Wednesday's Top 10 with NZ Mint: Why China's leadership change matters more than the US presidential race; Dilbert; The real Xi Jingping; Govts must releverage to offset household deleveraging

Here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read is #6 from Richard Koo on balance sheet recessions and the need to dump government austerity programmes across Europe and the United States.

1. The much more important transition - Our media is all agog over the US Presidential election. Fair enough.

But a much more important leadership transition is happening across the Pacific in Beijing later this week.

The once-in-a-decade transition to a new leadership in China is potentially much more relevant for New Zealand.

At current growth rates, China will be New Zealand's largest trading trading partner by the end of the decade. It is already far ahead of America as an export destination and it is far, far more important economically to us and Australia than America.

So it's useful to understand what's going on there, particularly given there is not saturation or overly partisan coverage.

Ambrose Evans Pritchard has this take on the latest shufflings in Beijing. 

He thinks the old guard have staged a comeback. 

 If reports from the Hong Kong press and China's blogosphere are correct, a remarkable upset has occurred on the eve of the ten-year power shift next week -- the greatest turn-over of top cadres since Mao's revolution.

The South China Morning Post says the new line-up of the Politburo's Standing Committee is "packed with conservatives". The succession deal agreed over the summer has been scuppered.

The 86-year Mr Jiang -- who rose to supreme leader on the bones of Muxidi and Tiananmen in 1989 -- has placed his accolytes in charge of the economy, propaganda, as well as the Shanghai party machine.

The hardliners seem poised to snatch control of the seven-man Committee, tying the hands of incoming president Xi Xinping and premier Li Keqiang. If confirmed, long-term investors may have to rethink their core assumption about the future course of China. 

2. No toy helicopters or fruit knives - FT.com reports Beijing is in lock-down mode ahead of the key Congress starting on Thursday to manage the handover.

You could cut the paranoia with a knife...if you could find one. 

In advance of the 18th party congress, the week-long meeting that begins on Thursday and will choose a new leadership, the capital city has mobilised sweeping security measures, some aimed at seemingly innocuous activities such as flying toy helicopters, opening taxi windows, or purchasing fruit knives.

With the 18th party congress just days away, security restrictions in Beijing include temporary bans on selling knives in stores, flying toy aircraft, and racing pigeons, a traditional pastime in the capital. Online retailers said they were also forbidden from shipping computer batteries to customers in Beijing, and trucks carrying toxic chemicals have been barred from the city during the sensitive time.

The official nervousness underscores the social pressures that have built up over the past decade under the leadership of Hu Jintao and Wen Jiabao, and highlights the challenges facing the new leaders as they assume power.

3. The Russian connection - Cyprus is asking for a big Euro-bailout, but the money may simply go to bail out 'black' Russian money deposited in Cypriot banks, Zerohedge points out.

Timing couldn’t have been worse. Or more opportune. A “secret” report by the German version of the CIA, the Bundesnachrichtendienst (BND), bubbled to the surface, asserting that the pending bailout of Cyprus would use the money of taxpayers in other countries, particularly in Germany, to bail out mostly rich Russians who have over the years deposited their “black money” in Cypriot banks that are now collapsing.

4. Europe still has a big problem - So says Wolfgang Munchau in FT.com:

Once you conflate sovereign and financial sector risk, the situation becomes more complicated. My bottom line is that the national backstops have not removed, and have possibly increased, the total solvency risk in the system.

Even worse, I believe the outlook for solvency has deteriorated over the past six months due to the effects of austerity on growth at a time when interest rates have hit their lower limit. The economists Dawn Holland and Jonathan Portes have pointed out one other reason why the fiscal multiplier is unusually high at the moment: everyone is pursuing austerity at the same time. We may well have crossed the line where austerity not only raised debt ratios in the short run, which is to be expected, but may end up increasing them even in the long run – so that it becomes self-defeating.

5. Deleveraging explained - Nomura's Richard Koo does a wonderful job here at FT.com of explaining why America (and Europe for that matter) need to keep government stimulus going at a time the private sector is saving more than 5% of GDP.

I'm quoting at length because it is so good. John Key should have a read too.

When the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.

Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies.

With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector. 

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.

6. Chinese coal stockpiles surge - Xinhua reports on rising stockpiles

7. An Australian hero - Felix Salmon at Reuters profiles the big court decision in Australia slamming Standard and Poor's and ABN Amro.

This reinforces again why it's a mistake to fear the bond vigilantes and their flag bearers at the ratings agencies. Remember, our government is embarking on a significant budget tightening because it wants to avoid a credit downgrade from Standard and Poor's and Moody's. Why do we care what they think again?

I’d never heard of Australian federal judge Jayne Jagot before today, but she’s my new favorite jurist, thanks to her decision in a recent court case which was brought against ABN Amro and Standard & Poors.

The coverage of the decision (Quartz, FT, WSJ, Bloomberg, Reuters) concentrates, as it should, on the hugely important precedent being set here: that a ratings agency — in this case, S&P — is being found liable for losses that an investor suffered after trusting that agency.

8. The Great Chinese Greenland boom - Reuters reports on plans for a US$2.3 billion iron ore mine in Greenland that would import Chinese labour...

Global warming seems to have helped Greenland. All the steel produced by this iron ore and pumped into cars and development will further melt the ice and open up Greenland even more...

By a remote fjord where icebergs float in silence and hunters stalk reindeer, plans are being drawn up for a huge iron ore mine that would lift Greenland's population by four percent at a stroke - by hiring Chinese workers.

The $2.3-billion project by the small, British company London Mining Plc would also bring diesel power plants, a road and a port near Greenland's capital Nuuk. It would supply China with much needed iron for the steel its economy.

With global warming thawing its Arctic sea lanes, and global industry eyeing minerals under this barren island a quarter the size of the United States, the 57,000 Greenlanders are wrestling with opportunities that offer rich rewards but risk harming a pristine environment and a traditional society that is trying to make its own way in the world after centuries of European rule.

9. All about Xi Jingping - Here's a Bloomberg profile of Xi Jingping, the incoming paramount leader of China who most people don't know much about.

Days after Xi Jinping became chief in 2002 of Zhejiang, China’s hotbed of private enterprise, he set out on a tour of the province. His message: more capitalism.

Promoted five years later to the party’s top policy making body in Beijing, and heir-apparent to President Hu Jintao, Xi lectured students at the Communist Party’s main school, by the Imperial Summer Palace. His plea this time: more Marxism. 

10. Totally Jon Stewart's team on the eve of the Election