Rational Capitalist Speculator
Why South China Sea may be world’s next hot spot: Burman | Toronto Star
Last Monday, on China’s first aircraft carrier, the relationship took an unusual, and perhaps promising, turn. As part of his first visit to China, U.S. Defense Secretary Chuck Hagel was invited to be the first foreign visitor to go aboard the aircraft carrier, which China has spent a decade refurbishing. The Liaoning was originally a rundown Soviet-era carrier purchased from Ukraine, but now it is seen as a central part of the expanded Chinese navy.
The last time the Americans came in contact with the Liaoning was in December, early in its trials in the South China Sea, when it nearly collided with a U.S. navy cruiser. Had that happened, it would have been the most serious confrontation between China and the U.S. in years.
At issue for the Americans is China’s claim over islandscontested by Japan and the Philippines — two allies tied by treaty to the U.S.
But there was no sign from China of any interest in a deal: “On this issue, we will make no compromise, no concession — not even a tiny violation is allowed,” warned Chinese Defence Minister Chang Wanquan.
But many observers were not surprised by the heated rhetoric. After all, that is what military people, defending their national interests, are expected to say. What is more significant and encouraging, according to U.S. journalist and foreign affairs analystRobert D. Kaplan,is that they are meeting in the first place, and at a very high level. - (thestar.com)
Here’s a more sanguine view of the recent Hagel China visit. The author points out that the stage is set over water as opposed to land in Europe during the conflicts in the prior century.
China ships in disputed waters: Japan coastguard
Three Chinese government ships have sailed through disputed waters in the East China Sea on Saturday, the Japanese coastguard said.
US Defence Secretary Chuck Hagel held talks with his Japanese counterpart Itsunori Onodera last week and warned China against unilateral action to resolve a territorial dispute with Japan or other Asian countries.
China’s defence minister, defending his country’s claim, said on Tuesday that Beijing would not act first to “stir up troubles” over island disputes with its neighbours.
Meanwhile, a Japanese cabinet minister has visited a controversial war shrine in Tokyo, in a move likely to cause anger in China and South Korea, which see it as a symbol of Japan’s past militarism.
The Minister for Internal Affairs and Communications, Yoshitaka Shindo, paid homage on Saturday morning at the Yasukuni shrine, Jiji Press and the Yomiuri Shimbun said.
China and South Korea see it as a brutal reminder of Tokyo’s imperialist past and wartime aggression, and its failure to repent for its history.
In December, Japanese Prime Minister Shinzo Abe made his first visit as premier to the shrine, which honours Japan’s war dead including several high-level officials executed for war crimes after World War II.
Mr Abe’s visit prompted angry responses from Beijing and Seoul, while the United States said it was “disappointed” by the prime minster’s decision as it would raise regional tensions. - (Australia Network News)
Fitch switches Portugal outlook from 'negative' to 'positive'
Fitch on Friday switched the outlook on Portugal’s BB+ rating from “negative” to “positive”, a month before the eurozone nation exits its international bailout, raising the prospect it may soon rejoin investment-grade ranks.
Fitch said the upgrade to the ratings outlook is justified by Lisbon’s progress in repairing public finances as well as the overall recovery of the economy three years after its EU-IMF bailout.
"Portugal is making good progress in reducing its budget deficit," the ratings agency said in a statement.
The economy took a big step towards emerging from its debt bailout and regaining investor confidence late last month by beating its budget target by a wide margin.
Portugal, still struggling to overcome its debt crisis, to pull away from recession and overcome public anger at tough austerity measures, turned in a budget overshoot equivalent to 4.9 percent of output last year.
That marked a huge reduction from a public deficit of 6.4 percent in 2012.
But despite this marked progress in reducing the annual deficit, the gap between spending and revenues, the public debt of accumulated past deficits rose to 129.0 percent of output last year from 124.1 percent in 2012.
The debt now amounts to 213.63 billion euros ($297 billion), the statistics office INE said.
Portugal is scheduled to exit next month its three-year 78-billion-euro EU-IMF bailout, under which it has been required to enact deep structural reforms to correct public finances and raise efficiency in the economy.
"The slow response of the ratings agencies could still make Portugal’s bailout exit in May more difficult," said Schulz.
The sub-investment grade rating is a key reason Portugal still pays more to borrow than Italy and Spain, and complicates ECB support measures, he added. - (Bangkok Post)
China's U.S. ambassador plays down tensions after Hagel trip
WASHINGTON (Reuters) - China’s ambassador to the United States on Thursday played down the tense exchange this week in Beijing between Defense Secretary Chuck Hagel and his Chinese counterpart and praised the frank talk between the two countries.
Ambassador Cui Tiankai spoke after Hagel’s meeting on Tuesday with Defense Minister Chang Wanquan, who called on the United States to restrain Japan and chided another U.S. ally, the Philippines.
"He had a very substantive and direct exchange with his Chinese counterpart," Cui said. "I think maybe this is not a bad thing. Maybe this is a good thing."
Hagel’s trip to China exposed tensions over its territorial disputes with regional U.S. allies, including the Philippines and Japan. China is at odds with Japan over uninhabited islets in the East China Sea that are administered by Tokyo. China claims most of the South China Sea. The Philippines, Malaysia, Vietnam, Brunei and Taiwan also claim parts of those waters.
Cui, who was China’s ambassador to Japan in 2007-09, said there was no room for concessions on territorial integrity and urged “mutual respect” from Washington over its interests.
"Our relations with Japan are much longer than your relations with Japan," Cui gently chided moderator Stephen Hadley, national security adviser to former President George W. Bush.
Similarly, the ambassador deflected questions about China’s troubled relations with some of its other neighbors: “We have so many neighbors. You only have two.” - (Reuters via Chicago Tribune)
…”maybe it’s a good thing”? Doesn’t inspire much confidence. Tensions remain. What was interesting was the reiteration from China that there is no room for concessions with regards to territorial disputes with Japan.
Big News on one of my macro thesis fronts
Japan starting up the nuclear reactors despite high public opposition. This makes sense given that without home grown nuclear power, the country’s debt dynamic situation becomes extremely precarious. The leadership knows that without nuclear power, Japan could face a financial bond meltdown at some point in the future.
The last article is rather bearish on whether the atomic industry in Japan can pick itself up.
- “A recent Reuters analysis shows as many as two-thirds of the country’s 48 idled nuclear reactors may have to be left closed because of the high cost of further upgrades, local opposition or seismic risks.” - (Reuters)
Philippine, Vietnamese Navies To Unite Against
Philippine navy will soon return to a South China Sea island it lost to Vietnam 40 years ago to drink beer and play volleyball with Vietnamese sailors, symbolising how once-suspicious neighbours are cooperating in the face of China’s assertiveness in disputed waters.
Diplomats and experts describe the nascent partnership as part of a web of evolving relationships across Asia that are being driven by fear of China as well as doubts among some, especially in Japan, over the U.S. commitment to the region.
When U.S. President Barack Obama visits Asia this month he will see signs that once-disparate nations are strategising for the future, even though he will likely seek to shore-up faith in America’s “pivot” back to the region.
Among the new network of ties: growing cooperation between Japan and India; Vietnam courting India and Russia; and Manila and Hanoi, the two capitals most feeling China’s wrath over claims to the potentially energy-rich South China Sea, working more closely together. The Philippines and Vietnam are also talking to Malaysia about China.
"We are seeing a definite trend here, one that is likely to accelerate," said Rory Medcalf, a regional security specialist at Australia’s independent Lowy Institute for International Policy in Sydney.
"It is quite a creative dance as countries hedge and try to cover themselves for multiple possible futures."
I wrote before how a withdrawal of US support from Asia would not be disastrous. In fact, it seems to have had the opposite effect. Countries that didn’t deal with each other are finding a common reason to do so, I’d venture to say that questionable US support has actually increased cooperation/peace in the region.
Nigeria is Africa's biggest economy
Nigeria has “rebased” its gross domestic product (GDP) data, which has pushed it above South Africa as the continent’s biggest economy.
Nigerian GDP now includes previously uncounted industries like telecoms, information technology, music, online sales, airlines, and film production.
GDP for 2013 totalled 80.3 trillion naira (£307.6bn: $509.9bn), the Nigerian statistics office said.
That compares with South Africa’s GDP of $370.3bn at the end of 2013. - (BBC)
Greece five-year bond to raise EUR3 billion; yield at 4.95%
Greece’s first bond sale since its bailout in 2010 will raise 3 billion euros ($4.15 billion) at a yield of 4.95%, according to media reports Thursday, citing people familiar with the matter. The demand came in at more than EUR20 billion, helping push the yield lower than what was expected by Greek officials ahead of the sale. Reuters said on Wednesday Greece initially priced the sale at a yield between 5% and 5.25% and aimed at raising EUR2.5 billion. With the five-year bond sale, Greece returns to the capital markets for the first time since it was bailed out by international lenders in 2010 and agreed to the biggest sovereign-debt restructuring in history in 2012.
This is another feather in the cap for the Eurozone bulls. This event marks the remarkable change in sentiment that has taken place over the past 1.5 years. Investors see the eurozone crisis as past news.
Euro Czar Dijsselbloem: Low Inflation Is Good News If Kept Quiet - Real Time Economics - WSJ
Low inflation in the euro zone is good news, but not if critics keep sounding the alarm about it. That’s the view of a top euro-zone finance official, Jeroen Dijsselbloem….
“What I’m worried about is that if all of us keep talking about and warning about the risk of deflation, it will become a self-fulfilling prophesy,” Mr. Dijsselbloem said. “Because if you keep telling people and investors and companies that there will be a long-term low inflation or even deflation, that could influence their behavior.”
The German leadership question | Economia
Many in the eurozone’s crisis countries complain that the source of their suffering is a rigid economic-austerity regime – including reductions in wages and pensions, tax increases, and soaring unemployment – imposed on them by Germany. Hostility against Germany has reached a level unseen in Europe since the end of World War II
And yet, despite this antagonism, loud calls for Germany to assume “leadership” in Europe can also be heard.
Complaints about the imposition of a “teutonic regime” and appeals for German leadership seem to contradict each other – a kind of continent-wide cognitive dissonance. In fact, the complaints and calls for leadership are mutually reinforcing. The implementation of austerity policies in the periphery has caused these countries to ask for help and request that Germany take the lead by putting more money on the European table.
Nobody would deny that Germany has an interest in preserving the euro. So why shouldn’t it support its partners with financial help to overcome the crisis?
Such support can already be found via the various rescue mechanisms – above all, the European Stability Mechanism and the implicit guarantees of TARGET 2 – that have been erected since the crisis began. But these mechanisms must be distinguished from a regime of more or less automatic, permanent transfers.
As long as a fully-fledged political union remains a vision for the future, fiscal transfers must be legitimised by national parliaments. For now – and probably for a long time to come – the eurozone will continue to be a union of sovereign states, with each country responsible for its own policies and for their outcome. The no-bailout clause that was included in the monetary union’s founding treaty is an indispensable corollary. Eurobonds, for example, would not only create moral hazard; “taxation without representation” would also violate a fundamental tenet of democracy and undermine support for the European idea.
The creation of a European banking union is another area in which misguided calls for solidarity prevail. Establishing a single supervisory authority and a resolution mechanism are valid proposals. But asking others to pay for the legacy of banks’ past irresponsible practices is hard to justify.
What would be the reaction if, say, Italian or Spanish taxpayers were asked to pay for the reckless behavior of the German IKB or HRE banks? Who would not find such a request inappropriate, to say the least? And yet when the bailout is presented the other way around, with German taxpayers asked to backstop reckless Italian or Spanish banks, somehow it is supposed to be an act of solidarity. Legacy problems in national banking systems should be solved at the national level before the banking union moves forward.
Bailing out governments and banks is not the direction in which Germany should lead. If Germany should lead at all, it should do so by providing a model of good economic policies for others to emulate. It should lead by respecting the commitments enshrined in the European treaties.
Walter Hallstein, the first president of the European Commission, repeatedly stressed that the union is based on the principle of a community of nations under the rule of law (Rechtsgemeinschaft). Today, credibility can only be restored if treaties and rules are respected again.
Those who are concerned about permanent German dominance of the European “club” can rest easy. Having emerged from the position of the sick man of Europe only a decade ago, Germany is now willfully, if thoughtlessly, undoing the reforms that had so strengthened its economy. By reinforcing already-strict labour-market regulation, pursuing a misguided energy policy, and reversing pension reform, Germany is undermining its current economic position and will move in the direction of problem countries.
This regression will take time, but it will happen. Accordingly, calls for German leadership will disappear and its strained public finances will suppress requests for financial transfers. One wonders how the discussion about “leadership” for Europe will look then? - (Project Syndicate via Economia)
Guardian and Washington Post win Pulitzer prize for NSA revelations
The Guardian and the Washington Post have been awarded the highest accolade in US journalism, winning the Pulitzer prize for public service for their groundbreaking articles on the National Security Agency’s surveillance activities based on the leaks of Edward Snowden.
Berlin and Paris ‘ruled Irish taxpayer should bail banks’
Germany and France, rather than the European Central Bank, made the decision that Irish taxpayers should bail out the banks, states a new book.
The claim that Berlin and Paris initiated the move against Ireland, rather than the ECB, is made in a newly published book, Europe’s Puppet Master. It has caused some upset in the capitals and in Brussels as it is based on confidential reports made by diplomats who attended the EU leaders’ summits during the crisis and is supported by insights from insiders.
Their account calls into question the independence of the ECB.
U.S. retail sales rise in March to highest level since 2012
U.S. retail sales increased in March by the most since September 2012 as Americans bought more cars, clothing and garden supplies, helping the economy recover from a weather-depressed start to the year.
Economic rebound continues. I’d like to see the YoY numbers though. Will post those soon.
Don’t bank on China’s financial reform Outside the Box
Reforming China’s economy begins with the banking system. Except the banking system might not be ready.
…there are significant problems in implementing changes.
First, China’s economic model requires keeping China’s cost of capital low to facilitate its investment strategy. Reform would increase capital costs as credit risk would be priced correctly, undermining the low profitability and solvency of many businesses. Higher rates would stress many borrowers.
Second, Chinese banks need to manage rising bad debts. Rating-agency Fitch Ratings has argued that Chinese banks may have unrealized losses in excess of that reported due to improper treatment, such as restructuring loans to avoid recognizing them as non-performing. These losses may be greater than the total capital and reserves of Chinese banks.
Third, Chinese banking crises resulting from bad debts is traditionally dealt with by maintaining access to deposits, low rates and a guaranteed wide spread between borrowing and lending costs. Deregulation would destabilize this process.
These factors dictate that any reform will be slow, at best.
China’s capital account is partially open. Foreign direct investment by “qualified” investors, including for short-term periods, is allowed within specified limits. In addition, local and foreign businesses and investors have access to a variety of unofficial techniques to undertake capital transfers, although these are slow, cumbersome, expensive and potentially illegal.
This creates tensions between domestic policy objectives and the management of the value of the currency. Large foreign capital inflows require the People’s Bank of China (PBOC), the central bank, to undertake money-market operations to remove excess liquidity while maintaining the desired value of the currency.
Like deregulation of interest rates, Chinese authorities have committed to the removal of controls on capital flows, albeit on an unspecified time scale. But the risk of deregulation is significant. Reforms may affect the flow of credit in the economy and negatively impact domestic demand. Capital flows also affect the ability of the PBOC to use the level of the yuan as a policy tool.
…speculative capital inflows have been strong, seeking to benefit from the perceived undervaluation of the yuan. However, Chinese authorities fear destabilizing outflows if the capital account is liberalized and the yuan trades at fair value. Outflows might be exacerbated by flight capital. Trapped domestic savings may exit the country as investors seek alternatives to low-yielding bank deposits or speculative property, or in order to diversify their investments or seek protection against political and social instability.
These risks are exacerbated by the increasing scale of the China carry trade. Investors have purchased yuan investments financed in foreign currency to benefit from higher Chinese interest rates. Chinese domestic borrowers have increasingly borrowed in foreign currency (U.S. dollars DXY +0.30% , yen USDJPY +0.13% and euroEURUSD -0.18% ) to reduce interest costs. Both investors and corporations have also sought to benefit from the expected appreciation of the yuan. In addition, myriad derivative strategies to take advantage of the carry and the currency movements have also been implemented.
Interestingly, the Bank for International Settlements has warned that China’s banking system has large and rapidly growing net foreign liabilities.
Large capital outflows would result in these strategies suffering losses and being reversed. This would result in the tightening of domestic liquidity and higher interest rates, setting off financial instability and a domestic contraction. - (Marketwatch)