Non-Performing Loans - Still a Bottleneck in the Chinese Banking System

As most of my courses at Tsinghua University include interesting aspects of the Chinese economy, there is another part of one of my papers that seems to be worth sharing: the issue of non-performing loans (NPL), which has puzzled both banks and the government for a long time:

When the Chinese banking system is discussed on an international basis, it usually does not take a long time until the topic of non-performing loans (NPL) is brought up. Since 1998, Beijing has injected 105 billion USD into the banking system (Farrell et al., 2006, p. 36) and – according to Bremner (2006a) – transferred NPLs worth roughly 400 billion to four state-managed asset management companies (AMC). Even though officially reported NPLs have fallen from 31 per cent of total balance sheet values in 2001 to 10 per cent in 2005, nevertheless 60 per cent of this decline is due to the shift to AMCs described above. So far, the average recovery rate within those AMCs has only been 20.5 per cent (Farrell et al., 2006, p. 14 & 32).

The reduction of the NPL ratio is also fueled by a sharp increase in overall lending activities: between 2001 and 2004, Chinese banks issued new loans amounting to between 156 and 331 trillion RMB, which represented between 13.3 and 23.3. per cent of total GDP (Id., p. 34).

Nevertheless, the remaining NPLs still have a total value of 125 billion USD representing 6.5 per cent of China’s GDP. While all above numbers are based on official bad loan rates, the actual rate may be even higher: According to a study by UBS, the true value of NPLs lies around 500 billion USD, 200 billion higher than the official value (Anderson, 2004).

Interestingly, China’s NPLs have become a much sought-for investment opportunity for international banks: according to PricewaterhouseCoopers, international investors like Morgan Stanley or Goldman Sachs have bought NPLs totaling over 15 billion USD and the market is not expected to slow down soon (PwC, 2006, p. 2). Even though this shows that the distressed securities market has become a reasonable investing opportunity, it nevertheless does not hide the fact that China does indeed still have a serious non-performing loan problem.

China’s NPL issue is most probably due to the special lending patterns and missing balance in the financial market. A recent study by McKinsey and Company has identified three main factors leading to those anomalies in lending patterns:

• Weak Governance And Lack of Commercial Mindset: State ownership of banks in China is extremely high as the government still controls 83% of all assets in the financial sector. This number is also very high when compared to Eastern Europe’s transitional economies where state ownership today on average is below 15% (Farrell et al., 2006, p. 35).
  
  
• Operational Weaknesses: Even though the large banks have already taken measures to improve their management and lending skills, those are still low compared to other countries. Especially the lack of good internal credit assessment capabilities is a big problem, as lending decisions today are still often based on incomplete data with insufficient analysis in many parts of China, due in part to the poor quality and unreliability of many companies’ financial statements (Farrell et al., 2006, p. 37). A study by Nihon Keizai Shimbun shows that state commercial banks today grant 96% of loans at a multiple of less than 1.3 of the government benchmark. In comparison, local credit cooperatives seem to spend more time on credit risk assessment: they only make 18% of their loans below a multiple of 1.3 of the benchmark. (Farrell, Lund & Morin, 2006, p. 6). In addition, the country is still in the early stages of developing a credit bureau and lacks full coverage of large rating agencies (Id, p. 19 & 38; Ye, 2006).
  
  
• Decentralized Structure: Even though China is a socialist transformation economy, economic central control is weaker than one would expect, which is also true for the financial sector: local organizations still have a large degree of autonomy, making it more difficult to establish corporation-wide standards (Farrell et al., 2006, p.40). Thus, lending decisions on the provincial level are more likely to be influenced by local politics. Furthermore, the sharing of credit information among banks is not established so that lenders who defaulted with one bank can easily get loans from another bank (Id.).
  
  
  

References

Anderson, J. (2005). How to Think About China. UBS Report.

Bremner, B. (2006a, Feb. 06). Banking on China’s Reforms. BusinessWeek Online Edition. Found on November 27, 2006 here.

Farell, D., Lund, S., Morin, F. (2006, July). The promise and perils of China’s banking system. The McKinsey Quarterly.

Farell, D., Lund, S., Rosenfeld, J, Morin, F., Gupta, N. & Greenberg, E. (2006). Putting China’s Capital to Work: The Value of Financial System Reform. McKinsey Global Institute Report.

PricewaterhouseCoopers (2006, May). NPL Asia. Issue 7. Found on November 27, 2006 here.

Social Change in China - It is Everywhere

Due to a heavy workload at Tsinghua's MBA Program, it's been a long time since my last post. As things are getting a bit more relaxed now, I would like to share a paragraph on social change in China with you (it is part of a paper that Willi Steinmark and I composed for a course here):

Chinese society today is in the midst of a process of rapid change – when compared to Chairman Mao Zedong’s era, it is in mere turmoil. The Chinese Communist Party is currently facing social challenges which before 1978 not even the most progressive of its members would have believed to come true.

From a macroeconomic perspective, one of the most astonishing facts about Chinese society is its high level of income inequality. This year, the country’s Gini coefficient has reached a level of 0.447, making Chinese total income even more unequally distributed than US income[1] (United Nations Development Programme 2005, p. 55). When compared to Europe, this development becomes even more apparent: Most European nations are today characterized by Gini coefficient values between 0.25 and 0.35. China’s Gini coefficient becomes even more tangible when one looks at the different buckets of income distribution: When society is ranked by income, in 2004 the top one percent earned 6.1 percent of total income, the top five percent earned nearly 20 percent and the top ten percent made up for 32 percent of total income in China. (People’s Daily, 2004a)

When it comes to rural-urban differences, current data should also be a cause for concern: Based on the first half of 2006, average annual income of the rural population is 1,797 RMB, while it is 5,997 RMB in urban areas (Li, 2006). Nevertheless, income inequality within cities is even higher: according to the Chinese Academy of Social Sciences, 60 percent of urban residents live off incomes lower than the national average (People’s Daily, 2006).

Driven by income differences between cities and the rural area, millions of migrant workers leave their rural homes each year seeking for jobs and wealth in the cities. Today, there are said to be over 130 million migrant workers in the country’s more than 450 cities (China Daily, 2004). As jobs are not abundant in China’s cities for low-skilled workers today, rural migrants are often forced to seek other ways to earn their living: 60% of all street markets in China are said to be run by people from out-of-town (Ferdinand, 1996, p.6)[2]. Disillusioned by urban reality, a large number of migrants engage in criminal activities. One estimate of the early 1990s says that approximately 80% of all criminal offences in Beijing were committed by migrants or vagrants (Id., p. 7).

Possibly caused by the rising level of income inequality or not, Chinese society today goes through other severe aspects of change: crime, drug consumption and sexual uproar.

Even though current crime statistics seem to be relatively stable, the last three decades have seen a sharp increase in criminal cases throughout China. While the country reported about 750,000 criminal cases in 1983 (New York Times, 1983), this number has increased to 2,13 million in the first half year of 2005, leading to a total number of over 4 million criminal offences throughout the year (YNET, 2005).

When it comes to drug consumption, the development is even more severe : While in 1983, the Public Security Bureau arrested only ten people for drug-related crimes and seized 5 grams of drugs for the whole country, between 1991 and 1999 the police confiscated over 40 tons of heroin alone. In 1991, China had 14,800 registered drug addicts – in the year 2000, this number had risen to over 650,000 (People’s Daily, 2000 and Ferdinand, 1996, p. 484).

Another aspect of the growing emancipatory tendencies of the Chinese people is sexuality. People’s Daily is talking about a “sexual revolution” (People’s Daily, 2003) and the data confirm this definition: While in 1989, only 15,5% of Beijing residents said to have had sexual relationships before marriage, this number has grown to 70% in 2006 (Beech, 2006). Among China’s urban population, the average age of first sexual experience has dropped significantly: While people in the age group of 31 to 40 on average lost their virginity at 24.1 years, today’s 14-20 year olds report this figure to be 17.4 years – a drop of almost 7 years within two decades (Id.).

China is moving...

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[1] The Gini Coefficient is a standardized measure of income distribution within a country and was developed by the Italian statistician Corrado Gini. Its value ranges from 0 (total equality) to 1 (total inequality).

[2] Ferdinand, P. (1996). Social Change and the Chinese Communist Party: Domestic Problems of Rule. Journal of International Affairs, 49, No. 2.

Pollution - The Price of Economic Development

After having praised China's current economic development, I think the time has come to talk about negative aspects of the actual situation as well.

Beijing is China's largest car market and today the city is already crowded with over 2.4 million cars. Every day, about 1000 cars are licensed leading to even more crowded streets and of course even more emissions. Those numbers and the fact that most cars lack a catalytic converter have led to the city being now the most polluted in the whole world.

When measured by the Chinese "Air Pollution Index" published daily by the Chinese State Environmental Protection Administration, the value for Beijing constantly lies above 140. This is over two times as high as the normal value of 60 reached by Los Angeles, which is today the most polluted US city. A blogger regularly records those values and publishes them here.

Still much more frightening is the fact that Beijing's air pollution index on some days has already hit a value of 500, the actual maximum of the scale. A value as high as that is surely hazardous to human health - sometimes the local government advises people to stay at home and keep their windows shut.

My own experience tells me that nothing of this is exaggerated. When I first came here in August, I sometimes had difficulty breathing. Unfortunately, the human body seems to adapt to those conditions. Nevertheless, look at those pictures in order to grasp Beijng's pollution reality.

In this video you can see the view from my window on a polluted, but still quite regular day - I miss our fresh Austrian and Swiss air!




P.S.: Let me just add one little comment: When you have lived in Beijing for a while, you cannot take things like this seriously :-)

"Der China-Code" - One of the most Impressive Books I Have Read for a Long Time...

German journalist Frank Sieren has lived in China for over ten years and is today one of the most sought after German-speaking China experts. In his current book "Der China-Code" he thoroughly describes the historical pillars of China's economic development and surprises the reader with interesting facts. He particularly analyses the effect of China's recent economic rise on the German economy and investigates the business activity of German corporations in China.
In the automotive sector, Volkswagen was the first foreign carmaker to be allowed into China by the Chinese goverment in the late eighties, thus providing the company with a headstart over all other international competitors. Naturally, VW soon had a market share of over 80%, but until today it has completely lost its leading position and is now fighting to keep about 15% of the market. The other two prestigious German automotive companies, BMW and DaimlerChrysler, first downplayed the importance of the Chinese market and then realized that they were already too late to make a profitable market entry. Both companies are today struggling to sell only some hundred cars per year.

But - to me - the most surprising story is Sieren's analysis of the Chinese business activities of the German Transrapid consortium, which is led by steelmaker ThyssenKrupp and Siemens. This story differs substantially from what people in Europe are used to hear about the project:

After over 30 years of development, Siemens-CEO Heinrich von Pierer managed to sell the first Transrapid train in 2001 - it should be built as a test project between Shanghai and Shanghai International airport. Furthermore, the Chinese government was thinking publicly about building a 1300 km Transrapid train between Shanghai and Beijing.

While China was longing to get its magnetic train even at a high price (the country even offered to pay 50 m EUR more), the German consortium apparently committed a lot of serious mistakes:

First, ThyssenKrupp wanted to sell a large amount of faulty and overpriced steel to its Chinese customer, who complained about the Germans who were treating them like employees.
Second, Thyssen is also said to have delivered lots of defective rail elements, which led to a serious project delay. Only days before the first official test drive of the Chinese Prime Minister Zhou Rongji and the German chancellor Gerhard Schröder, the train kept suffering from immediate blackouts leading to sudden standstills in the middle of the track. Luckily, the test drive worked without any problems, but only two minutes after the political delegation left the observation room, the train again came to an unplanned halt.

In this project, Sieren concludes, the Transrapid project and the German economy as a whole, have lost a great portion of their credibility in China - leading to a decision by the Chinese government not to build the Beijing-Shanghai train. Iinstead, a contract with a consortium led by the Japanese Shinkansen train corporation was signed soon afterwards.

Apart from providing interesting historical and economic facts, this book tries to galvanize all those of us who still think of the European - and especially the German - economy as being superior to the Chinese. Even though this might still be true in most cases, both Europe and the US will have to be extremely innovative and hard-working in order not to be surpassed by China as the world's leading economic region.

"Der China-Code" is a must-read for everyone who cares about the future of the German and the European economy - STRONG BUY!

Everyday Life and Biking at Tsinghua University

One has to get used to every new place - this is also true for Tsinghua University, which has a n enormously huge campus covering over 2.6 square kilometers. Thus, the only reasonable way to get around is by bike. Given the fact that the university has about 30,000 students who only go by bike and about 15,000 faculty and staff who mostly go by bike, this results in about 40,000 bikes on campus. As a result, every bike would still have a generous space of about 65 square meters - unfortunately, the university has lots of parks and houses without bikes, which makes everything more concentrated...

The heavy bike traffic paired with aggressive buses and cars is something unusual for Western minds - nevertheless, after some weeks it becomes quite usual to be nearly hit by one bus a day...

Even though I only managed to grab a very light example of biking at Tsinghua on film, it still gives you an idea about how everyday life works here.

Switzerland - The World's Most Competitive Country

Despite current political turbulences concerning the introduction of one of the toughest immigration laws throughout Europe, Switzerland is still in a leading position when it comes to economic aspects.

Even though the country has always been at the forefront of international banking (over one third of the world's international portfolios is managed in Switzerland), it has now even become number one in terms of overall competitiveness, according to the World Economic Forum.

Nevertheless, the report shows some weaknesses in terms of the sixth pillar, which is market efficiency: the cheese, chocolate and banking nation's competitiveness would suffer from high costs of agricultural policy and trade barriers. This perfectly corresponds to my own experience and opinion: I think that Switzerland is one of the most interesting and competitive economic areas in the world. But it will need a reform of its agricultural policy and the still existing trade obstacles in order to keep its position of one of the leading world economies.

China is changing faster than ever before - everyone knows this but wait until you SEE it...

Four weeks ago, I started my exchange semester at Tsinghua University's School of Economics and Management, which is said to be China's most prestigious business school.

I am fascinated by the rapid both social and economic development of this country, which is truly unbelievable. The change can be seen and felt everyday in the changing faces of the largest cities Beijing and Shanghai but also in the growing self-confidence and openness of the Chinese people. They are willing and eager to challenge the largest global economies and I am sure they will prevail soon.

China is already the fourth largest ecomony in the world and has been able to sustain double-digit growth for several years now. And believe me, there is no sign that this will change soon.

With respect to exports, China is already number three worldwide (behind the US and Germany) and receives the second-largest amount of direct foreign investment (behind the US).

But all this data becomes negligible when you look at foreign currency reserves: China has by far the largest amount of curreny reserves. The country now holds nearly one trillion USD, mostly in US currency. In other words, US consumption is to a large extent financed by Chinese exports. China is the largest holder of US federal bonds which makes the US highly dependent on China. In case China would entirely change its currency reserves from USD into EUR, this would set the USD/EUR exchange rate at over 2 USD/EUR instantaneously...

This data and the last four weeks in my life have shown me, that for any internationally-operating company, China is not an option but a must. The sooner interntional companies begin to understand this country and adapt to its culture and rules, the sooner profits will materialize.

One comment on the fotos, which represent the current development in Beijing: the upper foto shows a traditional on-the-road bike repair shop, which is still common in the city. The foto below shows one of the growing number of high-end shopping malls specializing in designer clothing - you can find anything from Gucci to Burberry's there...

What makes stock prices move?

It is information, I would say - and expectations.

Even though the strong-form market efficiency theory primarily shaped by Fama, French and Jensen might not hold entirely, I am convinced that stock prices are only responsive to different pieces of news thrown at the market - leading to the assumption that econometric analysis of price movements is not an accurate way of explaining them (even though some advanced econometric tools like the Engle-Granger GARCH processes allow to describe price movement patterns better than white noise processes, those patterns in my opinion only reflect responses to pieces of news). Furthermore, I believe that technical analysis is no serious approach to the problem, though the wide use of the concept might have led to the presence of "self-fulfilling prophecies" with respect to technical analysis.

Assuming that information and expectations are the only factors that makes stock prices move, the next question to be answered should be: Which piece of information (positive or negative, economic information or stock-specific) results in which movements depending on the state of the market (bull or bear) and the expectation level of the respective stock?

Maybe all those factors could lead to an information model of the stock market (or single stocks) helping companies to predict movements in their stock price, depending on the expectation level of the market with respect to the companies stock. Even though a large number of event studies have dealt with this problem - especially with the analysis of price movements in M&A processes, I think that so far there has been no paper trying to integrate all the factors into a single model.

MMORPGs - Virtual Realities are Creating Virtual Economies, but Real Money

Massively Multiplayer Online Role Playing Games (MMORPGs) have seen a tremendous growth during the last years. Besides, they may change the way the world works...

The most important difference to classic computer games is that the virtual worlds being constructed in those games continues to evolve, even if the user does not play the game. The evolution of the game not only depends on the ability of the individual player, but on the collectivity of actions of all players.

Economically and socially, the most interesting applications in the MMORPG area are games like Project Entropia, Second Life or There, where the virtual world offers a fully-functioning economy with a tradable currency which can also be converted into real money. And here is where the economic potential starts: through the convertability of virtual into real currency (e.g., in Second Life the online currency is called Linden Dollar), online gaming talent can be materialized to cash. Incredible, but real: people start to spend real money on virtual goods like shoes, T-shirts or real estate - and those activities are not limited to small sums: Last October, a user of Project Entropia spent USD 100,000 on a virtual space resort. The virtual money earned in the games can easily be converted into real currency through online services. This page for example just offered me USD 837.5 for 250 Linden Dollars...

In the MMORPGs, people start to build houses, shops, casinos and even stock exchanges - the only limit is the user's creativity. This sounds amazing, when it it is reduced to the gaming aspect. But when you think a little bit further, there could be serious consequences with respect to both economy and society. When more and more people start to build businesses and earn money in the virtual reality, there will be a growing number of people who quit their regular jobs, because they can earn a larger salary with online gaming. In consequence, the virtual economy grows and allows more and more people to earn their living virtually. Thought out, this leads to a decrease in the number of available employees for the real economy and consequently, an economic downturn. Apart from that, addicted online gamers will suffer from social isolation in the real world - the question is whether this is really a problem, because real social networks could be replaced by virtual ones...

This is frightening in a way, but maybe the economy will be saved by a self-regulating process: Assumed that the supply of real goods decreases due to the lower availability of real workforce, the prices will rise (because even virtual workers need real food ;-)), which will lead to an increase in the value of real money when compared to virtual money. This will make real activities more interesting again and will attract virtual workers to become real workers again. So maybe there is still a future for the real world :-)

International Investors and a Stormy Skiing Weekend

Wow! This was my impression of the Private Deal Conference (privateDC), which was held in Zurich and Interlaken from Friday 3, 2006 until today. (even though I am a little biased because of my position as a part-time analyst with BrainsToVentures, the host of the conference... Nevertheless, I try to be as objective as possible :-))

Over 120 investors from Europe, the US, China and Russia met at the SWX Swiss Exchange in Zurich to discuss investment opportunities and several topics related to private investing in an international context. But the most fascinating aspect of privateDC was to meet amazing people from all over the world dedicated to private investing. The investors, VCs and entrepreneurs enjoyed it as we did - we already got high-quality blogging coverage!

On Friday evening about 30 attendants and the b-to-v team went to Interlaken to enjoy a skiing and wellness weekend together. Even though our hotel did not recommend us to do so, the "diehard" part of our group went skiing on Saturday - just to find out that stormy weather conditions and skiing do not fit together :-) We ended up in the world-famous Röstizzeria, which turned out to be a good alternative to being blown away by an alpine storm... Altogether, the day was an impressive experience and reminded me of how small human being are compared to the power of nature...

Today, we limited our activities to the spa and sauna area before starting an odyssey to St.Gallen - well, in the end we made it :-)

What a banking year! But wait: was it really that tough?

The big players in the German-speaking banking sector have reported record earnings for 2005. In Switzerland, Zurich Kantonalbank reported a profit of CHF 810m (+16.5%), Credit Suisse Group earned CHF 5.9bn (+3.8%), which could only be beat by the UBS group with a profit of CHF 9.8bn (+28%, which refers to earings from continuing operations, when taking into account the sale of the three private banks Ehinger & Armand von Ernst, Ferrier Lullin & Cie. SA and Banco di Lugano as well as GAM Holding AG to its group company Julius Baer, this rises to an incredible CHF 14.0bn). In Germany, Deutsche Bank reported earnings of EUR 6.4bn (+58%). Are those record numbers only due to better management performance?

Well, yes and no, I think. In my opinion, the record profits in 2005 have two main reasons:

1) Strong Performance of Financial Markets
When you take a closer look at the reported numbers, profits rose especially in those divisions which directly depend on the performance of the financial markets: trading (as long as you "ride the trend") and wealth management (the fees are mostly based on the value of a portfolio or a stock). As European stock markets have rallied last year, asset-based fees have as well.

2) A rise in overall M&A transaction activity
As the world economy has gained momentum due to Chinese and Indian growth as well as a respectable performance of European and US economies, overall M&A transaction activity has seen a sharp rise in 2005 (+80% in Germany as compared to 2004). As a consequence of the overall market state, M&A transactions have been valued higher again which naturally leads to higher fee revenues and higher profits (as bankers' compensations probably have not risen proportionally).

Of course there are also other factors which have driven revenues and profits depending on the individual situation (at Deutsche Bank for example, mass layoffs probably have had their effect on profitability), but for 2005 a significant share of the rise in profits can be attributed to the market condition - even if this is disechanting, there has not been any magic in the market nor in the management's ability...

Are thieves homines oeconomici?

Maybe this is due to the end of my finance exams last week, but at the moment there seem to be much more exciting things to tell than finance. One of those things is the book I currently read: "Utopia" by Thomas Morus. Although a classic, the book is still not too present in the mind of the typical 21st century citizen. (I must admit, I would not have had the idea of reading Utopia either if Peter Gross would not have mentioned and recommended it to us :-)). The first 50 pages have reveiled a story I thought worth commenting on:

In Antwerp Thomas Morus talks with his friend Petrus Aegidius and a man called Raphael Hythlodaeus, a sailor and scholar at the same time. Raphael tells them about a talk he had in Great Britain about fair punishment for thieves. His opponent praises the then common practice: hanging people for stealing something. Raphael makes his opponent think by the following argument: When a thief knows that he is going to be killed for stealing, he is likely to kill his victim, because this reduces the chance of being accused and hanged. If he only expected a milder punishment, he would probably be satisfied with the stolen goods and let his victim go.

I have never thought of this before, but I think Raphael's argument is very clear and straightforward: When criminals know that the punishment for killing someone is the same or nearly the same as for a less severe crime, they are likely to commit the worse crime just to reduce the risk of being brought to justice by their victim. I cannot help, but this sounds just like the reknown homo oeconomicus, whom we have admired since the first economics lecture, doesn't it?

I am sure there are more interesting things to come in "Utopia". I will let you know...

The End of History?

The aim of this blog is to share interesting things that I am confronted with - things that make/made me think, be it finance-related or not. This time it is someting not-at-all finance-related, maye this is the reason why it is so interesting...

Today I heard a lecture of the reknown sociologist and philosopher Peter Gross on the philosophy of history. He pointed out that the western world was trapped in its self-perception, based on the belief that history

1) has a beginning and an end,
2) that there has been evolution in history and
3) that the current "western" model of society is the best-developed model so far.

It was the first time I really thought about this topic, but I realized that those three statements were true for me. So far, I would have always automatically answered all of them with yes. But are they really true? Is today's music, for example, on a higher level of development than was Ludwig van Beethoven's? Or is our democracy more advanced than was the one in Anient Greece? Interesing things to think about, don't you think?

Some scholars neither agree on those widely-spread beliefs. When talking about the first point for example, you should get to know e.g. Oswald Spengler's famous work "The Decline of the West", which was published as early as 1918.

It would lead too far to point out all works dealing with this topic, but what was also interesting to hear is that today, there are two academic opinions on the future development of the world.

1) All civilizations will converge and a Global State will be installed - This state is referred to as "The End of History" (see. e.g. "Cosmopolis Now" from Sybille Tönnies)

2) Civilizations will not converge, but will start to fight for world domination. This leads to the "Clash of Civilizations" described by Samuel Huntington.

As I do not prefer any of these theories, there are fortunately also some scholars (and most "normal people", I suppose) who think that there is still an option somewhere in between...

No Rocket Science, But Still Worth Posting....

We all know from finance and statistics lectures that the correlation coefficient (Rho) between (realizations) of two (random) variables must always lie in a range between -1 and +1. It is also quite trivial to prove that Rho becomes +1 in case of perfect positive correlation and -1 in case of perfect negative correlation. (Simply suppose a linear relationship Y=aX+b or Y=ax-b and substitute the respective values in the formula of the correlation coefficent, which is: Cov(X,Y)/s(X)s(Y)).

But when it comes to prove that Rho must always lie between (and not on) -1 and +1, there is no linear relationship that enables a comfortable proof. Interestingly, most web pages covering the correlation coefficient mention this issue, but only refer to the fact that the proof was an application of the Cauchy-Schwarz Inequality and leave the proof to the reader. I will not work through the proof here either, but at least I provide you with a useful link: The full proof is published on the webpage of Rice University's Department of Statistics: Here it is.

The Zen of Corporate Finance

Today we had a lecture of Tim Koller, partner at McKinsey's New York office and publisher of the book "Valuation: Measuring and Managing the Value of Companies" at my university.
He explained that based on his extensive research, every question of company valuation can be narrowed down to one single formula: A company's value mainly depends on it's organic growth rate and the return on invested capital. Simplistic? Well, according to Koller's data, reality proofs the concept (at least the data he presented :-)).
In my opinion, this can only be one side of the coin, because today financial markets also seem to follow other "laws": end-of-year rallies, patterns following analyses of technical investors (the ones drawing all those funny curves into stock charts) and of course the patterns described by behavioural finance.

Well, even if Koller's approach does not represent the whole truth, it is still a valuable concept and a must-know for every semi-professional investor.

Welcome to my Blog!

Well, don't really know what to write about at the moment, but as this is my first blog post ever this seems quite acceptable, doesn't it?