Shame offensive

Neville Maxwell makes no attempt to hide his distaste for India. But, what is amusing is that he does not take into account contextual evidence of China’s behaviour towards other countries in the region, in the last several years.

See this brief from Singapore-based Institute of Southeast Asian Studies on the exclusion of the Thailand Prime Minister from the Belt and Road summit.

This story suggests that the standoff between India and China near the tri-border with Bhutan is more a pressure on India to accept changing realities. That is realistic, compared to the Maxwell story above. But, are the realities really changing?

Frankly, China’s economy is far from healthy. It is brittle and vulnerable. Big time. It is overestimating its strength and underestimating American resilience, in my view.

STCMA – 19 July 2017

(1) Shock rise in China’s shadow banking enrages Xi Jinping. Quite why it should be shocking is unclear to this blogger. The interesting tidbit in the story is this:

… the shadow banking nexus is bigger than all other regular activities of the lenders put together. Regulators had thought it was equivalent to 42% of on-balance sheet business at the end of 2015. They have revised this drastically, admitting that it reached 110% by the end of last year.

(2)  Have the Economic Constraints on China’s Geostrategic Ambitions diminished? That is an interesting question to ask. But, as Brad Setser note,s there is room to disagree with the author’s recommendations.

(3) Headlines that tell the story together. No need for lengthy analysis

China’s Xi orders debt crackdown for state-owned groups [Link]

Chinese purchases of overseas ports top USD20bn in past year [Link]

(4) Barry Eichengreen on the 20th anniversary of the Asian crisis:

… if the emergence of China signifies how much has changed, it is also a reminder of how much remains the same. China is still wedded to a model that prioritizes a target rate of growth, and it still relies on high investment to hit that target. The government maintains liquidity provision at whatever levels are needed to keep the economic engine humming, in a manner dangerously reminiscent of what Thailand was doing before its crisis.

Because China’s government relaxed restrictions on offshore borrowing faster than was prudent, Chinese enterprises with links to the government have high levels of foreign debt. And there is still a reluctance to let the currency float, something that would discourage Chinese firms from accumulating such large foreign-currency-denominated obligations.

China is now at the same point as its Southeast Asian neighbors 20 years ago: like them, it has outgrown its inherited growth model. We have to hope that Chinese leaders have studied the Asian crisis. Otherwise they are doomed to repeat it.

(5) The real Takeaways from the weekend meeting in China:

(i) Support the real economy
(ii) reduce lending costs for the real economy
(iii) relegating financial opening up and currency reforms to the backburner – no more liberalisation. Concern over capital flows dominates.

The rest is all smoke and mirrors.

(6) Singapore blinks. [Link]

(7) Bill Gates cautions Europe on its open door immigration policy. Good stuff from the man. Speaking the truth.

(8) China’s Growth masks Unresolved Debt and Real-Estate Problems. Who knew?

(9) California confronts solar power glut with novel marketplace

(10) Conviction of former President of Brazil. I think Brazil is doing a far better job of cleaning up its politics than many other countries, including the so-called developed countries.

There is a big tale in this story

Revisited Chris Balding’s Twitter handle after a while. Came across this gem. (Arrived at this through this tweet)

According to new research based on data obtained under a Freedom of Information request by Hasan Tevfik and Peter Liu, research analysts at Credit Suisse, foreigners are buying property at an annualised rate of $8 billion per annum, equating to 25% of new supply in New South Wales and 16% in Victoria in the past 12 months….

… The bombshell figures suggest that, along with local investors, the level of foreign investor activity in the housing markets has been a significant driver of the price growth of recent years, and the overwhelming majority — a staggering 80% in NSW — is coming from China.

Chinese buyers are evidently not having any problem in finding money to pay for the purchases even though Australian banks are not extending credit and that there are alleged capital controls imposed by China.

Now, if Australia were to impose restrictions on Chinese buying of Australian property, it would be dubbed anti-globalisation and anti-foreigner. But, that would be a perfectly legitimate response because this additional demand is making homes unaffordable for Australians. Now, if ordinary Australians therefore vote for a politician who clamps down foreign ownership of Australian property, would he necessarily be a reckless and dangerous demagogue?

Would commentators argue that such real estate bubbles and unaffordability are necessary evils for keeping the world open? How many ordinary people would subscribe to such a philosophical stance? How many ‘philosophers’ would take such a stance if they were personally affected?

America matters more

The header of a Bloomberg article runs as follows:

If Trump Hits China, Regional Demand Would Soften Blow in Asia [Link]

I think that is a bit of a stretch. Surely, China has become important to Asian economies and other emerging economies but the U.S. matters much more. Without the U.S., the world economy would not be the same. Important for the so-called Pundits to shed that delusion or illusion too. Not that they have a good record on that.

You do not have to believe me but just peruse the BIS Annual Report 2016 (Chapter 3 – page 56):

In contrast to the significant rise in exports destined for China, the share of
most countries’ exports to the United States has remained stable or declined a little
over the past 15 years (Graph III.6, bottom panel). Despite this, US demand is still
more important than China’s for most countries’ exports.[Emphasis mine]

Trade spillovers can also occur through a third country that imports intermediate
inputs used in the production of its own exports. As a result, for many advanced
and commodity-exporting EMEs the indirect impact of a reduction in US imports is
large relative to the direct effect (the blue bars are large relative to the red bars in
the bottom panel of Graph III.6). Spillovers from other major advanced economies
also remain important for both advanced and emerging market economies. [Link]

Has the game changed?

I attended a half-day seminar on Jan. 7, 2017 sponsored by LKY School of Public Policy (LKYSPP) of the National University of Singapore (NUS) and ‘Foreign Affairs’ journal published by the Council for Foreign Relations (CFR) of the USA. It was a priced event and I thought it was worth paying S$100.00 for it. It was not a bad bargain, in the end. It had one key note speech and two panels. Keynote speech was delivered by DPM Tharman. It was a bit on the shorter side. In the short-term, he said that he was pessimistic. He stretched the short-term to more than a few years, in the Q&A.

He did not say anything direct about President Trump or the Chinese President or any particular country.

The keywords from his speech were regeneration and not re-distribution, reflection and a German word, ‘geerdet’ (being grounded, I suppose, it is about being grounded in reality or being humble and not hubristic).

The first panel was about the new U.S. administration. It was chaired by Jonathan Tepperman of ‘Foreign Affairs’. He was a typical ‘liberal’ American who was sarcastic about Trump without any attempt at reflecting on the failures of the other side that has brought someone like Trump. Evidently, he had not listened to DPM Tharman’s speech.

Second, there was also no attempt to consider the possibility that, may be, there is more to Trump than what they imagine because, in their own words, he has defied all predictions of his spectacular defeat. Instead, as we read, the attempt is to pin it all on Russia.

This is not only stupid but also suicidal and counterproductive for world peace.

The rest of the panel was not so bad. A former Italian PM was there. He is Enrico Letta. He was PM for about ten months from 2013 to 2014. He was not bad. He conceded that Europe had to focus on security, migration and terrorism in 2017. He was, of course, critical of both Brexit and Trump’s victory because he felt that both were about bringing back the past and not looking forward to the future. These are double-edged arguments. The past is a prologue usually as history repeats itself. But, he was not a mindless critic. He was, overall, thoughtful.

He said that political parties in Europe and in the USA had lost touch with the grassroots. For example, he said that one of the principal reasons for Trump’s victory was that the possible Presidential election contest a year or so ago was Clinton II vs. Bush III. How could that be exciting to voters?

The other panelist – James Goldgeier – made the point that many non-blacks voted for President Obama in 2008 and in 2012. So, what he meant to say that the country could not become ‘racist’ overnight. Only eight years, did the country elect a black President and re-elected him four years ago. He also said that the focus on ISIS, if it happened under President Trump, would be a positive. In that context, he said that a good relationship with Russia would be a useful thing for America. But, immediately, he brought in a caveat. Fighting ISIS might give a blank cheque to authoritarian/dictatorial rulers in Turkey, Syria and Russia!

The panel moderator or the audience should have connected the dots. If the country voted for Obama twice and some of the same states had swung (even marginally) towards Trump, was it not an indictment of his tenure and of the candidate that the democratic party put up? That was the point that the former Italian PM was making. Indeed, during the Obama years, the number of regulations passed outstripped two of his immediate predecessors. I had blogged on it recently.

I think those who are anointed or assumed to be or who accept that they are both ‘intellectuals’ and ‘Liberals’ are still insufficiently reflective.

Anyway, the next session was about Asia: ‘Managing the rise of Asia’.

You can understand from the title that the ‘rise of Asia’ is being taken for granted. That is quite complacent and is inconsistent with recent developments in Asia – both political and economic. The session moderator was Prof. Kishore Mahbubani, dean of LKY SPP. He thinks it would be Asia’s century, principally led by China. He is a major champion of this thesis. I am one of the (deep) sceptics.

Quite a few of the panelists actually pushed back against this idea. Mr. Chris Hill felt that China was not willing to assume responsibility. Its desire to pick off each and every single sovereign state of ASEAN (Cambodia, Laos, Philippines and Malaysia, for example) was actually an indirect attempt to undermine the collective ASEAN itself. Also, its heavy-handed dealing with South Korea was improper. He was unambiguous that the U.S. must back South Korea’s security needs.

He said THAAD deployment in South Korea was correct and that the security cooperation had to be solidified further. In this regard, this article in ‘South China Morning Post’ is a fascinating, if long, read. Perhaps, it reveals the extent of China’s statecraft. I do not know. That is my guess.

He was positive on Tillerson, the candidate for Secretary of State in Trump Administration. Mr. Chris Hill had negotiated with North Korea, on behalf of the U.S. He cited some examples to say that they are impossible and unpredictable.

Cheol-Hee Park felt that China does not listen well and that it needed to earn the respect of other nations. He said that that had not happened. He was quite apprehensive about the relationship between China and Japan. Also, he was surprised that Korea and Japan allowed the statue matter to escalate.

There was not much discussion on Russia or India.

Now, if you put these and the following together, does it give you a sense of assurance about the ‘inevitable rise of Asia’:

(1) China has issues with Vietnam, Singapore, Japan and South Korea.

(2) Japan and South Korea have a spat over the issue of comfort women.

(3) Malaysian regime has lost credibility

(4) Indonesian Islamists are trying to weaken the President

(5) In South Korea, the President has resigned and China is targeting South Korean companies.

(6) India has gone and put its own short-term economic and political future under a big question mark.

(7) Pakistan remains an important source of global terrorism. Nothing has been done about it.

On top of that, there are big economic question marks over China’s near future. I think it could be a 5-10 year problem. The China Outlook 2017 report of Goldman Sachs published in November 2016 is a very important read.

Extend your political antennas

On Wednesday, I glanced at headlines that said that Eurozone growth in 4Q2016 could be as high as 2.0% (q/q), according to JP Morgan. French industrial production has gone up unexpectedly in November. In the UK, there is no sign of Brexit stress on the economic front. In China, inflation is accelerating in a sign that monetary policy is too loose and that stimulus is working.

Perhaps, the world has far too much economic stimulus going on and that it needs to be reined in. But, policymakers, citing political risk, might be or are reluctant to roll them back. In this milieu, inflation risks would clearly be on the rise everywhere and real yields would remain at zero or negative, even if nominal yields rise. That is bad for bonds and temporarily good for equities as the equity bubble gets bigger.

At the margin, this should also be good news for oil and for gold.

At the same time, make no mistake. Political risks are clearly on the rise.

(1) The latest ‘unverified allegation’ reported in detail in Wall Street Journal that Trump advisors worked with Russian agents is a very clear sign that, even outside of politics, official America or bureaucratic America or the ‘Deep State’ is clearly divided on the Trump presidency. Make that ‘bitterly divided’. A section of the American deep state – Security and Judiciary – have wanted a change from the established so-called ‘liberal’ order. But, the intelligence community seems to be bent on thwarting them. American political risk is high and rising.
(2) In China, there is no need to belabour the point. Xie’s attack on opposition, on social media, on the NGO sector, on neighbouring countries (South Korea and Singapore are two recent targets) are not letting up. Beijing warns Singapore over its letter to Hong Kong to return the military vehicles ( AND On top of that, Singapore PM’s sister has taken a shot at the Chinese President. Singapore casinos could be targeted by Chinese authorities, ostensibly over capital flight concerns! Interesting times.

(3) In Indonesia,  the President is said to have ‘rebuked’ the military chief ( for unilaterally suspending military ties with Australia and we know about the ongoing trial of the former Jakarta Governor.

(4) Philippines President has announced an increase in private pensions. How would it be funded? “Since 1980, contribution rates have only been increased three times, while pensions have risen 22 times.” (

(5) Sri Lankans are protesting against China led investment zone at Hambantota (

Loose monetary policy; risk of a more activist fiscal policy (esp. in the USA) and dysfunctional global politics and domestic politics in many countries, rising bond yields and strong equity markets – simply cannot continue to co-exist. One or two will break out into something more turbulent and destabilising.