Sunday, 22 April 2007

Do you roll your eyes when you hear "global capital flows" or "exchange rate differential"? If so, maybe Hub Culture's Hong Kong Salon on the state of global capital was not for you. But for those interested in a peek at what the financial world is thinking about these days, read on.

Hub Culture hosted its latest salon, (this time on global capital trends and movements) in Hong Kong at Alcove, a private Chinese kitchen located in the heart of Soho, the city's dining sector. From its bohemian roots, Soho has moved upscale in the past several years and now offers a global mix of establishments that borders on posh.

Joining this salon were a number of global finance players and a few others who provided interesting perspective on everything from luxury to commodities.

As usual half the group requested anonymity, so who was there?

Rob, Morgan Stanley

John, JP Morgan

Anna, GaveKal Research

Paola, Safilo Group

Sheinal, HSBC

Juliana, Brunswick Group

Will, our big thinker

Dinner conversation opened with a look at long term currency trends with this central question: "is the dollar undervalued and the pound overvalued?" Most doubted the persistent rumor that the $ will hit 3 to 1 against the , and while the general feeling was that the dollar would continue to slide, most think it will hold steady soon while the euro stays stable and the pound planes.

John: "Before too long, within a generation certainly, the RMB will be the default currency alongside the USD. The pound stays strong because it has become a safety currency, a larger version of the Swiss franc." Thinking of the pound in terms of the Swiss is interesting, and may help justify its current stratospheric level. It remains the chief currency not part of the euro collaboration. Rob and John indicate that the Chinese have made it clear they do not want private equity investment at the precise moment PE has made a big play for China. With $4 trillion in savings, the bankers forcast a big change in the private equity world "the Chinese don't need western money" said one, "we should be doing the opposite from what every private equity firm is trying to do, and that is to use Chinese money to do private equity deals in the US".

Anna and Juliana seem fascinated with Dubai. Arab money is pushing sales of 1 in 3 luxury properties in the UK, and Chinese companies are using Dubai as a base for expansion into the Middle East, and Anna's research company, GaveKal is doing more research for clients from that area than before.

Anna also has new Brazilian clients, highlighting the growing links between China and South America. Juliana handles clients looking to make investments outbound from China, and notes that they are busy snapping up mineral and energy assets in Africa.

All agreed it is in anticipation of a coming pinch in commodities growing demand for resources will produce inflationary pressures unheard of ten years ago. Will, (the big thinker of the group) outlined "the food bubble", with theories put forward in books like Collapse that explore coming food and water shortages. Will says "the Gobi desert is advancing at 2 million hectares a year that equals 2% of their arable land, and over 10 years, China will lose 20% of its arable land that's a major problem." He also pointed out that damming of rivers in China is choking the Mekong, allowing the sea to poison the once fertile Mekong delta with salt water. The area is the bread basket of Southeast Asia, helping to feed over 500 million people. Sheinal and others jumped on the topic: a food bubble and commodity shortages are growing on the radar of their risk analysis. Collapsing fish stocks, including the recent discovery that tuna is nearly gone, are forcing the banks to re-evaluate their long term risk strategies.

Says Sheinal: "The global economy is now large enough that blow-ups get dissipated, but nobody knows where the leverage is. Its harder to see where the real risk lies." Yet innovation can help. Will pointed out the new Chinese practice of growing fish in rice paddies, called rice-fish culture, which help to eliminate insects while providing an extra source of food. When farmers drain the paddys, the fish are there waiting for them.

Juliana: "Everyone's concerned about the environmental situation, but what's anyone actually doing? Anyone can be CONCERNED, the issue is, where is the action?"

Real estate: Luxury continues to grow, especially in Asia, where its booming. Singapore is double over 18 months, Hong Kong up 40%, and Japan has even hit positive territory for the first time since the bubble burst there in 1989. "Hong Kong has the biggest luxury differential of any market. The high end is tight, but at the lower end there are over 25,000 completed but unsold units on the market now. Luxury real estate in Hanoi and Berlin: "Hot." In Buenos Aires? "Absolutely insane." Paola weighed in on the business side. Her company controls 50% of the global luxury eyewear market and produce in Italy, Japan and China. They see demand strong everywhere, and for them the picture is rosy. This led to the rather inebriated creation of the Dior Cost of Living Index, with the lowest prices for a basket of goods relevant to today's globetrotter:

Basket Item Best Value Location

Mojito : Bali

Dior Sunglasses : Hong Kong

City Apartment : Berlin

Hermes tie : Heathrow Duty Free

Pad Thai : Bangkok

Foot reflexology : Jakarta

Blackberry 8800 : Sam's Club, Dallas

Airline tickets : Bangkok

Anna helped sum it all up for the twelve months forward: "This year is a fire pig, not a golden pig!" What that means for the Chinese is that all the hype going on is shallow at best. Sure, things are fine at the moment, but the bankers among us are concerned there are big problems right around the corner.