Upside down map and other links

Reforms in China?

“Local governments issued $200bn of bonds in June and July under a new debt-swap plan. This frees up the equivalent for new loans by banks to credit-starved companies. China’s finance minister, Lou Jiwei, said on Friday that the cap on these bonds would be raised from $310bn to $500bn, a form of stimulus.” [Link]

Jamil Anderlini continues to write stellar stuff in FT on China:

Not only have global investors lost faith in China’s mandarins but within China itself the reform-minded officials who have overseen the turmoil have also been widely discredited, their plans for market-oriented economic reforms now in tatters.

The main reason for renewed state intervention late this week was a directive from top party leaders to provide a backdrop of rising markets when Beijing hosts a huge military parade next Thursday to commemorate the 70th anniversary of the “Victory of the Chinese People’s War of Resistance Against Japanese Aggression”, according to market participants and people familiar with the matter.

But since taking power in 2012, Mr Xi has concentrated decision-making power in his own hands to such an extent that his weakened underlings are unable to make firm decisions and stick with them. [Link]

China ready to launch military power from artificial islands in South China Sea [Link -article worth reading]

A crude translation but you get the picture:

China’s private bosses, more than 80 percent of enterprises facing collapse risk, legal risk. Typhoon cover when the ship, the captain must be the most unlucky own – crew can escape, but the captain could not bear his boat! [Link]

Tweets by George Chen of South China Morning Post suggest that

China’s Securities Regulator, CSRC, met with top heads at 50 major brokerages on Aug. 29 and urged them to continue to stabilise the stock market;

that China’s state agency for margin finance is raising 1.4 tln RMB interbank loans to prepare for a new round of stock market rescue and

China’s deputy Finance Minister wanted to let pension funds buy stocks ‘as soon as possible’ (market expectation: RMB1.0trn).

Apparently, lessons not learnt and hence, will be repeated.

A good bit of history on U.S buying silver up in the 1930s and causing money contraction in China [Link]. A similar move today will be to tighten global dollar liquidity and that is best done through higher rates. So, this is interesting and encouraging.

Great story in Wall Street Journal on how China’s collapse has upended Brazil. Did not realise that their trade with China rose more than 40 times since the new millennium! Also, fascinating insight into hubris – Brazil Foreign Minister apparently had the world map upside down – suggesting that, post-crisis, the world had changed! Amazing how quickly people lose touch with reality.

India’s TCA Srinivasa Raghavan has a simple, no non-sense thesis on how India should appeal to the dog’s owner (referring to Pakistan and China).

Willem Buiter wants a consumption-oriented fiscal stimulus in China monetised by the People’s Bank of China [Link – I sincerely hope they will go for it so that the world can launch into a full-scale beggar-thy-neighbour currency policies immediately]

IMF and Greece

Reuters has an in-depth story on the bailout of European banks via a seeming Greek economic bailout. It is interesting. Two things stand out, for me:

James Boughton, a former IMF economist who was also the fund’s in-house historian, remembers feeling that Europe didn’t seem to care what happened to the Greek economy as long as the euro zone’s financial system was protected.

According to former Greek Finance Minister Papaconstantinou, Strauss-Kahn finally decided to get tough with Merkel and insist on debt restructuring in May 2011. Then the unexpected intervened: As Strauss-Kahn was on his way to Europe to meet the German chancellor, he was arrested in New York after a hotel maid alleged he had sexually assaulted her. Under intense media scrutiny, Strauss-Kahn quit. (In 2011 New York prosecutors dropped charges against him and he reached a settlement with the maid.)

Strawman demo

The world doesn’t seem quite sure what it wants from China’s leaders. Critics scold Beijing for boosting stocks, then panic when they don’t. They insist market forces be allowed to set the yuan, then howl when those forces push it down. They tell China to accept slower growth as the price of rebalancing its economy, then clamor for stimulus when the economy slows. [Link]

Bloomberg Views writers gave us that gem above. So, who are these people who seem to be simultaneously wanting everything from China that only Bloomberg Views journalists have sighted?

Letters from editors

This is what I received from Simon Baptist of EIU today via email:

When I talk to business people about China, especially in Asia, there is a lot of scepticism about the growth numbers. Everyone’s individual experience seems to be that things are certainly not growing to the same extent as the 6.9% that the EIU is forecasting for GDP growth in 2015. We have been looking into this issue, and our conclusion is that the slowest growing sectors of China’s economy—like heavy industry and export manufacturing—are among the ones that foreign investors are most exposed to. Industrial sector value-added in July was only 6% higher than the previous year, while electricity consumption—taken by many as a barometer of the health of the economy—was up by only 1.3% in the first half of 2015. So where, then, is the growth that gets us up to this 6.9%?

The answer lies in the services sector. Even more so than is usual, data on the services sector is patchier in China than for manufacturing and heavy industry. Nonetheless, growth in many service sectors has been strong, with financial services, hospitality, transport, telecoms and e-commerce all growing above the national average rate. That’s not to say that there are no problems—the financial sector, in particular, is at risk of a slowdown in the latter parts of 2015, owing to market turmoil and questionable government intervention—but it is part of the transition of China’s economy that we have been watching for the last decade and will continue to watch for at least the next one too.

This is what I received from Jamil Anderlini, FT Bureau Chief in Beijing:

China has been roiling global markets all summer as its authoritarian leaders try to stop a huge stock bubble from bursting and its slowing economy from stalling. But the equity market collapse accelerated after Beijing opted in early August to devalue its currency for the first time in more than two decades and now the government faces growing questions over its policy-making competence.

With a debt load bigger than the US or Germany, an economy overly dependent on credit-fueled property development and capital flight accelerating, what will China’s Mandarins do next to avoid what many believe is a gathering economic crisis?

You can follow the latest on China’s Slowdown in our in-depth section.

Jamil Anderlini

Financial Times Beijing Bureau Chief

Tweets and counter-tweets on China

Markets like abstract idea of a successfully reformed Chinese economy, but don’t seem to like actual process of getting there. [Link]


I’m not seeing any reform. All policy prescriptions are anti-reform. That is what the market doesn’t like. [Link]

Another one:

China’s government is doing a great job of dispelling the stereotype that the Chinese are smart overachievers who know what they’re doing [Link]

From George Chen of SCMP:

BREAKING: China’s well-respected Caijing magazine confirmed 1 of its reporters was arrested by police for a stock market story denied by Gov [Link]

BREAKING: Chinese Police arrested managing director Xu Gang, ExCom member of China’s No.1 brokerage CITIC Securities [Link]

BREAKING: Chinese police arrested 8 people incl staff at top local i-bank CITIC and Chinese securities regulator CSRC due to insider trading [Link]

How ironic! Beijing wants to blame everybody for stock market crash – now adding “underground banks” on blame list after evil foreign forces [Link]

From Capital Economics – if you thought that this was the ‘ultimate’ excuse/justification, wait for the last one:

“PBOC didn’t devalue RMB. It made a technical change to reference rate mechanism. It was the market that devalued the RMB by overreacting.” [Link]

This is not a tweet:

PBOC researcher blames Fed for stock market rout [Link]

From Chris Balding:

Repeat with me: RRR cuts are feeding capital outflows. RRR cuts are feeding capital outflows [Link]

Re-tweets George Chen:

Communist Party mouthpiece People’s Daily today: “Underground banks” have helped capital escape from our stock market so we must crack down! [Link]

with this tweet

This has all the hallmarks of the very early stages of impending capital controls [Link]

The Gold Medal goes to Global Times

From George Chen (SCMP), this morning:

Chinese state media Global Times: China is the world’s largest democracy, NOT India, and we must be proud of the fact. [Link]

Secular stagnation

I was not referring to Summers’ thesis of a secular stagnation in global economy and/or in the U.S. economy. I am referring to the secular stagnation in intellectual contribution to the debate on reviving global growth. This has been discussed extensively in this blog on many occasions.  Here is my post from March 2014.

Recently, Summers has repeated his plea from March 2015 again in August, asking the Federal Reserve not to raise rates. He says that it would be a ‘dangerous mistake’. If either the UK or the United States were to make the ‘dangerous mistake’ of rising rates by 10 basis points or 25 basis points, after six years of 0.0% interest rate (or slightly above that as in the UK) and Quantitative Easing, then isn’t there something grievously wrong with their economies that cannot be merely fixed by low rates?

Is there no point in the discussion or the scenario that these folks would admit that they could have been wrong all along in diagnosing the problem, let alone in prescribing a solution. Some problems do not have man-made solutions. When would that wisdom dawn? Or that solutions could have large unintended consequences? In other words, if solutions are unprecedented, their consequences too would be unprecedented. How can these folks pretend to know what would happen if their proposals are accepted? The evidence after six years of zero rates and QE is that these policies are overwhelmingly underwhelming and have engendered many other imbalances again.

The gung-ho years of the 1920s resulted in a depression. The recession itself was ended by a war and then the boom of the next 20 years had to suffer a decade long stagnation cum inflation. Then, excessively high real rates were required to wring out the inflationary excess from the system and pave the way for the following 25 years of expansion. What did policymakers do in 2008? Did they allow the forces of creative destruction, intrinsic to capitalism, to happen? Did they enforce accountability? Did they bail out mortgage lenders or borrowers? Financial statements of financial institutions are still not marked to market.

Interest rate palliative or painkiller has become permanent. That itself must raise alarm bells or concerns. No, nothing of that. Proponents simply want more of it. World economy has borrowed too much from future growth, since the new millennium was born. Yes, it was economic growth on the steroid of debt. 2008 was a warning for payback. That warning has gone unheeded. More debt was the response of policymakers. More borrowing from future growth. Where will it keep coming from? What has the liquidity effect of post-2008 policy interventions? More debt stock in the hands of many emerging economies with little to show for it in terms of assets or sustainable economic growth.

That sovereigns or the financial sector have not ever put low interest rates to good use is evident from many places.

(1) Eurozone economies, especially in the South, benefited enormously with the collapse in borrowing costs once the EMU was born? What have they got to show?

(2) Federal Reserve in the U.S. brought down the Federal funds rate to 1.0% in 2003.  It gave America the weakest post-War expansion in capex and in employment generation.

(3) Japan did QE before and cut rates to 0.1% in the 1990s. What have they got to show for it?

(4) Post-2008, China opted for a massive stimulus funded by bank loans. Today, big questions loom over China’s economic and hence, political future.

Apparently, on Twitter, Mr. Summers has gone a step ahead and called for a resumption of the bond buying programme that the Federal Reserve ended not-so-long-ago.  He has been joined by Ray Dalio of Bridgewater Associates. The latter called on the Federal Reserve not to raise rates in July.

Another bond-buying programme on the part of the Federal Reserve will clearly be a bailout of China. It would signal that China was ‘too big to fail’ and that its failure would hurt their interests. That could be a wrong conclusion to make, unless the United States agrees to bail out China with enormous provision of US dollar liquidity in return for solid commitments on the unwinding of recent policy unilateralism on the part of China on many other fronts.

But, the big question mark is whether such a bailout would succeed or enormously complicate matters. This blogger knows where he stands. It could very well spell the death-knell of the U.S. dollar. Politically, Federal Reserve will be opening itself to massive criticism and censure by the Republicans. The resulting strengthening of the Euro and the yen will bring back economic gloom both for Europe and Japan. It will be ultimately self-defeating in many ways for the United States. So, I sincerely hope that American policymakers ignore Larry Summers and Ray Dalio.

Having said that, I am not very optimistic that they would heed my warning over their advice.

But, QE4 would spell the end of the post-Bretton Woods de facto US dollar standard. Then, it would be time for Paul Volcker’s idea propounded in May 2014 to be given concrete shape. In other words, time for another Bretton Woods conference.

Global Impact of China

This is one of the tweets of Patrick Chovanec in recent days:

I’m in odd position of arguing China’s downturn will be worse than most imagine, but impact on global economy better than most imagine. [Link]

Another one:

I spent last 2 years anticipating & thinking thru its consequences, many of which are positive for global economy. [Link]

Third one:

Most who closely follow China, even dieheart bears, tend to be more positive abt China crash’s effect on global economy than those tuning in [Link]

Then, this:

Odd that Indian rupee is taking a hit, since India is a huge beneficiary of cheaper oil, zero correlation w/China. [Link]

He is not connecting this tweet on the Indian Rupee with his other tweets that I had listed above it. This shows that he could be missing certain things or be dismissive of them as unlikely to happen because they are irrational. Fear is not rational and usually, contagion too is not rational. But, they are reality.

For a man as perceptive as he is, he is speaking too soon on the impact on the global economy being beneficial. He is discounting the power of bad ideas (QE IV), the law of unitended consequences, investors turning risk averse and taking profits to cover losses elsewhere, the flows from China’s sovereign wealth funds into global equities that were there until 2013 or so, on European exporters (Germany?), knock-on effects to the global banking system through their exposure to China’s short-term US dollar borrowings, trade protectionism and trade wars arising out of China dumping its massive excess capacity, an economically weak China turning politically adventurous with neighbours (read, India), etc.

Alternatively, of course, it might also go slow on South China Sea expansionism and other multilateral initiatives just to have the United States bail it out with a QE IV. America might yet do so simply because they are afraid that ‘China is too big to fail’ and that it would hurt U.S. interests if it failed.

In other words, they may not see it the way Patrick Chovanec sees it. If it is beneficial, they should not do anything to alleviate it. The talk of QE IV has started. Patrick Chovanec is really discounting the power of bad ideas.

Of course, all of these do not subtract from the enormous insights one derives from his tweets.

New-Old journey for Yuan

Barely had William Pesek written cautioning Asian governments not to engage in competitive devaluation, Bloomberg flashed a news-story on its website that Chinese government agencies were pencilling in RMB7.0 to a USD for 2015 and 8.0 for 2016. This reinforces the point that I had made in my blog post here and in MINT that China’s move on August 11 on its currency was the first of the many moves that are to come.

Chinese agencies would not be using them as their forecasts and that would not be shared with Bloomberg unless there was intent to do so and to signal to the world that China was going to do so.

‘Investing in Chinese stocks’ – a good blog – warns that

China must do a large one-off devaluation of the yuan or it will bleed its way to a currency collapse. [Link]

The chart of Chinext 2015 vs. Nasdaq 2000 that is constantly updated on this blog site bears watching. There is a lot more correction to come of Chinext, if Nasdaq 2000 is any guide.

Ambrose Evans-Pritchard had noted that capital outflows had accelerated:

Capital outflows from China have surged to $190bn over the last seven weeks, forcing the authorities to intervene on an unprecedented scale to defend the Chinese currency. [Link]

So, whether one-off depreciation would spook people violently and massively or drip-feed would give them time to adjust and take money out slowly is an empirical question. One-off big devaluation could be dangerous in today’s world for other countries and for social stability in China. People’s anger could boil over. China’s GDP would be reduced below USD10.0trn overnight and in a big way.

AEP, of course, says that China could have another of its mini up-cycle in the second half of the year. Two months are gone in the second half already.  This article is riddled with so many questionable statements that it would take a big effort to write them all out. ‘Stimulus works’ and ‘China has stimulated’ are the messages. The effects will be felt. This flies in the face of global evidence over time and China’s failure with its own stock market intervention recently. Faced with a debt trap, stimulus may only delay the inevitable. AEP hedges bets but his fascination and faith with stimulus are deeply ingrained.

There is a famous quote in the article. That man will surely live to regret this:

The violent moves over recent days may prove to be no more than an August squall. “Liquidity has dried up over the summer and that has exaggerated the moves,” said Marc Ostwald from ADM [Link]

‘Alpha Now’ has an effective response to AEP’s mild/mini optimism on China’s mini up-cycle.

Since we are all missing Charlene Chu’s analysis of the Chinese economy (which was possible to get with some effort when she was at Fitchratings), these two blog posts are priceless.

I would urge you to read at least one of them – especially the one that tells us how much of FX Reserves that China can actually deploy to defend the currency or stem capital outflows – around USD667 out of USD3600bn!

If that is the case, I am not sure why Chinese agencies are talking of  a much weaker Yuan exchange rate publicly.

In the meantime, China moved to cut deposit and lending rates by 25 basis points on Tuesday afternoon and reduced the Reserve Requirement Ratio (RRR) by 50 basis points. The last one will take effect on September 6. Throwing money at problems will make them vanish, of course. For proof, ‘Solarcycles’ has four charts on the U.S. economy which has thrown trillions at its economy.

Finally, Christopher Balding is a guy worth following, if one is following China. Three blog posts by him are great reads. The post he had written on the quality and quantity of GDP overstatement in China is a MUST READ. Amazing stuff on how the National Bureau of Statistics of China understated housing inflation by assuming an Urban/Rural mix of housing of 80/20 when the true ratio was more like 35/65!  The resulting understatement of GDP deflator has resulted in a significant overstatement of real GDP in China.

Then, there is a ‘Grab bag of thoughts on Thursday’. The last point debunks the myth that ‘China is different’. His comment on the stimulus that China unleashed in 2008/09 is also well worth noting. Right upfront is the comment on the threat by shadow banks to commit financial ‘immolation’. The story is this. They have sold ‘Wealth Management PRoducts’ to clients whose deposits (these are called high-yielding deposits) have been used to lend money to Property Developers. These loans are guaranteed by Hebei Financing Investment Gurantee Co. Credit Guarantee Firms are like ‘Credit Default Swaps with Chinese characteristics’. Hebei Financing has stopped paying out on its guarantees since January! Read the full stuff in FT here. The risk of social unrest and strife comes through palpably in this story.

On the rate cut today, he has a post too and asks us to watch the deposit rates, liberalisation of which is an attempt to keep money from leaving the country.

Tyler Cowen on PBoC rate cut and other developments – in bullet points. Timely reminder that the PM has to sign off on rate cuts in China.

With this rate cut and RRR cut, has China decided not to defend the Yuan? Perhaps. Then, this will be a problem. Gwynn Guilford has two very good charts in this post.

Pulling the plug

Pranay Kotasthane and I have a joint piece (Discussion Document) on whether the United States is ready to pull the plug on China. We have marshalled our facts and evidence and presented our conclusions. You can let us know what you think of it and what you think of the proposition. The document is here. The chart of the Real Effective Exchange Rates of the Yuan and that of the Yen is as dramatic as it can get, on the eroding competitiveness of China.

Of course, if the United States abandons its move to begin normalising monetary policy in the country and instead does QE4, then one would have to say that they are not ready to pull the plug. Alternatively, one could also say that they judge China ‘too big to fail’ and fear the fallout on their own financial system and economy. Hence, they may not be bailing out China strictly but bailing out their own economy. It will be hard to prove or disprove. It is a joint hypothesis problem.

We will know soon.

The Syndicate Project

Arvind Subramanian, India’s CEA, has a piece in ‘Project Syndicate’ on the Greek bailout. He think that Greece should have been allowed to exit with a generous haircut in its debt. I think that is what Schauble offered them.

Dani Rodrik’s ‘Project Syndicate’ piece has a sense of déjà vu. This is what he writes on China and India:

Compare China and India. China grew by building factories and filling them with peasants who had little education, which generated an instant boost in productivity. India’s comparative advantage lies in relatively skill-intensive services – such as information technology – which can absorb no more than a tiny slice of the country’s largely unskilled labor force. It will take many decades for the average skill level in India to rise to the point that it can pull the economy’s overall productivity significantly higher.

So India’s medium-term growth potential lies well below that of China in recent decades. A significant boost in infrastructure spending and policy reforms can make a difference, but it cannot close the gap.

On the other hand, being the tortoise rather than the hare in the growth race can be an advantage. Countries that rely on steady, economy-wide accumulation of skills and improved governance may not grow as fast, but they may be more stable, less prone to crises, and more likely to converge with advanced countries eventually.

China’s economic achievements are undeniable. But it remains an authoritarian country where the Communist Party retains its political monopoly. So the challenges of political and institutional transformation are immeasurably greater than in India. The uncertainty that confronts a long-term investor in China is correspondingly higher. [Link]

This reminded me of a famous piece by Tarun Khanna and Yasheng Huang in 2003 titled, ‘Can India overtake China?’. Indians loved it. India did not overtake China in the next twelve years – neither in growth and, of course, nor in debt.

The problem is not with rapid growth, per se. But addiction to rapid growth to an extent that one wishes to defy law of nature. Just as very few companies have seldom grown their topline 20% CAGR for five years, countries can achieve rapid growth in catch-up phase. Then, they must slow down. China attempted to defy gravity by borrowing heavily. It happened mostly in the new millennium and that too, after the global crisis of 2008.

But, I do recall reading in Yasheng Huang’s ‘Capitalism with Chinese Characteristics’ that China did enjoy good quality , bottom-up sustainable growth until Tiananmen Square happened. That was a 10-11 year period. India is yet to experience even that kind of longevity in rapid growth. That is the truth.

That brings me to the issues flagged by two of Prof. Bibek Debroy’s pieces on Indian labour laws – one in April and one recently. But, that has to be a separate post.