Another swipe at the Huns

Is Germany's disagreement over stimulus spending just a matter of differences with timing?

The folks in New York pointed out yesterday that the US unemployment rate has always led the Germans. With nothing different expected this time around, given the current trajectory of US unemployment we'll see German unemployment soon breaking above 10 and possibly even into the teens. We'll see what they think of stimulus spending then.

The U.S., due to its more flexible private sector, is ahead of the curve than Europe. If the continentals are forgetting this inconvenient fact, we're certainly seeing a reminder today.


U.S.


Germany

Source: Bloomberg

Emphasize the Efficiency in Energy Efficiency Please!

Thought of the morning: Why are the Germans still subsidizing solar? It seems they have marginally better solar potential than Sarah Palin's front porch. Wouldn't it be better to anschluss North Africa and put the panels there?

Or give the subsidies to the US, which is behind but fortunately, fast catching up with large projects in California and the South/Southwest.




Source: Solar Energy Industries Association Year in Review

以怨报德: China's disingenuous complaint

I find the recent voices (from as high up as Wen Jiabao) about China afraid of losing in its investments in US Treasuries to be either uninformed or disingenuous.

Yes, on a superficial level the Chinese currently own X amount of US securities, which include Treasuries ($800 billion?), agency debt and other instruments. But that’s only its current market value if you evaluate it on a Micro level.

When China received dollars as part of its trade surplus with the United States, it could have done whatever it wanted with them. Why did it plow it into Treasuries and agencies? As a deliberate national policy to keep the RMB from appreciating, and to provide employment and economic growth. It was the best policy available to China at the time, especially given competitive pressures from neighboring Asian economies. If Americans had not been so prodigious with their spending since the 1980s (see chart), the Chinese economy would not have grown so quickly and many fewer peasants would have been urbanized and many fewer Chinese would have built up human and physical capital.


Chart 1: Asia's Sugar Daddy, US Savings Rate

The Treasuries are likely not worth in the long-run what they are today, because in the long run the imbalances have to unwind. In fact, success of China's economic policy would ceteris paribus, result in appreciation against the dollar as the Chinese economy expands. And it was far better to grow the economy faster and “lose” some money on this "vendor financing" of the United States. In the real economy, this policy translated to quicker urbanization, more technology and skill transfers, and experience running businesses, etc. Imagine an apprentice or an intern willing to work for a master for low pay. The experience and skills are worth it. In fact, when you are young and entry level, you want your boss to display some sloth and give you more work to do. You need the experience more than the money.

So in conclusion, no one told China they had to buy Treasuries. They did it as deliberate national policy to hold the value of the RMB constant, and got a lot of benefits in the form of a faster growing economy and more development of skills in China (sorry to say this for the third time). In fact, one of the first things they teach students of economics is that Macro-level analysis (economic growth) is much different animal than Micro-level (gains or losses in a balance sheet). For example, an stimulate fiscal policy might lift government debt, but in many situations it might lift long-run growth to be able to cover the deficit. However, a deficit level is much easier to criticize than a counterfactual (what if stimulus was not spent) is able to defend. Similarly, I think it's arguable that China investing its export earnings into the USD may have been ultimately better for China's own growth because 1) unless the Chinese really start to ramp up domestic demand, it's unclear a shortage of capital is China's major problem, given much overcapacity 1) the U.S. at the time (and even today) is better able to deploy capital to truly innovative purposes. These innovations do not necessarily show up in any balance sheets (micro), but clearly they show up in GDP (macro) when the Chinese also benefit from these innovations without directly paying for them. Maybe it's only geeks such as me that have an appreciation for some of the simple things in our lives that aren't so simple. Think of the algorithms behind MP3s and web videos. Or the idea behind Facebook (Chinese copy: Xiaonei and Kaixingwang) and instant messaging (Chinese copy: QQ).

Look, I'll be the first to point out that the US economy has a lot of housekeeping to do right now. Excesses in the US also caused excesses in China. But let's just not forget that it takes two to create the two sides of an imbalance. If China and other Asian nations ran their own economies in a well balanced way that gives real opportunities to their citizens, they would not have had to depend on exporting to American consumers to grow their economies. Granted, young developing economies with no credit in the world need to do that and I’ll cut China some slack for that. But even Japan continues to depend on exports decades after its industrialization.

More Badness Ahead

I was just on a conference call with one of America's top [paid] fund managers. He believes there's still more shoes to drop in the financial sector. He didn't say how much he has calculated in capital shortfall, but pointed out the IMF's $2.2 trillion as a good guess, which means we're only halfway there (around $1.1 trillion so far).

He also said some European banks are even more leveraged than American banks, and many emerging markets are just now having their shoes drop.

FUN times ahead!

* I should note he also pointed out Nouriel Roubini estimated $3.6 trillion. What a depressing dude.

Random Anti-Japanese IM

So I logged into QQ to see another anti-Japanese instant message floating about ---

学这么多年英语,突然发现一个有趣现象:
clever 聪明的
honest 诚实的
intelligent 智慧的
noble 高贵的
excellent 卓越的
smart 机灵的
elegant 优雅的
把以上这些英文字的头一个字母
放一起就是：Chinese---中国人
junk 垃圾
adult 色鬼
prostitute 婊子
ass 蠢驴
nasty 下流
evil 魔鬼
scamp 流氓
excrement 臭狗屎
把这些英文的第一个字母
放在一起就是：Japanese---日本人!
是中国人就在你的每一个群里发一次
真是佩服李白，在唐朝就知道骂日本人了:
日暮苍山兰舟小，
本无落霞缀清泉。
去年叶落缘分定，
死水微漾人却亡。
日 小
本 泉
去 定
死 亡
请让中国人骄傲一下


As a Chinese person myself, I find this to be rather a bit of 报喜不报忧. To be honest, I'm not exactly sure I'd describe Chinese people as a whole to be 1) honest 2) noble or 3) elegant. As for excellent, intelligent and smart, well, those attributed have to be proven over time and require a system that can channel human excellence into actions. As for clever? I'll definitely give Chinese people clever.

What are some other attributed one can apply en-mass to CHINESE if I were an anti-Chinese Japanese netizen:


C
Cultural Revolution
Copiers
Communist

H
Hived-minded
Hypocritical

I
Impoverished
Imperialistic

N
Nihilistic

E
Envious

S
Spitters
Smelly


Just a few to get started...

Turning the IMF into a gold miner?

I was speaking with a colleague shortly after I heard the announcement of China's proposal of the eventual replacement of the USD with IMF SDRs, and I think I said "Oh my God, they want to turn the IMF into a gold miner."

I thought there would be some practical impediment to SDR really becoming a true reserve currency in its own right, rather than an accounting basket. Namely, how would the IMF become a central bank without having underlying central banking authority over currencies?

Unfortunately, it's blocked in China so I can't link directly to it, but I just read a Michael Pettis post that delves into a few of the practical issues with the plan. Some were also pointed out by my colleague right away:

1) Liquidity of the USD (both in terms of treasuries and other securities in the capital markets)

2) The US's role as the principal deficit nation with the surplus (thus, reserve accumulating) nations. Or as Pettis put it, the willingness of the US to deliver currency to reserve nations by way of our trade deficit.

3) The decisiveness and ownership mentality of a national central bank.

One of Pettis' more interesting tidbits was on the prospects of the IMF becoming a 'gold miner':

"Perhaps the SDR is a covert way of getting back to something resembling the gold standard by creating a fiat currency with very strict rules about its expansion. If that is the case, the SDR almost certainly won’t last long. Since we’ve gone off the gold standard we have forgotten how brutal and unforgiving gold-standard discipline can be, and I think it was Barry Eichengreem who argued in Golden Fetters that the gold standard could only work in a society in which the poor and the weak have little political power, the voting franchise is limited, and the impact of monetary policies on underlying economic conditions was not widely understood." [Trouble is, I'm not sure some in the Chinese government would find that sort of society distateful. ]

I knew it was Jennifer...

Someone at Harvard did a quick study of the popularity of given names among Chinese-Americans:

http://www.iq.harvard.edu/blog/sss/archives/2009/03/english_first_n.shtml

David and Jennifer topped the list.

The Glass is 80% Full

Bloomberg and just about every other news agency drank the Koolaid the other day: "ICBC Rallies After Goldman Sachs Extends Stock Lockup Period"

As my astute friend pointed out, what Goldman pulled off was to put a positive spin on selling 20% of their stake in ICBC.

NASDAQ-100 Fund Comes to China

The firm headed by China's asset management industry's 美女 (literally "pretty woman") just launched a QDII product to allow Chinese investors a fund linked to the NASDAQ 100 index.

Legacies of the Asian Financial Crisis

I've heard two people talk about the Asian Financial Crisis lately.

- Yesterday, during our daily call with our partner, we were asked about China's recent assertiveness, with regards to the naval confrontation and other actions. One of our analysts replied that this is nothing new and China's view of itself as Asia's premier power really dates to the Asian Financial Crisis in 1997-98. You'll recall that then, as now, China did not devalue its currency. It could stand up, unlike its weaker Asian peers.

- On Tuesday, I had dinner with a few fairly knowledgeable people on China's political economy. One of them, a Yale-trained Ph.D. economist, said that in his view, the reaction to the Asian Financial Crisis (more savings in emerging economies) really helped to trigger global imbalances. Others have said this too. BUT, it was pointed out, why did the reserve accumulations rise the most only in recent years? SIMPLE, said he, that has to do with the gradualist tradition of Chinese policy making. But the policy direction was set after the crisis.


The chickens is come home to roost? I wonder, looking back 10 years from now, what sea changes we will devine from this crisis.

Helicopter Bernanke-San

Some folks in China are wondering where the Fed is getting the money to run its up-to-$1.15 trillion program. Is Bernanke-san's helicopter-mounted printing press finally running?

Some are confused by the fact that last year, the Fed's expansion of its balance sheet seemed to "need" the support of the Treasury (Supplemental Financing Program) with an initial injection of $100 billion, rising quietly to $559 billion. It was then unwound in November when reserves began to flow into the Fed (attributed to the decision to pay interest on reserves). My colleague, who is also not a central bank expert, thought the Fed might not be statutorily capable of directly printing money. I asked him why I hadn't seen the Treasury go and ask for the money from Congress. He told me that the authorization ceiling of $2 trillion still remains, and the current US debt ceiling will accommodate any new issuance for the recent announced purchases. That could be where the money is going to come from, he supposes. However, in my admittedly undereducated reading of the situation, the Treasury action was mainly sterilizing at the time and the primary impetus was to keep effective short-term interest rates above 0%.

The current round of Treasury purchases should be partially or wholly unsterilized. Isn't that the point of "credit easing"? However, my colleague points out that they might still choose to do a lot of sterilization, since there is likely excess cash in the economy. Essentially, the powers that be would suck up cash lying around and get it to do something. Even the purchase of Treasuries can be sterilized, according to him, with different duration notes aimed at changing the yield curve.

I have not found much evidence in the press either way, except this from The Economist:

"THE Federal Reserve cut its shortterm interest rate to, effectively, zero last December, and with unsterilised bond purchases (that is, financed by creating money) now underway, the Fed is trying to get long-term interest rates there as well."

I want my household surplus back!

A client did not show up to a lunch meeting, so instead I had a [likely] more interesting chat with my colleague, our banking sector analyst. It was a wide-ranging discussion of China, its economy and geopolitics.

He started by noting that Mexico had a nominal GDP per capita of over US$10,000 and asked "Why is Mexico so rich?" (China's per capita GDP is roughly $6000 in PPP terms and between $2500 and $3000 in nominal terms, though this blog post at Marginal Revolution notes the complexity of arriving at this number)

I have been to Mexico enough to think the $10,000 number is fair. Mexico is not a poor country at all, but one beset by a horrendous wealth gap and a society that does not create enough opportunities for its people. So I turned around the far more interesting question of "Why is China so poor?"

Long story short, he thought a key factor was land policy. Land is still strictly controlled by the monopoly of the state and many local governments get a significant portion of their operating budget from land sales (or rather 'use transfer right' as all land technically belongs to the government). As with any monopoly, profit maximization steals household surplus. Housing in urban China is ridiculously expensive compared to the average disposable income. In the US, the affordability ratio of median housing price to median income has historically hovered around 2.7-3. In Europe, I think the ratio might be roughly twice that. In China, reliable nationwide data is hard to come by (I will ask our property analyst when he returns), but a rough guess might be 10-12 currently. Housing bubble cities like Shenzhen saw it go up to as high as 20. Of course, I should add the caveats that 1) housing has to be examined locally 2) Chinese income statistics are unreliable 3) subsidized public housing is a larger mix than in the US 4) some public sector employees have often had their housing subsidized or outright paid for (although this practice is being phased out).

Compared to Americans, Chinese prefer physical assets and are far more likely to want to own rather than rent. Anecdotally, I know that many well to do Taiwanese or Chinese families in the US own multiple properties. Also, the number of investment options are limited in China. Real estate is one. Another is an underdeveloped and retail-heavy equities market that, even today, seems more like a casino designed by the government to channel money from household savings into mostly state-owned companies. These factors are among those that have kept housing prices high. And Chinese banks typically take 30% or more as downpayment. The result is that many Chinese save excessively, including when they are young, mainly to buy homes. Later on, they save excessively for their children and their retirements.

If land was liberalized, according to my bank analyst colleague, housing prices might fall by as high as 50%. The result would be a massive transfer of surplus to Chinese households and a spur in both general economic activity and, importantly, consumption.

This is interesting. The Communist government, I opined, has lauded itself for maintaining 10% growth for a number of years. But why should it? China started at such a low base due to past mismanagement, had access to capital and technology from around the world and could rely on exports as one engine of its growth. But could China have grown even faster and better with the right policies? Clearly, it is not that [neo-liberally] simple, but it deserves some thought.



Another factor he pointed out was the underdeveloped financial system, but I will reserve that thought for another day...