Wednesday's Top 10 at 10: What the 'new normal' of unstable disequilibria looks like; Another Greek ultimatum; Europe's OBR-style fears of 'bail-in' wipeouts; Beijing's 'Universities of Wild Chickens'; Dilbert

Here's my Top 10 links from around the Internet at 10 am today.

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 today is #7 on what actually happened in China's credit crunch and why. It includes a serious forecast that China's growth rate will drop to 3%.

1. 'An unstable disequilibrium' - Uber-bear economist Nouriel Roubini and global political commentator Ian Bremner talk here to Charlie Rose about the new normal.

The global economy and markets just can't seem to get back to normal.

Why is that?

Is it the debt weighing down on developed economies?

Is it that financial markets are addicted to stimulus?

Is it that politicians and voters can't find a way to restructure and stimulate their economies at the same time.

The discussion is interesting here. 

“Our point is that this situation is one that is not a stable equilibrium, is not even a stable disequilibrium. It’s an unstable disequilibrium. Take for example the eurozone. You cannot have just a monetary union without banking, political, economic, fiscal union. Either you move towards more integration or you’re going to have more fragmentation and disintegration. So the situation we face right now in the global economy, same in the eurozone, is of a unstable disequilibrium, therefore a new abnormal, that cannot be sustained.”

Historically, whenever you start with too much private and public debt, there is a painful period that can last over a decade, where growth is going to be anemic. Why? Because you have to spend less, to save more or dissave less to gradually reduce this tox of deficit and debt. And that implies that economic growth has been very weak in the United States, in Europe, in Japan and other advanced economies. And that’s going to continue. Eventually, that slow economic growth is associated with rising unemployment rate, and also with social and political unrest. That’s the situation we’re facing right now – is unstable disequilibrium, is the new abnormal. We’re ahead of decade of very low economic growth.” 

2. 'Stand and deliver' - Keep an eye on this Greek situation, which could blow up in everyone's faces very quickly.

Here's Reuters with the report:

Greece has three days to reassure Europe and the International Monetary Fund it can deliver on conditions attached to its international bailout in order to receive the next tranche of aid, four euro zone officials said on Tuesday. The lenders are unhappy with progress Greece has made towards reforming its public sector, a senior euro zone official involved in the negotiations said, while another said they might suspend an inspection visit they resumed on Monday.

Athens, which has about 2.2 billion euros of bonds to redeem in August, needs the talks to conclude successfully. If they fail, the International Monetary Fund might have to withdraw from the 240-billion-euro bailout to avoid violating its own rules, which require a borrower to be financed a year ahead.

3. 'Renminbi appreciation' - We've become so used to China keeping its currency under-valued and pegged vs the US dollar that we've forgotton that the new leadership has actually allowed a significant appreciation in recent months, which is again helping to slow the export and investment centric economy.

What happens if an outflow of funds forces a depreciation?

Izabella Kaminska looks at the implications here at FTAlphaville:

 The opposition to PBOC currency policy highlights internal concerns about potential outflows, and the degree to which the government’s exchange rate strategy may have inflamed this.

“Yuan appreciation has been too fast…. Current appreciation may have reached its limits,” said a regulator in recent comments. “In future, depreciation expectations may create more negative issues than appreciation did though massive capital outflows still aren’t happening.” “The PBOC made a big mistake — they shouldn’t have let the yuan appreciate so quickly.” The PBOC should be setting the yuan’s daily central parity against the dollar more in line with the capital flow picture, the regulator said.

4. Europe's OBR fears - FT reports on the growing fear in Europe of a Cypriot-style Open Bank Resolution forcing 'bail-ins' of ordinary depositors and big corporate savers in any European bank collapses. And they have deposit insurance...

Analysts warn the latest initiative to build a resilient eurozone “banking union” – which will put deposits by large corporations at risk of being “bailed-in” to rescue trouble-hit banks – may have the opposite effect and spark renewed capital movement away from the continent’s troubled southern economies while benefiting banks in the north.

“There’s already been a reassessment of risk between periphery and core over the past two years which has led to foreign deposits being moved away from the periphery,” says Huw van Steenis, banking analyst at Morgan Stanley. “The bail-in directive could potentially accentuate this reallocation.”

5. Beijing's diploma mills - This piece in the Economic Observer about Beijing's often dodgy 'colleges'. We have a few with similarly trumped up names in Auckland too. My rule of thumb is to be sceptical of anything with the names Cornell, Oxford, MIT, Cornell and Harvard in them if they have an address in the Auckland CBD. There are a few.

If you see a school like Capital University of Finance and Economics, Beijing Economic and Trade Institute, or Beijing Foreign Trade Institute while brushing over a job applicant’s resume, you might be forgiven for thinking it’s a legitimate institution.

In China, these kinds of schools are called “Universities of Wild Chickens” (野鸡大学), referring to private schools with deceptively similar names to well-known universities that aren’t even licensed to accept students. Those who didn’t get a good score on the college entrance exam (or never even took it) can pay comparatively high tuition to these fly-by-night schools and get a “diploma.”  

6. How China's Shadow Banking system works - Here's a nice backgrounder from The Atlantic. 

 Over the last four years, the GDP growth generated by each yuan of additional loan has fallen from 0.85 to 0.15, an indicator that the limits of debt-fuelled growth are being reached. In effect, the very engine that caused China's growth ---fixed asset investment fuelled by local debt -- wasn't sustainable, and the government began to worry about the negative consequences of an overheating economy: inflation, real estate bubbles, and overcapacity.

So in 2009 they slammed on the breaks. An economy that was addicted to credit needed to go somewhere else to get its fix. This was where shadow banking came in.

Desperate for credit, banks began working closely with trust companies and other entities to refinance bad loans by bundling them up and repackaging them as "wealth management vehicles", or WMVs. These vehicles, which require a tenure ranging from a year to a few days, offered a higher rate of return than conventional bank deposits. They also allowed banks to keep their lending off their balance sheets and were sold through their branches or online, effectively turning banks into middle men between recipients and investors. In theory, this should have solved the problem of obtaining local financing. But the problems have only begun.

7. How the PBoC stuffed up - Here's the WSJ with a insider's look behind the Chinese credit crunch that sparked rumours one of the big four state owned banks had defaulted. 

It is a cracking read.

The People's Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth, according to an internal document reviewed by The Wall Street Journal.

But by failing to make that clear—at a time when worries about slowing Chinese demand had already scared away some foreign capital, and as signals from the U.S. Federal Reserve also were redirecting global cash flows—the Chinese central bank inadvertently contributed to a surge in global market anxiety.

A top Chinese leader, Vice Premier Ma Kai, has ordered an investigation into a market rumor of insolvency at Bank of China Ltd., 601988.SH -0.74% one of China's top four state-owned banks, said people with direct knowledge of the probe, which could be a signal leaders are looking for clues about the sources of the market turmoil that came to a head on June 20.

Since early June, the PBOC has sought to force Chinese banks to redirect their lending away from shadow bankers—a mélange of trust companies, pawnbrokers, leasing companies and others—whose lending is putting further stress on an economy already slowing, economists say.

Barclays is particularly worried.

 "Based on an increasingly likely downside scenario," GDP growth in China could drop to 3% or less within the next three years, Barclay's said, though the Chinese economy would bounce back "dramatically" from any such "hard landing" because it would approve economic reforms.

8. How about a land tax? - The Economist thinks it should be seriously considered, describing property taxes as an 'unexploited resource.'

Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes.

A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors.

9. Totally irrelevant but interesting article - This NYTimes Magazine piece from Clay Tarver is about Jason Everman, the guitarist fired from Nirvana and Soundgarden (two of my favourite bands) and who became a US special forces solider fighting in Iraq and Afghanistan. Certainly an interesting life with more twists than most.

10. Totally John Oliver on America's greatness "because what's in your head can be misleading..."

(Adds cartoon)