Praise where it is due

China may have lots of issues with their economy to deal with – size of the debt mountain in the private sector, shadow banking, eroding competitiveness, decelerating economic growth and capital flight. Yet, they are not losing sight of their long-term goals and vision. That is something that the other wannabe superpower in Asia (India) lacks.

Look at the two recent news-items on how China has inked agreements with Britain and Germany on offshore renminbi trading, clearing and settlement. See the news-stories here and here.

The story that informs us of China’s agreement with Britain has this important nugget:

Standard Chartered Bank developed a renminbi globalization index to measure overall growth in offshore renminbi use. It includes deposits, trade settlements and other international payments, dim sum bonds — Chinese bonds that attract foreign investors — certificates of deposit issued as well as foreign exchange turnover, all from an offshore perspective and denominated in renminbi.

The index initially covered only Hong Kong. Singapore and London were added in August 2011, and Taiwan was added in July 2013. The index doubled last year and has risen by 14 times since the beginning of 2011. [Link]

The Bloomberg story that reports on China’s deal with the Bundesbank in Germany has the following information:

In a sign of closer economic ties between the two countries, China plans to open a fourth consulate in Germany this weekend in Dusseldorf, according to the city’s local chamber of commerce. About 800 Chinese companies have bases in North Rhine-Westphalia, Germany’s industrial heartland. More than 300 of those are in Dusseldorf, where about 2,700 Chinese live, according to the city.

German companies including Siemens AG, the country’s biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements.

Germany’s financial capital prevailed over Paris and Luxembourg in a euro-area race to win trade in renminbi, which overtook the euro to become the second-most used currency in global trade finance in October, according to the Society for Worldwide Interbank Financial Telecommunication. [Link]

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Lewis beats Haldane

It has taken Michael Lewis’ forthcoming book (‘Flash Boys’) for the world of finance to loosen its embrace (or, at least pretend to do so) of ‘High Frequency Trading’ (HFT). It is a shame that this FT article does not mention the work by Andy Haldane of the Bank of England on this matter. His famous and well-argued speech on the topic of HFT is ‘Race to zero’. It can be found here and Yours truly wrote an article in MINT on this topic in 2011.

(p.s: This Bloomberg article too does not mention Andrew Haldane – one of the few regulators who saw High Frequency Trading for what it is – market rigging)

Do we get it?

The FT compensated for many articles like the one written by Philip Stephens with an article by Tim Harford on ‘Big data’, published online on March 28. It is long but must-read for students of economics and statistics, in particular.

When I read the article, I was reminded of two of my recent readings:

(1) Dennis Meadow’s comments (paraphrased here) that new technologies cannot save the world because they reflect the values that we have and that unless values change, we are doomed (or, words to that effect).

(2) Of the modellers’ hubris, well documented by Arnold Kling and Dani Rodrik.

I had blogged on both here and here.

As long as America dominates world affairs, hubris is the big risk for the human race. With other superpowers, there may be other risks, of course.

Anand Mahindra and Charles Dickens

The brief but nice convocation address by Anand Mahindra to the graduating class at IIM-A in 2014 is available here. Worth a read.

Must highlight this part of his speech:

I believe that this psychological legacy of colonialism was at least as pernicious as the memories of physical humiliation. Why on earth did we allow this residue to remain for so long? We were in a state of mind best summed up by this Urdu Sher:

Ajab ye zindagi ki
Kaid hai har insaan
Rihayi maangta hai aur
Riha hone se darta hai

Which essentially means that even though we long for our freedom, we are mortally afraid of being released.

He has questioned the need for us to allow the residue to remain for long. But, worse, we continue to read and extol those who wished to exterminate us from the face of this earth.

Until I read this piece (published in 2007) in ‘Guardian’, I did not know that the famous author Charles Dickens had such a mighty contempt for ‘races’:

According to an article by Dr. Gideon Polya, this is what Charles Dickens wrote to businessman Emile de la Rue in October 1857:

Thus Charles Dickens in a letter to Emile de la Rue on 23 October 1857 about the so-called Indian Mutiny of 1857 :  “I wish I were Commander in Chief over there [ India ]! I would address that Oriental character which must be powerfully spoken to, in something like the following placard, which should be vigorously translated into all native dialects, “I, The Inimitable, holding this office of mine, and firmly believing that I hold it by the permission of Heaven and not by the appointment of Satan, have the honor to inform you Hindoo gentry that it is my intention, with all possible avoidance of unnecessary cruelty and with all merciful swiftness of execution, to exterminate the Race from the face of the earth, which disfigured the earth with the late abominable atrocities [2,000 British killed in the 1857 Indian War of Independence aka the 1857 Indian Mutiny]

Gideon Polya cites this from the book by Grace Moore titled, ‘Dickens and the Empire. Discourses of class, race, and colonialism in the works of Charles Dickens”, published in 2004.

The Wiki page on Charles Dickens and racism is interesting but it mentions that the above intent of extermination was expressed in a letter that Dickens wrote to Baroness Burdett-Coutts. I do not know who is correct. But, it is important to note that he expressed that sentiment. The discrepancy is in the name of the addressee. This discrepancy apart, the Wiki page is worth reading.

Lest I forget to mention, the article in ‘Guardian’ mentions the work of historian Amaresh Misra who claims that Britain’s deacde-long ‘holocaust’ in India claimed about 10 million lives:

A controversial new history of the Indian Mutiny, which broke out 150 years ago and is acknowledged to have been the greatest challenge to any European power in the 19th century, claims that the British pursued a murderous decade-long campaign to wipe out millions of people who dared rise up against them.

In War of Civilisations: India AD 1857, Amaresh Misra, a writer and historian based in Mumbai, argues that there was an “untold holocaust” which caused the deaths of almost 10 million people over 10 years beginning in 1857.

How many such speeches do the Mahindras of India have to make before Indians shed their colonial hangover?

Cross-posted here.

‘Unfriending’ China

This Reuters article on German ‘honeymoon’ with China fading makes for interesting reading. From the Indian perspective, it is important to draw the right lessons.

What this article talks about may be the slow re-think but the fact is that the relationship soared to great heights and all because of China’s impressive economic growth. Savour the statistics.

Whether they like China or not, it takes enormous efforts for many countries to ‘unfriend’ (to use a Facebook jargon) China. They do not require much time to do the same to India simply because the economic relationship, in most cases, is too small to matter.

Through its sheer economic size, China created stakes for many countries in its economic health. No diplomacy required. Economy did it for them.

That is the biggest disservice that the UPA did to India. It has hugely undermined the Indian growth story. Big time. To an extent, the recent Indo-US divide could be traced to that.

Percy doth protests too much

Percy Mistry has a piece in FE on how much of investments India has to undertake in the next six financial years (beginning April 2014) to achieve a GDP growth of 8% to 9% per annum sustainably. His estimate of six trillion dollars is subject to a lot of important assumptions. India may not need so much of incremental investment. Some improvement in capital and labour productivity can make up for the incremental capital outlay that is required. De-clogging the regulatory and fuel linkage logjams in the power sector could add up to 2% to GDP growth. So, we are not sure if the number is sacrosanct or is really necessary. Further, in a later part of the article, there is a reference to another number and that is USD8-9trn. Quite how to reconcile the two is beyond TGS or, at least, beyond this post.

On the face of it, the number looks high. Certainly, as a percentage of India’s nominal GDP which stood at USD1.84 trillion in 2012, the investment/GDP ratio will be more than 40% in 2014-15 if one divides the USD6.0trn equally in the next six financial years.But, as nominal GDP growth is in the range of 12% to 15% per annum, this ratio quickly drops below  30% (33% for instance in 2016-17, assuming a rather reasonable 13% nominal GDP growth) and the ratio of investment/GDP is as low as 23% in the terminal year – something eminently do-able with Indian savings.

In other words, the requirements are not such as to warrant the recommendation of a drastic U-turn on India’s attitude to foreign capital. Some old mindsets that have crept in lately do have to be discarded again and one needed to become at least agnostic from being hostile towards foreign capital. But, Indias’ needs to not warrant India becoming a supplicant towards foreign capital.

So, what are his recommendations?

It must open up completely to foreign capital inflows.

It must entirely stop discriminating as absurdly as it does between foreign and domestic investment

Its financial system needs to be liberalised swiftly to a degree beyond the ambitious targets implied by the Mistry (2007) and Rajan (2008) reports.

The failure of the FM to get long overdue insurance legislation passed in the last Winter Session of Parliament has severely damaged his international credibility.

These are red herring and our antennas and eyebrows both go up. These have only tangential relationship to the subject of attracting capital the case for which is overstated by the author. For example, no country in the world can afford to treat and treats domestic and foreign capital alike. Nor has any conceptual or empirical case been made linking financial liberalisation to attracting capital. Long-term capital requires policy certainty to a degree, reasonable taxation, rights of repatriation and no retrospective legislative change. Linking financial liberalisation to attracting long-term capital is spurious.

Further, many important issues remain to be sorted out before red carpets are rolled out without reservations. The trans-Pacific Partnership accord is modelled after the US bilateral investment treaties. It proposes that investors be given the right to sue sovereigns. Check out this paper by Prof. Kevin Gallagher of BU on the implications.

Many countries in the European Union are uncomfortable with this right of investors (companies or individuals) to sue sovereigns. Indonesia plans to scrap bilateral investment treaties.

So, proposing a blanket red carpet treatment for foreign capital raises many eyebrows.

Those who overstate their case and do so rather heavily risk not only being ignored but also questioned as to their motives. More importantly, they achieve outcomes that are opposite of what they seek.

[p.s: Good friends Rajeev Mantri and Harsh Gupta had written a Op.-Ed. in MINT in 2011 on ways of tapping the domestic capital base. Worth reading and acting up on those suggestions first]

Tip for Tripathi

I ‘sympathise’ with the ‘pain‘ that Mr. Salil Tripathi is going through. He is quite obviously struggling to come to terms with the Modi juggernaut, arising partly out of his unsuccessful struggle, so far, to distinguish between his own prejudices and facts.

Professor Daniel Kahneman, in his famous book, ‘Thinking Fast and Slow’ has a tip for him on page 405:

Adaptation to a new situation, whether good or bad, consists in large part of thinking less and less about it.