China banks top the list and other links

China banks are leading the world in assets rankings just as Japanese banks did in 1988 and American and European banks did in 2007. Ahem. [Link]

China – US trade spat is the start of the cold war, says Conor Sen. I agree.

There is loan fatigue on the part of lenders and borrowers in China. That is something to watch for. That spells trouble.

China underestimated Trump and also over-read the trans-Atlantic fissures. Well, not just China made that mistake. Many did and very few are willing to admit to it and correct themselves. They are digging deeper.

David Fickling compares the OBOR infrastructure spending (or loans to other countries) with the Soviet Union’s Siberia infrastructure buildout that strained their finances.

Deleveraging with Chinese characteristics

Short-term lending rates in China have dropped to their lowest since July 2015, as the government stimulates the economy….This appears to have been engineered by the People’s Bank of China, which made a particularly large 502 billion yuan ($73.44 billion) loan to commercial banks through its medium-term lending facility in late July….

…Last week the Politburo, the decision-making body of China’s ruling Communist Party, called for pro-growth fiscal measures as well as “reasonable and adequate” liquidity conditions, interpreted as code for easier credit….

“The monetary setting has now almost entirely reversed the financial crackdown that began in 2017,” said Marko Papic, chief geopolitical strategist at BCA Research, in a note to clients. [Link]

Surprised, surprised.

One more sample of bond market ‘efficiency’

Despite tight restrictions on foreign exchange, Chinese investors have spent $30.4bn on US residential real estate in the past year, according to the US National Association of Realtors, while our monthly consumer survey shows that household demand for foreign exchange has only increased since the turmoil of early 2016.

Outflows have been balanced by record inflows from foreign investors, particularly into the onshore bond market. June data suggested these investors took the depreciation at the end of that month in their stride, but growing signs of currency risk could convince them to sell. [Link]

Why would anyone with a good awareness of risk and return buy Chinese onshore bonds? The yield pickup is not great and the risks are high. Unless, they were so confident that China would not really deleverage and would not allow defaults. Otherwise, it makes no sense investing in China bonds when the country’s non-financial debt to GDP ratio is already too high, when growth is slowing and trade tensions are escalating.

So much for investors’ ability to balance return considerations with risk.

That extract was from an article on RMB risk published by FT Confidential Research. Against America, China is indeed very keen to retaliate with RMB depreciation. But, they know very well that it is a double-edged sword. Capital outflows will accelerate. Same problem with their holding of US Treasuries. If they dump it, they face capital losses. The dollar will weaken, everything else being equal.  Rising US interest rates will push up Chinese cost of capital too. Yields on China bonds will rise too. It will be a self-defeating exercise too.

High external tariffs were effective once

I was preparing for a lecture I have been asked to give on Technology and Development to visiting scholars of Indian Economic Service at the Singapore Civil Services College tomorrow. I had made a mental note of referring to Professor Robert Allen’s work on the history of economic development. I had written on it in MINT in February 2015. Let me recall those words here:

According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise! [Link]

High external tariff was needed to catch up with Britain which industrialised earlier. Now, President Trump is again resorting to high external tariffs. America has a stable banking system and an internal free market. Its infrastructure is in need of improvement, for sure. In other words, trade barriers were effective. They may well be effective again. Academics are finding it difficult to accept that possibility.

I saw an article by Professor Dani Rodrik in FT.  He was making two points of which I thought one was valid – that the WTO was more intrusive than that of GATT. His second point was that such intrusion did not allow for heterogenous economic models like that of China’s. I thought that the second point was problematic.

Countries are now holding China into account for its failure to honour the very commitments it made when it joined the WTO.  It signed up to it. It benefitted from it. Its breakneck export growth and foreign exchange reserves accumulation were due to its accession to WTO. Higher Foreign Direct Investment into China was also due to WTO accession.

Second, I was not sure if China’s economic model was that heterogenous. It followed Japan’s model  – export growth, undervalued currency and protected domestic markets. Post-2008, China copied the neo-Western model of economic growth – reliance on debt. I doubt if there was much that was or is heterogenous about China’s growth model.

But, on the intrusiveness of WTO (vs. GATT), Professors Joel Trachtman and Simon Lester have responded sharply to Dani Rodrik. You can see their posts here and here.

For what it is worth, Professor Rodrik should also read this Merics brief on what certain things mean in China.

Also, I am not sure many in America see the US-China trade dispute the way Professor Stiglitz sees it. I have cited in these pages from the Harvard-Harris poll of the last few months that those polled did not want a trade war but they also wanted China dealt with, firmly.  Stiglitz writes:

No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war

He may be too harsh on the first part of his statement but he appears most certainly wrong with the second part of his statement. He should go through carefully pages 123-130 of the June 2018 Harvard-Harris poll.

If China was winning the trade war, a rare and risky outburst from a Chinese professor against President Xi Jinping would not have happened.

As of now, it does not appear that China is either winning the battle or the war. China has imposed unremunerated reserve requirements on forward transactions on Yuan and the People’s Bank of China demands ID proof for transfer of US dollars over USD1000.00 Professor Stiglitz has allowed his biases to cloud his judgment.

He should spend some time reading the detailed two-part article that the South China Morning Post on how China might have mishandled the US on the trade dispute. One can find them here and here.

Both he and Professor Rodrik would also find it useful to read the Merics China Monitor dated 18th July 2018 on China’s cosmological communism.

Read this comment too in the FT on strains showing in China.

Not too many people – even those who are ideologically ill-disposed towards Trump find it easy to side with China. For example, FT thinks that IMF would be wrong to bail out Pakistan which tantamounts to bailing out Chinese banks that lent to Pakistan to get China to build some infrastructure as part of its ‘One Belt One Road’ initiative.

How to revise GDP and other links

(1) American economy is now USD20.0 trillion and change. The personal savings rate is 6.8%. It was 3.2% before revision. Just like that. Investments in Cloud technology were allegedly under-reported. India was one of the few countries or is it the only country that revised its GDP calculations and the base year from 2004-05 to 2011-12 and reported a lower number.

See for yourself:

India GDP

(2) I liked this article that appeared in Wall Street Journal – by one Donald Luskin. He now writes as to why China will lose the trade war. That is a far cry from what many thought when the trade war began. It is not over yet. But, clearly, people are revising their odds.

(3) China is issuing dollar denominated bonds in record amounts. Nine years ago, they called for the end of US dollar hegemony. [Link]

(4) Mark Mobius says that the bottom is not in for China stocks. I leave it to you to decide on how to play it. [Link]

(5) China’s old economy is back [Link]

(6) Which means leveraging is back too [Link]

(7) FT Editors think China will listen to their advice on how to conduct Belt and Road initiatives. I am just wondering how will they have written the Edit had Trump launched OBOR and it is courting the controversies that China is courting now. [Link]

(7) Covenant-lite Leveraged loans (double whammy) are now 78% of all leveraged loans. They were 29% in 2007. [Link]

(8) Support for Merkel’s German Conservative coalition has dwindled to a 12-year low. Wait and wathc happens by the time she leaves office. [Link]

(9) That is a nice headline that explains everything that is happening in the world:

Australia executive pay hits record as workers’ wages stagnate [Link]

(10) This is what will happen in that case:

Royal Mail faces shareholders’ pay revolt [Link] AND

Nex shareholders’ punchy payday protest [Link]

(11) This may be three weeks old but Malaysia is abandoning white elephant infrastructure projects. I must confess to being pleasantly surprised so far with Malaysia’s new government [Link]

(12) This article offers a good assessment of Pakistan even as it wonders if OBOR projects have pushed the country into a debt trap.

(13) Good to know that Australian Parliament has passed two sweeping foreign interference and anti-spying  Bills [Link]

 

SG’s SG

Shekhar Gupta writes about how Modi’s early foreign policy successes have turned into failures in the last six months. He has a point to make. But, in sacrificing the microphone for the megaphone, he loses credibility. It is a pity because an opportunity for some well-founded critique has been frittered away.

The column features some blatant exaggerations and ‘driving a truck through the gap’ kind of assertions. The GDP growth slowdown on account of demonetisation is one of them when the biggest elephant in the room is that of bad debt in banks and corporate sector’s inability to invest.

GDP growth overstatement is a problem but that applies data prior to 2014 as well. It is a methodological issue after the base year was revised and other revisions to calculations made.

Wait! Why am I writing about GDP and domestic issues while blogging on an article that was supposedly on foreign policy. Well, that is precisely the point. In accusing Modi government of using foreign policy for domestic political goals, he falls into the same trap.

But, the article is about foreign policy errors and it should have stuck to that theme. It is Mr. Gupta’s willingness and inclination to make an omnibus statement out of a valid and relevant issue that raises doubts on the correctness of some of his assertions and
interpretations on his core topic – foreign policy.

At this stage, his point about Mr. Trump having become ‘cool’ towards India is well made and should be well taken. But, one should not make much out of it. Not yet. Mr. Trump’s focus is clearly on other issues and priorities, including the mid-term elections. India might be getting caught in the cross fire, for now.

So, on two core issues, Mr. Gupta actually concedes that the issues were outside Modi’s control – China and US behaviour.

His core points are domestic chest-thumping on so-called external successes, erroneous decisions on trade issues with the United States, on the lack of effective military build-up, change of Defence Ministers (four in four years) along with issues of competence, etc. Some of these points are well-made, substantiated and some are merely asserted.

For example, he writes,

The Chinese make three warships per year. We struggle to make one in three and still take a couple more to fit missiles and sensors on it. After much noise over Make in India and private sector, our achievement is a big cipher.

A friend of mine did some digging and sent me information that “the Indian Navy has added 3 destroyers (1 each in 2014,2015 and 2016) / total fleet is 11 destroyers. They have also added 3 frigates (1 each in 2014, 2016 and 2017)/ total fleet is 16. So it is not 1 ship every 3 years but 2 ships every year. You can see here and here.

Overall, it could have been a very thoughtful, serious and scholarly critique, even within the limited framework of a newspaper column but manages to fall well short of it.

In that sense, it is remarkable that it shares a large similarity with the subject matter of the article itself:

(1) It mixes up issues and loses focus – as he says India’s foreign policy did

(2) It confuses loudness for effectiveness

The second is a very Indian failing too.

Hence, the header of the article: Shekar Gupta’s Self-Goal.

Vacation time

Travelling now. Back with the routine around the 14th of July. Until then, light or no posts. Not that the world is going to stop in its tracks for that reason. Much is happening, including the exit of Germany from the World Cup 2018. Does not augur well. Putin-Trump summit is due in Helsinki in July. Youth unemployment rate is still above 34% in Spain – double the rate that prevailed in 2007. China’s stocks are officially in a bear market. Indian rupee is declining again.

With oil price ruling firm, with the US government posing restrictions on imports of crude from Iran, with the RBI warning on NPA problem (just caught the headlines) and monsoon being somewhat erratic, India does not appear very well placed. Of course, had written about it more than once in the course of the year.