Breakingviews

Markets sagely dismiss China’s anti-Tokyo tantrums

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors aren’t particularly bothered by China’s anti-Tokyo protests. While smashed cars and shuttered factories are worrying, the two countries have more to lose in trade and investment than to gain from tit-for-tat reprisals. Companies that are big in China like Nissan may suffer in the short-term, but Japan Inc. has more to fear from U.S. Federal Reserve chairman Ben Bernanke than from Beijing.

Judging by the two country’s stock markets, you wouldn’t guess a dispute over uninhabited islands north of Taiwan had caused the world’s second-largest economy to explode in anger against the third-largest. Japan’s stock market lost only 0.4 percent on Sept. 18, the yen rose, and the cost of insuring Japanese sovereign debt climbed only slightly. China arguably looks the victim: the Shanghai market is down about 3 percent this week. But even that is a trifle when compared with its 17 percent decline in the past year.

China might seem to have the economic advantage: it’s Japan’s largest export market, accounting for 18 percent of Japanese exports. And China is a crucial part of Japan’s supply chain – Chinese subsidiaries of Japanese companies sell 23 percent of their production back to Japan. Some Japanese companies have also come to depend on China for sales growth. Nissan sells more than a quarter of its vehicles in the country, its largest market.

But any move to punish Japan would likely prove, as Beijing’s mouthpiece the People’s Daily has observed, a double-edged sword. Chinese imports from Japan are largely capital goods such as steel, heavy equipment and industrial robots, which are difficult to substitute. Japan is China’s third-largest foreign direct investor and fourth-largest importer. And while China may be a key supplier, rising costs have been driving more Japanese companies to shift elsewhere.

It’s possible that the protests will flare up into a bigger conflagration. But a bigger threat to both economies may be the $40 billion-a-month barrage of cash Bernanke has vowed to blast into the global economy every month until the U.S. job market improves. That’s likely to sink the U.S. dollar, reducing returns on China and Japan’s foreign reserves, and put pressure on exports. Investors are betting Bernanke’s bazooka is the only weapon that will be fired.

U.S. Treasury stake not the millstone GM makes out

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

General Motors’ Dan Akerson deserves an A for effort. The automaker’s chief executive and his colleagues reckon the U.S. government’s 26.5 percent ownership hurts the Motown manufacturer’s image and its ability to hire people. But it’s not the millstone they make out.

The U.S. Treasury isn’t convinced, so far, that it needs to offload its stake in the automaker, according to the Wall Street Journal. And that’s the right response. Sure, for GM to be dubbed “Government Motors” is no compliment. But the moniker is nowhere near as prevalent as it was when taxpayers saved GM from collapse in 2009. And although the automaker has made good progress since – and thanks to – the bailout, it was only three years ago. That’s less than one full product cycle, so current management aren’t yet in the clear to argue they’ve fully overcome their predecessors’ disastrous failings.

There’s potentially more to the fear from pay restrictions linked to the bailout that could hamper GM’s attempts to hire the best people. But the government can grant waivers if the company puts forward a good case. That’s not ideal from a management perspective, but it’s not an insurmountable barrier.

GM’s other shareholders also don’t seem bothered about Washington’s big stake. The company currently trades at 5.8 times the consensus estimate for next year’s earnings, according to Reuters data. That’s hardly stellar for what is now a profitable company with $33 billion of cash on hand. But most automakers are afflicted by investor doubts about the rapidity of an industry turnaround. Bailout-free Ford, for example, trades at 6.8 times 2013 estimates. GM, with lower pre-tax operating margins and less-seasoned management, deserves to trade at a discount to its big rival.

The government’s large stake may well become more of a drag once investors look more favorably on the industry as a whole. Until then, there’s nothing wrong with Akerson trying to buy back shares while he considers the stock cheap. But for Treasury Secretary Tim Geithner, selling now would lock in a $15 billion loss on his department’s overall investment. The Treasury can afford to take Akerson’s grumbles with a pinch of salt and exit on its own schedule.

Politics and economy cloud China’s Davos

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Skies were unusually clear in the Chinese city of Tianjin this week as the World Economic Forum’s annual summer event took place. But there were two grey clouds: politics and the economy. Worries over both were hard to miss. Like China itself, there was a distinct feeling that the self-styled Asian gathering of the global elite had lost some of its sparkle.

When China’s answer to Switzerland’s Davos forum was conceived five years ago, the Chinese economic miracle was at its peak. Foreign businesses sought out new growth opportunities outside Beijing and Shanghai. Chinese officials and companies seized the platform to get a bigger voice in the world. Premier Wen Jiabao’s address was a major draw – and still is.

Politically, the tone was cautious. Wen’s last public speech in front of a global audience before he retires early next year avoided the hot-button global issues such as China’s relationship with its Asian neighbours and Washington. Wen didn’t lament the lack of reforms, as he has in the past. Instead, he delivered a defensive summary of his own track record as premier.

One senior British business leader complained that China’s government officials and state-owned firms were under-represented. And no wonder: China is in a political hiatus, with a new generation of leaders expected to be named in a month. Current officials have become old hat. A recurring topic of chatter was the whereabouts of Xi Jinping, China’s likely next president who has not been seen in public for two weeks.

Businesses worried openly about a weaker economy. Solar-panel maker Trina Solar was one which warned it may have to cut jobs to reduce costs. Sessions focused on the macro-economy were well-attended, with everyone trying to figure out whether this is a structural shift or a bump on the road. The China Davos go-to topics like innovation and developing human capital took a back seat – even though those are precisely what China needs most.

China’s big fiscal guns best left in the holster

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s fiscal guns are ready to fire. Premier Wen Jiabao reminded the world this week that government debt is low, and the country has scope to spend its way back to rapid growth. Investors believe it will: Shanghai’s stock market closed up on Sept.10, even as China showed August exports barely grew year on year.

On paper, Wen can afford to be generous. China’s central government debt is around 15 percent of GDP, and its fiscal deficit below 2 percent. Add in the provinces and total government debt is still below 50 percent. There’s also cash to spare. As well as a 100 billion yuan surplus outlined by Wen, many government agencies also have unquantified hidden reserves – known as “little cashboxes” – squirreled away. Those could be spent without official debt levels rising.

There’s no shortage of hopeful recipients. Cities have been announcing ambitious investment plans. Some are frivolous – like Kaifeng’s plan to build a $15 billion Song dynasty town centre. But seemingly sensible projects like subways and sewers are being approved, and need funding.

For now it’s a question of timing. Some stimulation is already happening. Land sales, which is how local governments make most of their money, more than doubled between July and August. Last month’s government spending increased by 12 percent, year on year.

But there are good reasons to hold back. There are tentative signs that the euro zone may be coming back from the brink, which would improve China’s trade. Non-fiscal tweaks, such as plans to increase the speed at which rebates are paid to exporters, might help some sectors. Politically, there are limits too, as China enters potentially six months of leadership transition.

China’s absent princeling is a mystery not a crisis

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s growth is slowing, and president-in-waiting Xi Jinping hasn’t been seen in public for two weeks. China-watchers are discussing little else. The former issue matters greatly to the world, while the latter is fascinating, but basically unimportant.

Xi hasn’t made an appearance since Sept. 1. He was not listed as having attended a meeting of the military commission, and cancelled sit-downs with U.S. secretary of state Hillary Clinton and the Danish prime minister. Reporters were chided for asking foreign ministry officials about his health. Rumours – all unsubstantiated – range from a mild heart attack to an assault by forces loyal to ousted Bo Xilai.

It’s not the first time China’s authoritarian public relations machine has left the public to fill in the gaps. Two decades ago, premier Li Peng disappeared from view for over six weeks. Rumours at the time included a heart attack, or a political ouster. He subsequently returned to serve for five more years.

China needs a president, of course. What’s less clear is how much it matters that it’s Xi. China’s one-party system relies ever less on individuals than in the era of Mao Zedong and Deng Xiaoping. Technocratic president Hu Jintao and his premier Wen Jiabao represented a big step away from strongman politics. The Party’s standing committee is a study in homogeneity, right down to the haircuts.

Xi’s views are as much a mystery as his whereabouts. What gives him legitimacy isn’t his unremarkable track record, but the belief that he has the support of the Party and, crucially, the military. If Xi can ensure stability and growth, he should have public support – but so might anyone else who can deliver those things. It’s a far cry from the issues-based politics of the U.S. presidential race. And of course, ordinary Chinese don’t get to choose.

U.S. political jamborees alienate Mr. Market

By Daniel Indiviglio and Jeffrey Goldfarb The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Mr. Market would have felt unwelcome in Charlotte and Tampa over the last couple of weeks. The political jamborees hosted in the two southeastern U.S. cities offered stark differences in tone that mirror the different options Americans face in November’s elections. Eat the fiscal spinach served up by Mitt Romney and the Republicans, or gorge on the pro-worker red meat dangled by Barack Obama and the Democrats. Voters may be tempted by one or the other, but investors will probably turn their noses up at both.

A broad cross-section of America showed up for the Democratic convention, which wrapped up proceedings on Thursday night with President Obama formally accepting the nomination to run again. The party’s diversity was obvious throughout Time Warner Cable Arena, even without organizers jack-hammering the point home on stage. And yet while union bosses, mayors, auto workers, abortion rights activists, firefighters, equal pay advocates and celebrities like Scarlett Johansson got their say, there was little room for Mr. Market.

He would have winced anyway at the repeated brags by Vice President Joe Biden and many others about the president’s deal to save General Motors and “more than 1 million American jobs,” which required upending the automaker’s capital structure and trampling on bondholder rights. He would have balked, too, at all the unqualified praise for Obama’s healthcare law, aggressive environmental enforcement and financial regulation.

The lack of attention to Uncle Sam’s biggest long-term challenge also would have alienated Mr. Market. How to reduce the nation’s debt load, which surpassed the $16 trillion mark during the Democratic convention, got scant mention during the three-day event and only brief lip service in the keynote speeches of former President Bill Clinton and Obama, whose $3 trillion of proposed deficit cuts over the decade starting in 2013 would all come from collecting more taxes.

Delegates from across the country liked the idea of raising taxes on the rich to balance America’s accounts, a populist and impractical notion that could stifle investment and growth if applied excessively. “Desperate Housewives” star Eva Longoria summed up the sentiment on the final day of the Democratic convention. “Eva Longoria who worked at Wendy’s flipping burgers – she needed a tax break,” Longoria said. “But the Eva Longoria who works on movie sets does not.” Wall Street was much less in evidence than Hollywood. The only banker who made a meaningful splash was Robert Rubin, the former Treasury secretary and Citigroup bigwig, who fell in a pool at the Ritz-Carlton.

The GOP convention started out all wet, too, with a hurricane washing out the first day. Once the Republicans started, though, they delivered a tsunami of “We built that!” rallying cries, derisively riffing on an Obama syntax gaffe which, taken out of context, suggested the government was responsible for business success. Mr. Market might have shared the disdain of everyone in the (publicly funded) convention hall for this twisted version of what the president said – but he wouldn’t have approved of the political rhetoric that obscured the reality of the issues that concern him.

Obama job adds match Bush, Clinton but not Reagan

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Thirty months after the U.S. jobs nadir, employment has risen by 3.1 percent, according to Friday’s report for August. That’s roughly in line with the post-recession record of the last 2-1/2 presidents – but far short of Ronald Reagan’s 9.8 percent jobs increase. The picture for August alone was also mixed: President Barack Obama, his Republican presidential rival Mitt Romney, and the Federal Reserve can all take something from it.

The increase in total employment in the 30 months following recessions was 3.8 percent under George W. Bush starting in 2003, and 3.4 percent under George H.W. Bush and Bill Clinton from 1991 to 1993 – though Clinton’s economy exhibited more robust job growth later in the cycle. On this comparison, it’s hard to argue Obama’s record on job creation is noticeably weak. Republicans willing to reach back 30 years, however, can point to much stronger numbers under Reagan.

As for August, the net new jobs figure of 96,000 was distinctly under par – fodder for the Romney camp. Yet the unemployment rate, measured by a different survey, declined to 8.1 percent. Another 0.2 percentage point drop would take the rate below 8 percent, surely a psychological threshold that Obama’s team would play up.

Beyond the headline numbers, the report underlined the sluggish nature of America’s economic recovery. The manufacturing sector lost 15,000 jobs, while overall new jobs figures for both June and July were revised lower. And the decline in the unemployment rate was mostly the result of reduced participation in the workforce. The ratio of total employment to population in August was only 0.1 percentage point above its December 2009 nadir. On this metric, Obama’s record looks poor. Thirty months after the previous three recessions, that metric had improved much more strongly, by at least one percentage point.

In any event, both presidential candidates will get talking points from the new data. The Fed, which meets next week, also gets a new input for its analysis. The U.S. central bank has indicated that it is leaning toward another round of so-called quantitative easing – essentially, bond purchases that amount to printing money. The lackluster report on Friday won’t discourage Fed Chairman Ben Bernanke from pushing ahead – and sooner rather than later.

It’s the budget, not the economy, stupid

By Rob Cox 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s the budget, not the economy, stupid. That variation of the 1992 slogan that propelled Bill Clinton into the Oval Office may now apply to Mitt Romney’s candidacy. The Republican presidential wannabe’s choice of conservative House budget chief Paul Ryan as his running mate has the power to transform a heretofore mealy campaign into something substantive: a referendum on fixing the American balance sheet.

It’s pathetic that it has taken the nomination of a 42-year-old Wisconsinite from Congress to give Romney’s candidacy much appeal, even to his base, beyond the simple fact that he is not Barack Obama. But at a time when debt crises threaten the sovereignty of developed nations and the U.S. fiscal picture is about as bleak as it has been has outside of wartime, righting the country’s finances is the stuff of long-term legacy creation.

Despite his relative youth, Ryan has spent 13 years in the House, neutralizing arguments that he’s unprepared for the post. Though that includes the Bush era, when Congress was at its most profligate, Ryan has since distinguished himself as a proponent of fiscal probity. His recent counter-proposal to the White House’s budget was a serious attempt to propose constructive fixes to vexing long-term economic problems.

Elements of Ryan’s plan, particularly deep cuts to entitlement and Medicare spending, offer the Democrats a distinct target. But that’s a necessary debate for the country to engage in. For Romney, too, it’s a better issue to campaign on than a half-hearted defense of the GOP’s more recent obstructive record in Congress.

Moreover, whatever either candidate says on the stump, tangling with America’s finances will be the chief legislative task of the new president. Congress will not find a solution to the so-called “fiscal cliff” of some $450 billion of tax increases and $1.2 trillion of spending cuts that take effect from 2013. In all likelihood, a lame-duck legislature will extend the implementation of these into the first half.

India begins the post-Mukherjee clear-up

By Jeff Glekin

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Pranab Mukherjee’s reign as Indian finance minister was stained by economic meddling and political favouritism. Now he is gone, and some of his excesses are being reversed. An enemy has been pardoned and a friend has not received a plum job. This could be the beginning of a better era.

Imagine if Tim Geithner had been accused of putting pressure on the securities regulator to protect some political friends. The U.S. Treasury Secretary would be in serious hot water. But when the former number two at the Securities and Exchange Board of India (SEBI) accused Mukherjee of something similar – putting pressure on the SEBI chairman to “manage” some high-profile corporate cases – there was little attention.

Rather, in a move that was all too typical of the Mukherjee regime, the finance ministry countered with allegations against the whistle-blower, K.M. Abraham. But the post-Mukherjee government is different. Prime Minister Manmohan Singh has cleared Abraham.

In another development, the board of UTI, Asia’s oldest asset management company, is set to appoint a new chief executive. The position has been vacant for the past year and a half as the finance minister put pressure on the company, 26 percent owned by U.S. fund manager T. Rowe Price, to appoint the brother of one of Mukherjee’s most powerful advisors. The former political favourite, Jitesh Khosla, hasn’t made the new shortlist.

India’s new finance minister, P. Chidambaram, is also shaking up his own team. On Sunday he announced that the top officials in the revenue and expenditure departments would swap jobs. That seems to be a signal of a shift in the tax department’s priorities. It might pave the way for a reversal of Mukherjee’s damaging retrospective tax grabs.

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.