Finance: Currency wars and the emerging-market countries

image money small THBThis article is republished from
Author: Richard Portes
originally published on at 4 November 2010

The threat of a currency war between the US and China is one of the main concerns for the G20 ahead of this month’s meeting in Seoul. This column say that while policymakers appear to grasp some of the issues, they underestimate the impact of quantitative easing by large economies on exchange rates worldwide.
The headlines shout “currency wars”. The US believes China engages in “currency manipulation”. The authorities hesitate to declare this to the US Congress, and the Secretary of the Treasury says “competitive non-appreciation” instead. China accuses the US of excessively loose monetary policy, flooding the world with liquidity. There is some truth in both charges, but some exaggeration.
This is one of the key issues facing the G20. Exchange-rate pressures, global imbalances and rebalancing, spillovers and the desirability of policy coordination – these are at the centre of the economic interdependence between the developed and emerging market countries. All this is in the context of weak US and European recoveries from the Great Recession, the risk of deflation, and the likelihood of more quantitative easing (QE) by major central banks. Domestic issues and inability to get direct action on exchange rates has led the US to propose internationally agreed targets for current-account imbalances. The wheel goes round – these proposals bear some resemblance to those of Keynes at Bretton Woods, which the US then opposed.

Need for an analytic framework

Policies such as these cannot be properly assessed without an analytic framework. In the current discussion, the furthest this has gone is evocation of the “trilemma”: the impossibility of simultaneously maintaining open capital markets, nominal exchange-rate stability, and monetary policy autonomy. (We hear little of the “inconsistent quartet”, which adds trade openness to these three – but protectionism is indeed a potential weapon in the currency wars, and we must not disregard that threat.)
While policymakers in both developed economies and emerging markets are aware of this trilemma, they are not fully conscious of the international repercussions of QE by the largest economies when they are at the zero lower bound for interest rates. This column will explore these issues.


The US dollar has already experienced a real effective exchange-rate depreciation of over 10% since early 2009, almost bringing it back to the low of early 2008. The Federal Reserve Bank of St. Louis has calculated that much of this is due to QE — the Fed’s $1.725 trillion asset purchases resulted in a 6.5% depreciation of the dollar (Neely 2010). The Bank of England has estimated that its QE resulted in a 4% depreciation of sterling (Joyce et al. 2010). So domestic QE does seem to have substantial international implications.
But the communiqué of 23 October 2010 by G20 finance ministers from their meeting in Gyeongju, while condemning “competitive devaluations”, avoids direct discussion of this spillover of monetary policy – which some might reasonably call a “competitive devaluation”: To quote the communiqué:

“Specifically, we will… continue with monetary policy which is appropriate to achieve price stability… move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates…”

This suggests that as long as QE does not lead to “disorderly” exchange rate changes, the monetary authorities can ignore its international effects. We shall examine whether this view is justified.

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Video: The Kandinsky Effect

A music promo by Manu Meyre for the modern jazz band The Kandinsky Effect.

THE KANDINSKY EFFECT from Manu Meyre on Vimeo.

  • director & motion designer : manu meyre
  • painter : vassily kandinsky, composition VIII (1923)
  • music band : the kandinsky effect, girl/boy song (edit)

More Information at:
Manu Meyre web site
The Kandinsky Effect web site

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Life: Why we can’t walk straight

A great animation explaining why people can’t walk straight when blindfolded together with the results of an experiment.

From NPR
Try this: Put a blindfold on someone, take them to a park or a beach or a meadow and ask them to walk for as long as they can in a straight line.

read the full article at NPR

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Books: 20 Things I Learned about Browsers and the Web

Google has produced a wonderful animated online book called “20 Things I Learned about Browsers and the Web” that explains many concepts and tools that the Internet is build of today.

Click on the image below for the link

link to

Quote from Google blog:
“…We built “20 Things” in HTML5 so that we could incorporate features that hearken back to what we love about books—feeling the heft of a book’s cover, flipping a page or even reading under the covers with a flashlight. In fact, once you’ve loaded “20 Things” in the browser, you can disconnect your laptop and continue reading, since this guidebook works offline. As such, this illustrated guidebook is best experienced in Chrome or any up-to-date, HTML5-compliant modern browser…”

The book uses the latest Internet technologies in a sensible way so that features like off-line storage and the latest stylesheet formatting that are available with the most modern browsers are demonstrated, while at the same time the book is still accessible with older and non-web kit browser versions.

An outstanding use of HTML5, CSS stylesheets and graphics to explain these concepts.

Read it online at:

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Life: Fake Work in the wild

image workers Fake Work – the best description for a cancer / plague often seen in large monolithic organizations. It is also very popular in organizations that have far to many people for the tasks assigned to them, but justify their existence with such counterproductive activities.

We’ve observed its most extreme use with a so-called Public-Private-Partnership in Geneva where 600 people are “working hard” to burn through Billions of tax payers funds while doing the work of 50. The sadest thing about such environments is that those who don’t do anything productive will most of the time get the recognition while the few others working hard are often treated like dirt.

Here’s the best definition we found ( :

Fake Work (FW): A project or task that keeps one or multiple people busy yet has no productive value. It serves to keep an illusion alive that there is still something of productive value being achieved.

More info on the topic: Fake Work is Destroying America

image CC-by-sa lumaxart

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Finance: The Indian Venture Capital Industry – Interview with Pravin Khatau

image money small Mr Pravin Khatau, a native Indian and a former Executive Director with Goldman Sachs, has a distinguished track record in Venture Capital investing globally and particularly into the Indian markets. He was previously on the board of a well known VC firm in India and is currently also serving as a Board member of the MVCA in Europe.

Mr Pravin Khatau was kind enough to share his insights into the Venture Capital industry with Duvet-Dayz as part of our Venture Capital series.

After decades of massive growth of the VC industry in India this growth flatted out to the end of 2008. The year 2009 was pretty though for VC investments globally and India has also seen a substantial decline in VC investments during that time. Now since earlier this year VC investment is back on the rise with an increase around 30% over the last year. Do you believe this trend will continue?

Pravin Khatau:
I believe the trend will continue and even accelerate.

What we’ve seen the last 2 years, the BRIC countries have largely avoided the leverage related problems of the leading western countries. Now with QE2 launched in the U.S. and comments from Fed governors saying that QE investing will continue for many years, artificially low – near zero interest rates are resulting in cash seeking higher returns. A country like India with a GDP growth rate of 9%+ and forecasts seeing such growth to continue for many years to come, very favorable population demographics is and will obviously be one of the key recipients of these fund flows.

India has two very interesting dynamics. Firstly her growth is largely domestic driven and not so reliant on export and thus much less affected by sluggish economy growth in the West. India’s export oriented industries are clustered within the high-tech segment which is beneficial again – being higher up in the value chain. From a VC’s point of view this throws up some very interesting investment opportunities. For example a recent listing on the NASDAQ for an Indian travel site ( reaped enormous rewards for its VC backers. Overall FDI inflows into India that from 2007 to 2008 almost doubled remains strong and near its record level of 2008.

In the U.S. and Europe deals are getting smaller with more money provided to companies as seed capital. Do you see a similar trend in India?

Pravin Khatau:
Deal sizes and the number of VC transactions dropped significantly at the end of 2008 / beginning of 2009 as a consequence of the bursting leverage bubble. What India realized by mid 2009 was that she was far less affected than the Western economies and after the initial knee-jerk slowdown GDP growth quickly recovered as did the Indian stock markets. The VC and PE fund flows have also recovered though as one would expect with somewhat of a time lag.

However over the last several months PE players have become extremely aggressive in India and new players such as KKR have entered the Indian market. The urgency of PE investors is driven by their desperate need to use up their “dry powder” and their access to cheap funding based on extremely low interest rates in the West. A lot of bank proprietary money is also being invested in India for the same reasons. The growth and VC investing has increased but at a slower rate due to the fact that VCs had a much more difficult time in capital raising than the PE-firms.

Real estate investment historically one of the largest areas of PE / VC investment in India has been hit particularly hard the last years with the global recession. Do you see a come-back in this industry as well?

Pravin Khatau
With regards to real-estate investments – the second half of the first decade in the new millennium saw very aggressive investments in the real-estate sector in India not only in tier 1 cities like Delhi and Mumbai but also in tier 2 and tier 3 cities and into increasingly risky projects. This overinvestment wave climaxed with the London listings of real-estate funds such as Hirco which raised hundreds of millions U.S.$ for speculative future deals. Not surprisingly these speculative projects took a severe hit when the crisis evolved during the last years. Since then residential values in tier 1 cities have recovered smoothly but commercial property prices have been much slower to recover. For example in Mumbai at Nariman Point (note: the prime commercial center of Mumbai) prices are still 20-30% off their peak and I’m aware of several prime office locations there which are still unrented.

Adding to the problem is the large supply coming to the market with the development of the BKC (note: Bandra Kurla Complex). Under normal circumstances strong economic growth would quickly absorb this oversupply creating a healthy undertone. Unfortunately the enormous flow of funds, coming into India from overseas investors seeking higher returns as a consequence of QE & QE2, is once again manifesting in large amounts of new projects coming up in both the commercial and residential sector.

Frankly, I’m a bit concerned that this might lead to a new QE fueled bubble and a potential subsequent crash / bust. The scenario in Delhi is very similar to Mumbai and even more so in tier 2 & 3 cities that can even less absorb larger projects. Personally, I always feel when an ambitious developer announces / plans to build the tallest building in the world it is a huge red flag.

Is the VC landscape in India changing?

Pravin Khatau
India’s Venture Capital industry has seen substantial change since the formation of the TDICI and regional funds in the 1980s and 1990s. After the entry of foreign Venture Capital funds since about 1995 and the emergence of domestic and India-centric VC firms we now see more and more global VCs and private equity firms actively investing in India. Until 2006 the PE /VC industry is estimated to have invested about USD 7.5 Billion.

Venture capital investment in India demonstrated massive growth over these years until 2008 when it reached its peak and growth flatted out. Based on data from Dow Jones VentureSource, India saw about US$864 million VC investments in 2008 up only 3% from 2007 VC activity.

In difference to China with more established business infrastructures, in India much of VC investment went into its business and financial service companies. Investments into India’s IT industry that was in earlier years the biggest segment, has recently slowed down while investments into the energy and utility sector has almost doubled. This could also be related to the maturity of the Indian IT industry gained over the last decade and we have by now already seen some quite substantial investments of Indian IT firms abroad. Some of the Indian IT firms are now amongst the largest IT service companies worldwide. Overall money inflows (DFI) into India remained strong and close to record levels during the last years and is now also complemented by more and more Indian companies investing abroad via M&A or other strategic investments.

During the last 12 months we’ve noticed much more aggressive activity by private equity firms and proprietary investment arms of international banks and investment banks. Due to the fact that Indian companies frequently get listed on stock markets at a very early stage, the private equity model in India is quite differentiated with these players often doing PIPE transactions and waiting for the stock market to rally to get their returns. This trend has been associated with the recent enormous inflow of FII (note: Foreign Institutional Investment) money which may well lead to an unhealthy bubble being formed. Similarly in the real-estate space – as mentioned before – a lot of foreign money is going to fund increasingly overambitious projects. FII inflows in the month of October for example was the second highest ever seen in India. This unhealthy trend seems to cross the boundaries of various institutional players regardless of strategy who invest in Indian asset markets because of its perceived attractiveness and with seeming disregard for their communicated strategies (e.g. private equity firms being involved in PIPE / buyouts). There’s an increasing risk of a policy response to prevent Western style bubbles taking place in India as well. Already the government has raised interest rates at least 6 times this year to head off inflation. Thus far they have not enacted any capital controls as for example Brazil has done, but they remain vigilant.

What is the most common exit strategy for VCs in India and their average time frames for investment?

Pravin Khatau:
There are basically 3 types of exits common with VC investments in India. First there are trade sales, the second is listing on the Indian stock markets and the third are listings on international stock exchanges abroad.

We are not seeing any extraordinary pickup in trade sales although with the strong growth in the economy continuing successful Indian companies are growing quite well. The competitive landscape in India has always been tough as there seems to be no shortage of talented entrepreneurs who are willing to jump on attractive looking opportunities. Throughout this year the IPO window with regards to domestic listings has been rather lukewarm.

The Indian investors have largely been out of the market and the IPO valuations this year have been too aggressive leading to very poor aftermarket performance. This is an unusual phenomenon particularly given the strong performance of the market index which would normally bring the retail investors back into the market but with market valuations being further pushed up by strong FII inflows, domestic investors largely remained on the sidelines.

2010 has seen a tremendous spurt in Chinese companies listing in the U.S. and Russian companies listing in Hong Kong. Indian companies have been much less aggressive in following this model though there are some examples of large and successful IPOs by Indian companies on overseas stock exchanges. I do expect that more Indian companies might follow along this avenue in the next years.

Is their a secondary market in PE/VC investments in India?

Pravin Khatau:
No, not to my knowledge.

A few last words and a general outlook for the VC industry in India?

Pravin Khatau:
The general outlook for the Indian economy is very strong and should continue like that for the foreseeable future, the strong monsoon should keep domestic spending high.

Infrastructure spending continues to be very strong therefor most people expect GDP growth rate to remain at the the 9%+ level. The concerns lies in signs that inflation is picking up and the government has been raising interest rates to counter this. Asset prices are being pushed rapidly by foreign investors fueled by QE2 fund flows and the U.S. weak dollar policy. This penalizes countries like India where exchange rates are trade related and therefor appreciating vs. the US$ and other linked currencies like the Chinese RMB thereby making Indian exports more expensive.

The overall business climate is very optimistic but there’s a high risk of destabilizing foreign fund flows creating problems down the road.

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