China banks top the list and other links

China banks are leading the world in assets rankings just as Japanese banks did in 1988 and American and European banks did in 2007. Ahem. [Link]

China – US trade spat is the start of the cold war, says Conor Sen. I agree.

There is loan fatigue on the part of lenders and borrowers in China. That is something to watch for. That spells trouble.

China underestimated Trump and also over-read the trans-Atlantic fissures. Well, not just China made that mistake. Many did and very few are willing to admit to it and correct themselves. They are digging deeper.

David Fickling compares the OBOR infrastructure spending (or loans to other countries) with the Soviet Union’s Siberia infrastructure buildout that strained their finances.


Deleveraging with Chinese characteristics

Short-term lending rates in China have dropped to their lowest since July 2015, as the government stimulates the economy….This appears to have been engineered by the People’s Bank of China, which made a particularly large 502 billion yuan ($73.44 billion) loan to commercial banks through its medium-term lending facility in late July….

…Last week the Politburo, the decision-making body of China’s ruling Communist Party, called for pro-growth fiscal measures as well as “reasonable and adequate” liquidity conditions, interpreted as code for easier credit….

“The monetary setting has now almost entirely reversed the financial crackdown that began in 2017,” said Marko Papic, chief geopolitical strategist at BCA Research, in a note to clients. [Link]

Surprised, surprised.

How much more recklessness?

Just yesterday, I wrote that the argument by Martin Sandbu that central bankers missed a trick by not being more reckless in the years following 2008 than they already were was monstrous non-sense.

See these blog posts by Jesse Felder. How can one argue, even after seeing these posts, that central bankers were not responsible for this recklessness on the part of investors? How much more reckless would investors have been, had central banks become been even more reckless?

Callous arguments such as those are simply astounding and mind-boggling.

One more sample of bond market ‘efficiency’

Despite tight restrictions on foreign exchange, Chinese investors have spent $30.4bn on US residential real estate in the past year, according to the US National Association of Realtors, while our monthly consumer survey shows that household demand for foreign exchange has only increased since the turmoil of early 2016.

Outflows have been balanced by record inflows from foreign investors, particularly into the onshore bond market. June data suggested these investors took the depreciation at the end of that month in their stride, but growing signs of currency risk could convince them to sell. [Link]

Why would anyone with a good awareness of risk and return buy Chinese onshore bonds? The yield pickup is not great and the risks are high. Unless, they were so confident that China would not really deleverage and would not allow defaults. Otherwise, it makes no sense investing in China bonds when the country’s non-financial debt to GDP ratio is already too high, when growth is slowing and trade tensions are escalating.

So much for investors’ ability to balance return considerations with risk.

That extract was from an article on RMB risk published by FT Confidential Research. Against America, China is indeed very keen to retaliate with RMB depreciation. But, they know very well that it is a double-edged sword. Capital outflows will accelerate. Same problem with their holding of US Treasuries. If they dump it, they face capital losses. The dollar will weaken, everything else being equal.  Rising US interest rates will push up Chinese cost of capital too. Yields on China bonds will rise too. It will be a self-defeating exercise too.

The real CSR stuff

Maharashtra, which accounts for about 15 per cent of India’s gross domestic product, is the 20th Indian state to introduce some form of plastic ban. On June 23, it imposed a blanket ban on plastic bags, bottles, disposable cups, plates, cutlery, wrappers and polystyrene containers.

With companies such as Coca-Cola and Amazon banging at its door, the state government relented a week later on bottles of drinking water over 200ml, medical packaging, wrapping materials thicker than 50 micrometres and garbage bags. Most shops in Mumbai, the state capital, are so far complying with the ban, and offer paper or textile bags at the checkout. [Link]

Is there any need to comment?

RBI Board appointment

The Government of India has appointed, among other people, Mr. S. Gurumurthy to the Board of Directors of the Reserve Bank of India. It is bound to send a wrong signal to the outside world on which India still depends on capital flows. It is a wrong signal not because he is a RSS ideologue, not because he is a friend of Modi, not because he is a BJP sympathiser and not because he recommended demonetisation, for the wrong reasons.

None of the above disqualify him. as FT makes it out to be.

The problem with his appointment is that he had criticised the previous RBI Governor and his policies for the wrong reasons. I had blogged on it here.

India cannot plough a lonely furrow on recognising non-performing assets as he recommends. It would be nothing short of disaster. India depends on foreign capital. India’s official savings rate and household savings rates have been declining.

India’s deposit insurance is not unique either, as he has claimed in a tweet, captured in this Bloombergquint article on his appointment.

RBI Board members do not have much say on banking regulation and on monetary policy decisions. So far, so good.

RBI Board members do not have to subscribe to Western economic orthodoxy. That it not even a remotely necessary condition for the role. But, it is enough if they are aligned with the wisdom of Indians such as Dr. Y.V. Reddy on central banking and banking regulation. That is not the case with Mr. Gurumurthy and therein lies the problem with his appointment to the RBI Board.

Bhushan, Sinha and Shourie on Rafale

Late on Wednesday evening in Singapore, a good friend forwarded me this link and asked me to go through it fully. It is a press statement or article written by M/s Yashwant Sinha, Arun Shourie and Prashant Bhushan.

At the outset, we have to note that the first two were Ministers in NDA 1 government of Vajpayee. PM Modi has sidelined them. They are bitter and angry. Mr. Bhushan was part of AAP and has pitted himself against the NDA 2 government in many instances.

Their press statement was released in which is also not so favourably disposed towards the NDA 2 government, to put it mildly.

Most SELL-SIDE research (research by stockbrokers and investment banks is called SELL SIDE research) in Financial Sector falls under this category. When they issue a BUY call on a stock, one does not know if they truly believe in the stock or if their investment banking interests dictate that they issue a BUY recommendation. There is a natural conflict of interest. So, it will be of interest and worthy of attention only when SELL SIDE issues a SELL recommendation.

So, like the SELL SIDE above, these three gentlemen have a natural conflict of interest. They have an axe to grind. When someone is bitter and has a personal animus, there will be a tendency to overstate the case, exaggerate a bit here and there and hide some inconvenient details, etc. One cannot lightly dismiss these possibilities.

Therefore, they have to make a rather rigorous case to convince the listener/reader that they have risen above their personal considerations. In this particular instance, when they have taken up something as important and critical as national security, the onus on them to be thorough with their homework is several notches higher.

My current reading of their press statement does not convince me that they have passed the above test. May be, I am wrong. One can never be certain, if one were honest.

To summarise their statement, they think that Government of India is vastly overpaying for the Rafale jet fighter, implying kickback, etc. It is not sharing the details of the contract. It has awarded the ‘Manufacturing under license’ to a favoured Indian private sector entity. These are serious allegations. Very serious. So, how seriously should we take them?

1) what is HAL’s record in defence production? How long did it take to produce the Light Combat Aircraft (single-jet, single-seat) and how comfortable are the Indian Navy and Air Force about the LCA? See here for details. It is a bit strange that Dr. Shourie, the man who privatised public sector enterprises is now batting for HAL with its track record of delivery.

(2) The questions raised by the three gentlemen sound so obvious. So, why were they not raised before and by others?

(3) How many defence manufacturing firms were there in India in the pvt. sector before? I presume the answer is zero. So, naturally, no firm will have a record. You have to begin somewhere.

(4) Understand the hsistorical context: When Korea wanted to become a steel power, they had no resource advantage or knowhow. They told Japan to pay war reparations in steel drawings and plans and depute people. The rest is history. Moral of the story: one has to start somewhere.

(5) Didn’t the French Government endorse the GoI answer on certain confidentiality provisions, after the ‘No confidence’ motion debate? See here:

Hours after Congress president Rahul Gandhi questioned the Rafale Deal, France responded saying a security agreement it concluded with India in 2008 legally binds the two countries to protect the classified information relating to operational capabilities of defence equipment.

That seems to make sense. Few countries would want details of the exact weaponisation and the customisation of a fighter plane to be made public. In fact, there is a healthy precedent with the UPA government Defence Ministers on this. See here.

(6) According to a Government of India press release, the process of acquiring a fighter jet was initiated in 2002 when NDA 1 was in office. UPA 1 and UPA 2 were in office for ten years from 2004 to 2014. They had not finalised and procured the fighter jets in these ten years.

The contract was signed late in 2016 finally, I think. By, August 2016, it was not signed yet. See here.

(7) The three gentlemen follow the ‘post hoc ergo propter hoc’ logic with many of their assertions. In other words, they are innuendoes, as of now.

(8) The clincher: the price of Rafale aircraft:

The most serious allegation that the three gentlemen have brought up is that the Government of India has increased the price from 670 crores per plane conveyed to the Indian Parliament in Nov. 2016 to 1660 crores per plane now!

In Feb. 2015, the French government agreed to sell 24 Rafale Jets to Egypt at EUR5.2 billion. Taking the average exchange rate of EURUSD and USDINR in Feb. 2015 (Source:, the price per aircraft works out to Rupees 1525.2 crores. That was in Feb. 2015. The Indian Rupee is now 10% weaker (USDINR = 68.60) than it was in Feb. 2015 (62.03735 USDINR then) and there are India-specific customisation which could be different from Egypt’s.

So, the current price of Rupees 1660 crore per aircraft for India does not seem odd or does not stink. Perhaps, there is nothing to see here.

It is quite possible the Minister who gave the price of 670 crores per plane in November 2016 was misquoting or did not take into account the correct exchange rate.

Many seem to forget that the Indian rupee depreciated 50% against the US dollar in 2011-13 period, thanks to double-digit inflation, high current account deficit and high budget deficit under UPA 2 government.

Yes, Indian sloppiness can be and is a security risk. Worse, India’s economic performance then was bigger security risk and some are working overtime to bring the risk back.

(9) Now, what about the bad debt problem in the Indian banking system? I think it is a very big economic and a security risk.

Let us crunch some back-of-the-envelope numbers:

India’s nominal GDP as of March 2018: 168,000,000,000,000.0

Stressed loans at 8% of GDP:                     13,440,000,000,000.0

Assume 60% goes bad                                   8,064,000,000,000.0

Assume 50% recovery rate; rest bad:        4,032,000,000,000.0

That can buy                                                   242 Rafale jets at the price of 1660 crores per                                                                                 plane.

Did the three gentlemen issue a press statement and urge the Opposition political parties to get to the route of the bad debt problem in Indian banks, to find out when these loans were made (under UPA 1, UPA 2 or NDA 2?), to whom, recommended by whom (UPA or BJP politicians?), sanctioned by whom and approved by whom and under what authority, etc.?

Tail-piece: In India, nothing except obituaries seems to be above politics. See here. Not even national security.

Final word:

Notwithstanding the above, given the nature of the allegations and given the previous Cabinet status of the two gentlemen making the allegations, it is incumbent upon the Government to share as much details as possible with the public to assure them that the transaction has been undertaken solely with natinal interest in mind and that it is above board.