Olympics a bad metaphor for economic rivalry
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China breaks the rules. The United States loses its edge. As for Britain, it barely registers at all. It’s easy to see the Olympic Games as a metaphor for economic rivalry. Fortunately, the real world is different, and can be much more harmonious – if everyone basically plays fair.
China’s dominance of the medals tables – 17 golds at the last count – resembles its economic ascent. Since the Beijing Games of 2008, China’s nominal GDP has grown by around two-thirds, and its foreign exchange reserves almost 80 percent. Olympic fever and national pride are inseparable: the top ten trending topics on social network Weibo on Aug. 2 were all about the Games.
But it hasn’t all been glory. Two Chinese badminton players were disqualified for apparently throwing a match, along with Koreans and Indonesian players. One Chinese player, Yu Yang, resigned from the game and was told by the government to apologise, causing much soul-searching in the Communist Party press about China’s fixation with winning, both on and off the court.
In trade terms too, the clash of Olympians feels familiar. The head of the World Swimming Association questioned teen swim champ Ye Shiwen’s “unbelievable” time, leading to a tit-for-tat round of name-calling by coaches and critics. On dry land, China faces 27 cases alleging unfair trading practices at the World Trade Organisation, ranging from stopping the flow of rare minerals to slapping duties on American cars.
Fortunately, there are some big differences that make the metaphor a poor one. In global trade, co-operation is rewarded. While China and the U.S. butt heads, both have benefited enormously from opening their borders.
India’s power vacuum needs to be filled
By Jeff Glekin
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Perhaps Manmohan Singh and Sonia Gandhi got trapped in the Delhi metro yesterday. If the two leading Indian politicians were indeed victims of the world’s largest electricity blackout ever, they would at least have an excuse for their lack of public response to this clear sign of policy failure. Actually, there was a response, but it was not what might be expected. The power minister was promoted to Home Minister and replaced with a part time substitute.
The promotion was not really a reward for failure; it was part of a planned reshuffle prompted by the move of Pranab Mukherjee from finance minister to the ceremonial role of President. Mukherjee’s tenure in the finance ministry was basically disastrous. He overturned the Supreme Court’s tax ruling in the Vodafone case and tried to retrospectively tax foreign investors. And he appears to have pursued these policies without consulting Singh, the prime minister.
Mukherjee and Singh have been playing mutually destructive power politics for years. The former appointed the latter as Governor of the central bank almost three decades ago, and seems never to have accepted fully that Singh had become his boss. The strained relations between the two politicians were made even more debilitating by the murky role of Sonia Gandhi, who holds no public office but has inherited the leading role in the ruling Congress Party. As they say in New Delhi, Gandhi has power without responsibility and Singh has responsibility without power.
Actually, the new cabinet provides one reason for hope, the re-appointment of Palaniappan Chidambaram as finance minister. In his previous four-year tenure, from 2004, Chidambaram worked well with Singh – and GDP growth averaged about 9 percent. He’s likely to appoint a new team in the Finance Ministry including the highly respected Raghuram Rajan, the ex-chief economist of the International Monetary Fund.
Chidambaram and Singh have less than two years to go before the next election. They won’t find it easy to make India’s government more effective and deft. On the other hand, it will be hard to do much worse than it did on Tuesday.
Take hope from India’s power and water failures
By Jeff Glekin
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
India’s economic reform agenda has lost its way. Forget trivial reforms like permitting more foreign direct investment in aviation. What the county needs most is improvements in chronically mismanaged infrastructure. But change is hard when the systems are working, even badly. So a huge power outage – the worst blackout for more than a decade which left more than 300 million people without electricity – and yet another unnecessary crop shortage – due to a weak monsoon – could prove a blessing.
New Delhi’s reform programme has become synonymous with opening markets to foreign competition. While such liberalisation would be good for India, the chronic failures in power and water management are more pressing and the economic pay-off from improvement would be much greater.
The government owns 90 percent of the country’s electricity assets. It gives power away to the agriculture sector. The country fails to meter much of its supply and theft of electricity in collusion with electricity board employees is unfettered.
The main source of energy is coal, which is abundant in India and made available to generators at about 45 per cent less than global prices. But environmental concerns have delayed new coal-mining projects, so the power producers which have invested in new coal-fired power stations are short of supply. Imported coal is uneconomic at the state-set electricity price.
Then there’s water. This year’s poor monsoon is likely to lead to the third drought in 10 years. But two-thirds of the water India receives is wasted because of inadequate storage and management. The National Council of Applied Economic Research in Delhi estimates that a project to interlink the country’s rivers, which was first proposed in the 1970s, would add more than 5 per cent of GDP on a cumulative basis over 13 years.
Beijing rains warn investors about political climate
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Beijing’s weekend floods inflicted an unusually high human cost for a modern city. Attempts to squash criticism of the response made matters worse. The lesson isn’t just that Beijing needs better drains, but that anxiety is acute ahead of next year’s leadership change. For investors, the equivocal way China handles crises alters the political risk premium.
An official put the damage at $1.6 billion – half a percent of the city’s GDP in 2011. The death toll has been more contentious. By July 26, the count hadn’t moved from the initial estimate of 37, to the disbelief of many Beijingers. Critical posts were swiftly deleted from social media, and Beijing’s police chief warned on July 24 that web users who attacked the country or the system would be severely punished.
Stepping back, the disaster doesn’t invalidate China’s achievements, even if the human tragedy proves worse than stated. Beijing’s drainage is bad, but China’s urbanization has done much good. Cities have helped lift millions out of poverty, and without the slums seen in India or Brazil. Freak rains aside, Beijing’s usual problem is too little water. In most years, the city gets less rain than Dallas.
But officials are anxious, and that means investors should be too. New rulers will be announced in Autumn, and the shocking ouster of Chongqing party chief Bo Xilai in March raised the worry that the process could be less than smooth.
That is already having an economic effect. Decisive policies have been lacking in recent months. While cross-border deals still happen – witness oil producer CNOOC’s $15 billion bid for Canadian rival Nexen – the property and IPO markets are in limbo. Modern China no longer reads natural disasters as a sign the emperor has lost his “mandate of heaven”, but it is telling that President Hu Jintao pointedly called for “unity” in a speech on July 23.
China Inc not letting politics get in way of M&A
By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China Inc isn’t letting politics get in the way of M&A. The upcoming conclave of China’s Communist Party, a once-a-decade changing of the guard, was supposed to hold back the global ambitions of state enterprises, at least temporarily. But CNOOC’s $15.1 billion bid for Canada’s Nexen suggests that’s not happening.
The 18th party congress is expected to convene in the fall to select new leadership. Seven of the nine seats on the all-powerful standing committee of the politburo are up for grabs. The two continuing members, Xi Jinping and Li Keqiang, are widely presumed to replace Hu Jintao and Wen Jiabao as China’s president and premier, respectively. Xi is also likely to become general secretary of the Communist Party. The next-most powerful body, the politburo, will see many of its two dozen members rotate. Ditto the central committee, which includes over 300 full and alternate members. All these changes will mean new people manning the red phones that connect party leaders to the heads of China’s most important ministries, regulatory agencies and state-owned enterprises.
Bankers and investors have, as a result, been bracing for a slowdown in Chinese deal-making. The logic is that an ambitious executive would be foolhardy to propose a risky transaction that might soon be frowned upon by new masters somewhere up the chain of the country’s inscrutable power structure.
CNOOC’s agreement to buy Calgary-based Nexen goes against that rationale. While smaller than the company’s eventually withdrawn bid for U.S. oil group Unocal a few years ago, it will be the largest ever full-blown foreign takeover by a Chinese company if it’s approved. Perhaps learning from the controversy over its Unocal effort, CNOOC is making big efforts to pitch the benefits of the deal to Canadian authorities, too.
In the run-up to a possibly tumultuous transition of power, such a big deal is a bold move. It brings China’s outbound announced M&A volume to $38 billion so far this year, 72 percent more than last year, according to Thomson Reuters. Though other sectors feature in much smaller deals, the bulk of that is in energy. China’s oil and gas champions are on the hunt for resources everywhere. Maybe, at least as seen from Beijing, even in a political season there’s no such thing as a bad energy deal.
Wen’s stimulus medicine may not be best for China
By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
China’s economy is being driven by politics and timing. Premier Wen Jiabao said on July 10 that investment remained key to spurring growth, suggesting the possibility of stimulating the economy, as China did in 2008. No one wants to end their reign with a hard landing. But pushing more investment would make things harder for Wen’s successors, who take over early next year.
China’s economy doesn’t look in desperate need of a rescue now. Second-quarter GDP is expected to rise by 7.6 percent in the second quarter, according to analysts polled by Reuters. Anything below 8 percent may seem sluggish for Chinese leaders, who have seen average 10 percent growth during their decade at the helm. They have already cut rates twice in a month to give the economy an extra kick.
Another big fiscal stimulus might help Wen’s growth record. But that may not be in the best interest of new leaders. As in democracies, that would make it easier for them to put their own mark on the economy, and avoid disappointing. Li Keqiang, widely expected to become China’s next premier, has been talking about the need for longer-term growth drivers and structural reforms, rather than a short-term fix.
China is still recovering from the hangover of the 4 trillion yuan ($600 billion) stimulus package implemented in 2009. The industries that are suffering most now, such as appliances makers, auto companies, and equipment makers, are among those that benefited most from the infrastructure investment boom and consumption subsidies in the last round.
Consider home appliance company Midea, which slashed 30,000 workers in 2011. BYD, an auto company in which U.S. investor Warren Buffett owns a stake, cut 20,000 workers in 2011. Heavy equipment maker Sany’s headcount fell 3,000 in the first half of 2012. Front-loading demand has made it more painful when the incentives are taken away.
Lest we forget, the crew in Beijing has previously stated that any GDP number less than 7% poses a risk to ‘social stability’. A country which spend more money on internal security than it does on the military is truly afraid of its’ citizens….
Europe’s bank recap strategy has reached its limit
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Europe’s bank recapitalisation strategy has reached its limits. The continent’s lenders have added 94 billion euros to their capital buffers since the end of September, comfortably exceeding demands set by the European Banking Authority. Yet they are not yet in the clear. To restore trust, banks will have to clean up their loan books – and hope the euro zone can solve its sovereign woes.
Last autumn, the EBA calculated that Europe’s banks needed a combined 115 billion euros to hit a core Tier 1 capital ratio of 9 percent, after marking sovereign bonds to market prices. Greek lenders and bailed-out banks such as Belgium’s Dexia and Spain’s Bankia were subsequently excluded from the calculation. The remaining banks comfortably met the updated 76 billion euro shortfall by the end-June deadline.
Moreover, banks used relatively few tricks to hit their targets. Most of the improvements to capital came from banks issuing equity and convertible bonds; buying back hybrid debt at a discount; retaining earnings; or offloading assets. True, some banks tweaked risk models to reduce their risk-weighted assets, but this sleight of hand accounted for just 10 percent of the total capital raised. Concerns that banks would respond to the EBA’s demands by shrinking their balance sheets proved wide of the mark. Total loans contracted by just 0.62 percent.
But anyone who expects faith in Europe’s banks to be magically restored will be disappointed. Not only are funding markets largely closed to the continent’s lenders, many are dangerously dependent on the European Central Bank for liquidity.
Rebuilding confidence will require banks to clear out the bad assets still clogging up their balance sheets. And Spain’s bank bailout illustrates the extent to which domestic regulators have allowed lenders to keep their problem loans hidden from view.
Does Barclays need a new broom or Rake in chair?
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Does Barclays need a new broom or Rake in the chair? The bank would ideally appoint external candidates as both chairman and chief executive to make a clean break with the Bob Diamond era. But if it can’t find a strong outsider to be chairman fast, deputy chairman Michael Rake would be a good internal appointment.
Barclays certainly needs some new people to shake up its brash culture. The snag is that the bank has become such a political football that it will be hard to attract top candidates. The most important post will be the new chief executive to replace Diamond. But the more immediate priority is to find a new chairman to replace Marcus Agius. After all, an incoming chief executive will want to know who his chairman will be; equally, an incoming chairman will want to pick his chief executive.
The new chairman needs to be tough, independent-minded and knowledgeable. He also needs to be willing to work virtually full time for perhaps 750,000 pounds a year. This is not the job for somebody who wants to get rich but for somebody who enjoys a challenge and is public-spirited. Possible candidates include Gus O’Donnell, the former cabinet secretary, and Philip Hampton, RBS chairman. But it might not be easy to attract either: O’Donnell may be in line to be next governor of the Bank of England, while Hampton still has a job to do helping turn around RBS.
If there is a dearth of attractive outsiders, Rake would be a good insider. He would, of course, have to give up his existing jobs as chairman of BT and easyJet. Although Rake suffers from association with the Diamond/Agius era, he has pushed for better governance, especially since he became senior independent director last year. He was, for example, instrumental earlier this year in persuading Agius to step down to make way for a stronger chairman at some point. And he was coaching Diamond on ways of improving the bank’s confrontational relationship with regulators.
If Barclays can’t get a good new broom to clean the Agian stables, a Rake would do the job.
How about just closing it down entirely?
Fire the whole stinking bunch of them, with the minumum compensation for which the law makes provision.
Let’s see these worthless profiteering SCUM try to get jobs in the normal world? I long to see them cleaning bus-shelters at 6am.
Bankruptcy loses its taboo for California’s cities
By Agnes T. Crane and Martin Hutchinson
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Bankruptcy is no longer taboo among California’s struggling cities. San Bernardino has just become the third Golden State municipality in two weeks to fail – ending a four-year hiatus since fellow California town Vallejo began its costly and protracted court battle against creditors. So far, though, investors seem pretty sanguine.
Granted, the three cities, which also include Stockton and Mammoth Lakes, are hardly bustling metropolises – each has a population of less than 300,000. But California, home to the glamorous Silicon Valley and Los Angeles, has the high taxes, big government and heavy regulation that are characteristic of major metropolitan areas.
That makes it especially tough for cities in the state’s heartland that can’t attract the glitterati. They have also been hammered by the housing market bust. Throw in rising pension costs and terrible governance and it’s likely that other towns will turn to the courts to remedy their woeful finances.
Yet municipal bond yields on lower-rated debt actually fell 0.06 percentage point to just 3.71 percent in the days after Stockton and Mammoth Lakes turned to the courts. Compare that to the height of muni madness two years ago, when investors feared a wave of defaults would rip through the $3 trillion market. Yields then topped 5 percent.
So what gives? First, the hysteria in 2010 was overblown. Bankruptcy is, and should be, the last resort for cities and counties who have exhausted all other options. As San Diego and San Jose have shown this year, governments can deploy more creative initiatives to plug budget shortfalls.
BoE governor’s arm-twisting raises tricky issues
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
In the old days it used to be said the Bank of England governor could get his way by raising his eyebrows. The current governor, Mervyn King, seems to have engaged in heavy arm-twisting to get Barclays to remove its former chief executive Bob Diamond. While the bank itself should have got rid of Diamond because he could not credibly engineer a change in its brash culture, the manner of his departure raises tricky questions.
Marcus Agius, Barclays’ chairman, told MPs on July 10 that King “made very plain” to him that Diamond “no longer enjoyed the support of his regulators”. But on whose behalf exactly was King speaking? The BoE, after all, is not responsible for supervising banks – and won’t be until next year. That’s still the job of the Financial Services Authority. If King wasn’t speaking for the FSA too, he was arguably stepping beyond his authority.
On the other hand, if the BoE governor was speaking on the FSA’s behalf, why didn’t the regulator itself deliver the message that Diamond should go? And why too did the FSA apparently change its position? After all, the regulator had only just agreed a settlement with Barclays over the Libor rate-fixing scandal. If it had wanted Diamond to go, that would have been the moment to say so.
A further question is how exactly the regulators managed to twist Barclays’ arm. If the FSA doesn’t support a bank director in his role, the current mechanism for removing the executive is to deem him no longer “fit and proper”. But it seems hard to argue that Diamond didn’t meet that test. After all, the lengthy investigation into the Libor scandal did not criticise him personally.
Some people will no doubt say it is good that Diamond has gone and it doesn’t really matter how that was engineered. But methods used in difficult situations can easily become precedents.
Mervyn King has no credibility with me. He was asleep at the wheel while the economy was experiencing huge inflationary expansion (slightly masked by the deflationary effect of China), in the lead up to one of our worst busts ever.
Personally I would sack Mervyn King before Bob Diamond, because Mervyn has done more damage to our economy.
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Reuters Breakingviews: Europe's situation not all badAug. 3 - European markets have reason to be downcast, but pessimism should not be all-pervasive; things can still be done, says Reuters Breakingviews Assistant Editor, Peter Thal Larsen.Video
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Breakingviews: Markets' dark KnightAug 2 - Jeffrey Goldfarb and Breakingviews columnists discuss the ill-advised finger-pointing over technical trading glitches and the ongoing turmoil for Knight Capital and its electronic flub.Video
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It is all just so disgusting. It’s as if George W, Tony Blair, Dick Cheney – the real power behind that dork George just said her you go china – you and walmart can rip out the US guts oh and lets bush this Pinhead Obama to the forefront to finish the job. Well I for one am not playing!