China watchers now recommend watching and other links

Visited John Pomfret twitter handle after a long time. Good harvest. Some of the harvest shared here:

China watchers recommend vigilance now. WaPo story; summary of the report here and the full original report is here.

Cornell halts China university ties over curbs on academic freedom [Link]. An important observation in the story:

Chinese regulators closed down more than a fifth of partnerships between local and foreign universities this year.

The tweet says it all:

China is loosening environmental regulations facing a weaker economy. The new policy allows a much higher PM2.5 level in northern China than announced a year ago, and heavy-polluting factories can operate again in the winter. [Link]


China shutters one of its truly independent think-tanks [Link]


Recent China links

From the story in FT on how fracking in China is leading to polluted water:

Earlier this year, a resident was detained and was still living under de facto house arrest because of his involvement in collecting evidence of pollution and sending water samples to Beijing, according to township residents.

From the story in New York Times on the internet conference in China:

The company has also started working with the authorities in Xinjiang, Mr. Wang said. The goal? To have a database of the irises of all Xinjiang residents within two years, he said.

Chinese banks don’t quite lend to private companies but things must be getting dire and difficult for the economy:

China aims to boost large banks’ loans to private companies to at least one-third of new corporate lending [Link]

Wow! Xi Jinping calls for a level playing field for the private sector! [Link]

‘Game of Chickens’ in the South China Sea:

The American concerns about Beijing’s naval modernization are reflected in a fictional account titled “How We Lost the Great Pacific War,” written by the director of intelligence and information operations of the Pacific Fleet, Dale C. Rielage, and published in a Navy journal.

The article portrays a possibly dark outcome for the American Navy in the Pacific.

Written in the form of a military dispatch from the year 2025, the author laments how the Navy had to “cannibalize aircraft, parts and people” and wonders if it will be able to “claw” its way back in the Western Pacific.

At the heart of this bleak prognosis is an assumption that the United States did not act aggressively enough in challenging China when it still could.

The article describes how an admiral, at the start of his term as chief of naval operations, saw that the Americans’ margin of victory in high-end naval combat had become razor thin — and would continue shrinking. “At the time, he assessed that the margin, though thin, remained ‘decisive.’ In the years following, however, the margin shifted imperceptibly to favor the other side.”

The article never names “the other side,” but makes clear: it is China. [Link]

Peter Nevarro warns Wall Street not to interfere in China-USA trade matters. Quite:

“The game that China has played — and they played people in the Bush administration like a violin — is to do the tap dance of economic dialogue,” Navarro said. “That’s all they want to do. They want to get us to the bargaining table, sound reasonable and talk their way while they keep having their way with us.” [Link]

Then, this incredible story in FT on how China is minding its financial stability risks and that the United States is not! To me, these two lines take the cake:

To counter the economic drag that trade war-related fears were creating, China has loosened its monetary policy in recent months. Its earlier belt-tightening gave it some wriggle room to do so. [Link]

Must read Mike Pence

It is hard for me to pick out the important parts of the speech of Mike Pence, America’s Vice-President, on China, delivered nearly a month ago. It is a MUST READ. I agree that it could be as significant as the speech by Churchill calling the Soviet Union as the country behind a ‘Iron Curtain’.

Brahma Chellaney says that Sierra Leone is the next country to pull out of the Belt and Road Initiative and that India is right to have stayed out of it.

America expresses concern over China’s attempts to take over Taiwan by non-peaceful means. Fair enough.

China’s manufacturing PMI and export data were weak [Link]

Today’s news links

The re-election problems of PM Modi [Link]

Suzuki commits to ‘Make in India’ with electric vehicles [Link]

Suzuki will test run its first electric cars in India in October! This news is from September. I do not know if it happened [Link]. If it did not, then we know how to read the previous link, though.

Japan is still struggling to come to terms with its relaxed foreign worker visa policies. The resolution passed but after a lot of doubts and scepticism were expressed [Link]

Philippines compromises (or, attempts to) with China on South China Sea [Link]

Two well-known Chinese economists-critics of China’s economic growth model actually blame China for the trade dispute with the United States. [Link]

A story in FT on how Mauritius still makes its revenues through assisting tax evasion although the African state confirms that it is compliant with all tax-evasion international laws and treaties. Indeed! India has scrapped its double-taxation treaty with Mauritius. Full capital gains tax will apply on capital gains earned by Mauritius-registered entities from 1st April 2019. Let us see.

China allows share buybacks to boost stock market – when in doubt, ape the West and yet claim superiority to Western model of economics and finance!

American college undergraduate students are now ambivalent on capitalism. Wall Street Journal is alarmed! While most of the points made by James Freeman are valid, he would have been more correct had he also exhorted capitalists to introspect on why things have come to such a pass.

Two classic understatements

China’s policies have focused on addressing the economy’s significant and longstanding financial vulnerabilities. But the shift in priority toward stabilizing growth may mean slower progress on deleveraging and heightened medium-term risks for China and the entire region. – Emphasis mine [Link]

This one from Barry Ritholtz:

You can have a committee of 10 geniuses that proves collectively to be a moron [Link]

The quote is attributed to Cliff Asness by Barry Ritholtz.

What did America do between 2014 and 2016?

My column in MINT on Tuesday 9th October:

Bloomberg Business Week broke the story of the “Big hack” — how a tiny chip (the size of a pencil tip or a grain of rice) was embedded in servers bought by America’s big technology companies on 4 October. A week earlier, The New York Times wrote that the Chinese government had issued instructions to stop the reporting of negative news in print media and online forums, etc. The directive sent to journalists named six economic topics to be “managed”. Two of them carry interesting implications. One is “local government debt risks” and the other is “the risks of stagflation, or rising prices coupled with slowing economic growth”. It is reasonable to assume that these two remain live issues or risks in China. However, China is not alone in wanting to suppress reality.

I have long been puzzled by the turnaround in the global economy and asset markets in 2016 when it appeared that the bottom was about to fall off for the global economy and asset markets. Everyone assumed that China’s credit taps were opened and that the world was saved. The truth is slightly trickier than that. There are reasonable grounds to suspect that the US had fudged data from 2014 to 2016 to prevent official data from showing an economic recession and that the stock market too was manipulated. The supporting arguments follow.

Between the summer of 2014 and spring 2016, stock prices in many markets declined sharply. Stock indices developed by Morgan Stanley Capital International for the European Monetary Union, Asia-ex-Japan, Japan, Switzerland and emerging markets had declined anywhere between 20% and 40% in that period. Emerging market bond spread doubled. However, the S&P 500 stock index traded sideways. Was it because earnings by S&P 500 companies were stellar? No. For about seven to eight quarters from December 2014 to September 2016, year-on-year (yoy) growth of earnings per share’ (EPS) of S&P 500 companies was negative. Quite how the S&P 500 stock index remained stable in the face of a global sell-off in risk assets and contraction in earnings remains a mystery to be solved.

What happened to the real economy in the US? In the same period, industrial production and manufacturing recorded more months of negative change than positive change—both on a month-on-month and on a yoy basis. Capacity utilization declined. Consumer confidence—University of Michigan consumer confidence indices—declined. Import prices—from China and Mexico—recorded declines on an annual basis. Consumer price inflation came down from 2% to around 0%. All these indicators suggested a recession in America. Real gross domestic product (GDP) growth slowed, but there was no recession.

The price of crude oil declined sharply in this period. It must have helped Asian stock indices and corporate earnings since Asia is largely an oil importer. But, as mentioned above, Asian stock indices fell sharply. The balance sheet troubles of oil producers and companies in related industries eclipsed the positive effects of lower oil prices. None of this showed up in American stocks. In fact, excluding oil stocks, the S&P 500 would have been up. Of course, excluding profits of oil companies, S&P 50 EPS might have experienced growth. That might explain the resilience of the index. However, this does not sound right because the rest of the economy was reflecting the strains that the oil industry was facing. But, not the stock market. Why did the US have to do this?

By 2015, had official statistics reflected the slowdown in the economy fully, it would have been a big indictment of the policies pursued since the crisis of 2008. Short-term interest rates at 0% and three rounds of quantitative easing and repurchase of maturing treasury assets could not produce a recovery that lasted longer than six years. It would have been a huge embarrassment to the Fed and would have emboldened the likes of Ron Paul to demand drastic changes to the charter of the Fed and the trimming of its sails. The other motivation is political.

An economic recession and a stock market decline would have sealed the verdict on the Barack Obama presidency and would have effectively nullified the chances of the election of a Democrat as president in the 2016 elections. Perhaps, a Republican victory coming on top of an official economic recession and stock market collapse would have made Democrats unelectable for a long time to come. In the end, they did not succeed because public sentiment could not be manipulated. They were hurting because of the sham recovery. Hence, apart from the traditional Democrat bastions along the coasts, the rest of the country voted Donald Trump to the office of the president.

What are the implications of this? By not allowing the American stock market to correct meaningfully in that period, policymakers have not allowed the pressure valves to function. Pressure has built up as the stock market then began to climb from 2016 onwards. So, the “bottled up” pressure is now immense. Stock market stability followed by a steep ascent since end-2016 means that excess risk had been taken by companies, funds and investors. We cannot pinpoint before the fact where they are. We will all be wiser after the fact as we were, after 2008 only to forget the lessons in short order. Recently, the chief economist of the European Central Bank expressed fears about the degree of leverage in the financial system because of shadow banking. It had taken just 10 years to come back a full circle. A truly bizarre world.

V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at http://www.livemint.com/baretalk.

 

First Published: Mon, Oct 08 2018. 09 09 PM IST

Breaking the hiatus: RBI, Michael Pence

I had joined the IFMR Business School as its Dean, as of October 4.  It is located at Sri City in Andhra Pradesh. I arrived at Sri City campus on October 1 and the last week has been a blur. But, blogging is a refuge. I think I had mentioned it once before.

You can watch the interview I gave to ET NOW Television on RBI monetary policy decision on Friday. I was part of a panel. I did not fault their rate decision on Friday. It was a fine call. They took their chances. The stock market appeared not to like it. But, it has fallen the day before too. In any case, it was so rich in valuation that it deserved to fall. Establishing causation for such short-term action when the market was anyway overvalued is problematic. Did the market expect RBI to cut rates or raise rates?

But, I felt that they should have offered more substantive comments on the IL&FS, if not on Friday, but on another occasion.

Before the interview, I managed to go through the monetary policy report and the press statement in the long car ride from Chennai city to Navalur in Kancheepuram District (OMR).

Michael Pence’s speech on China requires careful reading. I had not done so yet. It is an  important and calculated escalation.

We can do without headlines of this nature. The Federal Reserve Chairman does not exist to serve the stock market investors.