‘Stay on hold’, says FT!

The Financial Times has an editorial advising the Bank of England to stay on hold at 0.5% and not shrink its balance sheet because Brexit uncertanties loom large, they argue. It is wrong on many counts.

Ten years after the crisis started, the FT is still advocating that the BoE stayed with 0.5%. Do the writers even sit back for a second in their chairs and reflect on what they wrote, before hitting the ‘Gut zum druck’ button?  Quite how the monetary policy connects to the travails or woes that the British economy might experience with Brexit is never explained because, in the opinion of the FT writers, it is axiomatic.

The UK economy would need different set of policy responses to deal with the economic shocks, if any, arising out of Brexit. In the meantime, the costs of ‘too loose for too long’ would keep piling up. In July 2012, the BoE published a paper on the distributional effects of asset purchases. Five years later, the consequences have gotten worse and not better.  If policymakers appear incompetent and make wrong decisions, we do not have to look too far to identify their source of inspiration.


China linkfest – 10.09.2017

(1) I used to track UK based Fathom Consulting’s China Momentum Indicator. It gives an alternative estimate to the official GDP growth estimates of China. They have updated their indicator and now have a version 2.0. It actually paints the current growth rate of China’s real GDP at 8.2% vs. the official estimate of 6.9%! Over the last two years, the CMI used to track between 2 and 3%vs. official estimates of around 6.5% to 7.0%. Now, the shoe is on the other foot, it seems! [Link]. Fathom Consulting does not think that this is sustainable and attributes the growth re-acceleration to the return of the old economy – borrow, invest in smoke-stack industries. Chris Balding supports that conclusion here.

Interestingly, Moody’s has this to say in a research note that is publicly available on setting up a simple login:

Although the contribution of domestic consumption to GDP growth has gradually been increasing, a core of China’s growth model remains investment funded by credit. [Link]

(2) The Chinese consulate-general has entered a dispute over Taiwanese independence at the University of Newcastle, exposing the increasing influence exerted by Beijing on Australian university campuses. [Link]

(3) John Pomfret, the author of ‘Beautiful country and the Middle Kingdom’ has written an article about the influence of Chinese money in American Universities. You can also notice that there are two counter-reactions. However, an independent piece by Chris Balding seems to vindicate Pomfret. Also, check out this news report on what John Garnaut said about China stirring up patriotism among Chinese students in Australian campuses.  Looks like Pomfret was not exaggerating.

(4) How China is helping Malaysia narrow the military gap with Singapore [Link]

(5) The Communist Party has not just stopped with making inroads into the Chinese corporate world. Even foreign firms operating in China are not out of bounds, it seems. [Link]

(6) On to China’s finances and financial arrangements, it is a perennial story. This report in FT talks of the funds that HNA had amassed from shadow finance sources.  [Link]

(7) Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS Group AG. [Link]

(8) Similar to how Universities in the West are succumbing to the lure of Chinese money (by admitting students from PRC and through collaborations onshore in China), investors are buckling to the pressure from China. If Universities are not exempt from the seduction of more money, how can one expect investors to stand up to the money might?

BlackRock and Fidelity backed China’s Communist party writing itself into company law this year, according to disclosures that show some of the world’s largest asset managers voted in favour of ranking the party above the boards of state-owned companies. [Link]

(9) China’s media watchdog has said it will ensure production a flood of new TV dramas singing the Communist Party’s praises over the next five years, just days after one of the country’s top stations was publicly shamed for not toeing the ideological line.

With just over a month to go until the party’s five-yearly national congress, the State Administration of Press, Publication, Radio, Film and Television issued more than a dozen guidelines on TV content on Monday.

The first of the 14 guidelines said the industry would ramp up production of “ a large number of TV dramas that sing the praises of the party, the motherland, the people, as well as its heroes”.

Domestic networks will also set aside prime time for programmes with major revolutionary and historical themes. [Link]

(10) In the light of the above, this cannot be surprising. Indeed, to be expected.

(11) Eswar Prasad writes,

China’s vision of multilateralism will certainly serve China well, allowing it to expand its economic and geopolitical influence in a manner that will become ever harder to resist. Whether this will be good for the world remains to be seen. [Link]

Postscript: Must acknowledge, with thanks, that almost all of the links in this post are courtesy of the Twitter handle of James Kynge (FT).

ECB, Euro and more stimulus

ECB headlines_08092017

The above is a screen shot from the website of Credit Bubble Bulletin (http://creditbubblebulletin.blogspot.sg/) this morning. Ignore the first headline. Look at the next three. If a central bank raised its GDP growth forecast, it cannot be talking of more stimulus. It is inconsistent. If GDP growth were being revised higher, it is time to remove and not add stimulus. Then, why is the ECB doing it? They are not stupid.

The answer is in the last headline. I think they are concerned about the strength of the EURO. To me, it is surprising. I thought that a strong Euro suits Germany. Germany does not want to stimulate the economy to deflect criticism of its large external surplus. A strong Euro would suit the country fine. If you remember, that is the argument that Mervyn King (former Governor, BoE) made in a speech in May. The Eurozone exchange rate is dysfunctional.

But, notwithstanding the German situation that favours a strong Euro, if the ECB were to resist Euro strength – and that is why they are still talking of continuing with stimulus – then it shows the fragility of the so-called recovery of the peripheral countries – Greece, Italy, Spain, Portugal and France too.

My two cents worth.

Bad writing

A bad FT article on the monetary policy of the European Central Bank and the impact on savers in the Eurozone. One small problem: the article deliberately conflates impact on savers vs. interest cost savings for sovereigns.

As many commentators caught on, it was either a financially illiterate but bona fide article. Or, it is a mala fide article. Very bad conflation of issues and very misleading headline. Does no credit to FT at all.

Household savers may have even increased the amount they had saved over the years. But, the truth is that low interest rates have forced them to earn little on their savings. That is a fact.

A Bank of England discussion paper acknowledged this in the context of the UK. That was in 2012 or in 2013. Last year, OECD published as part of its mid-year economic outlook, that retirees’ incomes from their savings had dropped 40% from 2000. Check out page 13 of the link.

Nothing of what has been written in this FT article is consistent with this.

In the meantime, from the resourceful Twitter handle of Jeroen Blokland (many thanks to him for some wonderful charts) comes this table of what ECB had wrought. I am unimpressed. 40 bp. drop in the unemployment rate per year for all the money printing and negative rates? Inflation is lower. The EURUSD should be a lot weaker than this. But, that would be too hot for Germany.

ECB score card

Doklam standoff – some links

Kanwal Sibal on ‘China’s diplomatic loutishness’ in dailyo.in [Link]

Raja Mohan says that India would lean towards the United States and Japan, abandon its long-standing restraint on being a force that balanced China:

One of the unintended consequences for China from the Doklam crisis would be an India that is forced to think far more strategically about coping with China’s power. For nearly a century, sentimentalism in Delhi about Asian solidarity and anti imperialism masked the more structural contradictions with China. Beijing’s approach to the Doklam crisis could well help bury those illusions. [Link]

This blog post by Pieter-Jan Dockx says India has already aligned with the United States.

Evan Feigenbaum on the coercive ladder available to China. But, he is not sure if China uses them in that fashion.

This Reuters article says that India proposed that China withdrew its troops 250 meters but that China refused and offered 100 meters subject to approval from top government officials.

An interview of Andrew Small by Seema Sirohi for wire.in. I am not sure I learned much that is new.

Brahma Chellaney says that Xi should collaborate with India and find a face-saving exit for China:

Against this background, the smartest move for Xi would be to attempt to secure India’s help in finding a face-saving compromise to end the crisis. The longer the standoff lasts, the more likely it is to sully Xi’s carefully cultivated image as a powerful leader, and that of China as Asia’s hegemon, which would undermine popular support for the regime at home and severely weaken China’s influence over its neighbors. [Link]

A ‘response’ to Brahma Chellaney, I suppose:

Officials in the top ranks of the party, government and military were summoned this week to ­Beijing for a two-day seminar to study President Xi Jinping’s speeches and to gear up for a key, once-every-five-years Communist Party congress this autumn. ….

At the seminar, Xi told the officials that the last five years had been “extraordinary” for China and that the country had reached a historic turning point.

“Over the five years, the party’s central leadership … solved many challenging problems [the party] wanted to solve for a long time but couldn’t, and achieved many things it wanted to achieve in the past but didn’t manage to achieve,” he said. “The Chinese nation … has achieved the historic leap of rising to our feet, getting rich and getting powerful.”

Chen Daoyin, an associate professor at the Shanghai University of Political Science and Law, said Xi’s remarks were a signal that he had placed himself on par with late leaders Mao Zedong and Deng Xiaoping. [Link]

Repeat: symptoms of hubris [Link]

How long it took for the ‘Song’ to end?

I left for the UK on 29th July and returned on 6th August to Singapore. Spent two days in London and the rest in Manchester. It was English summer. Temperature in the mid-teens, cool and breezy. I returned with a nagging cough. Watched South Africa struggle both at the ‘Kia Oval’ in London and then at ‘Emirates Old Trafford’ in Manchester. Spent many an hour chatting with my co-author Gulzar Natarajan on India and Row.

Met with James Kynge at FT. I had known him for the last several years. It is a matter of personal satisfaction that I introduced him to Julius Baer in 2010, when I was working for them. He reminded me of an article that he had written in December 2016 that China has always had problems printing too much of money. I had blogged on it then.

Ye Shi, a Song dynasty adviser, warned that issuing “kongqian” — or “empty money” that is not backed by assets — would stoke inflation and reduce people’s incomes. His emperor did not listen, triggering economic chaos that enfeebled China before the Mongol invasion. [Link]

But, what the article did not say but which he said during the conversation was that it took seventy years before Song dynasty’s money printing turned inflationary. So, how much time does China have?

Ambrose Evans-Pritchard appears to think that the revelations in People’s Bank of China financial stability report make the case for a disorderly collapse of the Chinese financial system:

The Chinese version of the PBOC’s Financial Stability Report – not yet available in English – shows that the shadow banking nexus is bigger than all other regular activities of the lenders put together.

Regulators had thought it was equivalent to 42pc of on-balance sheet business at the end of 2015. They have revised this drastically, admitting that it reached 110pc by the end of last year. [Link]

Research by Mizuho confirms that Pritchard got it right:

On 4 July, the PBoC noted in the 2017 Financial Stability Report that the size of banks’ off-balance sheet activities reached CNY253.5t by the end of 2016. This suggests that off-balance sheet activities have already exceeded total assets in the banking sector in China.

That was from their China Economics Weekly No. 126.

On the topic of China’s debt problem, Charlene Chu, formerly of Fitchratings, has something to say, again:

Total outstanding credit is expected to grow to 223 trillion yuan ($33 trillion) by December from 196.8 trillion yuan at the end of 2016, analysis by Chu shows. The estimated increase will be lower than last year’s 19 percent gain as the government’s campaign against leverage starts to bite, she said.

Her estimates are far higher than the latest official figure of 167 trillion yuan in June, which she says doesn’t accurately represent the true state of financing as it doesn’t include items like local government bond issuance and some forms of off-balance sheet lending. [Link]

If my students write this, I would deduct marks:

Since the debt is financed by domestic savings—not foreign lenders—Beijing has ample wiggle room for reform. [Link]

The problems with that statement are as below:

1) Regardless of whether debt is financed by domestic savings or foreign savings, in the event of rising NPA or debt crisis, ‘capital outflows’ would occur. Yes, the residents would flee. If the government blocks that ruthlessly, then all bets are off on social stability and internal mutiny.

2) To ease the pressure on NPA and banks, the government can open the liquidity tap generously and thus lower interest rates, in order to bail out borrowers and lenders too. The government would have to keep interest rates rather low. Consequently, there won’t be any incentive for residents is no incentive to hold the currency. That feeds back into (1) above.

3) In order to stop capital outflows and to prevent the emergence of bad loans, if the government squeezed the credit market and shut it down almost, all asset markets would fall, including real estate. Further, the resulting higher interest rates would worsen the NPA problem.

That is why my reaction to all this ‘new found resolution’ on deleveraging, etc., is a big yawn. CPC is very unlikely to have a stomach for it.

So, whenever a journalist writes that, I realise that they have nothing more than superficial knowledge of economics.

Plus, they are ignoring empirical evidence. It is more than ten years since Wen Jiabao said that the Chinese economy was “unbalanced, unstable, uncoordinated and ultimately unsustainable”. What is the record after that?

Farewell to Lucy

Lucy Kellaway will no longer be working full time for Financial Times. She penned her ‘farewell’ column three days ago and these lines prompted me to write the following comment under the column:
As I sit down to write this last column, I feel so wobbly I can hardly put one word in front of another. This has taken me quite by surprise. so long ago, I have had ages to get used to the idea. And it is not as if I am regretting it. [Link]
dear Lucy, whether you realise or not, in these sentences above, you had debunked the idea of ‘rational expectations’ theory that ‘Homo Economicus’ types peddle, even now, after multiple crises and tonnes of evidence to the contrary.  You had just added one more to that pile of evidence. No matter how well and early information is available,  it does not get ‘discounted’ (or, ‘digested’) continuously, seamlessly and uneventfully. The emotions are there.
They matter and they will elicit certain responses from us which may not be strictly ‘rational’ but entirely valid. Certainly, we will miss your columns and, I am sure, many here have said this before me: you were one of the reasons why we hung on to FT. There are still a few journalists who have the ‘pull’ factor but equally, FT has many more now who wield the ‘push’. Your departure has tilted the balance in their favour, perhaps. We will see.
I remember one of your columns a while ago about life being too long these days for us to spend it on one thing that we started doing in our youth.  You are actually putting your words into action. I am happy to take a bet on you enjoying the experience as would your students. Best wishes.