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A rash of bankruptcies hits Chinese lenders backed by state firms

THE Communist Party dominates China’s economy and uses state-run companies, which it controls with an iron fist, to enforce its diktats. Or so the theory goes. Reality is messier: the party often struggles to monitor state-owned enterprises (SOEs), let alone to get them to toe its line. As it convenes its five-yearly congress, one of the financial system’s dodgiest corners has served up a reminder of the limits to its power.

In the past two months at least seven online lenders backed by SOEs have collapsed. It was a business none should have been in, far removed from the industries they were supposed to focus on. The money potentially lost is trivial—roughly 1bn yuan ($150m), compared with government assets worth more than 100trn yuan. Still, these cases highlight how hard it is for the party to stamp its authority on the vast state sector.

The troubled SOEs include distant subsidiaries of the national nuclear company, an aviation company and a big energy company in…Continue reading

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A Lloyd’s report urges insurers to ask “what if?”

ON JULY 7th disaster was narrowly averted when an Air Canada passenger plane, trying to land on a full taxiway at San Francisco airport, pulled up just in time. Five seconds longer, and it might have crashed into fully loaded planes and killed over 500 people, in potentially the deadliest aviation disaster ever. Instead, the incident became a non-event—not just in collective memory but also in insurance. With no losses, there was nothing to log. Yet ignoring such near-misses, argues a report published this week by Lloyd’s of London, an insurance market, and RMS, a risk-modeller, is a missed opportunity.

Counterfactual “what if” thinking may be an enjoyable pastime for historians—“What if Hitler had been assassinated?” being one favourite—but is not common among underwriters. They prefer to base estimates of future risk—and hence premiums—on hard data of what happened in the past, eg, the number of aeroplanes that crashed and the total losses incurred. Since actual…Continue reading

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Multilateral lenders vow openness about their carbon footprints

THE World Bank gets a lot of flak. Developing countries clamour for a bigger role in its management. President Donald Trump’s administration lambasts it for lending too much to China. Employees are in open rebellion against their boss, Jim Yong Kim. Now the embattled institution faces criticism from a traditionally friendlier quarter: environmentalists. They accuse it and other multilateral development banks (MDBs) of not being upfront about their true carbon footprint.

That must hurt. After all, MDBs pioneered climate-friendly finance. Ten years ago the European Investment Bank issued the world’s first green bond to bolster renewables and energy-efficiency schemes. The World Bank has not backed a coal-fired plant since 2010. In 2011-16 it and the five big regional lenders in the Americas, Asia, Africa and Europe offered developing countries a total of $158bn to help combat climate change and adapt to its effects. They disclose the amount of carbon dioxide emitted by their day-to-day…Continue reading

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IBM lags in cloud computing and AI. Can tech’s great survivor recover?

TECHNOLOGY giants are a bit like dinosaurs. Most do not adapt successfully to a new age—a “platform shift” in the lingo. A few make it through two and even three. But only a single company spans them all: IBM, which is more than a century old, having started as a maker of tabulating machines that were fed with punch cards.

Yet after 21 quarters with falling year-on-year revenues (see chart), doubts had been growing about whether IBM would manage the latest big shifts: the move into the cloud, meaning computing delivered as an online service; and the rise of artificial intelligence (AI), which is a label for…Continue reading

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Companies that burn up $1bn a year are sexy, dangerous, and statistically doomed

YVES SAINT LAURENT, Lady Gaga, David Bowie. Some people do not operate by the same rules as everyone else. Might the same be true of companies? Most bosses complain of being slaves to short-term profit targets. Yet a few flout the orthodoxy in flamboyant fashion. Consider Tesla, a maker of electric cars. This year, so far, it has missed its production targets and lost $1.8bn of free cashflow (the money firms generate after capital investment has been subtracted). No matter. If its founder Elon Musk muses aloud about driverless cars and space travel, its shares rise like a rocket—by 66% since the start of January. Tesla is one of a tiny cohort of firms with a licence to lose billions pursuing a dream. The odds of them achieving it are similar to those of aspiring pop stars and couture designers.

Investing today for profits tomorrow is what capitalism is all about. Amazon lost $4bn in 2012-14 while building an empire that now makes money. Nonetheless, it is rare for big companies to…Continue reading

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In dirt-poor Myanmar, smartphones are transforming finance

For chats and kyats

MYANMAR’S democratic transition sometimes seems marked as much by continuity as by change. Depressingly, the army continues its bloody persecution of Rohingya Muslims in the west, for example (see article). But elsewhere moves to open the country’s markets, started by the preceding military regimes, have gathered pace. New commercial and financial services are springing up.

Take Khin Hlaing, who owns Global Mobile Shop, a small store surrounded by tarpaulin-covered stalls selling fresh fruit in Hlaing Tharyar, an industrial area outside Yangon, the biggest city. He is one of almost 12,000 agents for Wave Money, Myanmar’s largest mobile-money transfer platform. Most days about 20 people use his shop to send funds to friends or family elsewhere in the country. One…Continue reading

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The internationalisation of China’s currency has stalled

ON OCTOBER 18TH, President Xi Jinping will preside in Beijing over the most important political event in five years. At the Communist Party’s 19th congress much will be made of the triumphs achieved in nearly four decades of reform and opening up. So expect a glossing over of one part of that process where progress has largely stalled: the “internationalisation” of China’s currency, the yuan.

This seems odd. Just a year ago, the yuan became the fifth currency in the basket that forms the IMF’s Special Drawing Right (SDR). This marked, in the words of Zhou Xiaochuan, China’s central-bank governor, in a recent interview with Caijing, a financial magazine, “historic progress”. Symbolically, China’s monetary system had been awarded the IMF’s seal of approval. A further boost to prestige was the announcement in June this year that some Chinese shares would be included in two stockmarket benchmarks from MSCI.

Yet the yuan’s international reach has in fact fallen in the past two years. It has regained its ranking as the world’s fifth most active for international payments, after slipping to sixth in 2016. But its share of this market has slipped from 2.8% in August 2015 to 1.9% now (see chart). Use of the yuan in global bond markets over this period has fallen by half, as companies have instead raised funds within…Continue reading

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An epic but inconsequential proxy vote at Procter & Gamble

SHAREHOLDER meetings in Ohio are not usually the stuff of high drama, but a recent gathering was a nail-biter. Nelson Peltz of Trian Fund Management, an activist hedge fund, sought a seat on the board of Procter & Gamble (P&G), the world’s largest consumer-goods company, in a proxy vote on October 10th. It was the biggest such battle ever. In the weeks leading up to P&G’s shareholder meeting, the fight resembled a political contest, complete with carefully crafted videos, lengthy white papers, mass mailings and tens of thousands of phone calls urging shareholders to vote blue (P&G) or white (Trian).

As The Economist went to press, P&G said it had won and Mr Peltz was contesting the tally. “Everybody but [P&G’s] current employees voted for us,” he said after P&G declared victory. “Maybe that’s why they keep so much overhead.” So the brawl is not over. Yet the outcome may not matter much. Mr Peltz will push P&G for…Continue reading

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Kobe Steel admits falsifying data on 20,000 tonnes of metal

THE port city of Kobe, on the southern side of Japan’s main island, is known for luxury beef from pampered cattle, fine sake and precision engineering. Its reputation for the last of those products took a blow on October 8th when one of its oldest industrial firms, Kobe Steel, admitted that that it had falsified data on many of its aluminium, copper and steel products. By October 11th, the company’s shares had fallen by a third, reducing its market value by ¥180bn ($1.6bn).

 Kobe Steel has admitted to falsification over the past year relating to large quantities of four types of material; 19,300 tonnes of aluminium sheets and poles; 19,400 aluminium components; 2,200 tonnes of copper products and an unspecified amount of iron powder that was supplied to over 200 customers. These items were certified as having properties—such as a level of tensile strength, meaning stiffness—that they did not in fact possess.

No deaths or accidents have yet resulted, but the…Continue reading

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BBVA, a Spanish bank, reinvents itself as a digital business

OUTSIDE, a patch of grass affording a spectacular view of the Sierra de Guadarrama is littered with cartridge casings. Inside the Club de Tiro de Madrid (Madrid Shooting Club), on the city’s northern edge, over 400 people are fixing their sights for the next three months. Their business is not shooting but banking. Teams sit at 27 tables working on specific projects—to improve the global mobile platform, say, or to share information about job applicants. At another 12 tables are data specialists, in-house lawyers and others whose expertise the teams will need. The targets are on the walls: white boards that are soon covered in yellow and pink Post-it notes, listing tasks for the weeks ahead.

BBVA, Spain’s second-largest bank, began quarterly planning sessions like this three years ago, in its Mexican subsidiary. This is the fourth global gathering. The idea, explains Derek White, head of global customer solutions, is to replicate the nimbleness of financial-technology startups (“fintechs”) at large scale. When a project is conceived, a small group is assembled to work on it within three days. A prototype is created in six weeks. The finished article should be “en las manos de los clientes”—in customers’ hands—within nine months. The quarterly cycle starts with a planning session to thrash out priorities. It ends with a demo…Continue reading

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American factories could prosper if they find enough skilled workers

Another way to see the factory floor

“WE ARE always short ten to 20 people,” says Jack Marshall, the manager of PPG’s plant in Oak Creek, Wisconsin. The company makes coatings, paint and speciality materials for customers such as Harley Davidson, a motorcycle manufacturer based in the state, with a palette ranging from black denim to candy orange. His factory employs 550 people, many of whom must work overtime. It is hard to fill jobs, he explains, because many still think factory work involves repetitive assembly-line tasks, as in the candy factory on the old TV sitcom “I Love Lucy”.

As part of trying to shed this outdated image, America’s manufacturing industry has for the past five years celebrated the first Friday in October as National Manufacturing Day. Some 2,800 events across the country were organised this time round, ranging from factory tours to banquets. Intel, a chip giant, displayed its wafer-fabrication equipment at its enormous…Continue reading

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Why McKinsey is under attack in South Africa

An unfamiliar sight for McKinseyites

MCKINSEY, a global management consultancy known for its discreet profile and rarefied air, is unused to the sort of tub-thumping popular revolt it is experiencing in South Africa. Such is public outrage over the Guptas, an Indian-born business dynasty accused of growing rich off their relationship with President Jacob Zuma, that a few professional-services firms linked to the family, including McKinsey—as well as SAP, a German software giant—have become targets of Twitter storms and protest banners.

Anti-corruption groups and the opposition Democratic Alliance (DA) have drawn blood in the case of Bell Pottinger, a British public-relations firm accused of orchestrating a racially divisive public-relations campaign on behalf of the Guptas. A complaint by the DA to a British PR industry association set in motion Bell Pottinger’s swift implosion in September. At KPMG, a global audit firm, eight senior executives in South…Continue reading

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The finance industry ten years after the crisis

MANY people complain that the finance industry has barely suffered any adverse consequences from the crisis that it created, which began around ten years ago. But a report from New Financial, a think-tank, shows that is not completely true.

The additional capital that regulators demanded banks should take on to their balance-sheets has had an effect. Between 2006 and 2016, the return on capital of the world’s biggest banks has fallen by a third (by more in Britain and Europe). The balance of power has shifted away from the developed world and towards China, which had four of the largest five banks by assets in 2016; that compares with just one of the biggest 20 in 2006.

The swaggering beasts of the investment-banking industry have also been tamed. The industry’s revenues have dropped by 34% in real terms, with profits falling by 46%. Return on equity has declined by two-thirds. Staff are still lavishly remunerated, but pay is down by 52% in real terms. (Perhaps…Continue reading

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An assessment of the White House’s progress on deregulation

DEREGULATION, along with tax cuts and trade reform, is one of the three pillars of President Donald Trump’s economic agenda. Republicans promise that, freed of red tape, American firms will invest more and unleash faster economic growth. And while Mr Trump has yet to unite his party around a major piece of legislation, the White House has plenty of sway over regulatory policy. For a start, the government agencies Mr Trump commands can regulate and deregulate on their own (subject only to the instructions that Congress has given them in the past). How much red tape have they managed to tear down since Mr Trump took office?

Regulation is difficult to measure precisely, but the long-term trend towards excessive rulemaking has been obvious. In 1970 there were about 400,000 prescriptive words such as “shall” or “must” in the code of federal regulations, according to the Mercatus Centre, a libertarian-leaning think-tank. Today there are 1.1m (see chart). Wonks of many stripes agree…Continue reading

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American politicians’ efforts to control Chinese firms amount to a dangerous game

WARS are fought with weapons, but also with money. To understand the global balance of power in the coming decades, it helps to pay attention to the commercial subplot of the North Korean crisis. For the first time, America is attempting to use its full legal and financial might to change the behaviour of Chinese companies and banks, which it believes are propping up North Korea by breaking UN and American sanctions. Some American politicians have concluded that, as China’s firms have integrated with the global economy, they have become more vulnerable to Uncle Sam’s wrath. America has potent weapons, but the trouble is that China can retaliate in devastating fashion.

North Korea is highly dependent on China. Some 60-90% of its trade is with its northern neighbour. China’s state-run energy giant, CNPC, is thought to have sold it oil in recent years—and is the parent of PetroChina, which has depositary receipts listed in New York. North Korean banks and firms operate in China, and…Continue reading

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Richard Thaler wins the Nobel prize for economic sciences

THE credit-card bill arrives. You have enough money in a savings account to pay it off—the sensible thing to do, arithmetically speaking, since the interest rate on the credit-card balance far exceeds that earned on the savings. Yet you leave the savings untouched, and pay only as much of the bill as your current-account balance allows. What looks a daft choice to most economists made perfect sense to Richard Thaler, who on October 9th was awarded the Nobel prize for economics for his work in behavioural economics. Mr Thaler helped demonstrate how human reasoning diverges from that of the perfectly rational homo economicus used in most economic modelling. The world, and the field of economics, is better for his contributions.

Economists mostly recognise that normal people—their friends and family—fall short of omniscience and perfect rationality in making day-to-day decisions. Economic modelling requires simplification, however, and economists generally suppose that…Continue reading

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Dirt-cheap mobile data is a thrill for Indian consumers

A swami gets the religion

THE security guards at the foot of Antilia, a 27-floor private residence in Mumbai, while away the days just as all bored Indians have been doing in recent months—watching movies on their phone. Using a mobile network to stream endless Bollywood epics would until recently have been an unthinkable luxury, even in the rich world. In India it now costs less than a cup of street-side chai.

Thank the tycoon lording it in the skyscraper’s upper reaches. As boss of Reliance Industries, Mukesh Ambani, India’s richest man, has spent more than $25bn on building Jio, a state-of-the-art mobile-telecoms network. The delight of the guards at Antilia, and of the roughly 130m Indians who have signed up to the service since it launched in September 2016, is matched only by the misery of Mr Ambani’s rivals.

Jio’s rise is nothing short of spectacular. It took less than a year for it to be delivering more data than any other mobile…Continue reading

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A Chinese carmaker agrees to buy a Danish investment bank

A COMPANY that moves up the value chain from refrigerator parts to cars is impressive but not that surprising. A car company that buys an investment bank is audacious. But Zhejiang Geely Holding Group, a conglomerate based in Hangzhou, China, did not become big by paring its ambitions. Having successfully made the fridge-parts-to-cars transition at home, it went global in 2010. It acquired Volvo, a Swedish carmaker, from Ford of America. Now Geely is back in Scandinavia for another acquisition. This time it is buying one of Denmark’s biggest banks.

Saxo Bank announced on October 2nd that Geely would acquire 51.5% of its shares. It will spend over $800m on the deal, which still requires regulatory approval. Sampo Group, a Finnish insurance company, will acquire 19.9% of Saxo shares for €265m ($311m), and Kim Fournais, Saxo’s co-founder and chief executive, will retain 25.7%. The sellers are Sinar Mas, an Indonesian conglomerate, and TPG, an American private-equity firm.

Saxo was an early adopter of online securities trading and still invests heavily in financial technology. It makes a substantial portion of its profits from selling trading platforms to other firms. Daniel Donghui Li, Geely’s chief financial officer, says Geely hopes to expand Saxo’s technologies into Asia. Besides facilitating this expansion, Geely does not intend to change how…Continue reading

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Dara Khosrowshahi is off to a strong start but there are miles to go

 

HERE’S the job spec. Unite a deeply divided board. Keep a strong-willed founder under control. Immediately recruit a new chief financial officer. Negotiate with angry local regulators intent on closing down the business in their city. Convince courts that the company does not have to provide its contract workers with the benefits due to full-time employees. Change a cut-throat culture without curbing employees’ drive. On top of all this, deal not only with an intellectual-property (IP) lawsuit that could cost the firm nearly $2bn, but also cope with a criminal investigation by the FBI that could see some managers end up in prison.

No one sane, you would think, would even apply for such misery. But after some hesitation Dara Khosrowshahi (pronounced cause-ro-SHAH-hee), until recently the chief executive of Expedia, an online travel agency, returned the headhunter’s call. Now he is boss of Uber, which, at $68bn, is the world’s most highly valued privately-held company. Can he…Continue reading

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The bosses of two famous French firms struggle to keep customers

You see her after the third glass

ALEXANDRE RICARD wants to talk boxing. He runs Pernod Ricard, a firm that sells Chivas whisky and Absolut vodka, among other drinks. Formed by his grandfather in 1975, with roots in a Pernod distiller set up in 1805, it is the world’s second-largest seller of wine and spirits, with a market capitalisation of €32bn ($37bn). He brags that Floyd Mayweather, an American pugilist with 19m Instagram followers, recently endorsed one of the company’s tequila brands. Such a “key influencer” on a digital channel “gives us speed and scale”, says Mr Ricard.

Celebrity endorsements are an old ploy: French singers, actors and racing drivers used to push Pernod Ricard’s liquor. But with 90% of sales in markets outside of France, punchier efforts are needed. Two years ago the firm commissioned a global study of boozing habits, which totted up all “moments of consumption” for drinkers, identifying 20 important ones in…Continue reading

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Ford has a clear plan to fix its present failings

Hackett plays it safe

LIKE any mechanic with a misfiring car, Ford’s new boss has had his head under the bonnet working out what needs attention. Jim Hackett emerged on October 3rd with a checklist of repairs to present to investors, who have been awaiting his diagnosis since he took over in May. The list is short but the engineering is complicated: restore Ford’s competitiveness while preparing for a future of electric vehicles (EVs), self-driving cars and transport services. But those expecting a radical overhaul were probably disappointed.

Mr Hackett’s predecessor, Mark Fields, was shown the door by Bill Ford, the firm’s chairman, for failing to make a persuasive case that he was reinventing Ford as a mobility firm at the forefront of automotive technology. Despite acknowledging to investors that he and Mr Ford agreed that his new job was “about the future not the past”, Mr Hackett was clearest about how to make Ford fit for the…Continue reading

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Tech giants are building their own undersea fibre-optic networks

Only 6,599km to go

WHEN Cyrus Field, an American businessman, laid the first trans-Atlantic cable in 1858, it was hailed as one of the great technological achievements of its time and celebrated with bonfires, fireworks and 100-gun salutes. Alas, the reason for the festivities soon went away. Within weeks the cable failed.

On September 21st the completion of another trans-Atlantic cable was welcomed with much less ado. But it is remarkable nevertheless: dubbed Marea, Spanish for “tide”, the 6,600km bundle of eight fibre-optic threads, roughly the size of a garden hose, is the highest-capacity connection across the ocean. Stretching from Virginia Beach, Virginia, to Bilbao, Spain, it is capable of transferring 160 terabits of data every second, the equivalent of more than 5,000 high-resolution movies. It is jointly owned by Facebook and Microsoft.

Such ultra-fast fibre networks are needed to keep up with the torrent of…Continue reading

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Mergers and acquisitions often disappoint

WHEN you are the chief executive of a public company, the temptation to opt for a merger or acquisition is great indeed. Many such bosses may get a call every week or so from an investment banker eager to offer the kind of deal that is sure to boost profits.

Plenty of those calls are proving fruitful. In the first three quarters of 2017, just over $2.5trn-worth of transactions were agreed globally, according to Dealogic, a data provider. The total was virtually unchanged from the same period in 2016, but the number in Europe, the Middle East and Africa was up by 21%.

It is easy to understand why an executive opts for a deal. Buying another business looks like decisive action, and is a lot easier than coming up with a new, best-selling product. Furthermore, being the acquirer is far more appealing than being the prey; better to be the butcher than the cattle. A takeover may keep activist hedge funds off the management’s back for a while longer. And being in charge of a much bigger company is a more demanding task that will surely justify (ahem) a larger salary for the executives in charge.

But these temptations, good and bad, should generally be resisted. S&P Global Market Intelligence, a research arm of the ratings agency, has updated a study on the impact of deals on the acquiring company’s share price. The study looked at M&A deals done…Continue reading

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Taxing fat and subsidising healthy eating widens inequality

IN RICH countries, people’s diets are getting worse and they are getting fatter. Hence the increasing popularity of a “fat tax”, to make unhealthy food cost more. Since Hungary led the charge in 2011 with a “chip tax” on fatty and sugary foods, other countries have followed. Britain is to join a long list next year.

Since the poor both spend a higher proportion of their income on food and tend to eat less healthily, they are the main targets of such taxes. In France, for instance, adult obesity is seen in over 20% of households with monthly incomes under €1,500 ($1,765) compared with less than 10% of those who earn over €3,000.

Punishing consumers, however, is politically painful. So “thin subsidies” have been gaining ground. But data on the impact of such policies are scarce. A recent study on the distributional impacts of fat taxes and thin subsidies from researchers at the universities of Oklahoma and Grenoble suggests policymakers should be…Continue reading

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How protectionism sank America’s entire merchant fleet

IN APRIL 1956 the world’s first container ship—the Ideal X—set sail from New Jersey. A year later in Seattle the world’s first commercially successful airliner, Boeing’s 707, made its maiden flight. Both developments slashed the cost of moving cargo and people. Boeing still makes half the world’s airliners. But America’s shipping fleet, 17% of the global total in 1960, accounts for just 0.4% today.

Blame a 1920 law known as the Jones Act, which decrees that trade between domestic ports be carried by American-flagged and -built ships, at least 75% owned and crewed by American citizens. After Hurricane Irma, a shortage of Jones-Act ships led President Donald Trump on September 28th to waive the rules for ten days to resupply Puerto Rico. This fuelled calls to repeal the law completely.

Like most forms of protectionism, the Jones Act hits consumers hard. A lack of foreign competition drives up the cost of coastal transport….Continue reading

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Manias, panics and Initial Coin Offerings

EVERY market mania reaches a point when pitches to would-be investors enter the realm of the surreal. So it goes for “initial coin offerings”, or ICOs. A new one by a firm called POW invites Facebook users to claim tokens for nothing; when they later become convertible into other tokens, the first to take advantage of the offer could “become worth $124bn…making them the richest person on Earth”, the blurb says. Not a bad return for no money invested and no risk borne. However bizarre, bubbles are hard to resist: no one wants to be the only one of their friends left out. They can also be financially ruinous. But gambling on a craze, even a highly dubious one, can be about more than blind greed.

The ICO boom is an outgrowth of the emerging, occasionally inscrutable world of cryptocurrencies. These are a form of money (bitcoin and ether are examples) used in transactions which are recorded on a distributed public ledger called a blockchain. An ICO is a scheme to raise funds for an…Continue reading

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After a bite of Apple, Margrethe Vestager targets another tech giant

MARGRETHE VESTAGER’S assault on technology firms she deems to have improperly massaged down their tax bills continued this week with a tilt at Amazon. The internet retailer faces a bill of €250m ($293m) for back taxes over what the European Union’s competition commissioner considers to have been an illegal sweetheart deal with Luxembourg.

The order requiring the Grand Duchy to recover the money follows a well-publicised three-year investigation. It is the latest in a series of tax-avoidance cases brought by the European Commission against multinationals, most of them American. Last year, Ireland was ordered to recover €13bn from Apple—smashing all past records for EU corporate-tax cases.

As with Apple, the commission concluded that Amazon received illegal state aid—in the retailer’s case between 2006 and 2014—through a tax-cutting arrangement that was unavailable to its rivals. This came in the form of a ruling from Luxembourg’s tax authority,…Continue reading

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