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January 2014 April 19,6,2013
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China Daily The National Development and Reform Commission, China’s top economic planner, will allow bond swaps in an effort to avoid defaults in the local government-created separate investment agencies. In a statement the commission said that as part of its latest debt-restructuring effort, it will let local government financing vehicles issue new bonds to replace old ones that may have matured but can’t currently be repaid due to lack of funds. China has more than 10,000 LGFVs, created by local governments to fund the building of roads and other infrastructure.
Taipei Times Manufacturing activity in Taiwan improved last month for the 10th straight month, with the official purchasing managers’ index (PMI) rising to its highest level since June, according to a report released by the Chung-Hua Institution for Economic Research. The official PMI reading stood at 53.6 last month, up 1.6 points from a month earlier, the Taipei-based think tank said. A PMI above 50 indicates expansion. The expansion, mainly driven by the rise in new orders and production, provided more evidence that the nation’s economy is gradually recovering, CIER president Wu Chung shu said.
Asahi Shimbun Sony Corp is planning another round of job cuts after failing to produce profits in its mainstream electronic equipment sector. No specific target has been set for the latest downsizing measure, but it will affect five plants operated by wholly owned subsidiary Sony EMCS Corp. Sony EMCS produces digital cameras, TV sets and computers. The factories together employ about 5,000 people. “Because there is insufficient demand in the electronic equipment sector to support the current work force, there is a need to reduce the sector to the appropriate level,” a Sony executive said.
Korea Herald The South Korean won gained 1.4 percent last year to the U.S. dollar, becoming the fourth-best performer among major 20 currencies, official data showed. Meanwhile, the won hiked by 23.6 percent to the Japanese currency last year, the data showed, raising concerns that its exports may lose ground in overseas markets. Key export items of the two countries overlap in overseas markets, which means that a weaker yen could hurt profitability of South Korean firms.
The world economy’s shifting challenges George Soros
Chairman of Soros Fund Management and of the Open Society Foundations
A
s 2013 came to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character. After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese. By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nationstates can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.
Euro pain The euro’s design – which was modelled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent. This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket. After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and
government debts should be paid in full. Without realising it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe. The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. Nonetheless, the acute phase of the financial crisis is now over. The European financial authorities have tacitly recognised that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilised. Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.
made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire. More surprising, the polarisation of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neoconservatives, that moved it to a far-right extreme.
A successful transition in China will most likely entail political as well as economic reforms
American strength As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether. In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the U.S. an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have
The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activistdominated party primaries took precedence over general elections. That completed the polarisation of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system. The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise
has run out of steam. That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35 percent of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing. There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008. But there is a significant difference, too.
Economic growth In the U.S., financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises. Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook. The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad. The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely. © Project Syndicate