Bernard's Top 10: How 'communism by stealth' made NZ's economy grow faster; A vampire sucks up US$40 bln a month; China's housing protests; Peak oil demand; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. 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 reads today are #3 and #4 on financial innovation in China that is helping savers subvert capital and interest rate controls, but may cost them big time in the end. Financial deregulation never goes smoothly.

1. NZ a standout performer - This collection of useful charts on inequality from Filip Pagnoli highlights how poorly New Zealand performed on both an economic growth and income inequality front from 1970 to 2000.

Our performance has improved somewhat since then, but worth remembering how much ground was lost during that period.

Our income inequality widened dramatically to the worst half of the OECD over that time, while at the same time our economic growth rate dropped down the OECD rankings.

That's in tune with the latest research showing that widening inequality actually reduces economic growth and that moves to redistribute income don't hurt economic growth.

Now New Zealand is a 'rock-star' economy with faster economic growth rates than most of the OECD.

It may not be a coincidence that there's been significant income transfers since the 2000s, including through a generous NZ Super system, Working for Families, Accommodation Supplements and interest free student loans. John Key's decision to keep these acts of 'communism by stealth' helped support the economy through the recession and means we have a faster escape velocity now.

And this chart courtesy of the Washington Post also tells a story of how redistribution slows growth by less than inequality does.

2. The problem of the 'rentiers' - Former banker and lawyer Charles R Morris has a good old rant here via Reuters at the 'rentiers' in banking in America.  He targets Merrill Lynch in particular.

The special animosities felt toward the big banks stems from the feeling that they are rentiers — sitting athwart the sluice gates of global finance, dipping out bucketsful of glittering tolls from the passing stream.

There is a lot of evidence to support that view. The financial sector, for example, accounts for just under 10 percent of U.S. gross domestic product. But for much of the 2000s, it consistently captured between 30 percent to 40 percent of corporate profits. Bank earnings tanked in 2007 and 2008, of course, but by 2009 they were once again claiming 30 percent of profits. So the penalty for causing a global financial thrombosis was just a couple of off years, and then back to the big bonuses — as the rest of the economy still struggles in the mire.

Unproductive churning that benefits no one but the churner sucks the resilience out of an economy. The poster boy for financial churning, perhaps, is the old Merrill Lynch. From 2001 through 2007, it booked more than $100 billion in revenues. Consistent with contemporary practice, half was paid to employees, largely to the most senior levels. In 2008, Merrill was suddenly on the brink of insolvency. It agreed to a shotgun wedding with Bank of America. When the accountants had sifted through all the rotten paper on Merrill Lynch’s books and totted up the losses, it turned out that from 2001 through 2008, despite the terrific profits made during the financial boom, Merrill had earned a negative $21 billion.

3. How China UnionPay is used to get around China's currency controls - This piece on Reuters from James Pomfret is a fascinating look behind the scenes at how many people in China get money out of China and past various capital controls, often using the UnionPay credit card system and trips to Macau. UnionPay is owned by China's government and is growing at an astonishing rate globally. It is quickly becoming a rival for Visa and Mastercard. I wonder if any of these fake purchases are happening in Auckland.

In a warren of gritty streets around Macau's ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases - a way of evading China's strict currency-export controls.

On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a "general sale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

4. No squids involved - This Bloomberg piece about the boom in internet savings schemes in China is a fascinating insight into what happens as a once very-closed financial system starts to open up and deregulate. I realise David included it in his 90 at 9, but it's too good not to include here. What happens when one of these unregulated savings schemes falls over? See #5 below. Remember that there are 81 million customers with money in these things.

Here's the amazing detail, including that one of the funds has taken in US$40 billion in a month...sigh.

It has been labeled a “blood-sucking vampire” by a prominent commentator on state-run television. Executives at China’s largest banks have called for regulators to curb its rapid expansion.

The focus of this ire is Internet financing, specifically Yu’E Bao, the fund pioneered nine months ago by Alibaba Group Holding Ltd.’s online-payment affiliate Alipay. Its ease of use, involving a few taps on a smartphone, has drawn deposits from 81 million customers, more than the population of Germany, as they chase returns higher than China’s banks can offer. The total exceeded 500 billion yuan ($80 billion) as of Feb. 28, according to the official Xinhua news agency, double the amount reported by Alipay in mid-January.

5. Just imagine the protests - We've seen this week with the MH 370 protests at the Malaysian embassy in Beijing what happens when people in China think they've been lied to or misled.

Now apartment investors in China who bought their apartments before developers slashed the prices to clear inventory are out protesting, the WSJ reports, via Macrobusiness.

According to property agency Soufun Holdings, Wharf cut prices of 20 apartments in the project to 8,200 yuan ($1,317) per square meter, down from the average 11,000 yuan per square meter it recorded in recent months. Groups of angry homeowners put up banners and demanded their money back after Hong Kong-listed property developer Wharf Ltd. cut prices.

Around 20 homeowners picketed outside a property showroom in Changzhou Saturday, demanding to meet executives of the developer. They said they wanted their money back after prices at the project dropped.

Meanwhile, there was also a small disturbance at a second project called Ambassador House in the same city after the same developer cut prices there. Furniture at the showroom of Wharf’s Ambassador House was knocked over and the wooden stands for advertisements for the homes were flung on top of a model of the project.

Others said that as many as 100 people who had bought homes at the project had vented their frustrations outside the showroom over the past week.

“Wharf, give us justice. Return us our hard earned money,” read one of the banners, held up on bamboo poles outside the Phoenix Lake Garden showroom of a project for mid- to high-end apartments and villas. "We aren’t speculators. We just want an explanation from the developer,” said one 35-year-old home buyer, who said he had bought an apartment and gave his surname as Wu.”This is very unfair.”

6. Peak oil demand - There's been a lot of talk over the years about peak oil supply, but what about the prospect of peak oil demand as the cost and desirability of electric cars, solar power and other renewables become increasingly economic?

Here's Jeremy Grantham from GMO with a good look at the issue in his fourth quarter newsletter.

Some emerging countries, notably China, are likely to take more dramatic and faster steps to reduce demand than we have ever thought about. Already they have 200 million electric vehicles – mostly motorbikes – almost as many as the rest of the world squared. Total global oil demand at current prices or higher is likely to peak in 10 years or so. At much lower prices we would fairly quickly lose most of our high-cost production: deep offshore, fracking, and tar sands.

Times may be changing faster than we think. My guess is that oil prices will be higher than now in 10 years, but after that, who knows? The idea of “peak oil demand” as opposed to peak oil supply has gone, in my opinion, from being a joke to an idea worth beginning to think about in a single year. Some changes seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.

7. Second acts - There's been plenty of company founders who have made windfall gains from selling their babies who have then gone on to party or salt it all away. That's fair enough. New Zealand has had plenty of successful business people go off to a quiet retirement with their bach, boat and BMW.

But those who use their windfalls and their time after the windfall to invest in brand new big things should get credit.

The Trade Me alumni behind the successes at Xero and Vend should get big pats on the back for creating large licks of shareholder value and hundreds of brand new and high paid jobs.

The latest is Vend, the point-of-sale cloud software company that connects cleverly with Xero. It raised NZ$25 million overnight from the likes of Pay Pal cofounder (and Facebook investor) Peter Thiel, Seek Co-Founder Paul Bassat and MYOB founder Craig Winkler.

Congratulations are in order to those Trade Me alumni Sam Morgan, Rowan Simpson and Lance Wiggs, who are heavily involved with Vend.

8. Tax the balance sheets - Here's support for a serious idea via Professors Mark Roe and Michael Troge in the FT for a tax on bank assets rather the profits.

A tax on the balance sheets of big banks – first proposed by US President Barack Obama in 2010 but later shelved – is back on the political agenda. Last month Dave Camp, Republican chairman of the House of Representatives ways and means committee, put forward a proposal for tax reform that included a 0.035 per cent levy on bank assets more than $500bn. This would hit large institutions such as Bank of America, Citigroup and Goldman Sachs.

The aim of the Republican plan is to find tax revenue that could be used to offset cuts in income taxes on individuals. Mr Obama pitched his proposal as a way of raising money from US banks to help repay taxpayers who had to bail them out at the height of the crisis. Neither plan aims to make the financial system safer, and neither would. But with a few alterations, a balance-sheet tax could help strengthen the banks.

9. The backlash has begun - Tim Harford writes here at FT.com about the popularity of behavioural economics and how a backlash has begun.

10. Four steps to fixing inequality - This piece from Harford on his websites detailing four steps to fixing inequality is too good to ignore, even though I've already got one link from him in today's Top 10.