Emerging markets are the place for investment bankers to wheel and deal during the next couple of years, as bankers in Asia, the Middle East and Latin America earn an increasing share of investment banking revenue.

Emerging markets share of investment banking revenue has increased both in percentage share and total value over the past few years. In 2005, investment-banking revenue from emerging markets accounted for almost $40 billion, or 16% of the global investment-banking revenue total. Those figures increased to just over $78 billion, a 21% share of the total in 2007.

Emerging markets’ share of investment banking revenue will soar to 28%-30% by 2010, according to McKinsey Quarterly. And depending on how quickly the global financial markets recover, emerging markets will see investment banking revenue growth from $40 billion to somewhere between $90 billion and $115 billion in the five-year period of 2005-2010.

McKinsey’s overall thesis – that emerging markets are coming to represent an increasingly important source of investment banking revenues – appears correct. Emerging market economies are generally growing economically much faster than the West, so opportunities for companies are greater and an increasing proportion of the merger business is happening there.

With high Asian savings rates, current account surpluses, and the piling up of petrodollars, emerging markets represent much of the world’s savings pool. So, it’s not surprising that emerging market investment banking business is growing rapidly, both in absolute terms and as a percentage of the global total.

So we should all rush out and buy Goldman Sachs Group Inc. (GS), right?

Not so fast.

First, Goldman Sachs has had huge successes in a number of emerging markets, notably China, but its main business remains with U.S. and European Union companies, and that’s not going to change. Even if its emerging markets business were to expand, it could never be big enough to provide more than a modest uplift over the gloomy prospects for investment banking business domestically.

Second, Goldman Sachs and the rest of Wall Street are hopelessly uncompetitive in terms of costs and fees. They can be undercut, and fairly easily.

Wall Street firms have a habit of relying on superb connections to get the mandates and a dedicated team of top quality salesmen to sell the paper. But with emerging markets being largely separate from the United States and EU, the big Wall Street houses don’t necessarily have the local connections they need. And paper issued by emerging markets often sells to investors such as the sovereign wealth funds, which are again outside the normal Wall Street speed-dial.

Moreover, Wall Street bankers are hopelessly overpaid – recent graduates from the top business schools can start at around $200,000 a year. That makes a lot of emerging market deals off-limits, because they are too small to cover U.S. investment bank’s costs.

A merger deal that might make a $250,000 fee just isn’t worth their while – by the time they’ve put analysts onto it, found a buyer and done the legal work, they’re out of pocket. A $250,000 fee is small change to a U.S. or Western Europe investment bank, but in many emerging markets it represents a decent piece of business. What’s more, there are a far greater number of $250,000 deals around in those emerging markets then there are $2.5 million pieces of business.

Local traders and analysts, even with some years of experience, make a fraction of $200,000 Wall Street salaries. That means, for most business in emerging markets, local houses are likely to be much more competitive than their Wall Street brethren.

How to Play Emerging Markets Growing Share of Investment Banking Revenue

If you want to buy into the dynamic growth business of emerging markets investment banking, you need to invest in emerging markets investment banks. Here are three prime examples (the third of which is primarily a fund manager):

• The Nomura Securities unit of Nomura Holdings Inc. (ADR: NMR): Japan might not be an emerging market, but its top investment bankers are paid a fraction of Wall Street’s head honchos, even though living standards are similar to the United States. The bad news first: It was horribly battered by the subprime fiasco, but has since exited that business. The worse news: Its top management is obsessed with competing in London and New York, and liable to waste yet more shareholder money attempting to do so. The good news: Nomura has a truly wonderful franchise, as the largest investment bank and brokerage house in the second-largest market in the world. It’s selling at an infinite Price/Earnings ratio, due to its U.S. losses, but only at about 1.2 times net asset value, a very reasonable rating indeed, and about eight times its peak earnings in the last cycle. It doesn’t pay a dividend currently, but I still like the franchise.

• Sun Hung Kai & Co. Ltd. (PINK: SHGKY or Hong Kong: 0086): This is Hong Kong’s largest independent investment bank and brokerage house, with operations in China and the Middle East. Its shares trade at a prospective P/E ratio of 4.6, and feature a dividend yield of 6.1%. It’s illiquid in the U.S. market, so if your broker deals through Hong Kong, you may want to buy there. Still, you have to like the rating, and it’s particularly attractive for income investors.

• Fondos Provida SA (Chile) (ADR: PVD): Primarily a funds manager of the privatized Chilean social security funds, the business has diversified to hold investments in fund administrators in the emerging markets of Peru, Ecuador, Mexico and the Dominican Republic. It is majority owned by the Banco Bilbao Vizcaya Argentaria SA (ADR: BBV). Its shares are trading at nine times trailing earnings, and feature a dividend yield of 7.6% – again, especially alluring for income investors.

[Editor's Note: An investment banker with more than 25 years' experience, Money Morning Contributing Editor Martin Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution's derivative operations, one of the most challenging units to run. He has also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, as an advisor to the Korean conglomerate, Sunkyong Corp., and worked extensively in the emerging markets of Bulgaria, Croatia and Macedonia to help stabilize, what at the time, were fledgling economies.]

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A narrowing trade surplus and declining money-supply growth in China has some analysts worried about the prospects of global growth, particularly as the U.S. economy flirts with the possibility of recession. But the red-hot Asian markets may prove more resilient than many think.

China raised its interest rates six times in the past year in an effort to tame the worst inflation the country has seen in a decade. The government in Beijing has also restricted credit, and frozen the price of some products such as gasoline. And after months of reform, China is finally starting to see some results.

December’s trade surplus shrank to $22.7 billion from $26.3 billion in November, and the broadest measure of money supply rose by the least amount in seven months. That raised the eyebrows of analysts who think an economic slowdown, or worse, a recession in the United States could significantly damage Chinese exports and further hinder the global economy.

"As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown," Frank Gong, chief China economist at JP Morgan Chase & Co. (JPM), told Bloomberg News.  "If the central bank raised interest rates too much, it would damp domestic demand and increase the danger of economic downturn."

Yesterday [Monday], Goldman Sachs Inc. (GS) lowered its Asian growth forecast to 8.3% from the previously projected 8.6%.

There is no doubt that a U.S. recession would have a negative impact on Chinese exports and thereby the Chinese economy as a whole. But the United State’s role in the global economy, while still substantial, is shrinking.

America accounts for about 19% of emerging market exports, but its topped by Europe, which takes in 28% of the goods being shipped out of those countries. In 2007, the 27-nation European Union, not the United States, was China’s No. 1 trade partner.

Trade with the EU rose 27% year-over-year to $356.15 billion. The United States came in second with bilateral trade volume standing at $302.08 billion, up 15% compared with 2006, according to the customs administration.

And while the U.S. dollar remains weak, making it harder for the United States to import goods, the euro is hitting all-time highs.

China’s trade surplus for the first 10 months of the year expanded by 59% to $212.4 billion, easily eclipsing the full-year record of $177.5 billion set in 2006.  For all of 2007, however, China’s total exports rose 25.7% to $1.218 trillion.

Even as demand slackens in the United States, domestic demand in emerging markets, particularly China, continues to boom. In fact, many fund managers see weakness in the U.S. economy as yet another reason to invest in sectors that benefit from Asia’s dynamic domestic growth.

"The one pocket of growth for now at least is Asian consumers, particularly in China and India," Anthony Muh, head of Asia Pacific for AT Asset Management told the China Post.

"We’ve been pulling back on cyclicals, on the export sector, and adding more to domestic consumption and raising a little bit of cash to keep our powder dry to take advantage of some of the pullbacks," he said.

That’s not such a bad idea, either. The Shanghai Composite Index climbed 96.7% on the year, making it the world’s best performing major bourse for 2007. A pullback induced by a recession in the United States and tighter economic restrictions could take some of the heat out of overpriced stocks and open the door for bargain hunting.

Sectors such as retail, telecommunications, real estate, construction and infrastructure could present significant opportunities as domestic demand for their services remain high, declining in exports. Even if China’s rate of growth drops significantly from last year’s 11.5%, a growth rate higher than 8% is still exceptional.

George Hoguet, strategist at State Street Global Advisors doesn’t even see growth dropping that dramatically.

"[China's economy] will slow down less than half a percentage point for every point of growth the U.S. loses," Hoguet recently told CNNMoney. 

"Emerging markets account for 30% of the world’s economy," Hoguet added. "As the U.S. slows, investors will be looking for earnings growth in other parts of the world. Emerging markets will be increasingly driven by earnings growth over the next 12 months."

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[This is the first of two parts.  The second part will run tomorrow.]

By Horacio Marquez
Emerging Market Specialist, Money Morning

In the past few weeks, the markets have run up strongly. Of course, this run has been mostly fueled by one thing:  Statements from Goldman Sachs Group, Inc ( GS), JPMorgan Chase & Co. ( JPM) and others who declared that their exposure to subprime mortgages and "structured products" was not dangerous.

And the traders had a field day. No more major write-downs were coming, they said, and the markets rejoiced.

Of course, this is the just the latest "credit crunch"- induced market swing. It’s hard to go a day without hearing another pundit speculate on the next worse- case scenario – or why a recession is about to crush your retirement plans.

Yet so few investors – and many of the best analysts on Wall Street – really understand how this credit crisis came to be. Or what it may portend for the coming year.

Having worked in global banking for nearly 25 years – and having gotten so many questions from readers – I’ve put together this report. No doubt, the "dumbest money in the world" created the housing bubble and the mortgage crisis. And the story below takes a circuitous path. But I think you’ll enjoy it…

The Start of a Bad Scene…

Back in August, we saw huge distress in money markets, as short-term structured investment vehicles (SIVs ) – which are cash funds sponsored mostly by major banks around the world – found themselves unable to roll over their daily funding as investors fled the asset class fearing that they could be saddled with "radioactive" exposure to subprime loans.

The sponsors and banks guaranteeing these funds were saddled with losses, and they had no liquidity in the investments in these funds. The irony of this all is that the objective of money market funds ( and the investments that go in them ) is safety and liquidity.

This crisis prompted central banks around the world, notably the European Central Bank and the U.S. Federal Reserve to inject massive amounts of liquidity, open their discount windows, and in the case of the Fed, lower interest rates. All of this in an effort to keep their banking systems and economies going. 

The resulting financial turmoil reverberated throughout the global capital markets with sell-offs in global equity and corporate bond markets. It created a "flight to safety" into sovereign debt like U.S. Treasuries. And many took refuge from a falling U.S. dollar in gold, oil and other commodities.

Surely, nobody could have prevented this, most would say.  But is this true?

The seeds of the current financial crisis were planted well before 2000…

 In 2000, as I headed credit at a major asset manager, I took precautions against each of the problems that are now blowing up.  If most other market participants had taken similar precautions, this crisis and the housing bubble could have been prevented.

And the scary thing is that all I did then was to take the trouble to double-check the spoon-fed analysis from Wall Street and the rating agencies, and question the basic assumptions in them.  And I managed to do this while I was jettisoning  WorldCom, Enron, AT&T Inc. ( ATT), Lucent Technologies and the Detroit carmakers out of the approved investment list well before their credit quality collapsed.

We realized back then that the assumptions used by rating agencies for sub-prime structured products were a stretch… And also that SIVs made little sense. 

In these "black box" investments, we would be picking up only a couple of basis points over Fed funds in yield – and taking an unquantifiable risk at the same time. 

We could not know the individual holdings of the SIV, and once a month we would get an assessment from a couple of rating agencies, telling us that the SIV was in compliance with their risk diversification and minimum credit quality of their holdings. 

It amounted to giving some trader our money so that he could cherry pick the best investment opportunities ahead of us. It also gave them the opportunity to include bad credit in the SIVs without our knowledge. And that is precisely what happened.

At the time, I approved 12 SIVs out of more than 200: those 12 had full bank guarantees. A couple of my colleagues in the industry, with much deeper staffs dedicated to this asset class, later confirmed to me that they had only 28 and 32 of these SIVs. 

So the huge question is: Who was investing in the remaining 170- plus SIVs?

We now know the answer: The Dumbest Money in the World. 

The dumbest money in the world enabled the growth of structured commercial paper to about half the size of the entire U.S. money markets. And the SIVs were the worst part of this. 

Yet one thing stands clear, financial institutions could not have originated all this structured subprime mortgage paper without greedy and careless buyers.

Where were the real estate executives, the real estate appraisers, the regulators, the bank examiners, the accountants, the financial press, the rating agencies, Wall Street, the Fed, and the discipline of the buy-side, and especially Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE)? 

No alarm signs went up. Most went for the quick buck and forgot to do the right thing.  

How could this happen to the "safe" cash market? Any fool can make a loan – the difficult part is collecting it…

Last month, GE Asset Management shocked investors when it forced them to take 96 cents on the dollar for their investments in a short-term bond fund.  Money market firms have almost always absorbed the few losses in their money market funds. 

After all, the money market funds are supposed to focus on safety and liquidity through diversified, very safe, short-term investments.  They cannot afford to "break the buck" – that is, suffer a loss of capital in their fund that requires them to mark down their net asset value below $1 per share. 

Neither can they afford to tell their clients that they cannot have their cash back on any given day. So how could this have happened? Simple…

The money market funds have a large number of clients moving cash in and out of their funds every day, during the day. Thus, they invest a very large portion of their balances overnight, so that this money is available the next day.  This requires them to reinvest a very large amount of money in a large number of transactions quickly, every day – and to avoid bad names in a blink. 

Thing is, only the best and largest money market funds have enough qualified staff to analyze all the approved names in great detail. So most rely on the rating agencies and on Wall Street guidance.  The problem with the rating agencies is that in many cases they are a coincident indicator of credit quality.  When they downgrade a credit, most probably you are already trapped in it.

So, the thinking is that when an inevitable credit event hits a name they hold, the exposure is typically minimal in size because of diversification. A nd there is usually very few days left until getting paid back . If everything else failed, the asset management company usually takes the loss themselves, rather than alienating their clients in their money market fund.

The result of having to trade in a large amount of transactions… in a very fast-moving credit market… in a highly competitive business… with low-quality analytical support… relying strongly on rating agencies… led to complacency in the vast majority of the money market participants.  Enter the banks. [In part two tomorrow, we’ll look at how banks contributed to the problem and the way ahead in 2008.]

As the U.S. market falters amid credit worries and a disastrous housing slump, emerging markets are picking up the slack.  Investors abroad are reaping huge profits from initial public offerings (IPOs), which have yet to break stride this year. Year-to-date, more than half the record $255 billion raised through IPOs came from emerging markets.

China tops the IPO leader board, accounting for 27% of all global stock listings so far this year. In Shanghai, 195 listings have generated more than $87 billion. That’s more than double the $38.5 billion raised by 174 U.S.-based IPOs.

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So, it was hardly a surprise when PetroChina Ltd. (PTR) became the world’s largest company by market cap last month after its Shanghai debut raised a record $8.94 billion. Not to be outdone, Alibaba.com Ltd. saw its shares nearly triple after listing in Hong Kong. Shares bolted 290% to give the company a market value of $25.7 billion. When it was all said and done, Hangzhou-based Alibaba had raised $1.5 billion, the most ever for a China-based Internet company.

China Railway Group became the latest Chinese success story when it raised $3.03 billion (22.44 billion yuan) from the sale of 4.675 billion Class A shares in November. The company raised an additional $2.46 billion last week in an IPO of Class H shares ahead of a listing in Hong Kong set for Friday.

Soon, China Pacific Insurance, the nation’s third-largest life insurer, will take its turn at the wheel. It plans to raise about $6 billion through offerings in mainland China and Hong Kong.

Despite all the success China has had, Brazil, India, and others aren’t far behind. India’s Mundra Port & Special Economic Zone Ltd. has skyrocketed 121% since its IPO last week. In Brazil, trading has expanded six fold since 2000. As a result, Bovespa Holding SA, owner of Brazil’s largest stock exchange, is up 42% since it started trading Oct. 26.

"People are uncertain about the growth outlook in developed markets, but they can certainly see plenty of growth potential in emerging markets," Alex Tedder of American Century Investments told Bloomberg News. "These things are in great demand."

Emerging markets such as China, India and Brazil will grow 7.4% next year, compared to a 2.2% rate for industrialized nations, according to data compiled by the International Monetary Fund.

In the first nine months of 2007, emerging market IPOs locked in a total $98.4 billion, versus the $89.2 billion from developed nations. IPOs from emerging nations have raised $35.4 billion this quarter alone, compared to the $32.7 billion raised by IPOs from developed countries.

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With ambitious plans for overseas sales and continued growth abroad, PepsiCo, Inc. (PEP) is reorganizing and adding senior-level managers to capitalize on opportunities outside of North America.

Previously, Pepsi was comprised of PepsiCo North America (with its own three divisions – Frito-Lay North America, PepsiCo Beverages North America and Quaker Foods North America) and PepsiCo International. Once reorganized, Pepsi will be split into three units, each with its own chief executive officer, consisting of:

• PepsiCo Americas Foods.
• PepsiCo Americas Beverages.
• And PepsiCo International.

PepsiCo Americas Foods will include Frito-Lay North America, Quaker and all Latin American food and snack businesses, including the Sabritas and Gamesa businesses in Mexico. John Compton, currently CEO of PepsiCo North America and a 24-year company veteran, will become its chief executive.

PepsiCo Americas Beverages will include Pepsi-Cola North America, Gatorade, Tropicana and all Latin American beverage businesses. Massimo d’Amore, currently executive vice president of PepsiCo International, will become CEO of the unit.

PepsiCo International will include all PepsiCo business in the United Kingdom, Europe, Asia, Middle East and Africa. Mike White will continue his role as CEO of PepsiCo International, but will also assume global responsibility for two strategic corporate functions: procurement and information technology, including the company’s business transformation initiatives.

Nooyi’s Global Vision

Within the next five years, Pepsi is angling to sell as many gallons of soda and bags of snacks in its markets overseas as it does in North America, Pepsi Chief Executive Officer Indra Nooyi told Bloomberg News in an interview a week ago.

International revenue made up 37% of PepsiCo’s $35.1 billion total sales last year, and is advancing at four times the rate of the U.S. and Canada markets – thanks to such market-tailored products as crab-flavored Lay’s in China, and lentil snacks in India.

International revenue will help Pepsi reduce its reliance on the United States market, where it gets the majority of revenue, compared with only 30% for rival Coca-Cola Co. (KO). To that end, PepsiCo has acquired more than a dozen companies abroad since 2000. In the U.S. market, it now plans to market products to increasingly health-conscious consumers, reducing its reliance on sugar-laden soda and such high-calorie salty snacks as Fritos.

"I suspect it’s going to be somewhere around 2010 or 2012, in that area, where it might catch up,” Nooyi told Bloomberg. "At its current trajectory, around that time, you could see a potential catch-up."

PepsiCo trails Nestle SA in global snack and beverage sales, while Coca-Cola leads in worldwide soda sales.

Through the first nine months of this year, PepsiCo Americas Foods accounted for about 45% of the company’s revenues. PepsiCo Americas Beverages accounted for about 30%. And PepsiCo International accounted for about 25%.

Nooyi, the CEO, expressed confidence that the new organizational structure will deliver double-digit profit growth in the next few years.

"Given PepsiCo’s robust growth in recent years, we are approaching a size which we can better manage as three units instead of two," Nooyi said yesterday. "Creating units that span the North American and international markets, as well as developed and developing markets, allows us to better share best practices among our North America and international businesses, while providing valuable development opportunities for our senior executives."

Positioning for Growth, Battle

Pepsi’s management and corporate shuffle basically splits its food and beverage divisions in half in the Western hemisphere. Meanwhile, food and beverages are under the same roof for its Eastern hemisphere operations.

The division allows Pepsi to allocate more time and attention to its prime growth market – Asia. During the third quarter, PepsiCo International profits rose 22% on the back of double-digit growth in China, Russia, Pakistan and the Middle East. And it gives the company a better position in the next big battle ground in the never-ending cola war with Coca-Cola. 

Money Morning has extensively covered Pepsi and Coca-Cola’s Asian strategies – as well as their sugary sweet third-quarter earnings in which Pepsi’s profits were up 17% and Coca-Cola’s up 13%. [McDonald's Corp. (MCD) and Yum! Brands Inc. (YUM) also are engaging in a similar war for the coveted Asia market.]

Pepsi and Yum! are two of the globally focused U.S.-based companies that several of Money Morning’s experts have identified as opportunities investors might want to research further. Their business models for growth don’t involve just Asia, but will benefit from having a solid strategy for Asia, said Contributing Editor Keith Fitz-Gerald.

And the more business they do outside the United States market, the more they will benefit from the falling dollar, which make U.S.-made goods cheaper for foreign consumers to buy. [Our research report, "Investments for a Weak Dollar World," is one of several research reports that list which U.S.-based companies follow this strategy and benefit in the face of falling greenback. The report is free of charge; please click here].

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Most people associate Bangladesh with catastrophic floods and chronic instability, but that country has actually come a long. According to the International Monetary Fund, growth is set to reach 7% this year, a 30-year high.

A military-backed government has pushed through a series of reforms, and 26 state-owned enterprises (SOEs) are slated for sale.

“It’s a quantum leap in the mindset of the government…that they’re embracing privatization,” says Yawer Sayeed, CEO of the first and only private fund manager in the country. Newfound political stability has encouraged foreign investment, and consumer consumption is also on the rise.

The Dhaka Stock Exchange Index has risen by about 80% this year amid these improved conditions. The market’s total value is a tiny $8 billion, says Pooja Thakur on Bloomberg.com, but it’s expected to double to more than $15 billion as privatizations provide further impetus and the market appears on foreign investors’ radar screens.

JPMorgan Chase & Co. (JPM), Merrill Lynch & Co. Inc. (MER), and Citigroup Inc. (C) – which last month became the first foreign lender to acquire a license to offer investment banking services – all reckon Bangladesh may be the “next Asian success story,” says Thakur.

"Major operations were impacted by scheduled maintenance and tie-in activity associated with expansion projects," the report said, alluding to an ongoing expansion at the Olympic Dam where uranium was particularly affected.

"[Uranium] production was lower than the June 2007 quarter mainly due to a decline in grade and tonnes milled," the report stated. Uranium production from the company’s Olympic Dam project totaled 933 tonnes in the third quarter, well short of its quarterly capacity of 1,250 tonnes. 

Uranium experienced an electrifying price surge over the past year, peaking at $138 a pound in June.  It was only $37.50 per pound in January 2006. The price has slipped to $75 a pound in recent months, but it’s still well above Olympic Dam’s contract value of less than $20 a pound. 
BHP’s production of copper and nickel, were also below many analyst’s forecasts. Only the company’s output of petroleum beat estimates.  Copper production dropped 10% from the previous quarter, but it was still a 23% improvement over last year. Nickel output fell 19% from the previous quarter and 13% from a year ago.

Iron-ore production climbed 7% to 25.87 million tonnes in the three months through September from a year earlier.  The output is a record high for the company, but it stopped short of meeting analysts expectations, and is only a marginal improvement over the previous quarter.

BHP’s disappointing production figures have forced some analysts to scale back their profit forecasts for the company. ABN Amro cut its 2008 profit estimate by 5.5%, while JPMorgan trimmed its profit estimate by 2.8%. 

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With worries mounting that the global credit crunch will squeeze the worldwide demand for petroleum-based products, oil prices dropped below the $81 a barrel level yesterday (Monday), according to The Associated Press.

Light, sweet crude for November delivery fell 44 cents to $80.78 a barrel in Asian electronic trading on the New York Mercantile Exchange in Singapore. In the United States, Light, sweet crude for November delivery fell $2.20 to settle at $79.02 a barrel on the New York Mercantile Exchange, its lowest close in nearly a month.

In an interview with the Financial Times, Rodrigo Rato, the outgoing managing director of the International Monetary Fund, said it would be "a few months, probably into next year" before there is any return to normalcy from the worldwide credit crunch.

As far as the negative impacts on economic growth, "the U.S. is going to slow down," Rato said. "Growth in Europe looks less strong than before, and in Japan too… Everybody is going to feel some impact."

Rato acknowledged that many large emerging markets are growing rapidly, but said, "to what extent they will keep that momentum will depend on how long the slowdown is in the United States and Europe."

However, while the credit crisis may linger, lower oil prices may not. Summer officially ended two weeks ago and colder weather will soon be here. Also, many U.S. refineries close down in the summer for routine maintenance. When they are brought back online, capacity for winter demand will surge.

Something else to consider is foreign demand, which is rapidly increasing, particularly in China. The state-run Xinhua News Agency reported Sunday that China’s net oil imports rose 18% in the first eight months of the year. Between January and August, China imported 757.5 million barrels. Total imports were 773 million barrels, according to the government’s customs data.

The International Energy Agency (IEA) said in July it expects China’s demand for oil to remain at 7.59 million barrels per day (bpd) for the rest of the year, before rising to 8.05 million barrels per day in 2008 and to 9.96 million barrels per day in 2012. The IEA said China would be the main catalyst for rising oil demand across Asia, accounting for 48.9% of non-Organization for Economic Cooperation and Development demand by 2012.

Xinhua also reported yesterday that China’s oil and gas pipelines have increased by 62% in the last four years. According to the National Bureau of Statistics, China’s oil-and-gas pipelines stretched 24,136 kilometers at the end of 2006. In 2002 they were approximately 14,964 kilometers. Oil-transmission capacity is reportedly up 59% and gas transmission 158.9%.

Also factoring into a potential rise in oil prices will be the weak U.S. dollar, which has angered the European Union by sinking to the 1.40 mark against the euro. Unfortunately for those overseas, an exchange rate of 1.30 is possible, meaning the pain could increase.

Because oil is priced in U.S. dollars, that price will continue to rise as the dollar loses value.

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Vietnam’s economy has grown 8.16% in the first nine months of 2007, its best economic performance in 10 years, according to that country’s General Statistic Office.

At its current pace, it will hit its 2007 growth target of 8.2% to 8.5%, the China Post reported. Last year, its overall GNP growth was 8.2%

This isn’t a surprise to those who follow Vietnam’s growth. Many analysts predict Vietnam will be the country that emerges after the current wave of emerging markets subsides. Others can argue that growth phase has already begun.

In the past decade, the Vietnam economy has made fantastic strides. Its GDP growth has exceeded 7% in each of the past four years and the government has penciled in growth of 8.5% this year. Deregulation and privatization programs, buoyant exports (helped along by the commodities boom), and rapidly increasing foreign direct investment, have underpinned the nation’s vast economic expansion. As a result Vietnam’s growth rate has exceeded that of Thailand, Malaysia, Taiwan, South Korea, and even India.

Spurred on by Vietnam’s admission to the World Trade Organization, foreign investment jumped by 49% in 2006, with major international companies moving in.

Vietnam is host to several big-name electronics companies including Intel Corp. (INTC) and Hon Hai Precision Industry Co. Ltd, the world’s No. 1 contract-manufacturer of consumer-electronics products.

And Vietnam’s online game industry is expected to generate $50 million in revenue this year, and an $83 million in 2010.

News and Related Story Links:

• China Post:
  Vietnam’s Economy Grows 8.16%.

• Money Morning Investment Analysis:
  The Market that will Emerge After the Emerging Markets.

• Money Morning Investment Analysis:
  The World’s Leading Electronics Manufacturer Makes Its Move In Vietnam.

• China View:
  Vietnam to Make Bigger Online Game Revenues

Transparency International last week published its Corruption Perceptions Index, ranking 180 countries around the world according to their level of corruption. That sounds like boring goody-goody stuff, suitable only for one of the less-interesting World Bank seminars.

But that’s not the case: The level of corruption in a society is a measure of the leakage from that country’s economy. In other words, if you’ve invested in a corrupt country, a portion of the profits that should be going into your pocket is being siphoned off somewhere else.

This is a particularly important consideration for international investors, since many of the markets abroad are nowhere near as efficient as ours.

When you’re investing internationally you need to consider this issue; it’s available at: http://www.transparency.org/news_room/in_focus/2007/cpi2007/cpi_2007_table

The CPI isn’t the only thing you must consider: If it were, you’d plunk the entire bundle down in Denmark, Transparency International’s #1 country (the truth is, you could do much worse). You can’t learn much in general from the small differences between the countries at the top of the list; after all, the United States is only 20th, and we’re all presumably pretty satisfied that this market is a safe-enough place to invest.

Differences between emerging markets, and between different regions, are much more illuminating, however. You’d expect Scandinavia and northern Europe to rank high, and they do, but there are East Asian countries scattered among the Scandinavian nations, a remarkable tribute to places that were very poor only 40 years ago. Singapore, for example, is at #4 – ahead of Britain, Germany, the United States and everywhere else, except for New Zealand and a couple of the Scandinavians.

Hong Kong and Japan are both higher on the list than the United States, while Taiwan is at #34 and South Korea at #43, both pretty respectable levels.

The major bad news for Asia from Transparency International’s list is the position of its two great growth stories, China and India. Tied with Brazil and Mexico at #72, they are one place below Senegal. While a mid-table position isn’t disastrous, it indicates that corruption is a very serious problem in both countries. Typically, this corruption is worst in the public sector, and in the banking system as a whole – both areas in which a modest bribe can secure an altogether disproportionate benefit. In India, it means that any company dealing with the public sector is likely to get in trouble – think, for example, of the disastrous investment Enron made in the Dabhol power plant a few years back. In China, pretty well all quoted companies are majority controlled by the public sector, and so is the banking system, while price-earnings ratios are above 30. However brilliant are its growth prospects, China is thus a very dangerous place to invest.

Some other Asian countries are even worse – Burma brings up the bottom of the table at #179. But you presumably wouldn’t put money there anyway; nor probably in Iraq (#178), Afghanistan (#172), or Bangladesh (#162). However, Indonesia and the Philippines are surprisingly low, at #143 and #131 respectively, and if you’re an experienced emerging markets investor I’m sure your broker has shown you investments from those countries. Both countries are at a level where, as a foreign investor, not only are your investments unsafe, but so are everybody else’s. In the long term, or even in the medium term, growth from such a base is impossible unless the government produces drastic and long-lasting reforms.

Outside Asia, Transparency International’s table is generally bad news for Latin America. Some countries are okay – Chile and Uruguay are both well ranked at #22 and #25 respectively, pretty well up with European levels (but there’s little for a U.S. investor to buy in Uruguay). However, Mexico and Brazil are down with China and India, where corruption is a real problem, and Colombia (#68) is only a little better. Even worse are Argentina, at #105, and Venezuela, at #162. The Middle East is also pretty tough, though the Gulf States of Qatar and Bahrain seem OK.

Africa doesn’t rank as badly as you might think, though very poor African countries make up most of the bottom-feeders. Botswana at #38 and South Africa at #43 both have perfectly respectable ratings, comparable with Italy (#41) for example, a country you’d presumably be fairly happy to invest in. If you’re interested in natural resources investments, some of Africa should thus not be ruled out.

Southern and Eastern Europe, finally, are a bit iffy but not really disastrous. Greece at #56 and Turkey at #64 are both at levels where corruption is a problem, but they shouldn’t be ruled out as investments. Most of the Eastern European countries that were formerly communist are more or less OK too – Bulgaria at #64 and Romania at #68 bring up the tail. However, with the exception of the Baltic States, if a country was in the old Soviet Union, you should worry. Ukraine is at #118, which probably doesn’t surprise you, but the richer and more investable countries of Russia and Kazakhstan are worse, not better (#143 and #150.) I should avoid both.

To summarize, Transparency International’s Corruption Perceptions Index is useful mainly as a check for investments that may otherwise seem attractive. If a country is above #50 on the list, then corruption probably isn’t a major problem, except in particularly problematic areas like government contracting. Between #50 and #100 or so, corruption is endemic in the society and a risk to you as a foreign investor. While it may not prevent the country enjoying good economic growth, it may prevent you as an investor or a foreign company as a direct investor from enjoying the fruits of that growth. If a country ranks below #100, it is very unlikely that it will enjoy any kind of economic takeoff, although with good natural resources (Russia, Kazakhstan, Venezuela) it may have a few good years if resources prices are high.