profit.com.pk

Obama presses ailing Europe tofocus on growth Page 02

Monday, 14 May, 2012

MUMBAI/SINGAPOREBLOOMBERG

GoLD demand in China may surgeas much as 30 percent this yearas rising incomes boost con-

sumption, helping the country topple asthe world’s largest bullion market on anannual basis, according to the WorldGold Council.

Demand, which rose to a record inthe first quarter, may gain to between900 metric tons and 1,000 tons thisyear, from 769.8 tons in 2011, , Far Eastmanaging director at the producer-funded group, said in an interview. In-dian usage may drop to 800 tons to 900tons, from 933.4 tons, he said.

Higher demand in the world’slargest gold producer may help arrest aslump in prices, which have plungedfrom last year’s record as investors fa-vored the dollar amid concern may quitthe euro. Global gold demand fell 4.6percent to 1,097.6 tons in the first quar-ter, the council said in a report today.“We are confident China will become thelargest source of demand for gold thisyear,” Cheng said in , restating a councilforecast made earlier in 2012. “over thenext two to five years, and India will goneck to neck and may account for morethan 50 percent of world demand.”

Immediate-delivery gold traded at$1,548.19 an ounce at 4:03 p.m. in Sin-gapore. That’s down 1.2 percent thisyear, and 18.5 percent from the recordclose on Sept. 5. The price touched

$1,526.97 yesterday, the lowest levelsince December as the Greek debt crisissent the euro to a four-month low.‘Seek CASh’: “Investors are sellinggold now to seek cash and rebalancetheir investment portfolio because ofconcerns about the euro- zone sover-eign-debt crisis,” said Cheng, who’s beenin the gold industry since 1985. “Thefundamental reasons for investing ingold remain very strong, so these in-vestors will return.” Bullion has ralliedfor 11 years, gaining through the finan-cial crisis that started in 2008, as in-vestors bought the metal to protect theirwealth from currency debasement andinflation. said in a May 9 report the pre-cious metal remains the so-called cur-rency of last resort.

Demand in China totaled 255.2 tonsin the three months to March 31 from232.5 tons a year earlier, the council saidin the report. Investment demandgained 13 percent, while jewelry demandincreased 7.9 percent to 156.6 tons, mak-ing China the world’s largest jewelrymarket for a third quarter.

The council’s outlook for increasedconsumption in China this year con-trasts with the view from, the mainland’sbiggest gold-jewelry maker, which saidthis month the country’s demand growthmay stagnate in 2012.‘InCreASIng WeALth’: “The ofthe middle class is very important,”Cheng said. “In the past 10 to 15 years, ithad reached first- and second-tier citiessuch as Beijing, Shanghai and

Hangzhou. We expect such wealth toreach 600 million people in third-tiercities.” The prospect of China becomingthe largest bullion user reflects the coun-try’s economic ascendance. Per capitagross domestic product has more than

doubled since 2000, according to WorldBank data. The country is already the topconsumer of copper and biggest pro-ducer of steel.

In India, demand fell to 207.6 tonsin the first quarter, from 290.6 tons a

year ago, after the government hikedtaxes and , the council said. Investmentdemand dropped 46 percent and jewelrydemand fell 19 percent, it said. A drop inannual demand this year would be thesecond straight fall.

ISLAMABADNNI

THE Attock Chamber of Commerceand Industry (ACCI) on Saturdayasked Pakistan and India to speed uptrade liberalisation efforts. Pakistanand India are the two most populous

and largest economies in South Asia while tradevolume remains unsatisfactory, it said.

Liberalised trade will help both countriessave billions in the transport costs alone that

could be utilised for fruitful efforts, said Presi-dent ACCI Tariq Mehmood while speaking tobusiness community.

Islamabad and New Delhi should hammerout issues impeding trade and growth as bothcountries have already wasted over half a cen-tury in futile struggle, he said.

Increased foreign direct investment, in-creased technology, higher productivity, accessto larger markets, efficiency boosts and regionalintegration are some of the potential advantagesof trade liberalization, he added.

Tariq, who is Chairman FPCCI StandingCommittee on Health and Director Pak-UKBusiness Council, said only trade can help bringtemperatures down and ensure a cordial envi-ronment. He said that now policymakers of twocountries have realised that too much focus onsecurity has deprived masses of many benefits.

Enhanced trade shouldn’t be confused withcompromise on political disagreements, hestressed. Pakistan can easily promote its owneconomic interests by opening up trade andconflict resolution dialogue with India.

China may surpass India as biggest gold market, WGC says

g Pakistan, India asked to accelerate trade liberalisation

The Doctor’s therapyseems to be workingRevenue collection grows by 25 pc in 10months: ShaikhISLAMABAD: FederalMinister for Finance DrAbdul Hafeez Shaikh saidon Saturday the revenuecollection had registered 25percent growth during thefirst 10 months of the currentfinancial year (2011-12) ascompared to the last year.“If the trend contin-ues, the revenuetarget of Rs.1952billion is expectedto be achieved bythe end of cur-rent financialyear”, he toldjournalists afterattending a convocation of Iqra University here. He said thebudget for next financial year would be announced on June 1.The Finance Minister said the General Sales Tax on services,whether collected by the provinces or by the Federal Govern-ment, is the right of former. Replying to another question, theMinister said the United Kingdom (UK) has announced a fi-nancial assistance of 1.4 billion pounds for next four years toPakistan. APP

Hydel generation jumps to 4,167 MW ISLAMABAD: The hydel generation has witnessed sharp in-crease owing to improved water inflow in all major rivers andit stood at 4,167 MW during the last 24 hours. According to thereport on daily power generation and load-management posi-tion on Daturday, the total generation was recorded as 11,887MW against the demand of 16,387. The hydel generation stoodat 4,167 MW, WAPDA thermal 1,704 MW and IndependentPower Producers (IPPs) 6,016 MW. The electricity shortfall inthe country also jumped to 4,500 MW from 3,873 MW. Asmany as 660 MW was supplied to the Karachi Electric SupplyCompany (KESC), the report added. APP

Attock Advises

PRO 21-05-2012_Layout 1 5/21/2012 12:54 AM Page 1

CAMP DAVIDREUTERS

Agrowing chorus of worldleaders pushed for a shift to-ward more pro-growth poli-cies to help ease a Europeancrisis that threatens to oust

Greece from the euro zone and reverber-ate throughout the global economy.

Setting the tone for a weekend G8summit, President Barack obamaaligned himself with the new Frenchpresident’s drive for more economicstimulus in recession-plagued Europe, ina swipe at the tough austerity programsthat have been spearheaded by GermanChancellor Angela Merkel.

obama’s stance reflects his worriesthat the euro zone contagion, whichthreatens the future of Europe’s 17-na-tion single currency, could hurt the frag-ile U.S. economic recovery and his ownre-election chances in November.

The Camp David summit kicked offfour days of intensive diplomacy - includ-ing a NATo meeting in obama’s hometown of Chicago - that will test leaders’ability to quell unease over the threat ofanother financial meltdown as well asplans to wind down the unpopular war inAfghanistan.

over dinner Friday at the presiden-tial retreat, the leaders discussed stillother intractable global problems. Thegroup, which included Russian PrimeMinister Dmitry Medvedev, agreedahead of world powers’ talks next weekwith Iran that Tehran must answer ques-tions about its suspected nuclearweapons program, a U.S. official said.

North Korea, Syria and Myanmarwere also on the dinner agenda, but itwas the global economy that domi-nated the day.

After White House talks withFrench President Francois Hollande,obama said the two agreed that tacklingthe euro-zone crisis was “an issue of ex-traordinary importance, not only to thepeople of Europe, but also to the worldeconomy.”

“We’re looking forward to a fruitfuldiscussion later this evening and tomor-row with the other G8 leaders about howwe can manage a responsible approach tofiscal consolidation that is coupled witha strong growth agenda,” obama said be-fore flying to Camp David and greetingfellow leaders for an opening dinner.

Merkel, who has insisted on the needfor tough fiscal discipline to bring downsuffocating debt levels even as angry vot-ers have toppled some euro zone govern-ments, seemed certain to find herselfincreasingly alone.

As obama welcomed his guests one-by-one outside a rustic lodge at the pres-idential retreat in Maryland, he askedMerkel: “How have you been?”

She shrugged and offered a strainedsmile. “Well, you have a few things onyour mind,” he said in a brief exchangecaptured by a boom microphone.

Her predicament could be under-scored in the summit’s final communiquethat, according to a draft shown toReuters, will stress “our imperative tocreate growth and jobs.”greeCe MUSt “MAke UP theIrMInDS”: Reflecting growing frustra-tion as Greece’s post-election turmoilshakes global markets, British PrimeMinister David Cameron called on euromembers for decisive action and said theGreeks must “make their minds up”whether to stay in the euro zone.

No major economic policy decisionsare expected from the talks but obamawill urge the Europeans to work harderat forging a comprehensive approach totheir debt troubles.

World stocks fell to levels belowwhere they began the year, depressed bythe prospect that a Greek euro exit wouldspread upheaval in the currency bloc andengulf much larger economies such asSpain’s.

The European Union’s trade com-missioner said for the first time that Eu-ropean officials were working oncontingency plans in case Greece bombsout of the euro zone.

While obama and Hollande foundcommon ground on economics, theirmeeting also showed differences overFrance’s commitment to the NATo mili-tary mission in Afghanistan, which willbe the focus of the alliance’s summit inChicago starting on Sunday.

Hollande, a socialist sworn in thisweek as president, told obama he wouldstick by his campaign pledge to withdrawFrench combat troops from Afghanistanby year’s end, earlier than the alliance’s2014 timetable. But Hollande saidFrance would continue to support theNATo effort in a “different way.

U.S. officials hope to convince Hol-lande to rethink the French pullout plan.gerMAnY ‘QUIte ISOLAteD’: Butthe two leaders, meeting for the first timesince Hollande’s election victory earlierthis month, were more in sync on theeuro zone crisis.

Hollande said he spoke to obamaabout the need to put a priority ongrowth, and that they also agreed it wasimportant to find a way for Greece to stayin the euro zone. obama’s administrationspent heavily to try to tackle the 2007-2009 U.S. recession, and has long urgedEuropeans to do more to boost growth.Hollande is seeking to take the edge offausterity with more job-creating infra-structure investments.

Like Cameron, Canadian Prime Min-ister Stephen Harper has been a frequentcritic of euro zone G8 members’ handlingof their debt woes. Italian premier Mario

Monti was calling for growth measureseven before Hollande did.

That could leave Merkel, who hasused Germany’s status as Europe’sbiggest economy to pressure others tokeep a tight rein on debt, cutting a lonelyfigure at Camp David.

“Germany is absolutely quite iso-lated,” said Domenico Lombardi, a for-mer International Monetary Fund officialwho now is a senior fellow at the Brook-ings Institution think tank.

Lombardi said that while Germanyhad the upper hand when controllingdebt was the focus, “it is now clear thatGreece has become a systemic crisis” andthis must now become the center of thedebate.A SOFter APPrOACh: WhileMerkel wants Greece’s continued mem-bership in the euro zone tied to Athensmeeting tough austerity measures laidout in its bailout program, Hollande wasseeking a softer approach.

Hollande also said he favors Europerecapitalizing Spain’s troubled banks,which would mark a significant shift to-ward Europe taking over wider responsi-bilities from individual nations.

Backing calls for a concerted effort toboost economic activity, Jose ManuelBarroso, president of the European Com-mission, said there was a need to pro-mote growth while putting publicfinances in order and this should be cen-ter stage at the summit. He insisted, how-ever, that “we want Greece to stay in theeuro area.”

The G8 summit comes as Greeks arepulling cash from banks amid growingfears about its euro zone membership.Financial markets are deeply concernedabout the future of the entire currencyzone, with Spain’s banking sector alsounder pressure.

Nearly two-thirds of Greeks voted onMay 6 for parties of the radical left andfar right, which oppose the austere termsof an EU/IMF assistance program. Talksfailed to avert a repeat election, which isnow set for June 17.

The “balanced approach” thatobama is pushing for in the euro zone issimilar to his domestic efforts combiningshort-term stimulus and longer-termcuts to try to heal the U.S. economy andstoke hiring that has not recovered fromthe financial crisis. But the U.S. economycontinues to struggle, posing problemsfor obama’s re-election.

Mitt Romney, the presumptive Re-publican nominee to face obama in theNovember 6 election, has made reducingthe U.S. debt load, which has escalatedduring obama’s tenure, one of his keycampaign messages.

news02Monday, 21 May, 2012

ISLAMABADAPP

THE Securities and Exchange Commis-sion of Pakistan (SECP) and the Jor-dan Securities Commission (JSC)

have signed an MoU to further enhanceregulatory cooperation and informationsharing between the two regulatory bodies.

A statement of the Commission issued heresaid , on the sidelines of the annual meeting ofthe International organization of SecuritiesCommissions (IoSCo) in Beijing, MuhammadAli, the SECP Chairman, and Mansour Had-dadin, the JSC Commissioner signed the MoU.

The agreement reiterates the two regula-tors commitment to work together in ensuringthat securities and commodities markets inthe two countries are fair, transparent, effi-cient and regulated to world standards. Boththe SECP and JSC are signatory to the IoSComultilateral MoU, the international standardfor information sharing between the securitiesregulators and this bilateral MoU would sup-plement the cooperation extended under theumbrella of multilateral MoU.

The MoU has been inked in the backdrop ofevolving globally integrated financial markets,necessitating for regulatory agencies of capitalmarkets to develop cooperative linkages to en-sure information-sharing for enforcement of se-curities laws and facilitate detection and combatcross-border violations.

The SECP has been promoting cooperationwith other regulatory authorities of the capitalmarket at the bilateral, regional and interna-tional levels. The SECP has already signedMoUs with the regulatory agencies of India,Maldives, Australia, Bhutan, Sri Lanka, Iran,China, Turkey, oman and Morocco. The MoUalso outlines a framework for cooperation andinformation sharing in areas of mutual interest.The scope of document also includes assistancein actions against insider dealings, market ma-nipulation and other fraudulent practices in se-curities dealings, enforcement of relevant laws,rules and regulations, monitoring the marketsfor their compliance with laws and regulations,promoting high standards of fair dealing in theirconduct or business, and technical assistanceamong the two regulatory bodies. ChairmanSECP after signing the agreement said that it is asignificant milestone in the development of thecapital markets of two brotherly countries.

It cements an already excellent level of co-operation between the two independent agen-cies. Each regulator will be able to rely on theMoU to ensure compliance with applicable legis-lation and to collaborate in regulating inter-ju-risdictional dealings as well as share technicalknow-how and joint training in enhancing thecredibility of financial markets and protect in-vestor rights. The MoU seeks to minimize therisk that is usually associated with financial mar-ket transactions and will also help prevent fraud,money laundering, market manipulation andother prohibited practices in the securities mar-kets of both countries.

SECP signs MOUwith Jordaniancounterpart

DAVID HENRYREUTERS

JPMoRGAN Chase & Co’s decision toradically change the way risk wasmeasured in its Chief Investmentoffice is likely to dog the bank in the

developing crisis over the big trading lossesit has suffered.

The move, which allowed the bank todisguise the level of risk that the CIo wastaking in its trading, could become a majorfocal point of investigations by the U.S. Se-curities and Exchange Commission and theFBI, former regulators said. It also willlikely become part of investor cases in law-suits against the bank and its executives.

When JPMorgan Chief ExecutiveJamie Dimon announced on May 10 thatthe company had lost at least $2 billionthrough “egregious mistakes” in trading, healso said for the first time that the bank hadchanged its model for measuring so-calledvalue-at-risk in the CIo where the deriva-

tives portfolio was managed.The change made the CIo’s portfolio,

which totaled about $375 billion, appear tobe a lot safer than it actually was and gavetraders more leeway to make risky bets.The rest of the bank’s divisions apparentlykept to more conservative modeling.

The old model would have soundedalarms by showing that the CIo could lose$129 million, or more, in a day during thefirst quarter - a higher reading than duringthe financial crisis. But the new model cutthat figure alm ost in half, to $67 million,clouding the view inside and outside thebank of the danger it faced. That figure waslower than the $69 million reading at theend of the prior quarter.

So far, Dimon has not revealed exactlywhen the model was changed, or why.

Those questions now appear certain tobe at the center of regulatory and share-holder inquiries into the losses, which areexpected to grow. Some traders and ana-lysts at other firms estimate the final loss

tally could exceed $5 billion as the banktries to unwind its positions. Dimon hassaid the losses could total $3 billion ormore.LAWSUItS ABOUt rISk: Investorshave dumped JPMorgan’s shares since theloss was announced, pushing them downmore than 17 percent and erasing morethan $27 billion of market value. Twoshareholder lawsuits were filed against thecompany on Wednesday, accusing the bankand its management of taking excessiverisk. The SEC is investigating what hap-pened at JPMorgan, the White House hasconfirmed. [ID:nL5E8GECMU] The FBIhas also opened a preliminary investiga-tion, according to agency director RobertMueller. [ID:nL1E8GG9HX]

A JPMorgan spokesman declined tocomment. Spokesmen for the SEC and FBIdeclined to comment.

“It is logical to expect that the SEC willlook at this issue” of the disclosures, as wellas why and how the new model was

adopted, said Harvey Pitt, a former SECchairman.

“Regulators are going to want to knowif changes were made consistently with theobligation to operate safely and soundly,”said Pitt, who is currently CEo of KaloramaPartners, a business consulting firm.

An initial report on the bank’s resultsfor the first quarter, made April 13, dis-closed the $67 million figure, the readingunder the new risk model. It did not saythat there had been a change in models.

on May 10, as it explained the losses,the bank showed the $129 million riskreading from the old model. on a call withanalysts that day, Dimon said the bank hadtried the new model, and then reverted tothe old one, which it had used for severalyears. “There are constant changes and up-dates to models — always trying to get thembetter than they were before,” Dimon saidin the May 10 conference call. “That is anongoing procedure.”

That explanation, “does not pass the

smell test,” said Mike Mayo, analyst at in-vestment firm CLSA. “It is a red flag forthem to change the model,” said Mayo, au-thor of “Exile on Wall Street,” about theinner workings of big banks.

Banks sometimes refine their value-at-risk, or VaR, models but those common-place changes do not by themselvesproduce such dramatically different results,said Christopher Finger, one of thefounders of RiskMetrics Group, which pio-neered VaR models and is now a unit ofMSCI Inc. The model JPMorgan put backin place shows “a huge, huge increase inrisk,” Finger said.

Finding out how the company decidedto change the model would reveal a lotabout its internal controls and about howthe traders apparently got the upper handover risk managers, said Finger.

Risk controls on traders in the CIowere eased last year without Dimon know-ing, the Wall Street Journal reported onFriday, citing unidentified sources.

JPMorgan to be haunted by change in risk model

Obama presses ailing Europeto focus on growth

PRO 21-05-2012_Layout 1 5/21/2012 12:54 AM Page 2

news

Monday, 21 May, 2012

03

JASWANt SINGH

ON her recent trip to China,Bangladesh, and India, USSecretary of State Hillary Clin-ton was eager to trumpetAmerica’s “New Silk Road”

strategy, which she unveiled last Septem-ber. But the Silk Road was a trade route,whereas knife-edge diplomacy dominatedClinton’s Asian tour.

Nothing about Clinton’s trip was aspath-breaking as her visit earlier thisspring to Myanmar, where she met withopposition leader Aung San Suu Kyi andPresident Thein Sein to lend her supportto their delicate political dance, whichmay yet bring the country into the globaldemocratic fold. Her trip opened with thealways-tense annual US-China Strategicand Economic Dialogue, which wasthreatened at the start by the plight of theblind human-rights activist ChenGuangcheng, who had taken refuge in theUnited States’ embassy in Beijing. ButChen was not the only one to upstage Clin-ton; her boss, President Barack obama,did so as well, landing at midnight inKabul, where he executed a strategic pactwith Afghanistan, flying back to the USbefore dawn. Was this – a negotiationwithout her participation – the definingevent of Clinton’s Asian fortnight?

Afghanistan’s national security ad-viser, Rangin Dadfar Spanta, describesthe pact as “providing a strong foundationfor the security of Afghanistan, (and) adocument for the development of the re-gion.” But, while the new pact does clarifyAmerica’s post-2014 posture towardAfghanistan, and to some extent has as-suaged India’s concerns about that trou-bled land’s future, anxiety in Pakistan hasonly deepened. only time will tellwhether the pact boosts stability in the re-gion. Twice upstaged, Clinton’s discus-sions with China’s leaders took placeunder the shadow not only of the Chenaffair, but also of the recent purge ofBo Xilai from the CommunistParty’s senior leadership. Bo’souster, the source of the greatestintra-Party ruckus since theTiananmen Square mas-sacre in June 1989, is thesort of dirty linen thatChina’s leaders neverair in public. So, in-stead, they “rippedinto” the US delegation,in the words of a seniorAmerican official, over the Chen affair.

At first, with Chen in the US embassy,

the Chinese began to suggest cancelingthe Strategic and Economic Dialogue,scheduled to begin with the arrival ofClinton and Treasury Secretary TimothyGeithner. The Americans also appearedwilling to walk away. In the end, bothsides blinked: the Americans accepted adeal for Chen to leave the embassy thatcould not be enforced, and the Chinese ul-timately agreed to allow Chen to go to theUS to study, just like many thousands ofother Chinese do nowadays.

The China leg of Clinton’s Asia tourwas salvaged – so much so that, at theend of her stay in Beijing, she indulged inthe type of diplomatic hyperbole that fewwould have expected three days earlier:“our countries are thoroughly, in-escapably interdependent,” she said,adding that “a thriving China is good forAmerica…” That may or may not be true;but both countries seem to have reached

the conclusion that no human-rights dis-pute is worth sabotaging the entire bilat-eral relationship.

So it was on to Bangladesh for Clin-ton. But here the American propensityfor gratuitous preaching led to unneces-sary strain in her talks with Prime Min-ister Sheikh Hasina’s government. Thistime, the issue was Hasina’s treatmentof the Nobel laureate Muhammadyunus, the microcredit pioneer andfounder of the Grameen Bank. Unlikethe testy Chinese, Hasina’s spokesper-son offered only a gentle rejoinder, re-jecting Clinton’s suggestions aboutalleged mistreatment of yunus.

From Dhaka, Clinton made the shortjourney to India’s West Bengal, where herhost was the diminutive Chief MinisterMamata Banerjee, whose election ended34 years of Communist rule in the state.Assurances of US investment in Bengal’sdevelopment flowed; whether funds willactually follow remains to be seen.

Then it was on to India’s capital, NewDelhi, for what many took to be Clinton’sfarewell visit (assuming, that is, that shesteps down at the end of this year asplanned) – a visit marred by awkward co-incidences and untidy scheduling. Evenas Clinton was cautioning Indian officialsabout contacts with Iran (demanding, inparticular, a reduction in imports of Iran-ian oil), India was hosting a high-levelIranian trade mission aimed at boostingbilateral economic ties.

Finally, Clinton, speaking from Delhi,warned Pakistan not to allow its territoryto be used as a “launching pad” by terror-ist groups, asserting that al-Qaedaleader Ayman al-Zawahiri was hiding inthe country. True to form, Pakistani of-ficials were outraged at the charge,which they promptly refuted withroughly the same vehemence with whichthey once denied osama Bin Laden’spresence. The US responded by an-nouncing that its drone attacks on Pak-istan’s North Waziristan region willcontinue. Was this the long-awaitedsignal that the US was about tosqueeze Pakistan on the issue of ter-rorism? With the US blueprint for itswithdrawal from Afghanistan com-pleted by obama earlier on Clinton’sjourney, one might think so. In anycase, Clinton’s tour appears to con-firm the central fact of US diplo-macy nowadays: the Asia pivot iscomplete. The region is now Amer-ica’s top foreign-policy priority.

Courtesy: Project Syndicate

Hillary ClinTOn’sasian advEnTurE Jamie F Metzl

THE compelling drama of formerChongqing Communist Party chief BoXilai’s ouster amid allegations of cor-

ruption and murder, and of blind Chinesehuman-rights advocate Chen Guangcheng’sdash to safety in the US Embassy in Beijing,are more than just fascinating narratives ofvenality and courage. Unless China canpurge the thousands of corrupt Party leaderslike Bo, and empower people – like thoseChen represents – who have been left behindor harmed by rapid growth, its economy willincreasingly suffer.

Like the Asian Tiger economies before it,China has excelled in the first phase of capi-talist economic growth, benefiting from mas-sive infusions of capital, low-cost labor,intellectual-property theft, and centralizedplanning. And, like many of them, China isnow facing a “middle-income trap”: as wagesrise, its low-end manufacturing is losingglobal competitiveness while governmentpolicies, endemic corruption, and dominantstate-owned enterprises are stifling the typeof private-sector innovation that China needsmost to generate products and services withhigher added value. China’s leaders under-stand this, which is why the government’s12th Five-year Plan calls for a gradual open-ing up of the Chinese economy. Likewise, aChinese government think tank worked withthe World Bank to produce the report, whichoutlines the structural reforms needed tostrengthen the foundations of the country’smarket-based economy and create a climateof open innovation.

But if China’s national imperative todayis reform, the greatest threat to that goal isthe massive influence and institutionalizedcorruption of the country’s entrenched elites.For years, senior Chinese officials and theirfamilies have received a cut of countlessmajor investments throughout China. Theyand their families have become multimillion-aires by exploiting the close association ofbusiness and politics, as well their stronglinks with China’s state-owned enterprises.

The resulting rise in inequality has beenexacerbated by China’s capital controls andmandated low interest rates on savings. Forlack of other options, poor people put theirmoney in banks which then lend to moreprivileged people to fund state-owned enter-prises or much higher-yielding real-estate in-vestments.

This system worked to drive overall eco-nomic growth and financial rewards in thefirst phase of China’s post-reform growth,but the incomes of ordinary Chinese havestagnated over the past decade, their inter-ests have been neglected, capital has beenmisallocated, and major negative environ-mental and social side effects have emerged.

Now those who have benefited most from thecurrent system are blocking badly needed re-forms.

For example, years of imbalanced incen-tives have led China to overbuild premiumresidential real-estate, which should causeprices to fall dramatically. But, although thegovernment is trying to take some of the airout of the market, the authorities cannot eas-ily take the more aggressive action that is re-quired, because Chinese officials and otherelites store so much of their wealth in real es-tate, which also comprises much of the col-lateral of state-connected banks, Similarly,although state-owned enterprises are suck-ing too much oxygen out of China’s economy,reforming them would require taking onChina’s most powerful business and govern-ment leaders.

This is why the Chinese government’sdance around the Bo scandal has been socomplicated. Bo may have lost an internalpolitical struggle, and may have crossed aline after the murder of British businessmanNeil Heywood, for which Bo’s wife is underarrest; but vilifying him is a double-edgedsword for the government. on one hand, theauthorities need to pursue him aggressivelyto justify the purge of someone who was sorecently lauded. on the other hand, many ofthe accusations against Bo could be leveledat an extremely large number of senior offi-cials across China who, like Bo, haveamassed multimillion-dollar family fortunes.

In highlighting Bo’s misdeeds, the Partyis trying to demonstrate that it alone canand should be responsible for addressing of-ficial corruption. But given that the peoplewho have benefited so much from the cur-rent system are unlikely to clean it up, theonly other way to generate reform would beto empower the people getting the short endof the stick – people like Chen and those hehas helped.

The crackdown on Chen for representingvillagers who have been abused by the au-thorities follows the same pattern as the si-lencing of parents who protested shoddyschool construction after the 2008 Sichuanearthquake, and of opponents of the environ-mentally damaging Three Gorges Dam. IfChina is serious about reform, it will needarmies of people like these, fighting for theirrights, in order to balance the overwhelmingpolitical power of its entrenched elites.

China’s reform process can succeed onlyif it is pushed from the top and the bottom.The Party needs to find every possible way toget rid of the Bo’s in its midst. Instead ofthreatening people like Chen, the Partyshould give them recognition and support.None of this will be easy, but the future ofChina’s economy depends on it.

Courtesy: Project Syndicate

NEW YORKREUTERS

NoRMALLy a big declinewould set up Wall Street fora technical rebound. But thatmay not be the case next

week, even after the market posted itsworst weekly loss for the year and theS&P fell for six straight sessions.

With the corporate earnings seasondrawing to an end and recent U.S. eco-nomic data raising doubts about thepace of growth, the S&P 500, which isdown 7.3 percent so far in May, coulddecline further next week as concernsabout the financial health of Europepersist.

“What has changed in the worldsince April? We went from hearing aconstant refrain that the world is awashin money and markets must go higherto hearing nobody wants to take anyrisk. ... All in a week,” said Peter Cec-chini, global head of institutional eq-uity derivatives at Cantor Fitzgerald &

Co in New york.The S&P 500 fell 4.3 percent for the

week, its steepest weekly decline thisyear, and closed below 1,300 for thefirst time in four months.

The hotly awaited market debut ofFacebook on Friday was marred bytechnology glitches on the Nasdaq insending messages back to the broker-ages that handled orders of FacebookInc (FB.o) for individual, or “retail,”investors. Those problems rekindledfears about the market’s electronictrading system and caused some in-vestors to stay away from equities.

Weighing on sentiment is a growingsense among investors that the eurozone debt crisis is nearing new heights,fueled by fears of the potential for aGreek euro exit and the deterioratinghealth of the Spanish banking system.

Solid corporate earnings and up-beat U.S. economic indicators had fu-eled the rally in U.S. stocks, offsettingjitters over Europe. But with earningsalmost out of the way and data starting

to disappoint, investors have shiftedtheir focus back to headlines out of Eu-rope.

Leaders of the Group of 8 major in-dustrial economies meet this weekendto try to tackle the financial crisis inEurope. U.S. President Barack obama,the G8 host, has urged European lead-ers repeatedly to do more to stimulategrowth, fearing contagion from theeuro crisis that could hurt the U.S.economy and his chances of re-electionin November.

“The market is extremely oversold.Nonetheless, all major indicators re-main on sell signals,” said Larry McMil-lan, president of options research firmMcMillan Analysis Corp, in a report onFriday.

“We expect a powerful but short-lived rally should be coming soon. Butat this point, barring some major shiftsin our indicators, it may only be a rallyin a larger down-trending market,”McMillian said.the FACeBOOk eFFeCt: Face-

book, the No. 1 online social network,disappointed investors with a tepidmarket debut on Friday. Shares rose ascant 0.6 percent - nowhere near ex-pectations for double-digit gains on thefirst trading day - and the day wasmarred by technical problems due tohuge order volume. The stock closed at$38.23 after falling as low as $38, itsinitial offer price.

The disappointing debut curbed in-vestors’ appetite for other social mediastocks. Hardest hit was Zynga Inc(ZNGA.o), which closed down 13.4 per-cent to $7.16 after falling as low as$6.40. The stock was temporarilyhalted twice due to sudden declines.

LinkedIn (LNKD.N) shares fell 5.7percent to $99.02, and Groupon(GRPN.o) fell 6.7 percent to $11.58.Zynga and Groupon, both of whichwent public late last year, are also trad-ing below their IPo prices.

Despite the disappointing marketdebut and the weak performance of so-cial media stocks, market participants

are still optimistic about Facebookgoing forward.

“In any brand new area, socialmedia in this case, most are going to belosers and only some are going to bewinners. yes, the IPo was disappoint-ing, but Facebook is clearly the winnerhere and others aren’t,” said RandyWarren, chief investment strategist atWarren Financial Service.

Next week’s economic data includesApril’s existing home sales on Tuesdayat 10 a.m. Existing home sales are fore-cast at a 4.60 million-unit annual, upfrom 4.48 million in March.

New homes sales figures are due onWednesday at 10 a.m. April’s new homesales are also expected to post an in-crease, gaining about 7,000 units overa 328,000-unit annual rate in March.

Initial jobless claims and durablegoods orders will be published onThursday at 8:30 a.m. Consumer senti-ment is due at 9:55 a.m. on Friday.

For the week, the Dow is off 3.5 per-cent and the Nas.

The market is oversold, but major signs say ‘sell’

The paradox ofChina’s reform

WALL ST WEEK AHEAD

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