Sturdy BRIICs?

Wall Street Journal carries an interview with Jim O’ Neill of Goldman Sachs on the BRIC resilience. The four BRIC countries collectivley contribute to 15% of global GDP, 5% more than what Goldman  Sachs first predicted in 2002, for the end of the decade. More here.

Iin the PEW Annual Global Attitudes Survey, American President gets high marks around the world.  Interestingly, in the context of BRIICs (second I stands for Indonesia), excepting in Russia (where it has plunged),  a higher percentage of survey respondents rate their national economy better in India, Indonesia, China and Brazil than they did in 2008. Turkey could be added (a marginal improvement) to this list. But, in every other country surveyed, people are gloomier about their national economic prospects. [More here].

What are stock markets smoking?

China’s monetary and fiscal stimulus

Caijing magazine has two interesting pieces – one is its editorial on China’s monetary policy and the other is on the amount of road construction that is taking place in China.

It is hard to be ambiguous with a sub-title like this:

A policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path. [More here]

There is more:

With excess production capacity and weak domestic demand in China, extra liquidity will not immediately push prices higher. However, cash released through new loans, due to low domestic demand, is flowing into the stock and real estate markets instead of the real economy. This is pushing up asset prices, encouraging even more profit-hungry capital to flow into the investment market. This vicious circle will compromise the foundation for further economic growth as well as encourage speculation, which creates bubbles. [More here]

On its road construction, here are the key points:

According to another World Bank report released in 2003, high income countries need 11.7 kilometers per 1000 people while middle income countries require 1.3 kilometers per 1000 people. Low income nations need 1.2 kilometers per 1,000 people.

“Compared with these World Bank numbers, China’s explosive growth in road construction is unusual,” said Shen.

According to China’s official statistics, at the end of 2007, there were 1.85 kilometers per 1,000 people in eastern China and 4.75 kilometers per 1,000 people in the central and western areas. [More here]

RBI report on India’s forex reserves

The Reserve Bank of India (RBI) has released its half-yearly report on India’s foreign exchange reserves. It has been around since February 2004. So, this is the 12th report. It is not too long and provides useful information. It is interesting to know that the RBI uses external asset managers to manage a small fraction of its reserves:

As at end-March 2009, out of the total foreign currency assets of US$ 241.4 billion, US$ 134.8 billion was invested in securities, US $ 101.9 billion was deposited with other central banks, BIS and the IMF and US$ 4.7 billion was in the form of deposits with foreign commercial banks / funds placed with the External Asset Managers (EAMs) (Table 5). A small portion of the reserves is assigned to the EAMs with the objective of gaining access to and delivering benefit from their expertise and market research. [Page 13 of the report – see here]

Equally if not more interesting is the press release dated 30th June 2009 titled, ‘Sources of variation in India’s foreign exchange reserves: 2008-09’. Out of the 57.7 billion USD decline in foreign exchange reserves in 2008-09, nearly USD37.7 billions were attributable to valuation changes.

As we know, in the second half of 2008, the US dollar strengthened against most global currencies. The large valuation decline in India’s foreign exchange reserves suggests that bulk of India’s foreign exchange reserves is not in US dollars. That is why the reserves, expressed in US dollars, dropped by nearly 37.7 billions due to valuation changes alone.

Now, with the US dollar resuming its decline – and my take is that, if and when risk aversion returns, the US dollar is unlikely to strengthen as it did in the second half of 2008 – bulk of these valuation losses would have been or is on its way to being recovered.

Good stuff and good work by RBI.

Arms-length delivery

‘Business Standard’ newspaper carried an excerpt from the speech of Mr. Bimal Jalan on July 15th. I happened to see it today. The difference between outsiders and insiders turned outsiders giving policy suggestions is evident in the precision and the specific nature of the suggestions made. The former runs a higher risk of being arm-chair. That is why I felt that writing op-eds. (which is what I do!) do not bring about change.

This is a precious paragraph in my view:

Under our Right to Information Act — we are very proud of it — you can ask a question and you are time-bound to give answer to us. But you can’t provide food on time. Why? The fundamental reason is that we don’t have delivery structures which are at arms-length from the ministries. The policies should be decided by the government or by the ministry. But the delivery, like the elections conducted by the Election Commission, like the appointment of civil services done by the UPSC (and not by the home ministry or the Department of Personnel), should be with an autonomous agency. [More here]

UK’s survey of economic conditions

The UK Central Bank – Bank of England – has a publication called Agents’ summary of business conditions – similar to the US Federal Reserve’s Beige Book. Somehow , I feel that it is better to read, view and the charts are nice and colourful. The July issue of the Agents’ summary of Business Conditions was released just this week. The cover page bullets tell the story. Check it out. But, these lines inside caught my attention. Mohamed-El-Erian talked of DDR – de-leveraging, de-globalization and re-regulation. De-globalization is happening for other reasons too and not just because of failures with specialisation at the sovereign level, with global imbalances and because of trade protectionism. Here are the sentences that caught my attention:

Over and above any impact of weak domestic demand, there had been further reports that firms were switching to domestic suppliers of components and finished goods. Most attributed this to sterling’s earlier depreciation. But for some, import substitution had been driven by a strategic push to minimise inventories — as shipping times were shorter for domestically sourced items. [More here]

Incidentally, when I saw this afternoon that the retail sales volume grew 1.2% in June in the UK, I was only reminded of this news-item: 

Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent. [More here].

Would love to know – with some authenticity and credibility – if the bugs have been fixed.

The romance is off?

If any one who follows more closely than Brad Setser, US trade deficits, its financing, global central banks’ reserves accumulation and sovereign wealth funds, then I am yet to find that person. This post by Brad Setser on the open announcement by China of its decision to put its reserves to use to fund overseas acquisition by China State-owned enterprises is a good read.

If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals. [More here].

One of the interesting links in his post is this TIME article. I missed it. It is an  important development, if true  and if sustained. It removes one of the key pillars of support for China’s mercantilist exchange rate policy which are foreign-owned exporting firms operating out of China. Their outsourcing model had made it imperative for China to maintain currency competitiveness. So, they were a powerful lobby against change in China’s exchange rate policy. In some sense, they were pursuing their rational self-interest but clearly it did not enhance systemic welfare globally (Adam Smith repudiated here?). See my piece in MINT here that briefly touches upon this issue. More background is available from James Kynge’s wonderful book, ‘China shakes the world’. A ‘must-read’ for understanding China’s modern economic history.

From Brad Setser:

Meanwhile, corporations are paying much closer attention to the risks and hidden costs of supplying their home markets with stuff made thousands of miles away in China. None of this necessarily means an end to the extraordinarily co-dependent economic relationship that China and the U.S. in particular have built up over the past decade. But it does mean big changes.

On one side, you had autocrats who feared losing their grip on power if the economy didn’t keep growing; on the other were autocrats who feared losing their grip on power if profits didn’t keep growing. They had a lot in common.  [More here]