created from the original bond is the derivative. Based on the illustration, one might say that derivatives are not that complicated and it is a simple thing but in reality, the truth is much farther. Derivatives are way, way more complex. There are many derivatives in the market such as options, warrants, bond derivatives, Collateralized Debt Obligation (CDO), futures, etc. Now, if betting in a security is a tough call because nobody can really predict the future and the behavior of a security whether it would go up value or collapse the next day is highly volatile, imagine then betting on a derivative that hinges on these volatile and unpredictable securities. It’s a lot tougher. If buying on security is like playing a dinner table poker, playing derivatives is like gambling in a high stake casino. Now, the present financial crisis started out as a sub – prime mortgage crisis. Sub – prime mortgages by it’s term refers to real estate mortgages (loans for purchase of real estate and using the real estate in question as collateral) made to people with poor creditworthiness and/or to people with good credit standing but due to certain circumstances, the loans to be made do not conform to certain standard requirements and hence rendering these people with good credit standing ineligible to apply for the loan. In short, sub – prime mortgages are pretty risky loans with high default risk that normally, a prudent investor would shriek at putting their money into. However, due to their high risk nature, the commensurate pay – off is also high, i.e., the interest charged on this type of loans are quite high, very much higher than the prevailing interest rate. As such, it becomes “enticing” to some investors looking for means to “maximize” the return on their investments but their numbers are however, few. To broaden the appeal of the sub – mortgages to the greater number of investors looking for high return and relatively “acceptable” risks, investment banks began to package them as Collateralized Debt Obligations (CDO), a type of bonds whose cash payments to the bond holders came from the payments made on mortgages by the mortgagor (the borrower). In this set – up, the investment bankers are the ones who technically assume the risk of credit default by the mortgagor. Usually, investment bankers in order to assure bond investors of the steady stream of cash flows payout in spite of the erratic cash flow payment behavior of these high risk loans, would pool together numerous mortgages and creates a “basket” from these mortgages with more or less a predictable cash flows. The investment banker makes money from the whole scheme of things through charging commission on the sale of the bonds and the fees from obtaining the loan, management fees and etc. Investment banks don’t make money from the loans. This is entirely different from the traditional commercial mortgage loans obtained from a commercial bank. In the commercial bank mortgage loans, the banks obtained their loanable funds from depositors and in return pay, the depositors a fixed interest for the deposits which are usually low. The commercial bank would then in turn lend out these amassed funds to borrowers in return for interest payment. A commercial bank makes money from the spread between the interest paid to the depositors and the interest earned from the loans. In addition to that, the commercial banks assume the risk of credit default of borrowers. In this traditional set – up, due to the fact that the profit of commercial banks came from the interest spread between loans and deposits, return of investments on the part of the depositors are hideously low. Furthermore, banks are fiduciary financial institutions i.e., they are institution of trusts and as such are highly regulated by the government. Henceforth, commercial banks cannot just simply give out loans freely to anyone and this in turn forced them to apply stringent credit evaluation guidelines. As a result, poor credit quality borrowers were often unable to obtain loans from a commercial bank and sub – prime mortgages wouldn’t have existed at all. In contrast, the CDO deal would technically create a win – win solution for all the parties involved. The investor (the equivalent to the depositor of a commercial bank) would earn higher rate of return from his funds, the investment bank makes money through commissions and fees, and because the whole set – up is not regulated like that of commercial banks, poor credit quality borrowers can actually get a loan. It is precisely because of this supposed “win – win” scenario that makes CDOs the more preferred form of mortgage lending than the traditional set – up except for one caveat, the risk assumed by the banks. For investment banks, the credit default risk is very high, higher than the risks assumed by commercial banks because of the credit quality of the borrowers. To circumvent this problem, investment banks created another derivative product called credit derivatives and the types usually employed in this deals are the credit default swaps (CDS). This is where AIG comes in. Credit default swaps are very much like insurances. The investment banks basically buys a cover against credit defaults from the sub – prime borrowers and pays a certain sum for that cover with the basket of mortgage loans as reference not as collateral. In the event of a credit event be it a default on payment or a declaration of bankruptcy or pre – payment of loans, etc, the seller of the credit default swaps (in this case, AIG) pays the buyer of the swaps (the investment bankers) an amount equivalent to the difference between the actual market value of the defaulted security and the agreed value. So if the security is initially valued at let say, $1 million and after the credit event, the market value of the security is say $800k, then, the seller of CDS would pay the buyer the difference, which in this case is $200k. CDS may seem simple enough but it is actually not. CDS differs from a regular insurance in one aspect, namely, the collateral or the property or asset to be insured. In an insurance, there is a property or an asset to be insured and serve as collateral (in the case of insurance, the collateral is usually irretrievable in the event that triggers a payout). In CDS, the property or asset in question which in this case refers to the basket of mortgage loans serve only as reference for the calculation of the premium payments and eventual payout. There is no collateral at all. In short, investment banks or any financial entity doesn’t have to hold the reference securities in question but they still could buy for the cover and receive payout in case of credit defaults. In addition to that, there is no regulation to supervise the creation and sale of CDS. So what the whole set – up suggest is that CDS like any other derivatives are tradable instruments for profit gain and not simply just for cover of risks. So in the event that an entity felt that likelihood of default increases due to some macroeconomic changes and therefore increase the likelihood of a payout from the seller of the CDS, the holder of the CDS could sell it to a third party for a certain amount of profit. Or, the seller of the CDS could “sell” the swap to a third party in return for cash up front while the third party receives the premium payment from the buyer of CDS granting the likelihood of default is minimal at that juncture. Now, with the understanding of the underlying financial basis of the sub – prime mortgage loans, one would get a feeling that the entire complex and supposedly, “win – win” dealings hang by a very thin hairline, which is the paying capacity of the mortgagor or the borrower. If the borrowers pay their mortgages diligently and timely, the wheel of this dizzying meshwork of a clock would keep on going. On the other hand, if a few borrowers were unable to pay and defaulted on their mortgages, the “clock” would suffer a jolt but it will still tick but if there is a massive bankruptcy of the borrowers, the clocks utterly breakdown and the result is catastrophic and chaotic as we’re in right now. This led us to the second of cause of the global meltdown, which is the over leverage positions of the middle class Americans. Since the 1990s, with the launch of the dotcom boom, the ensuing prosperity has greatly increased the “paper wealth” of the average American thus laying the foundation for increase in spending. Couple this with a healthy economic growth for almost 2 decades, American spending increases dramatically to the extent that during the aftermath of the 1997 Asian financial crisis, American consumers became “the consumer of the world”. Two recessions, the Mexican Peso Crisis, the Russian financial crisis, the 1997 Asian Financial Crisis, the dotcom bubble burst, and the 2001 terrorist attacks had temporarily tempered the American economy but failed to completely dampen it. This is due in large part to the aggressive rate – cutting authored by the Federal Reserve under the guidance of Alan Greenspan. As a result, American spending continued to roar on. This time, it is abetted by cheap credit. It became common at that time for a typical American to possess multiple credit cards with credit transfer features. It was also at this time when American began to translate their paper wealth into hard assets via investments in real estate and automobiles. So what all this translate to is that the claims on the future cash flows, i.e., the money that had yet to earn of the average American grew significantly such that not much could be saved from what remains of those future earnings. Given this scenario, in prosperous times where opportunities for economic gains abound, future incomes are assured and were enough to cover all these claims. However, in bad economic situation, future cash flows becomes unstable and claims has caused an added burden to consumer struggling to make ends meet. This is what happened two years ago when inflation sky rocketed mainly due to a surge in oil prices and the spiraling increase in the cost of food. Added this to the aggressive rate increases to curtail inflation by the Federal Reserves, the claims on future earnings grew and ate whatever little surplus those future earnings had if not totally outstripped it. As an immediate consequence, Americans first reacted by withholding payments for big ticket items like mortgages or selling their fixed asset holdings like real estate. However, in a struggling economy wherein a few can afford to buy, the influx of so many real estate for sale resulted in precipitous dropped of real estate prices. This is in turn exacerbated the worsening mortgage crisis as paying mortgagor suddenly find themselves saddled with expensive debts with soaring interest rate backed by real estate whose value is declining rapidly. And so, it came to a point that defaulting on expensive mortgages packs more financial logic than holding onto it. This in turn creates a snowballing effect that produced the sub – prime mortgage crisis late last year. On the financial side of the sub – prime mortgage crisis, the patchwork of derivative deals has broken down completely as the cash flows from mortgage payments dried up forcing investment bankers to pay up the bondholders (the buyers of CDOs) from their own pockets and since investment banks normally don’t take in deposits, they’re hard pressed for cash. This in turn force some bondholders to call in the CDOs whenever possible which further aggravate the already perilous state of investment banks. Now, the CDS should in theory cover for the mounting losses from sub – prime mortgages but since the value of tradable CDS are way, way bigger than the actual mortgage default and the fact that the seller of CDS didn’t set aside a contingency fund in the event of default and that the default is no longer a distinct possibility but a reality, the fund required for payout of the cover is simply too much for a insurer of credit default and this is what led AIG to sought for government bailout. Now, with CDS being somewhat “useless”, investment banks are left alone to fend for themselves. With no revenue income (due to defaulting mortgages and restricted payouts from CDS), pricy debts (due to high interest rate CDO’s), and virtually no funds on its own (since investment banks don’t take in deposits like a regular commercial banks), investment banks are left with no choice but to find ways to raise funds and payout the bondholders. They do this by either selling their shares in return for cash infusion or borrowing heavily to finance short term debts. But as we all know, one cannot survive by raising debts at least, not that long. Because of the deteriorating financial conditions, financial institutions with excess funds became apprehensive about lending out precious cash to firms with doubtful survivality. And this triggers among other things, the fall of investment banks led by Bear Sterns and (hopefully) ended with Lehman Brothers, thus, precipitating, the Wall Street Financial Meltdown. Even so, the Wall Street Meltdown was actually an American crisis and limited to the USA only. It morphed into something greater because of a third factor and that is the globalization of finance. Since the end of the cold war in the beginning of the 1990’s, nations around the world began to realize the “superiority” of the capitalist system and quickly adopted it by opening up their markets to foreign trade and investment through the removal of tariffs and the removal of restriction on the flow of capital in and out of the country. The result is the alignment and integration of the national financial systems to the world financial markets dominated by Western Europe and Japan and led by the United States and this in the process gave birth to the global financial system that we see today. Financial markets of every nation around the world became more closely linked and highly dependent on each other. It is therefore no surprise to see American companies having financial interest across the globe and that the rest of the world has financial interests in America. One of the greatest American exports aside from Capitalism, Democracy, automobiles, computers, the internet, and McDonald’s is the derivative instruments (and the financial crisis if one is to be sarcastic about it). Companies around the world including their government’s central banks usually invested in American debt, a major part of which are in treasury notes but with sizeable investments in bonds issued by venerable Wall Street institutions with superb credit rating like Bear Stern and Lehman Brothers. So when Wall Street is crumbling, the rest of the world became apprehensive about buying into American debt and this in turn created a credit squeeze on these once high flying investment banks. As the value of American debts kept falling, the finances of some of these companies outside America are also gravely affected resulting into their shaky financial situation and expose their vulnerability to sudden adverse changes in the macro environment. And that adverse change was triggered with the fall of Lehman Brothers (a venerable financial institution with long history and previously good credit standing) and it’s eventually bankruptcy. Soon, companies with poor financial foundation and huge exposure to the toxic American debt followed suit and this in turn forced companies especially commercial banks to become even more apprehensive if not outright fearful about lending precious funds to other banks who maybe in intensive care. The net effect was the frozen the credit market. You see some companies for one reason or the other cannot turn their paper profits into cash easily that could fund their daily activities and they therefore turn to the short term debt market like the commercial papers market for their financing needs. However, with the credit market frozen, cash suddenly becomes scarce and companies are fraught with to panic on how to “sustain” their operations even if they are profitable and the old adage about “Cash is King” became the cardinal rule in the market. With little cash and nowhere else to borrow money from, the next logical step among companies was to sell whatever asset they could sell in order to raise cash and the most liquid of all assets available to them for the moment are their marketable securities that they’re holding, i.e., stocks (other assets like fixed assets are harder to sell and could materially affect their operational sustainability). After all, a dollar in cash is much better than a dollar in stocks whose value may become next to nothing overnight. This caused the global sell – off in stocks that we bear witness to the past few weeks. The global stock selling frenzy cause the companies to sustain loses which makes finances of these companies all the more precarious and this in turn feed more fear and panic contributing to the ceaseless downward spiral into total chaos necessitating unprecedented bailouts and intervention by governments around the world last week. And that folks, is in a nutshell (and 6 pages long), the 2008 global financial crisis, which is unraveling as we speak.

Reference:

1. Bond Markets, Analysis, and Strategies, 5th edition, international edition. Frank J. Fabozzi, Pearson Prentice Hall, 2004.