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A Marriage Made In Asia

Economic Trends


Sino-Japanese ties worry the U.S.

In its dealings with Japan and China, the U.S. would do well to keep a weather eye on the fast-growing economic alliance being forged by the two Asian nations. For one thing, Japan's direct investment in China has begun to take off, jumping by 78% last year and outstripping U.S. investments by 40% (chart). Indeed, economist Chen Zhao of The China Analyst, a publication of the Bank Credit Analyst Group in Montreal, reports that Japanese companies now regard China as their main investment target and plan to place half of their overseas capacity increases there.

Moreover, Joseph P. Quinlan of Dean Witter Reynolds Inc. estimates that Sino-Japanese trade flows exceeded U.S.-Chinese trade last year for the first time since the 1980s. At the same time, with U.S. exports to China running only about one-third the size of China-bound Japanese exports, America's $38 billion trade deficit with China dwarfed Japan's $12 billion shortfall.

Looking ahead, Chen observes that Japan's China policies may well give it a leg up vis-a-vis the U.S. in building trade relations. It rarely has mixed business with politics, for example, and since 1979, it has provided China with over $33 billion in government loans, export credits, and other forms of financial aid, compared with a paltry $300 million in export credits extended by the U.S.

Japan also is more sympathetic to China's slow-paced economic reforms and its desire to maintain a strong government role in economic policy. By contrast, the U.S. has pushed rapid liberalization and market-oriented reforms, as well as human-rights issues.

Ironically, says Quinlan, Japan's growing investment in China may well exacerbate U.S. trade frictions with the Chinese. That's because many Japanese products that were once exported from Japan are now being assembled and shipped from China, widening America's huge trade deficit with that nation.By Gene KoretzReturn to top

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A study finds secrecy cost-effective

Loose lips can cost merger-minded companies big bucks. That's the conclusion of a new study of stock movements associated with mergers and acquisitions by G. William Schwert of the University of Rochester.

Schwert looked at pre-bid and post-bid rises in share prices of some 1,400 companies acquired in takeovers from 1975 through 1991. Since he found that the size of pre-bid runups had no effect on stock price rises occurring after bids were announced, he concluded that the early runups added to acquisition costs. Otherwise, anticipatory price gains would have subtracted from post-announcement stock increases.

As it is, Schwert found that shares of targeted companies appreciated about 30% from a period starting two months before the first bid and ending with the deal's consummation--with the price action evenly divided between the pre-bid and post-bid periods. The clear lesson for companies planning acquisitions, he says, is that they are likely to save themselves and their shareholders a bundle if they can keep the pending move under strict wraps.By Gene KoretzReturn to top


Will a stalemate lead to recession?

Since the recent failure of Congress and the President to reach a balanced-budget accord caused interest rates to surge, you might think a protracted budget stalemate would produce more of the same. Not so, says Paul A. McCulley of UBS Securities Inc.

Without a deal, notes McCulley, Congress is likely to continue funding the government under continuing resolutions rather than normal appropriations bills. But continuing resolutions usually require spending to stay below year-earlier levels, while appropriations bills incorporate "normal" increases to reflect inflation. And that means fiscal policy would be even tighter than it would be if a balanced-budget deal were passed.

The upshot, says McCulley, is that going the continuing-resolution route could increase fiscal restraint "enough to tilt the economy close to the recessionary precipice--and strongly reinforce the case for Fed easing."By Gene KoretzReturn to top

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