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Friday's Top 10 with NZ Mint: Capital flight from China; US Postal Service may run out of cash in October; Who's afraid of Huawei?; 'It's the middle class, stupid; Clarke and Dawe
Here's my Top 10 links from around the Internet at 5 pm today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email to firstname.lastname@example.org.
My must read today is #6 from Steve Keen on Australian house prices.
1. Exodus of cash from China - The Economist reports that more money left China than entered it in the second quarter for the first time since 1998 as very wealthy Chinese people nervous about losing their possibly ill-gotten gains in any blowup ran for the exits.
No doubt at least some of that money will end up here in New Zealand.
It is no doubt one reason why house prices in central and eastern Auckland are currently rising at an annual rate of 15-25%.
This departure of funds should be watched as a sign that not all is well in China. Capital inflows to New Zealand are also a factor in the currency being up near 81.3 US cents despite commodity prices having fallen 20% from their May 2011 peak.
This follows news that US banks are back issuing New Zealand dollar bonds for the first time in 5 years. It's a great way to funnel freshly minted US dollars into New Zealand dollars, thus pushing the currency higher.
A SAFE spokesperson felt the need to say that these outflows did not amount to a mass rush for the exits. The exits are, in any case, partially blocked by China’s capital controls. Still, such regulations can stop neither multinational companies, which may repatriate profits, nor determined wealthy individuals, who travel frequently, hold foreign bank accounts and run their own cross-border businesses. Chinese individuals may take up to $50,000 out of the country each year without special permission. Victor Shih of Northwestern University reckons that the richest 1% of Chinese households own $2 trillion-5 trillion of property and liquid assets. If they took fright, they could overwhelm even China’s vast foreign-exchange reserves.
China’s rich often have inside knowledge of the economy’s condition, Mr Shih has pointed out. If their money is leaving, everybody else should take note. But Zhiwei Zhang, chief China economist at Nomura, a Japanese bank, is more sanguine. He thinks the capital outflow is not an alarming sign in itself, but just reflects economic worries that are already well-known. It is no surprise that firms and investors should reshuffle their portfolios given disappointments in China’s property market and the interruption in the yuan’s rise against the dollar.
2. US Postal Service defaults - CNN reports the US Postal Service has defaulted on a US$5.5 billion payment for retiree health benefits and may run out of cash by mid October.
While the Postal Service is in big financial trouble due to fewer people sending mail and the mandate to prepay retiree benefits, the default is largely symbolic. The agency will skip that payment and another $5.6 billion payment due Sept. 30, while continuing to pay employees and contractors to deliver the mail on time.
However, by Oct. 15, the agency's cash crunch could result in a $100 million shortfall, according to David C. Williams, the service's inspector general.
3. Capital flight from China - FTAlphaville points to some statistics showing significant capital outflows from China in recent months and explains why this may be tough for China to turn around.
It quotes the always excellent Victor Shih on how China might respond to these capital outflows, particularly once they get above the US$1 trillion threshold.
Even with this wide array of tools, an outflow of 1 trillion USD, roughly 30% or less of the wealth of the top 1%, would see the PBOC redeeming all of its bonds and bringing down RRR to the 6-7% range. Any additional outflow would completely deplete banks’ reserves and force banks to halt credit expansion and even to recall loans, which would drastically increase bankruptcies and slow economic growth. To support continual credit expansion, the PBOC can also print money on a large scale, as it did in the 1980s and 1990s (Shih 2004). This likely would trigger very high inflation rates. Inflation above 20%, however, provides strong incentive for the top 1% of households to reallocate their savings overseas.
In sum, once capital flight takes hold, the Chinese government will have few ways of forestalling it without either making the situation worse or without suffering massive economic costs.
5. Expensive subway systems - Xinhua reports that many Chinese state governments may have bitten off much more than they can chew with their plans for massive subway systems. Let's hope Auckland doesn't make similar mistakes.
The belief that a subway system is a symbol of a modern metropolis means smaller cities are also keen to build. "They see subways as their chance to polish their civic image and look like a modern city," he said. Amid the raging competition between many similar-scale cities, some lost their ability to think rationally. "Some cities are mapping subway networks that will cost their entire combined income for five years," he said.
According to Chen, a large proportion of the funds come from the government - usually around 40 percent - and bank loans. "Subways can barely attract investors, because the (low) ticket prices are set by the government to benefit the public," he said.
Local governments are likely to shoulder a heavy financial burden if they build subways, said Chen, citing figures indicating that provincial, city and county government debt had risen to more than 10 trillion yuan by 2010. "Large-scale construction of subways will pile more debt onto local governments, increasing the financial risks."
6. In line with Japan - Australian real house price deflation since its peak in early 2011 has been 9%, which is in line with Japan's slow deflation from its peak in the late 1990s, but less than the 20% seen in America Steve Keen reports at DebtDeflation
To cause a sustained rise in house prices, Australians would need to not merely not delever, but to lever up from the current historically high debt levels—since it takes accelerating mortgage debt to cause house prices to rise.
Middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood.
In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.
8. A frightening slowdown - Bloomberg reports Mohamed El Irian of PIMCO, the world's largest bond fund, reckons the global slump in factory production is frightening.
Pacific Investment Management Co.’s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia “frightening” and said the world economy is suffering its severest slowdown since the global recession ended in 2009. “This is a serious, synchronized slowdown,” El-Erian said in an interview today.
His forecast highlights the troubles the global economy is facing as the euro area struggles to contain its debt crisis and growth in the U.S. and China slows. Separate surveys of purchasing managers released yesterday showed manufacturing in the 17-nation euro area shrinking by the most in 37 months while Chinese factories teetered on the edge of contraction.
9. Who's afraid of Huawei? - The Economist looks at the thorny issue of cyber-espionage and China's fast-growing tech companies, including Huawei. This is all very topical in the wake of Pacific Fibre's comments that US interests opposed significant Chinese investment in its cable. The magazine also makes a good point about where most telecommunciations equipment is now manufactured -- China.
Huawei inspires fear too—and not just among its competitors. The company is said to be too close for comfort to the PLA. Westerners fret that the networks the firm is building are used by Chinese spooks to eavesdrop during peacetime and could be shut down suddenly during wartime. They see the firm as a potent weapon in China’s burgeoning cyber-arsenal.
It is a view that some governments are taking seriously. Earlier this year Australia blocked Huawei’s participation in a scheme to build a national broadband network in the country. The company has also faced opposition to its commercial expansion in India. And in America, where Huawei’s attempts to grow have often been stymied, a congressional committee that focuses on intelligence matters is putting the firm under a microscope; suspicions have been aggravated by a recent spate of cyber-attacks attributed to Chinese hackers.
Western governments are also suspicious of the subsidies, low-interest loans and generous export credits lavished on favoured champions, including Huawei. The European Commission is considering opening an investigation. Some people suppose that the Chinese government is helping Huawei win overseas contracts so that spies can exploit its networks to snoop on ever more of the world’s electronic traffic.
The other reason for not banning Huawei is the dirty little secret that its foreign rivals strangely neglect to mention: just about everybody makes telecoms equipment in China these days. Chinese manufacturers and designers have become an integral part of the global telecoms supply chain. Blocking Huawei (or its rival Chinese telecoms giant, ZTE) while allowing gear from, say, Alcatel-Lucent or Ericsson on a network may make politicians feel good. But it is no guarantee of security. Huawei’s competitors have a vested interest in hyping concerns about it, while disguising their own reliance on Chinese subcontractors and on subsidies.
"A lot of them have tapered for the event."