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 #3 from Ambrose on the depression in Southern Europe. Curdled my blood. Although it's nothing a good dose of money printing can't delay or at least shut down for a bit...
1. Has Beijing blinked? - WSJ reports China's leaders may be about to blink and restart the stimulus machine.
In recent months the new leadership have been making noises about letting the economy slow down to make it more sustainable.
But things are slowing mighty fast.
Now some are asking if Beijing can actually press the restart button even if it wants to.
It doesn't have a great history of consumer-led government stimulus. It tends more to be about infrastructure, concrete and steel.
Now the challenge is for the Chinese government to spend more on the 'soft' stuff like Health, Social Welfare and Education.
Chinese Premier Li Keqiang's said on Wednesday that Beijing will not let growth slip below an unspecified minimum level needed to sustain labor markets. That's a slightly different message than Beijing has sent in recent months. So far this year, Chinese policy makers have repeatedly signaled a tough line on the economy, indicating they are willing to accept slower growth in return for a more balanced economy in the long run.
The government's ability to pump the economy, though, is limited. China's leaders do not want to encourage more binge borrowing. Last month's credit crunch was a warning to the country's lenders that the flood of credit has to stop.
The leadership could turn instead to fiscal policy tools. Nomura economist Zhiwei Zhang says the government could boost public spending and let the fiscal deficit rise above the current, modest target of 2% of GDP. HSBC notes that low inflation—still well below the 3.5% annual target set by China's central bank—means there's room for more spending on areas like education, health care, social welfare and public housing.
That would make sense. China's leaders have so far resisted the urge to follow their predecessors by boosting the economy with a massive lending spree. Higher fiscal spending would not only support growth. It could also help with the shift from an investment-led economy to one where consumption is a more significant driver of growth.
2. 'It's all about leverage' - Simon Johnson writes well here at NYTimes' Economix section about the problem of Too Big To Fail banks in America and the need to reduce leverage and increase the equity levels held by the mega-banks.
It seems the big banks' mates at the Fed are letting them get away with low equity levels of 5% when they should be 10%. New Zealand's banks must have a minimum of 8.5% equity.
The big banks swear up and down that to subject them to a tougher leverage requirement (less debt, more equity for them) would somehow derail the economic recovery or even crater the global economy.
This is a complete fabrication – read the independent bankers’ report or look at the recent paper by Anat Admati and Martin Hellwig, “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked,” which goes in detail through all the fallacious arguments that have surfaced in response to their recent book, “The Bankers’ New Clothes.”
The Fed’s board, unfortunately, has sided with the megabanks, resisting attempts by the F.D.I.C. to set an interim final rule on leverage (which would be more definite and harder to lobby than the proposal put on the table) and pushing back against the idea that the leverage ratio for megabanks should be at least 6 percent.
So what we have instead is a proposal, which will now receive comments, for the leverage ratio to be 5 percent for the largest eight or so financial companies (at the holding company level; debt levels would need to be slightly lower at insured bank subsidiaries).
But it doesn't matter much because the European Central Bank has yet to start unlimited bond buying with freshly printed money. That will cool things down for a long time...until some change of government actually leads to one of these Southern European countries pulling out of the Euro.
Europe’s debt-crisis strategy is near collapse. The long-awaited recovery has failed to take wing. Debt ratios across southern Europe are rising at an accelerating pace. Political consent for extreme austerity is breaking down in almost every EMU crisis state. And now the US Federal Reserve has inflicted a full-blown credit shock for good measure.The International Monetary Fund has just slashed its growth forecast for Italy this year to -1.8pc. The accumulated fall in Italian output since 2007 will reach 10pc. This is a depression. Yet how is the country supposed to get out of this trap with its currency overvalued by 20pc to 30pc within EMU?
Spain’s crisis has a new twist. The ruling Partido Popular is caught in a slush-fund scandal of such gravity that it cannot plausibly brazen out the allegations any longer, let alone rally the nation behind another year of scorched-earth cuts. El Mundo says a “pre-revolutionary” mood is taking hold. Portugal is slipping away. Professor João Ferreira do Amaral’s book -Why We Should Leave The Euro – has been a bestseller for months. He accuses Brussels of serving as an enforcer for Germany and the creditor powers.
Like Greece before it, Portugal is chasing its tail in a downward spiral. Economic contraction of 3pc a year is eroding the tax base, causing Lisbon to miss deficit targets. A new working paper by the Bank of Portugal explains why it has gone wrong. The fiscal multiplier is “twice as large as normal”, or 2.0, in small open economies during crisis times.
4. How long before governments force car makers to use blood alcohol testing sensors that stop drunk drivers starting their cars? - This New York Times piece on the slide in the cost of such sensors is a good read.
5. Critiquing the critique - In last Friday's Top 10 I included a widely distributed TED talk address from Eric X Li that questioned the west's criticisms of China and democracy.
Here's an excellent response from Yasheng Huang (also via TED):
The narrative that was apparently fed to Li when he was a “Berkeley hippie” is based on the actual experience of human affairs. We have had hundreds of years of experience with democracy and hundreds of countries/years of democratic transitions and rule. The statement that countries transition to democracy as they get rich is a positive statement — it is a prediction based on data. In the 1960s, roughly 25 percent of the world was democratic; today the proportion is 63 percent .
There are far more instances of dictatorships transitioning to democracies than the other way around. The rest of the world has clearly expressed a preference for democracy. As Minxin Pei has pointed out, of the 25 countries with a higher GDP per capita than China that are not free or partially free, 21 of them are sustained by natural resources. But these are exceptions that prove the rule — countries become democratic as they get richer. Today not a single country classified as the richest is a single-party authoritarian system. (Singapore is arguably a borderline case.) Whether Li likes it or not, they all seem to end up in the same place.
6. How to bribe a Chinese official - This is all very topical at the moment given the newly virtuous Chinese leadership are cracking down on Western companies such as GlaxoSmithKline who have been caught bribing doctors and others. Our own Zespri got caught up in the latest crackdown. It seems stored value gift cards are popular and you don't have to spend much.
But here's a nice piece in the Atlantic on how to do the business:
How do you get a "license to pollute" in China? Start by giving a 2,000 RMB (approximately US$330) gift card to the local environmental protection agency's director.
That is, according to a list that was circulated on China's social media that allegedly shows 47 government officials as recipients of gifts from a real estate developer in Yinchuan, the provincial capital of Ningxia province. While the authenticity of the list cannot be verified, journalists in China have confirmed that the officials named on the list do indeed exist.
7. Speaking of gift cards... - This Reuters article on the shadow financing sector in China interviews a Shanghai man starting a gift card company about how he got a loan. It wasn't from a bank...
If you think New Zealand had a problem with dodgy finance companies, you should see China's.
The dearth of bank credit available to China's millions of small to mid-sized companies is expected to tighten as authorities seek to rebalance the world's second-biggest economy. The central bank briefly allowed short-term interbank rates to surge last month to crack down on lending tied to property speculation and bloated local government debt.
The crackdown, however, only reinforced the dependency of many of China's non-state backed enterprises on the shadow banking industry. Fitch says some 36 percent of outstanding credit in China, or 34 trillion yuan ($5.55 trillion), lies outside banks' loan portfolios, a huge pool of money which market participants find difficult to track and which could cause an ugly credit mess in a steeper slowdown.
Beijing now faces the difficult task of trying to re-direct a non-bank financing system - created by the government's own lending policies - that has helped keep its economy humming.
8. 'Just hold the boss hostage' - The recent case of an American manager of a factory in China who was held hostage for three days gives an interesting insight into what can go wrong. Henry van der Heyden will be glad this never happened to him. It turns out the local police helped the local workers lock up the American guy until he promised to make redundancy payouts to workers he was laying off.
While this labor dispute may seem unusual, both because it occurred in a foreign-owned enterprise and the co-owner was held hostage, in fact it is part of an increasing trend. While noting that foreign executives aren’t typically targeted, James Zimmerman, a former Chairman of the American Chamber of Commerce in China, was quoted in one report as saying that “holding a manager hostage isn’t an unusual practice in Chinese labor disputes.”
Kent Kedl, a China-based executive for Control Risks, a global risk consultancy,reports a “sharp increase” in hostage situations in China because of China’s slowing economy and fears among employees provoked by employer decisions to restructure their businesses.
9. Does money make you happy? - Austrian millionaire Karl Rabeder decided to give all his money away after a luxury holiday, the Telegraph reports. First world problems?
The tipping point came while he was on a three-week holiday with his wife to islands of Hawaii.
"It was the biggest shock in my life, when I realised how horrible, soulless and without feeling the five star lifestyle is," he said. "In those three weeks, we spent all the money you could possibly spend. But in all that time, we had the feeling we hadn't met a single real person – that we were all just actors. The staff played the role of being friendly and the guests played the role of being important and nobody was real."
He had similar feelings of guilt while on gliding trips in South America and Africa. "I increasingly got the sensation that there is a connection between our wealth and their poverty," he said.
10. Totally Clarke and Dawe - Here's the latest from the French Alps...
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