eNews September 17, 2015

U.S. Considers Sanctions against Chinese for Cyber Thefts

The Obama administration has been developing a package of economic sanctions against certain Chinese businesses and individuals for cyber thefts it attributes to them. It, however, doesn't plan to impose them before President Xi Jinping's visit next week, media outlets reported.

The sanctions target companies that have allegedly benefited from the theft of trade secrets from U.S. corporations as well as the persons who conducted the hacks. Over the past year, the FBI has seen a 53% increase in economic espionage cases, in which China plays a significant part, said the agency at a July briefing.

"We've made very clear to the Chinese that there are certain practices they're engaging in that we know are emanating from China and are not acceptable," said President Barack Obama on Sept. 11 to a group at Fort Meade in Maryland. "We can choose to make this an area of competition ... or, alternatively, we can come to an agreement in which we say, 'This isn't helping anybody; let's instead try to have some basic rules of the road in terms of how we operate.'"

Obama added, "There comes a point at which we consider this a core national security threat and we will treat it as such." U.S. officials also reportedly told Reuters that the U.S. also is considering sanctions against Russian individuals and companies for cyber attacks.

When asked about the possibility of sanctions coming next week, State Department spokesman Mark Toner told reporters, "When it comes to economic sanctions, we don't preview any kind of sanctions beforehand for obvious reasons. We don't want to give a heads-up to those who may be potential targets of economic sanctions to begin to take steps to evade sanctions activity."

At a Sept. 11 press conference, China's foreign ministry spokesperson, Hong Lei, said, "The Chinese government firmly opposes and cracks down on all forms of hacking activities in accordance with the law. China also falls victim to cyber attacks. ... The issue of cyber security shall become one area of cooperation rather than a source of friction between China and the U.S. Some people from the U.S. should stop their unfounded accusations against the Chinese side and carry out dialogue and cooperation based on mutual respect and trust so as to jointly create a peaceful, secure, open and cooperative cyberspace."

The U.S. government has experienced several cyber attacks in recent months, most recently on White House staff records at the Office of Personnel Management (OPM). The sanctions under consideration would target foreign citizens and firms believed responsible for cyber attacks on commercial enterprises.


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Auto Market Expected to Return to Record Sales before 2016 Speed Bump

The United States automobile industry is expected to grow by 4% this year before easing by 1% next year, according to the Euler Hermes report, "Auto Market—a live wire," released in early September. The predicted 2016 slowdown in key automotive markets, such as in the United States and Europe, could arrive due to the economic struggles of emerging countries.

For the last six years, the U.S. market has showed continued growth. Euler Hermes economists expect the industry to return to its record sales level of 17.5 million vehicles by the end of 2015. Next year, however, the Fed rate hike and increased gas prices may impact the industry both domestically and abroad.

"China, for instance, now the world's biggest car market ahead of the U.S., is serving as an amplifier of losses and gains," wrote Ludovic Subran, group chief economist and director for economic research at Euler Hermes as well as keynote speaker for FCIB's Global 2015 Conference. "Markets with considerable growth potential, such as Brazil and Russia, are collapsing, and it is hard to see what will be the next promised land for American SUVs, Japanese compact cars, and French or German sedans."

The Chinese automotive market, which more than tripled in size from 2008 to 2014, is expected to slow by 3% this year. Euler Hermes economists acknowledged that the industry will need to evolve in order to cope with the emergence of a secondhand market as well as increasingly stringent environmental and traffic regulations.

"This means that new consumer populations will need to be tapped, with the production of more affordable vehicles that cater to motorists with less purchasing power than those living in coastal areas," the Euler report states. "Automakers will need to focus their efforts on profitability in the coming months, which can always be found in the form of joint ventures."

- Jennifer Lehman, NACM marketing and communications associate


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Study: Percentage of Troubled Companies Surges to 4-Year High

Creditors may find the level of bankruptcy filings creeping upward, or even surging, in the near future if the latest edition of a monthly index tracking the insolvency risk of 36,000 companies proves correct.

The September edition of Kamakura Co.'s Troubled Company Index registered its largest increase in months, up 2.04% to 9.03%, meaning nearly one corporation in 11 carries at least a 1% likelihood of default within the next month. This is the highest percentage since September 2011, and the August to September increase accounts for nearly half of the total rise during the last 12 months. Although the riskiest company is again retailer American Apparel, which carries an updated default probability of 65%, the majority of the 10 worst are tied to market-upsetting industries like natural resources and European financial institutions, particularly those in Greece.

"Market turmoil was the dominant story as the month of August came to a close," said Kamakura President/COO Martin Zorn. "While the old joke that the stock market indexes predicted nine of the last five recessions is often told, one cannot help but notice the jump in KDPs [Kamakura Default Probability] and especially in the troubled company index. ... The upward bias in the index over the past 12 months should cause credit managers to look more closely at their current portfolios."

The fall in oil prices is causing a number of problems in emerging economies as well as in the United States, where fading boom conditions mean oil-dependent manufacturers and service providers are experiencing a sudden drop in demand. For example, lower oil prices and reduced demand mean fewer purchases of expensive equipment needed for exploration—in short, there is a domino effect that affects other industries. Regarding Greek banks, with many European economies on edge because of potential losses from Greek-owed debts as well as continued bailout spending, potential failures in Greece could continue to undermine confidence. Other looming issues include possible repercussions from a U.S. Federal Reserve rate hike, which is likely to occur this week or in December, and the escalating immigration crisis in Europe stemming from Islamic State terrorist activity in countries like Syria.

Of the 10 most troubled companies, according to Kamakura, six are U.S.-based and three operate primarily out of Greece. One Australian company, Atlas Iron Ltd., made its first appearance among Kamakura's riskiest 10. This is not surprising given Australian dependence on Chinese demand, which has been dropping amid its well-publicized growth rate slowdown.



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Major Cities Face $4.56 Trillion Debt Risk

New York City could lose $90.36 billion from more than a dozen threats over the next 10 years, according to a new index from Lloyd's. At the other end of the spectrum for U.S. cities, El Paso, TX, has $2.44 billion at risk. These are just two of the 29 U.S. cities covered in the Lloyd's City Risk Index 2015, developed with Cambridge University's Centre for Risk Studies, which highlights the economic exposure of 301 leading cities worldwide to 18 manmade and natural threats. The index estimates that globally $4.56 trillion is at risk.

The index attempts to identify and quantify the risks based on total GDP at risk (Total GDP@Risk)—the expected loss to a selected location's economic output from all 18 threats. It also provides a look at what governments, businesses and communities can do to make infrastructure and institutions more resilient.

The analysis identifies three trends in the global risk landscape:

  • Emerging economies will have an increasing proportion of risk-related financial loss as a result of their accelerating economic growth—more than 70% of Total GDP@Risk comes from emerging economies, with their cities often exposed to single natural catastrophes, such as earthquakes.
  • Manmade threats are becoming increasingly significant. Market crashes, cyber attacks, power outages and nuclear accidents are associated with about a third of Total GDP@Risk. Combined exposure to market crashes, oil price shock and cyber attacks represents more than 60% of the Total GDP@Risk in both New York and Paris.
  • New or emerging threats—cyber attacks, human pandemic, plant epidemic and solar storms—are increasing and threaten about a quarter of Total GDP@Risk.

Cities with high asset values have significant levels of economic exposure to catastrophic events, making Taipei, Tokyo, Seoul, New York, Hong Kong, Shanghai and London the world's riskiest cities, the index notes. GDP in developed cities is most at risk from multiple and often manmade threats.

- Diana Mota, NACM associate editor


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Japan’s Monetary Easing on Hold

Despite the contraction of Japan's economy in the second quarter, the country's central bank announced on Tuesday that it would put monetary easing on hold, according to several media outlets.

Even as Japan's economy showed signs of recovery in August, the Bank of Japan (BoJ) acknowledged that "exports and production are affected by the slowdown in emerging economies." Meanwhile, Standard & Poor's on Wednesday lowered Japan's sovereign debt rating from AA- to A+ due to the country's financial uncertainty.

Despite Tuesday's announcement regarding monetary easing, analysts continue to predict the BoJ will stimulate economic activity in the future and will pay attention to its upcoming policy meeting on Oct. 30.

Maricar Gallardo, ICCE, management and program analyst for the United States government currently on overseas tour in Japan, told NACM that the economic situation in Japan highlights the enduring challenges policymakers face in steering the economy toward a recovery. "I think the lack of consensus among practitioners and among economists on the root cause(s) of this chronic deflation explains some of the difficulties the country has had in addressing this problem," she said.

Japan Prime Minister Shinzō Abe's economic program, Abenomics, is also under scrutiny, Gallardo explained. The economic policy consists of three arrows: monetary easing to reverse deflation, fiscal stimulus to boost spending and structural reforms to revitalize long-term growth. But many economic experts question the policy's effectiveness.

"The fundamental problem is that while Japan's government recognizes the need to stimulate the economy, it is conscious about its growing debt problem and wants to get its fiscal house in order. So the policy response is somewhat confused," said Gallardo. "It introduces spending measures, but then raises the consumption tax rate (from 5% to 8%, with another planned hike to 10%), thereby offsetting the stimulus."



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