The Great Debate UK
from The Great Debate:
China can outgrow overcapacity, at least for now
-- Wei Gu is a Reuters columnist. The opinions expressed are her own --
China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.
Banking regulator Liu Mingkang recently told a conference that China's banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China's annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.
Since the stock of loans has been enlarged by this year's explosive credit growth, the regulator's target represents a 15 percent increase in China's loan base. This is in line with past trends, but marks a sharp slowdown from this year's 30 percent growth in total loans.
Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.
Setting the credit growth target too low will make it hard for new borrowers, because banks naturally want to keep funding current projects. That puts private sector borrowers, who are expected to invest more next year following strong government investment this year, at a disadvantage.
What's more, if the banks sense the government might tighten lending targets next year, they are likely to lend as much as possible at the start of the year. This will increase the volatility of credit.
from The Great Debate:
A rally that is both rational and crazy
(James Saft is a Reuters columnist. The opinions expressed are his own)
Stocks and other risky assets are rallying around the world this week because the Group of 20 nations said on the weekend they would keep the economic stimulus flowing, a state of events which illustrates where we are and what a very strange place it is.
The G20, the only group of big hitters that matters because it is the only group which includes the Chinese, met in Scotland over the weekend and, as is the way of these things, did very little with immediate consequences for anybody.
In the communique they issued, the Group of 20 finance ministers, after congratulating themselves on the recovery, more or less admitted that the measures we once thought of as heroic are in the process of becoming commonplace.
"However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern," the statement said. "To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured."
Let me put that in human terms for you:
"We've spent untold trillions saving the economy, but, er, we've really only saved the financial system and that only to the extent that we keep on saving it. Jobs, well, not so much. We therefore pledge to continue doing this thing that may or may not be working until we are sure that it is."
Property taxes, utility bills (you call them rates I think) haven’t changed and the towns and cities haven’t noticed that the bubble burst. In fact the property taxes and utility bills still creep upward due to their own COLA logic. This does not help the consumer who is supposed to be stimulating the economy through big consumer spending. None of this local taxation does anything to stimulate economic activity. It just sucks up income on more or less unproductive efforts. All town projects are really on hold. But it must be nice to work for the local schools or town hall. Talks with my dear old Dad remind me that this is what the Depression was like. You were well off if you worked for the Town or State government – but those days almost sound humane because town or state employees didn’t have contractual cost of living adjustments.
All the towns and cities may be doing is waiting until the dollar has inflated to levels where the assessments seem like they match and make sense again. Our houses won’t be more valuable, they will only sound like they are. But nothing much is selling so I can’t understand how that will ever work. Since the property in towns and cities has dropped appreciably in price and still aren’t selling, how can it ever get back, even with inflation, to the levels before the prices collapsed? There is some increase in the employment here but the wages haven’t risen. A very few more people can now pay their bills but those bills are getting larger. They have invisibly risen dramatically actually, because they are being based on assessments made at the peak of the bubble. But in visible terms they are still also rising.
It’s a little like living in an expanding universe and actually feeling the phenomenon.
from The Great Debate:
UK takes right step on too-big banks
(James Saft is a Reuters columnist. The opinions expressed are his own)
So it can be done after all.
Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.
It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.
Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.
Britain took over Northern Rock after a run on the bank and its rescue of Lloyds and RBS left it with stakes of 43 and 70 percent, respectively.
It is worth noting that if anything Britain is more dependent on its financial services sector than the United States.
James, this is another extraordinary complex debate you propose here, and I doubt that anyone has a definitive stand to partake. I see it more like an experiment, and Britain has a long history of failed economic experiments. Nevertheless, for observers, it would really become a bonanza of information. Philosophically, I would just point that the size of an enterprise in a competitive market should accommodate a certain granular structure of its clients. It is interesting to see how tuning one side would affect the other.
I cannot abstain from remarking that the political complex you just have described may play a larger role than just to respond to an angry constituent base. It might well be the case that this is the last attempt to save most of the banking system from nationalization. I do not think that any government in the developed world would have the appetite to micromanage its banks. Problem is, it may well become an inevitable pragmatic (i.e. not ideological) solution in not so a distant future, like healthcare, education, power grid and so on.
from The Great Debate:
The death of the “punchbowl” metaphor
(James Saft is a Reuters columnist. The opinions expressed are his own)
Don't expect the year-long rally in risky assets to be undermined any time soon by the Federal Reserve becoming concerned about inflation.
The old metaphor -- that the Fed's job is to take away the punchbowl just when the party starts getting good -- just doesn't apply in the current circumstances. That's not to say inflation isn't a threat in the medium term -- it is virtually a promise.
But punchbowl thinking dates from a time when firstly the Fed was presumed to have a degree of control over events we now know is not true and secondly to an era when asset prices were the caboose rather than the engine of the economic train.
Even with an economy that is now growing, the risk of a self-reinforcing de-leveraging spiral is enough to ensure that the Fed will not pull the trigger on tightening any time soon.
"Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don't go up, economies don't do well, and when they go down, the economy can be horrid," Pimco bond chief Bill Gross writes in his most recent letter to investors. Gross argues that leverage inflated the price of assets even as investment in the U.S. real economy flagged. As this happened the U.S. economy became ever more dependent on asset prices and on the sectors, such as finance, which intermediated the borrowing. When the debt and asset bubble is pinched, the whole edifice is threatened, leading to a response like the one we've seen: massive and overwhelming aid trained on markets irrespective of the costs.
Pimco data shows that the prices of assets in the United States over the past 50 years have gone up 1.3 percent a year more than would have been expected given nominal growth in the economy, leading to a putative 100 percent overvaluation if you reason that the assets which depend on the economy for income shouldn't outgrow it.
Our infrastructure can’t compete with an easy money charged financial services establishment and the excessively low interest rates that are inducing only investment banking bonuses will push more and more infrastructure and manufacturing jobs to China.
There is no small business investment as with zero percent interest, there is no reason to pay attention to the development end of the business cycle which is at the outside of the Risk/Yield Curve.
Playing the no interest game favors China’s development of infrastructure, not ours.
Wake up EASY BEN, that is why their is no domestic lending.
No one will invest in America’s Core when they need to make 20% every month in a paper trade.
The Feds answer to the Financial Crisis hangover is bankers doing scarface piles of cocaine with their coffee while innovators starve to death.
But there will be piles of cocaine at Goldman!
from The Great Debate:
Winning the copyright battle in China
-- Wei Gu is a Reuters columnist. The opinions expressed are her own --
When it comes to protecting intellectual property in China, the United States often feels that its pleas are falling on deaf ears. Its best hope is that China recognizes that copyright protection is in its own interests. To achieve that, Washington needs to push for changes from within.
After a fruitless decade of lobbying China on intellectual property, Washington has reached for the microphone. This week, the U.S. Chamber of Commerce launched a high-profile international forum on intellectual property in Guangzhou, capital of Guangdong Province and best known as both China's manufacturing hub and the global centre for intellectual property theft.
Guangdong understands it cannot hold on to both titles forever. Its reforming leader Wang Yang has vowed to build an innovative Guangdong, but he and his deputies understandably do not want to be criticized in public. The U.S. delegation included high-ranking officials such as Commerce Secretary Gary Locke, but the very man they hoped to engage with didn't show up.
Foreign pressure can help, but changes rarely happen in public. First, both parties need to agree on what they are trying to achieve. As a manufacturer for the rest of the world, China has historically seen little upside in protecting copyright. The United States needs to convince Beijing that, if it wants to develop its own products, then protecting copyright is important.
Huawei Technologies, the telecom equipment maker based in Guangdong, could be a good partner in this. In 2003, Cisco sued Huawei for copyright violations, but dropped the suit after Huawei agreed to stop selling some products. Now, Huawei has emerged as a strong protector of copyright. Last year the company filed the largest number of patents in the world.
Song Liuping, Huawei's chief legal officer, advocates increasing the penalty for IP theft, a view shared by Americans. But he thinks the problem is not the lack of an adequate legal system or even lax enforcement, but the absence of a culture in China that values designs, patents, and copyrights.
I just bought windows7 for under 1 US Dollar in China. Even if I could not find it in China I could download it with a torrent. You think that is going to stop? That is like trying to stop drugs in the US. You arrest Gmoney and the next day his boy JT is out on the same block with some fresh product. You want copyright protection for big monopoly corporations? Tell them to quit overpricing their products. Windows7 should only cost a few dollars and be mass produced. The Chinese are showing them how to do it. Instead of crying maybe they should start learning. You put them out of business by eliminating the incentive.
from The Great Debate:
Time for a shareholder revolt
(James Saft is a Reuters columnist. The opinions expressed are his own)
There are encouraging signs that shareholders are becoming more assertive in defending their interests.
The Financial Times reported on Monday that some of Britain's largest institutional shareholders - including Standard Life, Legal & General and M&G - are working on a plan to bypass investment banks by creating a club to underwrite new issues of equity by small and medium-sized British companies, a move that could save hugely on fees.
What, you may wonder, took them so long?
Second only to taxpayers, investors have been the great patsies of the financial crisis, paying massive costs to a financial services industry which has, to put it mildly, not served them well.
Activist shareholders and investors could be a key force in fixing what is wrong with the financial system. Unleashing their power to act in their own best interests should be a main thrust of new regulation.
The British investor group, reportedly being assisted by mergers and acquisition advisors Lazards, would effectively cut out the middle men by agreeing to take up any unwanted new shares in an offering. This is an idea which if successful could save companies and their owners huge amounts in fees and at the same time deal a blow to investment banking profitability.
I came to the conclusion a while back that investing in the stock market is a foolish thing to do with my retirement funds. After reading the lies in annual reports, seeing unpunished fraud and watching share price falloff a month before the bad news was public I decided that anyone without inside knowledge had no business in stocks. There are better local investments that do have more transparency.
from The Great Debate:
An unhealthy privilege
--James Saft is a Reuters columnist. The opinions expressed are his own.--
When the U.S. dollar ultimately loses its status as the world's premier reserve currency it will be painful for all involved, almost certainly disorganized, and very possibly a very good thing.
World Bank President Robert Zoellick outlined the risks to the dollar's status in a speech in Washington on Monday.
"The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency. Looking forward, there will increasingly be other options to the dollar," he said.
Zoellick went on to emphasize how choices in the United States on inflation, fiscal policy and financial system reform would help to influence the dollar's fate.
Quite true. The U.S. cannot simply devalue its way to competitiveness, nor can it appear to be inflating away its debts without risking a run on the currency. The Chinese and others would sell dollars or fail to buy up new debt if they felt the U.S. was behaving both cynically and irresponsibly.
China has good reasons not to force a crisis and devalue its holdings of dollars, but not immutable ones. The two nations are like two men trying to swim to shore while dragging a heavy box of gold, the difference being that the U.S. is tethered to the box while China is only holding on. If China decides the water is too rough it can let go, sacrifice its dollar holdings and swim for it. The United States is not so lucky.
This article is based on the assumption that the dollar *will* lose privilege as reserve currancy.
As the financial crisis hits the recovery phase I wonder, has this assumption been made out?
For what reason will the dollar cease to be the reserve of choice? America remains higher in GDP then the major players of Europe put together. And stronger then China and several other nations combined.
So what possible competitor currancy can uproot the dollar in terms of national demand or stability? That has yet to be seen.
So until the assumptions have been proven beyond doubt, I find I cannot comment on the accuracy of articles such as this.
from The Great Debate:
Global imbalances: out with a bang?
(James Saft is a Reuters columnist. The opinions expressed are his own)
The simplest way to end the imbalances in the world's economy is also sadly perhaps the most likely: for the Chinese to stop buying U.S. debt.
This is not going to happen anytime soon, for one thing deleveraging in the U.S. will for a time make U.S. Treasuries look good value, but a buyer's strike is a heck of a lot more likely than the orchestrated rebalancing the U.S. will push at this week's G-20 meeting of leading nations.
The U.S. plans to advance a plan at the Pittsburgh summit to fundamentally change the balance of the global economy, which over the past 15 years or so has been characterized by over-borrowing and consumption in the West provided and financed by savers and workers in Asia.
That state of play kept going, as is the way of these things, until it stopped, or rather until one of its wheels fell off. It wasn't that Asians stopped saving or buying U.S. debt but that speculators, usually in Europe, stopped buying securities, often minted in London, which were being created to front run the flow of capital from Asia to the west.
That popped the asset price bubble and the flow of finance to consumers in the U.S. who, with much gnashing of teeth, began to save again and consume more guardedly.
But the debt bubble hasn't really popped, it has only shifted shape. Before we had private debts which only could be repaid if assets, mostly real estate, continued to go up in value. Now, a new wave of public borrowing is cushioning the downturn. Asians buy some of the debt and some of the money raised buys goods from Asia.
The fatal flaw of globalism has manifested itself. As nations become too dependent upon each other for trade, one domino falling can bring down all the rest. Has no one read the “Wealth of Nations” recently?
“Balance of Trade” means just what implies, balance. Surpluses or deficits reap negative long term consequences. History is replete with examples of societies failing for this very reason. I urge anyone interested to read Jared Diamond’s book “Collapse”. Trade is good when done wisely. However, a society must still be self sufficient. The U.S. is not. This keeps us at risk for all manner of ills.
from The Great Debate:
China’s coming magnificent bubble
--James Saft is a Reuters columnist. The opinions expressed are his own--
If and when China makes its currency convertible and opens its financial system the stage will be set for a bubble that should make the dotcom and housing booms look tame.
China has recently signaled its key aspirations: for a greater international role for the renminbi and for Shanghai to become a great financial capital. Neither is imminent, but both imply, if not require, a series of steps that, taken in combination with China's legitimately great potential for growth, could lead to a bubble of magnificent and dangerous proportions.
Magnificent in that, like the dotcom bubble or the railroad boom in the U.S. in the 19th century, a bubble in domestic China is directionally right and will build useful things which will change the world. A bubble, after all, needs a good story and China has one of the best ever.
Dangerous because, like the housing bubble, it will inevitably go too far and could take down banks and banking systems globally.
Perhaps rather than dotcom or housing, the most useful template for China is closer to home; namely the Japanese bubble which preceded its ongoing malaise, according to Dylan Grice, a strategist at Societe Generale in London.
"In the medium term we face the mother of all asset bubbles in China. The fundamental story is a good one; there are just lots and lots of people to sell to," Grice said.
from The Great Debate:
Ex-Google China chief’s dream factory
-- Wei Gu is a Reuters columnist. The opinions expressed are her own --
Google's former China head Kai-Fu Lee wants to create China's next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest businesspeople and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?
Lee's plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors.
Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics Inc., Legend Group, New Oriental Education and venture firm WI Harper Group.
Consider the fact that everyone remembers the ‘Cultural Revolution’ and what happened to people who used their creativity. Also consider Tien an min where the youngest, best, thinkers in China were shot or jailed for thinking freely. Now consider creative talent lining up for this. It’s not going to fly.
