Monday's Top 10 with NZ Mint: China a zero growth economy?; Capital outflows from China; Bjork and the very dotty Sigurdardottir; 'Chancers and rogues'; Dilberts

Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

My must read today is #8. It's all about China's unsustainable debt growth.

1. 'A zero growth economy?' - Gordon Chang at Forbes reckons the Chinese economy is growing much slower than many people believe (including our own Reserve Bank Governor)

He thinks China may not be growing at all, which would be a very hard landing.

Chang points to weak electricity production growth in January and February, low single digit growth in cargo through the Shanghai port and a 6.5% fall in vehicle sales early in 2012.

He thinks Premier Wen Jiabao may not repeat the decisive and very stimulatory action seen in late 2008 and early 2009.

That would be a problem for New Zealand and Australia.

Our Global Financial Crisis was cushioned by China's decision to lend freshly minted money like mad to property developers and railway builders.

We've already seen Standard and Poor's warn that a hard landing could cut Australian house prices by more than 10%.

Here's Chang:

Nobody sees a return to Beijing’s “tidal-wave investing” of the 2008-2009 period.  To his credit, Premier Wen does not want to over stimulate the economy again, and even if he did he no longer has the tools to do so.  Therefore, one has to wonder what he will do this time to get growth back on track.  This is not to say that 7.5% growth is unattainable, but it is attainable only if Beijing takes decisive measures and does so soon.

In the meantime, the January-February results indicate that the downward slide, evident in the last quarter, is picking up momentum.  At the moment, China is heading to an essentially zero-growth economy.

2. More problems in China than the Americans think - Samuel Sherraden, the associate director of the Economic Growth Program at the New America Foundation, writes at Bloomberg about why America's government may be worried about the wrong things in China.

Similar to Chang above, Sherraden says China is much weaker than America thinks.

Here's more:

Movements in currency markets also suggest a lack of confidence in China’s economy. In September, currency forwards contracts, or bets on the value of the yuan in the future, started predicting that it would depreciate, rather than continue the appreciation trend that forwards markets had generally shown since China’s currency de-pegged from the dollar in 2005. Forwards contracts now predict China’s currency will be basically flat in the next 12 months, a reflection that concerns over the Chinese economy remain.

In the past, bouts of weakness in China’s economy weren’t as obvious because its capital account was closed, meaning that capital couldn’t leave the country. Even though the capital account is still largely closed, money can now flow out of the economy more easily than before: In the fourth quarter of 2011, China’s surplus in the trade of goods, services and transfers, known as the current account, was almost completely offset by outflows from the capital account or elsewhere, according to preliminary figures from the State Administration of Foreign Exchange. This indicates that despite China’s trade surplus, investors are still insecure about domestic economic conditions.

There is mounting anecdotal evidence that Chinese are trying to protect their wealth by holding less yuan or even moving their wealth offshore. According to the Hong Kong Census and Statistics Department, China’s gold imports from Hong Kong increased threefold in 2011. This is often assumed to be a hedge against inflation, but it may also be seen as a store of value given a weaker economy and faltering real-estate market.

In a further sign that Chinese citizens may be trying to protect their wealth, gambling revenue in Macau increased 35 percent in January due to more traffic from mainland China, according to Macau’s Gaming Inspection and Coordination Bureau. Gambling is thought to be a way Chinese individuals can exchange their yuan for foreign currency and move wealth offshore. In this respect, increased gambling revenue in Macau may be a contrary indicator for the health of China’s economy and confidence in its currency.

3. Is Bjork in charge? - Bloomberg reports the Prime Minister of Iceland Johanna Sigurdardottir says Iceland needs to adopt another currency such as the euro or another currency.

What is she thinking? The free floating Krona was the one of the reasons Iceland is now rebounding. And she seriously wants to join the Euro...At least the public in Iceland know this is nuts.

A Capacent Gallup poll last month showed that about a quarter of the island’s voters support joining the bloc, or 26.3 percent, while 56.2 percent oppose EU membership.

Iceland could fix the krona’s exchange to the euro and be sheltered by the European Central Bank “as early as by the middle of next election term” in 2015, said Sigurdardottir.

And here's a gratuitous Bjork video. It's oh so quiet, directed by Spike Jonze. Mad. As. A. Cut. Snake. But Brilliant with it.

4. The inevitable response - Brazil is desperately trying to avoid being hammered by money printing elsewhere. It has just slashed its main interest rate to reduce the attractiveness of its Real currency.

Now Reuters reports is suggesting Brazil trade controls on competing car imports from Mexico.

Brazil is pushing Mexico to slash its auto exports to Latin America's biggest economy by more than a third to about $1.4 billion a year as it attempts to shield its own struggling industry from a strong currency. The export quota, proposed in a letter to Mexico's government dated March 8, is one of several Brazilian demands to rework a bilateral automotive trade deal.

The proposal fans a dispute that has stirred tensions between the two regional giants. It could also upset nations such as the United States that provide components for cars made in Mexico.

5. 'Eliminate the Chancers and Rogues from banking' - Tim Whalley writes a nice response to Andrew Haldane's excellent 'Doom Loop' article in the London Review of Books.

Here's Whalley: (I just wanted to write the name without a O and with an H)

Although Haldane is right that there has been a failure of systemic governance, his ready exoneration of individual and board responsibility is surprising. It is not, he says, ‘a story of pantomine villains and village idiots’ (though the CEOs of RBS and Lehman Brothers and their respective boards surely merit an audition for these parts), but governance in financial institutions has contributed to the systemic failure.

The bonus culture speaks to a radical change in the mores of management and governance in banking, and to undo it will require a more brutal response than Haldane suggests. Senior bank executives and board members should be liable to charges of negligence and reckless lending in the event of bank failure and subject to suspension. Unless there is a determined effort to eliminate the chancers and rogues from the banking industry, the most determined regulatory reforms will come to nothing.

6. The imbalances in the NZ economy - Treasury has produced an excellent chart in its briefing to the incoming Finance Minister Bill English. Just spotted it. HT John Walley.

Following an increase in trend growth over the 1990s, the deterioration in New Zealand's economic performance over the past decade reflects a stalling in productivity growth and a pattern of growth biased towards consumption. Domestic demand, fuelled by rapidincreases in private sector debt and government spending, has increasingly dominated overall activity. 

The more-productive tradable sector declined, as ongoing growth in the non-tradable sector drew in resources (figure 4) and resulting capacity constraints put additional upward pressure on costs and on interest and exchange rates. Although average real interest rates were lower during the2000s than in the previous decade, they have remained high relative to other developed countries', and have contributed to thepersistently high level of the real exchange rate.

7. Get the hell out of Afghanistan - In my opinion New Zealand troops should not be in Afghanistan. The latest tragedy, as reported by Reuters, reinforces this.

8. Michael Pettis on China's growth rate - Michael Pettis is a close observer of what happens in China and writes thoughtfully and with detail about the economy there. Here's his latest missive via Credit Writedowns on China's unsustainable economic structure.

And how much will growth slow? The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years. That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.

9. Greece not fixed yet - Reuters' Ingrid Melander tells it like it is:

Greece's euro zone partners, exasperated by many broken promises, could be tempted to pull the aid plug if the winner of elections penciled in for late April or early May fails to reverse a poor track record on delivering reform. At the same time, a population angry with a prolonged recession could eventually push for another cure altogether if record-high unemployment keeps increasing and EU and IMF lenders ask for even more sacrifices.

"The debt swap deal does not solve the problems of Greece at all," said Holger Schmieding, chief economist at Berenberg Bank. "Of course, without it, Greece would be in huge trouble. But Greece's problem is that it has to return to growth. Otherwise, no debt burden is sustainable."

Greece's economy is estimated to have shrunk by about 15 percent since 2008, when it plunged into its deepest post-war recession, dragged down by tax hikes and wage and investment cuts meant to put public finances back on track. More than one in ten jobs have been destroyed, leaving over half of young people unemployed.

10. Totally Jon Stewart on America's Socialist movement(s) and why Barack Obama is no real socialist. It seems a lot like that scene in the Life of Brian (below) when Brian tries to get into the Judean's People's Front...or is that the People's Front of Judea...

"Splitter!"