Archive | Asia

Trump rolls the dice and tells all the players what to do

Donald Trump’s visit to Auckland in August 1993 lasted just a few hours, and his visit on a blustery day to the proposed Auckland Casino Ltd site, the old central railway station, took only a few minutes – enough to greet intending partners, be greeted by a few protesters and make a quick tour of the vacated station building.

It wasn’t hard to see a man on a mission which wasn’t going to include Auckland. He was here to assess a deal to his advantage, not to see where he might fit into a relatively small & tightly regulated venture in an outpost.

But now, from New Zealand’s support of the UN Security Council resolution on 23 December declaring Israeli West Bank settlements a flagrant violation of international law, as a supporter of the Trans Pacific Partnership and as an eager signatory to the China-led Asian Infrastructure Investment Bank, New Zealand might just get marked down among the Bad People.

On that miserable August day he also visited the Casino Control Authority, which had the task of assessing intending casino owners & operators. Mr Trump’s financial position at the time was precarious and his lead development partner, the National Maori Congress, went on to present a poorly devised case.

The Maori congress’s partner in premises licence applicant Auckland Casino Ltd, New World Development Co Ltd of Hong Kong, was a major developer there and in mainland China but showed little understanding of what was required in Auckland.

Not surprisingly, in December 1993 the authority awarded the casino premises licence to Brierley Investments Ltd’s slicker Sky Tower project. The casino business has been a highly successful venture, but would have been far less of one if Harrah’s had stayed as SkyCity’s operator or Trump had won the operating licence. SkyCity has ridden the local ups & downs and come out well ahead. The American operators would have crawled into their shells in bad times back home and the outpost venture would have suffered, or been sold.

Ability to sum up a position flows through Twitter

Mr Trump was a man in a hurry then, with an evident ability to sum up his surroundings & company. He’s been in financial straits many times since then which would have knocked most serial entrepreneurs off their perch, and every time he’s come out proclaiming victory. Since he vanquished Hillary Clinton in the US presidential race on 8 November, however, he’s surpassed himself in summing up opponents, the people who are going to fill executive roles in his governance ensemble, the foreigners he wants to dominate.

His master stroke has been the use of Twitter. His relentless tweeting has been derided by many, but it’s worked. Before he’s taken office he’s espoused the policies that will be followed and his lackeys, the generals & Goldman Sachs entourage fast filling executive posts, have mostly fallen into line. They all know the words they’ll hear if they get out of line: “You’re fired!”

The result is that, before he even gets the keys to the White House on Thursday, Mr Trump has directed a total revision of the natural order.

Hardlining versus working with nuances

Socialist policy, very limited in the US anyway and resisted by a high proportion of the electorate, will be reduced to the corporate capitalist version: What’s necessary to keep the workforce working.

Mr Trump acknowledges governments as providers of services, but every service involves a deal. He wants his people to drive hard bargains, starting (via Twitter) with aircraft construction contracts, pharmaceutical contracts (via his media conference this week), the Mexican wall, trade with China and China as a currency manipulator (is there a country in the world that doesn’t at least try to manipulate its currency?), reordering trade relations with many other countries, decreeing boundaries which other nations ought not pass (as in the South China Sea).

The US was going to get a better deal than it ought to have from the Trans Pacific Partnership – for its pharmaceutical manufacturers & licence rights, for corporates & their ability to contest national positions. That partnership began as a small affair between 4 countries and expanded, ultimately including the largest Pacific trader, the US. It could continue to a signed partnership excluding the US, but it would be a much less effective agreement.

In the bluster of the Twitter outpourings, Mr Trump has made it clear he wants deals that are fair to the US. Which, as his desire to force carmakers to produce vehicles in the US rather than next door in Mexico shows, won’t be “fair” to Mexico.

It’s an example of bullying because you can, but it’s a course open to unintended consequences such as an increase in illegal migration through Mexico to the US, wall or no wall.

Always, the unintended consequences

Another unintended consequence, though, is the impact of US arrogance on other nations. I’ve always seen the 9/11 attacks on the World Trade Centre in New York and Pentagon building in Washington in 2001 as at least partly a response to that arrogance, whereas the official US view then & since has been that this was an unjustified terrorist attack – without cause.

As China builds islands in the South China Sea – undoubtedly heightening the consternation other nations bordering that sea feel – the US comes in heavy-handed: Do as we tell you.

China – through both government & private-sector companies – has been investing heavily in businesses & property around the world, including landmarks around the US. It has also been lifting the international importance of its currency for bilateral trade, particularly with Russia, and has been forging new trade partnerships – BRICS (Brazil, Russia, India, China & South Africa), the New Silk Road across Asia to Europe, the maritime Silk Road, the Asian Infrastructure Investment Bank and, perhaps most important of all, having renminbi added on 1 October 2016 to the basket of currencies used to value International Monetary Fund special drawing rights, joining the $US, euro, yen & pound.

The Silk Road trade routes, to Europe across continental Asia, and to Africa on a maritime course.

According to currency website The Balance, over 85% of forex trading involves the $US and 39% of the world’s debt is in $US. When the global financial crisis hit in 2008, non-US banks had $US27 trillion of international liabilities denominated in foreign currencies, and $US18 trillion of that was in $US.

The rouble & renminbi aren’t going to take over, but it will suit Russia & China to have a strong alternative, and IMF special drawing rights can achieve that for international trade, if not for consumer transactions. They were calling for such a move before the global financial crisis.

China in, US heading out?

China’s president, Xi Jinping, will deliver the opening address at this year’s World Economic Forum gathering in Davos, Switzerland, on Tuesday, and he’ll be accompanied by the largest Chinese delegation since the Davos meetings began in 1979. As the US erects barriers and its almost-president tweets decrees, China is opening itself to wider relationships, including drawing closer to the far right of capitalism.

However, it’s conceivable that the US & Russia could also draw closer as many of their interests merge. Russia is now a non-communist country, albeit still autocratic; Mr Trump’s style is autocratic, albeit the country adhere’s loosely to a democratic veneer. Both countries’ governments have played others to their own advantage, and in some theatres such as Syria it may suit the US & Russia to be on the same side at times (simultaneously, unlike in Afghanistan).

A dealmaker first & last

All of the above is about position-taking, some for commercial gain, some for international power.

Mr Trump looks at all of this in terms of dealmaking, which he emphasised during his press conference last Thursday: “I want to bring the greatest people into government, because we’re way behind. We don’t make good deals anymore. I say it all the time in speeches. We don’t make good deals anymore, we make bad deals. Our trade deals are a disaster. We have hundreds of billions of dollars of losses on a yearly basis – hundreds of billions with China on trade & trade imbalance, with Japan, with Mexico, with just about everybody. We don’t make good deals anymore.

“So we need people that are smart, we need people that are successful, and they [his Cabinet appointees] got successful because generally speaking they’re smart.”

A family of traders, with connections

Outside the political sphere, Mr Trump’s life has been about commercial deals, and his wider family has followed the same trajectory. Attempts are being made to separate family commercial life and political roles, but there are natural crossovers. For instance, Mr Trump’s daughter Ivanka and her husband, Jared Kushner, are moving to Washington for Mr Kushner to take on a role in Mr Trump’s administration.

The Washington Post noted last week that Mr Kushner’s family had donated to pro-Israel causes, hardly surprising given that the New York property development family is Jewish. But it is that kind of connection that makes it so much harder for Mr Trump to lock himself into a “for everybody equally” role.

Those Jewish connections will have a bearing on his view of the Security Council resolution, and also of the countries that voted for it, New Zealand among them. ‘Where was that country again? Oh, yes, I went there one day, cold & blustery, they didn’t like me, didn’t like me.’

In contrast to “draining the swamp” of insider vermin, all Mr Trump’s business & family relationships make connections to the swamp – to financiers, Goldman Sachs in particular, to people who can pull levers – that much more important for a person who’s spent his life combatting regulators. And now it’s the swamp dwellers who are rising to lead positions in Mr Trump’s Cabinet.

Outcomes

You see a president (swearing in Thursday) bent on certain courses – Israel, China, corporate power, finance sector.

The tariff wars are already underway. China already had tariffs on imports of corn-based animal feed from the US, and has increased them. Mr Trump has threatened a 45% tariff on all imports from China, effectively a calculation to make up for alleged currency imbalance, and has threatened carmakers manufacturing in Mexico.

Most of the American focus is on Mr Trump & his outbursts, little on what Mexico might do or how it will cope with the sudden departure of whole industrial sectors. This is the kind of action that can set off international turbulence. China has already been lifting its internal trade, trade around Asia rather than with parties outside Asia may rise, the Silk Road routes will increase trade across continental Asia and over to India & Africa.

The Trump argument is that China has been devaluing its currency to make its exports more competitive. The New Zealand way of doing this is for the Reserve Bank governor to remark that the $NZ is overvalued and for nothing much to change. The US has effectively devalued by printing billions of dollars through quantitative easing since the global financial crisis began, but its exchange rate has climbed over the last 4 years.

Unilateral trade actions can easily flow into redirection of trade, and will certainly encourage affected nations to move away from the greenback as international currency.

The anti-UN tirade unleashed

Fast & determined action on a number of fronts by Republican politicians means a vote to pull the US out of the United Nations and oust the United Nations from New York could well pass this time, spurred on by the UN Security Council vote to pillory Israel for continuing to develop West Bank settlements.

The bill received little support when former Congressman Ron Paul introduced the American Sovereignty Restoration Act in 1997 (and he continued to introduce it annually for the next decade). Other senators, including Ron Paul’s son Rand, have tried with similar bills without success.

While the US under new management is determined to assert its right to police its trade routes, a decision to send the UN packing would be a fitting conflicting conclusion to the withdrawal from pax Americana. It could make that policing so much harder, in a world where the US would have far fewer friends.

Impacts will flow

None of the above is directly related to property development, investment or regulation, which are the main topics on this website. But all of the above concerns international commerce, which fluctuates like the tides. Except, sometimes, somebody builds a wall where it shouldn’t be, and the tide gets angry.

The disaffected of America got angry and elected the outsider candidate as president. Together, they want to hurl their anger at others. In politics and in commerce, that can unleash powerful repercussions.

How does all this affect us in New Zealand?

On Wednesday, I’ll write about some New Zealand issues, again not all directly related to specifics in property, but related when you think about it.

Links:
World Economic Forum
Silk routes
New York Times, 11 January 2017: Press conference transcript
Washington Post, 7 January 2017: Trump’s son-in-law poised to resign as CEO of real estate company
New American, 6 January 2017: Bill to get US out of UN introduced in new Congress
The Balance, 22 October 2016: Why the dollar ($US) is the global currency
World Economic Forum, 26 June 2016: Why is China building a New Silk Road?
World Economic Forum, 2 January 2017: 5 leadership priorities for 2017

Earlier stories:
14 August 2016: Propbd economic update Sun14Aug16 – the greenback’s future
4 July 2016: East Asia & Pacific central banks shift bond fund into local currencies
1 May 2016: Propbd economic update Sun1May16 – Rethinking boundaries, Silk Road unity
Propbd economic update M8Feb16 – Big investors’ targets, ETFs to keep growing, Chinese planner positive, Portents of crash, Silk Road, global way forward
World property Wed14Oct15 – LJ Hooker IPO, Goodman UK fund, Silk Road forum
World property T2Jun15 – Stepping stones across Central Asia
1 July 2015: NZ formally signs up to Asian infrastructure bank
30 March 2015: China & IMF agree reform programme
2 May 2014: Canadian professor says conflicting trade views mitigate against TPP success
16 December 2006: Bernanke tells China to free currency, become consumer society
17 December 2004: NZ joins Asia Bond fund

Attribution: 1983 recollections, US news observations, New York Times, Washington Post, New American, World Economic Forum, The Balance.

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East Asia & Pacific central banks shift bond fund into local currencies

A group of East Asia & Pacific central banks – including New Zealand’s Reserve Bank – is closing its $US-denominated bond fund and transferring the investment to a local-currency bond fund.

The 11-member group of central banks & monetary authorities (EMEAP) said it set up its original Asian bond fund in 2003 as a stepping stone to this second one, which is intended to enhance development of a market in local-currency bonds in the region and offer members a diversified regional investment product for their reserves management.

The original fund is managed by the Bank for International Settlements on behalf of the group of central banks. It invests in $US-denominated bonds issued by sovereign & quasi-sovereign issuers in East Asia & Pacific economies other than Japan, Australia & New Zealand. The new fund, comprising the Pan-Asia Bond Index Fund & 8 single-market funds, is managed by private-sector fund managers with the Bank for International Settlements as the administrator. It invests in local currency-denominated bonds in economies other than Japan, Australia & New Zealand.

From 2003 to 2015, issuance of local currency-denominated bonds in Asia excluding Japan recorded a near 8-fold increase from about $US125 billion to more than $US1 trillion.

The central bank group decided in April the original fund had achieved its purpose and should be closed. The proceeds are being reinvested in the second fund over the course of several months, to ensure a smooth transition & minimal market impact.

Reserve Bank of NZ deputy governor Grant Spencer chairs the working group on financial markets and the bond fund oversight committee.

Attribution: Bank group release.

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Propbd economic update Sun1May16 – Rethinking boundaries, Silk Road unity

Rethinking boundaries
Silk Road tourism draws 14-nation support

Rethinking boundaries

6 maps that will make you rethink the world: The Washington Post’s heading above Ana Swanson’s story on how you might look very differently at the shape of this world – economically, geographically, geologically, climatically, but not nationally or bound by state borders – took me to a surprise in the many comments from the “middle” people for whom change arouses fear of a threat rather than joy at an advance.

I like this kind of information for the opportunities it points to, for how access & economic development can be restructured. Mind you, it takes a leap beyond the wrangling over whether humans are causing an excess of climate change, to a position of regarding Canada & Russia as places of the future because they’ll be growing all the crops to feed to people in the new desert.

One of the maps divides the US into 7 regions, ignoring state boundaries and introducing high-speed rail corridors, 2 of these running straight up-country from Galveston in Texas and New Orleans.

Another map includes Canada & Mexico, reinforcing the point of the rethink exercise instead of allowing thinking to stop at the border, because there is plenty of work going on to create some of those redirectional corridors.

Other maps are global, showing the megacities which the subject of the article, global strategist Parag Khanna, sees being the focus of economic growth, another by New Scientist in 2010 of the world 4°C warmer.

For me, both the article & Parag Khanna’s work open the mind to what might be quite different futures from the tracks we’ve been following, but 2 comments of the many under this story summed up the entrenched views many Americans display wherever change is discussed: “Adapt or die”, followed by this retort: “You will be assimilated. Resistance is futile.”

Links:
Washington Post, 29 April 2016: 6 maps that will make you rethink the world
Parag Khanna, Connectography
New Scientist, 29 November 2010: Royal Society paints picture of world 4°C warmer

Silk Road tourism draws 14-nation support

Another exercise last week which involved a great deal of rethinking was a meeting of the UN World Tourism Organisation Silk Road task force in Urmia, Iran, where participants agreed to advance joint marketing, training, infrastructure development & visa facilitation.

Oddly China, the biggest campaigner to revive the Silk Road linking Asia & Europe, wasn’t listed as attending, while some of those that did attend could hardly be counted as friends, at least at the moment – Bulgaria, Croatia, Georgia, Indonesia, Iran, Iraq, Kazakhstan, Mongolia, Pakistan, Russia, Spain, Turkey, Ukraine & Uzbekistan.

World Tourism Organisation executive director Zoltán Somogyi said a growing number of countries were prioritising the Silk Road in their economic development strategies. “There is also an increasing demand for transnational tourism routes & itineraries globally from the perspective of both public & private sectors and we must maximize this trend.”

Iranian vice-president Masoud Soltanifar said: “We hope to co-operate with other countries, while bridging information dissemination, commercial & trade co-operation & cultural exchanges. In doing so, we will contribute to the promotion of the modern Silk Road spirit – contributing to world peace & development.”

Priorities are to develop a Silk Road app and enhancing joint management of Silk Road heritage corridors through the unification of heritage guide & heritage protection standards.

Earlier stories:
Propbd economic update M8Feb16 – Big investors’ targets, ETFs to keep growing, Chinese planner positive, Portents of crash, Silk Road, global way forward
World property Wed14Oct15 – LJ Hooker IPO, Goodman UK fund, Silk Road forum
World property T2Jun15 – Stepping stones across Central Asia

Attribution: Washington Post, Patag Khanna, New Scientist, UN World Tourism Organisation

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Propbd economic update M8Feb16 – Big investors’ targets, ETFs to keep growing, Chinese planner positive, Portents of crash, Silk Road, global way forward

Big BlackRock clients target illiquid assets & cut indexed equities
Studies point to continuing growth of ETFs
Top Chinese economic planner says country can meet challenges
UK Telegraph highlights portents of a giant crash
Ex-World Bank economist sees Silk Road advancing strong Chinese future
Lin also writes on global way forward

Big BlackRock clients target illiquid assets & cut indexed equities

US investment manager BlackRock Inc polled 170 of its biggest institutional clients in December and found their 2 main drivers for 2016 were to embrace illiquid assets, including private credit & real assets, as a way to meet their long-dated liabilities, and secondly (quite divided on this) to cut equity allocations and shift from index to active management.

Those clients had a combined $US6.6 trillion of assets under management. BlackRock says on its website it has $US4.6 trillion under management. It also has a standard disclaimer on its releases that the information is for use in the US, although the datestamp is from 4 cities – New York, London, Hong Kong & Toronto. And, although the website is open, BlackRock warns that its releases shouldn’t be circulated to anyone else without its consent – and shouldn’t be shown to the general public under any circumstances.

Those health warnings aside, BlackRock’s senior managing director & global head of institutional client business, Mark McCombe, said: “Recent market volatility is driving a repricing of assets globally. The ripple effect from recent events is causing investors to actively manage risk and seek alternative sources of returns. Investors are attempting to look past the current market environment and find alpha-generating opportunities that match their liabilities…..

“Many investors are looking to illiquid assets to insulate themselves from market volatility and reap the rewards of illiquidity premia.”

Link:
BlackRock, 25 January 2016: Institutional investors to embrace illiquid assets & active management in 2016 – BlackRock study

Studies point to continuing growth of ETFs

In a report from Greenwich Associates LLC quoted on BlackRock’s website, Greenwich’s sixth annual study of exchange-traded funds (ETFs) pointed to continued growth in that market as existing users broadened usage to take advantage of their versatility and new investors adopted the funds for the first time.

A second Greenwich study, of Asian institutional investment, concluded: “Although overall investment in ETFs remains modest relative to total assets held by Asian institutions, the funds are being adopted for a wide variety of strategic & tactical tasks. The 2 most common applications for ETFs are strategic in nature: obtaining core investment exposures and international diversification within portfolios.”

Links:
28 January 2016, Greenwich Associates: ETFs take root in Asian institutional portfolios
20 January 2016, Greenwich Associates: Institutional investment in ETFs: Versatility fuels growth

Top Chinese economic planner says country can meet challenges

The head of China’s National Development & Reform Commission, Xu Shaoshi – the nation’s top economic planning official – told a news briefing on 3 February the economy faced major internal & external challenges this year, but it had the ability to ensure the economy would run “within a reasonable range”.

China’s official Xinhua newsagency quoted Mr Xu saying unstable & uncertain global conditions, and growing downward domestic economic pressure & risk, would affect the country.

Although growth had slowed, he said it was still within a reasonable range and signs of improvement were emerging, such as better demand & industrial structure as well as more balanced regional development.

“Predictions that the Chinese economy is to face a hard landing will be proven wrong, and accusations that it has dragged down the global economy are unfounded.

“Attempts to reduce industrial overcapacity are likely to increase unemployment in some regions, especially those dependent on steel & coal such as Shanxi & Heilongjiang provinces. Central & local governments will have policies to deal with increased unemployment.”

Link:
Xinhua news service, 3 February 2016: China can deal with economic challenges: official

UK Telegraph highlights portents of a giant crash

Under the headline Debt, defaults & devaluations: why this market crash is like nothing we’ve seen before, the UK Daily Telegraph asked on Saturday: “A pernicious cycle of collapsing commodities, corporate defaults & currency wars loom over the global economy. Can anything stop it from unravelling?”

The newspaper started with a bald statement – a cycle looms – then quickly turned the emphatic into a question. From there it moved on to briefly examine a few portents – the greenback’s rise, China’s currency questionmark, oil industry debt and the probability of company defaults in the US.

Business reporter Mehreen Khan wrote in the article: “A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction. The real question is always when & how deep the upcoming downturn will be.”

She quoted Scandinavian bank SEB’s head of economics, Thomas Thygesen, telling an audience of over 200 commodity investors & analysts in London last month: “The crash will come, but it would be nice if it came 2 years from now.”

Although the slump in oil prices should be a positive for consumers, it’s also crippling the industry, imperilling the finances of producer countries such a Nigeria & Azerbaijan.

In addition, Olivier Blanchard, who ended 7 years as the International Monetary Fund’s chief economist last year, said: “China’s growth is probably less than officially reported. Russia & Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast.”

However, he said selloffs by investors at the moment amounted to herd behaviour: “Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

Link:
Daily Telegraph, 6 February 2016: Debt, defaults & devaluations: why this market crash is like nothing we’ve seen before

Ex-World Bank economist sees Silk Road advancing strong Chinese future

Justin Yifu Lin, who ended 7 years as World Bank chief economist last year, has maintained a positive outlook on China’s economy despite the many rumblings of concern over its currency and its ability to convert itself from an economy dominated by conversion of commodities into exports.

In an article on the Project Syndicate world opinion website last month, he much of that positive outlook on the potential from the Silk Road & maritime Silk Road ventures across Asia and into Africa & Europe.

“In 2015, global headlines reflected mounting concerns about China’s slowing economy and whether the country can maintain its reform momentum and complete its shift to a new growth model based on higher domestic consumption & expanded services. Within China, however, confidence in the economy’s long-term trajectory remains undiminished. Indeed, although Chinese leaders are undoubtedly mindful of the growth slowdown, they remain focused on ensuring the realisation of President Xi Jinping’s ‘one belt, one road’ initiative. That will remain true in 2016….

“While the world frets about China’s decelerating growth & downward corrections for equity prices & the exchange rate, the country is pressing ahead with an initiative that will bring untold benefits to the entire global economy. Beyond creating unparalleled opportunities for other developing countries, the ‘one belt, one road’ strategy will enable China to make better use of domestic & international markets & resources, thereby strengthening its capacity to remain an engine of global economic growth.”

Link:
Project Syndicate, 21 January 2016: China’s Silk Road vision

Lin also writes on global way forward

In 2013, Mr Lin wrote a book on the global financial crisis and its likely evolution, Against the consensus, reflections on the Great Recession. Its publisher, Cambridge University Press, ran this commentary: “In June 2008, Justin Yifu Lin was appointed chief economist of the World Bank, right before the eruption of the worst global financial & economic crisis since the Great Depression. Drawing on experience from his privileged position, Lin offers unique reflections on the cause of the crisis, why it was so serious & widespread, and its likely evolution.

“Arguing that conventional theories provide inadequate solutions, he proposes new initiatives for achieving global stability and avoiding the recurrence of similar crises in the future. He suggests that the crisis & the global imbalances both originated with the excess liquidity created by US financial deregulation & loose monetary policy, and recommends the creation of a global Marshall Plan & a new supranational global reserve currency.”

Link: Cambridge University Press book page

Attribution: BlackRock, Greenwich Associates, Xinhua, Daily Telegraph, Project Syndicate, Cambridge University Press

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NZ formally signs up to Asian infrastructure bank

New Zealand formally became a founding member of the Asian Infrastructure Investment Bank at a signing ceremony in Beijing on Monday.

Finance Minister Bill English said: “New Zealand actively participated early in the negotiations. Our aim was to push for a well run, transparent & broad-based multilateral institution. The 50 countries who signed today are testament to the final result.

“We have strong economic, trade & investment links with Asia. Raising the economic potential across the region is very much in the interests of all New Zealanders.”

The bank, a Chinese initiative to address Asian infrastructure needs, is expected to begin operations before the end of the year.

Attribution: Ministerial release.

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NZ confirms Asian infrastructure bank membership

The Government confirmed yesterday that New Zealand would become a founding member of the China-led Asian Infrastructure Investment Bank.

Finance Minister Bill English said: “New Zealand was the first Western developed nation to join negotiations to set up the bank and our membership will enhance our already strong economic, trade & investment links with the Asian region.”

It is envisaged the bank will have initial capital of close to $US100 billion ($NZ139 billion) to invest in infrastructure projects. It will be financed by individual country contributions proportionate to their economic size.

New Zealand’s paid-in capital will be about $NZ125 million, paid over 5 years.

Cabinet agreed in December that New Zealand would join negotiations to establish the founding articles of agreement for the new bank and to agree on acceptable governance arrangements.

Foreign Affairs Minister Murray McCully said yesterday: “Those progressed to a point where those conditions have now been met. The next step will be a formal signing ceremony in Beijing later this month. The bank is expected to begin operations before the end of the year.”

Attribution: Ministerial release.

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Canadian professor says conflicting trade views mitigate against TPP success

Canadian economics & political science professor Richard Stubbs, of McMaster University in Hamilton, Ontario, has posed the prospect of TPP (Trans-Pacific Partnership) failure and its replacement by the more flexible RCEP (Regional Comprehensive Economic Partnership).

Professor Richard Stubbs.

Professor Richard Stubbs.

In an article in The Conversation & MacroBusiness in Australia on Wednesday, Flawed TPP trade deal a bridge too far, Professor Stubbs described the battle of the capitalisms – the market-led versus state-guided approach to economic growth.

Most of the public debate about the Trans-Pacific Partnership has been about secrecy – participants, including big business, know the detail of what’s being discussed, but the public in all 12 countries involved are deliberately being kept from frank accounts and about the prospect of rules favouring US big business being imposed on the partners.

On one of the difficulties those trying to patch together an agreement have met, Professor Stubbs wrote: “The form of capitalism found in East Asia also relies heavily on production networks. Yet free trade agreements associated with Western countries tend to assume that manufactured goods are produced in one country. Cumulative rules of origin which would take into consideration a country’s participation in production networks are generally problematic for the US or are included in such a way as to privilege the TPP members – such as the US. The infamous ‘yarn forward’ rule, which will require Vietnam to source yarn from the US rather than its current supplier, China, is but one of the problems faced by East Asian economies.”

Professor Stubbs said the regional comprehensive economic partnership among Asian countries “is less intrusive, less ambitious & more flexible”.

Link: Flawed TPP trade deal a bridge too far

Attribution: MacroBusiness.

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Bernanke tells China to free currency, become consumer society

Published 16 December 2006


US Federal Reserve chairman Ben Bernanke has told China it should free its currency from its $US link – a constant call from many US sources for a couple of years as the US economy & currency have declined.



Secondly, Mr Bernanke said China should become a consumer society. Both policy shifts would help the US, now the world’s biggest debtor nation.


Mr Bernanke also suggested some more socialist policies for China, as they’re practised in the US – health insurance, pension plans, more spending on education & social security.


The US’ chief banker made his recommendations in an address at the Chinese Academy of Social Sciences in Beijing, so it wasn’t as though he was lecturing uninvited from afar, but the speech makes interest reading in terms of global trade & currency policy. I’ve run 3 excerpts here – the link to the full speech is at the foot of the page:


China’s economic growth owes much to the extraordinary share of GDP that is devoted to investment in new capital, such as factories, equipment & office buildings, which is partly financed by a very large amount of business saving. However, the rapid pace of investment growth raises concerns about whether new capital is being deployed in the most productive ways.


In particular, some analysts have questioned whether China is getting an adequate return on its investment. For example, from 1990-2001, fixed investment as a share of GDP in China averaged about 33% and the economy grew at an annual rate of 10%. Between 2001-05, fixed investment’s share of GDP rose to about 40%, but the economy’s average growth rate remained about the same, suggesting a lower return to the more recent investment. Comparisons can also be drawn to the rapid development phases of other Asian countries, such as South Korea & Japan. Average annual growth was between 9-10% in South Korea during the 1982-91 period and in Japan during the 1955-70 period; but for both countries during the relevant years investment’s share of GDP was about 30%, lower than it is in China today…..


Monetary policy


The effectiveness of monetary policy would also be enhanced by greater flexibility in the exchange rate. To maintain the current close link of the renminbi (RMB) to the dollar in the presence of capital inflows (arising from China’s trade surplus or from foreign purchases of RMB-denominated assets), the People’s Bank of China must intervene in the exchange market to buy dollars with RMB. Increases in the domestic money supply will result unless the central bank offsets the effects of these purchases on the money supply by selling bonds to investors, primarily commercial banks, in exchange for RMB – a procedure commonly referred to as “sterilisation.” If dollar purchases by the central bank were not routinely sterilised, the money supply might increase more than desired, possibly leading to an overheating of the economy and inflation.


To date the PBOC has been largely successful in its sterilisation operations, but if it continues to use this strategy it will eventually encounter problems…..


Sorting global imbalances by becoming a consumer society


Together with the large trade & current account deficits of the US, the Chinese external surpluses are contributing to the current pattern of global imbalances, which many economists & policymakers have argued are unsustainable in the long run. The Chinese leadership has recognised the importance of encouraging imports and achieving greater balance in China’s international trade, having recently included these objectives in the 5-year plan for 2006-10. In my view, not only would China’s achieving smaller external balances contribute to global financial stability, it would also be in China’s economic interest.


Although China’s extensive participation in the global trading & financial systems has been invaluable for the country’s development, the ultimate purpose of economic growth is to improve living standards at home. Today, about half of China’s GDP is devoted to investment and to producing net exports for the rest of the world, and thus only the remaining half is available for consumption, including government consumption. In particular, household consumption in China last year was only 38% of GDP, down from 45% in 2001. In comparison, household consumption was about 60% of GDP in India in 2004, according to the most recent available data. China’s low share of consumption in GDP is, of course, the counterpart of its high national saving rate.


Policies aimed at increasing household consumption would clearly benefit the Chinese people, notably by improving standards of living and allowing the fruits of economic development to be shared more widely. Such policies, by reducing saving and increasing imports, would also serve to reduce China’s current account & trade surpluses. Putting greater reliance on domestic demand rather than net exports to drive growth would also decrease China’s vulnerability to fluctuations in global demand.


How can China direct a greater share of its output to domestic consumption? Again, increased flexibility in the exchange rate could help. As the Chinese trade surplus has continued to widen, many analysts have concluded that the RMB is undervalued. Indeed, the situation has likely worsened recently; because of the RMB’s link to the dollar, its trade-weighted effective real exchange rate has fallen about 10% over the past 5 years.


Allowing the RMB to strengthen would make imports of consumer goods (as well as capital goods) into China less expensive. Greater scope for market forces to determine the value of the RMB would also reduce an important distortion in the Chinese economy, namely, the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market.


A decrease in this effective subsidy would induce more firms to gear production toward the home market, benefiting domestic consumers & firms. Reducing the implicit subsidy to exports could increase long-term financial stability as well: If China invests too heavily in export industries whose economic viability depends on undervaluation of the exchange rate, a future appreciation of the RMB could lead to excess capacity in those industries, resulting in low returns and an increase in nonperforming loans.


Although more flexibility in the exchange rate would be helpful, the most direct and probably the most effective way to reduce the external surpluses and increase the welfare of Chinese households is to take measures to reduce domestic saving relative to domestic investment.


Thin safety net


Why is domestic saving so high at present? The high saving rate of households, even very poor households, likely reflects the relatively thin “social safety net” in China. For example, only about 14% of the population is covered by health insurance, and pension plans (which, in any case, replace only about 20% of pre-retirement earnings) apply to only about 16% of the economically active population. Combined expenditures by the central government & local governments on education, health, pensions & relief and social security amount to only about 4% of GDP, lower than most other countries at similar income levels. In the absence of a stronger social safety net, Chinese households save at high rates to protect themselves against risks such as unexpected medical expenses and poverty in old age.


A sustained programme of expanding social services has the potential for reducing saving and raising living standards in China and, at the same time, moderating China’s external surpluses. In particular, increased Government spending on health, education & other types of social services would raise both household consumption & government consumption, and thus reduce national saving.


As one means of helping to fund the increase in social expenditures, state-owned enterprises could be required to pay larger dividends to the Government, a measure which I understand to be currently under consideration. Financial reforms that increase the access of households to mortgages, private insurance & other forms of consumer finance would also support higher rates of consumption.


As I have noted, the Chinese leadership has made reducing the trade & current account surpluses an important policy objective. Further, recognising that achieving these goals would be greatly facilitated by increases in consumption and in the social safety net, the Government has instituted or proposed various reductions in taxes and increases in social spending.


Website: Fed, full Bernanke speech


 


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Attribution: Fed release, story written by Bob Dey for this website.

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NZ joins Asia Bond fund

New Zealand’s Reserve Bank intends to invest $US50 million and Australia $US222 million in the newly created EMEAP Asian Bond Fund 2 as part of its foreign reserves, and as part of a programme by 11 East Asian & Pacific central bank to strengthen the bond market in the region.


The fund will invest about $US2 billion in domestic bonds of 8 of the 11 Emeap markets ­- China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore & Thailand. The other Emeap countries are New Zealand, Australia & Japan.


Emeap is the Executives’ Meeting of East Asia & Pacific Central Banks Group. Its first bond fund, in June 2003, went into $US-denominated bonds issued by member countries & quasi-sovereign issuers


Private sector investors will be able to invest in the sub-funds in 2005.Website: Emeap

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