Edwin Rosskam Shoeshine, 47th Street, Chicago’s main Negro business street 1941
“It’s not difficult to issue more loans, but let’s say in a years time when the loan is due, if the borrower defaults, then I won’t just see a pay cut, I’ll be fired, and still be responsible for loan recovery.”
• A Chinese Banker Explains Why There Is No Way Out (ZH)
Friday’s adoption of NIRP by Japan, which send the US Dollar soaring, has only made any upcoming future Chinese devaluation even more likely. But whether China devalued or not, one thing is certain: it is next to impossible for China – under the current socio economic and financial regime – to stop the relentless growth in NPLs, which even by conservative estimates at in the trillion(s), accounting for at least 10% of China’s GDP. Sure enough, a cursory skimming of news from China reveals that even Chinese bankers now “admit the NPL situation is dire, but will keep on lending” anyway. As the Chiecon blog notes, NPL “ratios might be closer to 10%… supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts.”
“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area. Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.
But the main reason why China is now trapped, and on one hand is desperate to stabilize its economy and stop growing its levereage at nosebleed levels, while on the other hand it is under pressure to issue more loans while at the same time it is unwilling to write off bad loans, can be found in the following very simple explanation offered by Mr. Zhou, a junior banker at a Chinese commercial bank.
“If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but let’s say in a years time when the loan is due, if the borrower defaults, then I won’t just see a pay cut, I’ll be fired, and still be responsible for loan recovery.”
And that, in under 60 words, explains why China finds itself in a no way out situation, and why despite all its recurring posturing, all its promises for reform, all its bluster for deleveraging, China’s ruling elite will never be able to achieve an internal devaluation, and why despite its recurring threats to crush, gut and destroy all the evil Yuan shorts, ultimately it will have no choice but to pursue an external devaluation of its economy by way of devaluing its currency presumably some time before its foreign reserves run out (which at a $185 billion a month burn rate may not last for even one year). However, before it does, it will make sure that it also crushes every Yuan short, doing precisely what the Fed has done with equity shorts in the US over the past 7 years.
While still ‘assuming the official agriculture and service sector growth figures are correct’.
• China GDP Growth 4.3%, Or Lower, Chinese Professor Says (WSJ)
As growth in the world’s second-largest economy slows, the spotlight has intensified over the accuracy of China’s growth figures. This week, Xu Dianqing, an economics professor at Beijing Normal University and the University of Western Ontario, joined the debate with an estimate that China’s GDP growth rate might just be between 4.3% and 5.2%. China’s official growth rate in 2015 was 6.9%, the slowest pace in more than two decades, allowing the government to hit its target of around 7%. But longstanding questions over China’s statistical methodology have spurred a cottage industry in alternate growth indicators. Many of these analyze other measures believed to be less subject to political pressure in estimating actual growth, including indices compiled by economists at Capital Economics, Barclays Bank, the Conference Board and Oxford Economics.
Most peg China’s annual growth in the 4% to 6% range. Mr. Xu told reporters at a briefing this week that the focus of his concern is the growth rate for China’s manufacturing sector, which according to official figures grew 6.0% last year and accounts for 40.5% of the economy. A closer look at underlying indicators, however, including thermal power generation, railway freight volume, and output from the iron ore, plate glass, cement and steel industries released monthly by the National Bureau of Statistics paint a different picture, he said. Of some 60 major industrial products, nearly half saw output contract in the January to November period, while railway cargo volume fell 11.9% for all of last year, according to official sources.
Given weaker industrial output in China and more than three years of industrial deflation, a 6% expansion for manufacturing in 2015 is questionable “no matter how the number is counted,” said Mr. Xu, who added that he believes it’s more probable that industry and construction grew at most by 2% last year and perhaps not at all. That translates into economic growth that tops out at 5.2% last year and perhaps something in the 4s, assuming the official agriculture and service sector growth figures are correct, he said. Mr. Xu said it’s unlikely that the service sector– sometimes cited as an explanation for growth rate discrepancies – did better than reported by authorities.
Twins.
• Yuan Vs. Yen: How China Figures Into Japan’s Negative Rates (WSJ)
Japan’s move to negative interest rates is the latest step in a dangerous dance between the world’s second and third largest economies. The problem is currencies. China’s moves to bring down the value of the yuan have rattled markets this year, sparking a flight from risky assets that has sent investors into safer havens like the yen. The stronger yen in turn has threatened to tip Japan’s economy back into deflation, which the central bank has struggled to vanquish. The rising yen has also put more pressure on corporate profits and helped push Japanese stocks into bear market territory last week. So when the Bank of Japan announced its plan to lower interest rates below zero for the first time Friday, it makes sense that Governor Haruhiko Kuroda named just one country among the risks facing its economy China.
Now it’s China s turn to sweat. The yen fell as much as 2.1% after the announcement, which will make Chinese exports more expensive relative to Japanese products. The two countries, and most of their neighbors, are struggling against a tide of money outflows and weak trade. While governments in the rest of Asia have far more room to stimulate their economies than Japan does, a decline in the yen could spur them to try to push down their own currencies. Were China to follow and the central bank has already allowed the yuan to fall it would ignite another round of fear, which could push up the yen and force the Bank of Japan to act again. So far, the yen’s ups and downs have left it about where it was a year ago, so the risk of a cycle of competitive devaluation is limited.
In addition, the drop in the yen would have been a bigger problem for China when the yuan was pegged to the dollar. The government’s recent switch to a basket of currencies that includes the yen means the move up won’t be as big. But it still will push the currency in the wrong direction for the slowing economy. There’s another reason China does’ t want the yen to fall. Right now, thousands of Chinese are planning their Lunar New Year’s holidays in Japan early next month, hoping to take advantage of the cheap yen. During the October Golden Week, China’s other big travel week of the year, Chinese tourists descended on Japan, spending more than $830 million on shopping, according to the state-run China Daily.
China is suffering an epic capital flight in which hundreds of billions of dollars are leaving the country. A weaker yen will send more Chinese into Tokyo’s department stores and further drain China’s currency reserves. The economic fates of China and Japan are closely connected. Until their economies get on stronger footing, moves to boost growth in one country could hurt the other and risk retaliation. As the world economy stays weak, the interaction between China and Japan could play an increasingly important role both in Asia and globally.
Zero.
• IPO Market Comes to a Standstill (WSJ)
A frigid January for initial public offerings is pointing to a hard winter for fledgling biotechnology firms and other private companies. There were no U.S. IPOs in January, the first such month since the eurozone crisis in September 2011, according to data provider Dealogic. Investors and analysts attribute the dearth to the global stock-market rout of the first two weeks of the year, which signaled a broad retreat from risk by investors. If sustained, the reversal threatens to send ripples through global financial markets. Many analysts and traders view a healthy IPO sector as a necessary precondition for a sustainable advance in the broad stock indexes, as dozens of private companies have built their plans around raising cash in the public markets.
In recent years, markets were “wide open and companies that wanted to raise capital could,” said Eddie Yoon, portfolio manager of the Fidelity Select Health Care Portfolio, with $9 billion in assets. But now some companies, both public and private, could face being shut out for an extended period, as many investors seek to reduce risk by focusing on firms with histories of steady profitability and revenue growth. Several new share offerings by already-public biotech companies have floundered this year, not only pricing at steep discounts, but also falling even further the session after pricing. So far this year, new-share offerings by biotech companies have dropped 15% from the time of the announcement of the deal to the end of trading after the sale, according to data from Dealogic. “If the market does reopen, it will be for higher quality companies,” said Mr. Yoon.
France wants debt relief?!
• Greece’s Lenders To Start Bailout Review On Monday (Reuters)
Greece’s official lenders will start a review on Monday of what progress the country has made in implementing the economic reforms agreed under its third bailout, a necessary step towards debt relief talks, a finance ministry official said on Saturday. Greece’s international lenders are the IMF and the euro zone bailout fund. The reforms that Greece has to implement in exchange for loans are also reviewed by the ECB and the European Commission. “The first phase will last a few days as there will be a break at the end of next week, after which the institutions will return to conclude the negotiations,” the official said, declining to be named. Athens is keen for a speedy completion of the review, which was expected to begin late last year, and hopes a positive outcome will help boost economic confidence and liquidity.
To secure a positive result from the review Athens needs to pass legislation on pension reforms to render its social security system viable, set up a new privatization fund and come up with measures to attain primary budget surpluses for 2016-2018. A successful conclusion of the performance review will open the way for debt relief talks. The head of the bailout fund, the European Stability Mechanism (ESM), has ruled out a haircut for Greece’s debt but extending debt maturities and deferring interest are options that could be used to make it more manageable. French Finance Minister Michel Sapin told Kathimerini debt relief talks must start soon to help restore Greece’s financial stability. “France’s view is that the sooner the first review is completed, the faster we will be able to tackle the issue of debt sustainability and this will be better for everyone – for Greece as well as the entire euro zone,” Sapin told the paper.
Stories from NZ have been bad for a while now.
• Milk Collapse Brings a 45% Pay Cut to England’s Dairy Farmers (BBG)
England’s dairy farmers will see income fall by almost half this year, evidence that the global milk crisis is far from over. Earnings will average 46,500 pounds ($66,500) per farm in England for the 2015-16 season that started in March, the Department for Environment, Food & Rural Affairs said in a report Thursday. That figure, which includes European Union aid payments, is 45 percent below the prior season and the lowest in 9 years. Dairy farmers across Europe are struggling with a collapse in prices after a global oversupply of milk was compounded by slowing demand in China and Russia’s ban on EU dairy in retaliation for sanctions.
Protests over low prices broke out in France this week as more than 100 farmers, many of them livestock breeders, blocked roads and used tractors and burning tires to stop access to the port city La Rochelle. “There’s too much milk in the world,” said Robbie Turner, head of European markets at Rice Dairy International, a risk management advisory firm in London. “There are people who are hard for cash,” and prices are likely to remain low for at least the next six months, he said. On Thursday, Fonterra, the world’s largest dairy exporter, cut its milk price forecast to a nine-year low. The Auckland-based company doesn’t expect a sharp recovery in Chinese demand any time soon.
Luckily we’re maxed out.
• ‘Peak Stuff’ And The Search For Happiness (Guardian)
On Monday, Walmart will start paying a minimum of $10 an hour to its 1.4 million skilled staff in America – in conventional economists’ terms, a ludicrous and unnecessary transfer of income from capital to labour. But, facing the same retail environment as Apple and Ikea, Walmart wants to motivate its frontline staff into being more engaged and innovative. Consumers want some help in understanding and interpreting their particularities, help in answering the question of what, in a profound sense, their spending is for. When you have enough, what need is being served by having more?
Economists are not equipped to address such phenomena. Faltering growth in consumer demand in all western countries is understood wholly in traditional economic terms: the story is that consumers are indebted and uncertain, they lack confidence and want to rebuild their savings. Rightwing, anti-state economists, so influential in the Republican and Conservative parties, peddle tax cuts as the universal panacea. Like Pavlov’s dog, consumers will flock back to the shops once they are emboldened by a tax cut. Obviously, there would be some increase in spending, but far less than there used to be. More fundamental forces are holding back spending .
There is a quest for meaning, aided and abetted by the knowledge and information revolutions, that is not answered by traditionally scale-produced goods and services. Economist Tomas Sedlacek, who has won an international following for his book Economics of Good and Evil, insists that contemporary societies have become slaves to a defunct economistic view of the world. When western societies were poorer, it was reasonable for economics to focus on how to produce more stuff – that was what societies wanted. Now, the question is Aristotelian: how to live a happy life – or “humanomics”, as Sedlacek calls it. Aristotle was clear: happiness results from deploying our human intelligence to act creatively on nature. To inquire and successfully to quest for understanding is the root of happiness.
Yet most people today, says Sedlacek, work in jobs they do not much like, to buy goods they do not much value – the opposite of any idea of the good life, Aristotelian or otherwise. What we want is purpose and a sense of continual self-betterment, which is not served by buying another iPhone, wardrobe or a kitchen. Yet purpose and betterment need a social context: purpose is a shared endeavour and self-betterment is to act on the world better with others. An individualistic society such as our own makes it much harder to find others with whom to make common cause.
Well, stop the war then.
• Merkel Says Refugees Must Return Home Once War Is Over (Reuters)
German Chancellor Angela Merkel tried on Saturday to placate the increasingly vocal critics of her open-door policy for refugees by insisting that most refugees from Syria and Iraq would go home once the conflicts there had ended. Despite appearing increasingly isolated, Merkel has resisted pressure from some conservatives to cap the influx of refugees, or to close Germany’s borders. Support for her conservative bloc has slipped as concerns mount about how Germany will integrate the 1.1 million migrants who arrived last year, while crime and security are also in the spotlight after a wave of assaults on women in Cologne at New Year by men of north African and Arab appearance.
The influx has played into the hands of the right-wing Alternative for Germany (AfD), whose support is now in the double digits, and whose leader was quoted on Saturday saying that migrants entering illegally should, if necessary, be shot. Merkel said it was important to stress that most refugees had only been allowed to stay for a limited period. “We need … to say to people that this is a temporary residential status and we expect that, once there is peace in Syria again, once IS has been defeated in Iraq, that you go back to your home country with the knowledge that you have gained,” she told a regional meeting of her Christian Democratic Union (CDU) in the state of Mecklenburg-Western Pomerania.
Merkel said 70 percent of the refugees who fled to Germany from former Yugoslavia in the 1990s had returned. Horst Seehofer, leader of the Christian Social Union (CSU), the CDU’s Bavarian sister party, has threatened to take the government to court if the flow of asylum seekers is not cut. Merkel urged other European countries to offer more help “because the numbers need to be reduced even further and must not start to rise again, especially in spring”. Fabrice Leggeri, the head of the European Union’s border agency Frontex, said a U.N. estimate that up to a million migrants could try to come to Europe via the eastern Mediterranean and Western Balkans next year was realistic. “It would be a big achievement if we could keep the number … stable,” he told the magazine Der Spiegel.
Europe doesn’t care for kids.
• 10,000 Refugee Children Are Missing, Says Europol (Observer)
At least 10,000 unaccompanied child refugees have disappeared after arriving in Europe, according to the EU’s criminal intelligence agency. Many are feared to have fallen into the hands of organised trafficking syndicates. In the first attempt by law enforcement agencies to quantify one of the most worrying aspects of the migrant crisis, Europol’s chief of staff told the Observer that thousands of vulnerable minors had vanished after registering with state authorities. Brian Donald said 5,000 children had disappeared in Italy alone, while another 1,000 were unaccounted for in Sweden. He warned that a sophisticated pan-European “criminal infrastructure” was now targeting refugees.
“It’s not unreasonable to say that we’re looking at 10,000-plus children. Not all of them will be criminally exploited; some might have been passed on to family members. We just don’t know where they are, what they’re doing or whom they are with.” The plight of unaccompanied child refugees has emerged as one of the most pressing issues in the migrant crisis. Last week it was announced that Britain would accept more unaccompanied minors from Syria and other conflict zones. According to Save the Children, an estimated 26,000 unaccompanied children entered Europe last year. Europol, which has a 900-strong force of intelligence analysts and police liaison officers, believes 27% of the million arrivals in Europe last year were minors.
“Whether they are registered or not, we’re talking about 270,000 children. Not all of those are unaccompanied, but we also have evidence that a large proportion might be,” said Donald, indicating that the 10,000 figure is likely to be a conservative estimate of the actual number of unaccompanied minors who have disappeared since entering Europe. In October, officials in Trelleborg, southern Sweden, revealed that some 1,000 unaccompanied refugee children who had arrived in the port town over the previous month had gone missing. On Tuesday a separate report, again from Sweden, warned that many unaccompanied refugees vanished and that there was “very little information about what happens after the disappearance”.
But they think they can stop it.
• Aegean Sea Refugee Crossings Rise 35 Fold Year-On-Year In January (Guardian)
More than 52,000 refugees and migrants crossed the eastern Mediterranean to reach Europe in the first four weeks of January, more than 35 times as many as attempted the crossing in the same period last year. The daily average number of people making the crossing is nearly equivalent to the total number for the whole month of January as recently as two years ago, according to the International Organisation for Migration. More than 250 people have died attempting to make the crossing this month, including at least 39 who drowned in the Aegean Sea on Saturday morning after their boat capsized between Turkey and Greece. Turkish coastguards rescued 75 others from the sea near the resort of Ayvacik on Saturday, according to the Anadolou news agency.
They had been trying to reach the Greek island of Lesbos. The eastern route into Europe, via Greece, has overtaken the previously popular central Mediterranean route from north Africa over the past year. Refugees have continued to use the route all winter, despite rough seas and strong winds. “An estimated 52,055 migrants and refugees have arrived in the Greek islands since the beginning of the year,” the IOM said. “This is close to the total recorded in the relatively safe month of July 2015, when warm weather and calm seas allowed 54,899 to make the journey.” Turkey, which is hosting at least 2.5 million refugees from the civil war in neighbouring Syria, has become the main launchpad for migrants fleeing war, persecution and poverty.
Ankara struck a deal with the EU in November to halt the flow of refugees, in return for €3bn (£2.3bn) in financial assistance to help improve the refugees’ conditions. This week the IOM reported that a survey of migrants and refugees arriving in Greece showed 90% were from Syria, Iraq or Afghanistan. People of those nationalities are allowed to leave Greece and enter Macedonia en route to western Europe as asylum seekers. But on Wednesday the Idomeni border crossing from Greece to Macedonia remained closed from midday to midnight. Macedonian officials blamed congestion at the border with Serbia.
“Why is Greece guilty? Because it doesn’t let them drown?”
• Greeks Worry Threatened Closure Of EU Border ‘Definition Of Dystopia’ (Guar.)
With Brussels contemplating drastic measures to stem the flow, calls are mounting to seal the Greek-Macedonian border, raising fears of hundreds of thousands being stranded in Greece, the country now perceived to be the continent’s weakest link. The prospect of migrants being trapped in a member state that financially is also Europe’s most fragile may once have seemed extreme, even absurd. Its economy ravaged by six years of internationally mandated austerity and record levels of unemployment, Greece’s coping strategies are markedly strained. But as EU policymakers seek ever more desperate ways to deal with what has become the largest mass movement of people since the second world war, it is an action plan being actively worked on by mandarins at the highest level.
Like so much else in the great existential crisis facing Europe, a proposed policy that was once seen as bizarre now looks like it could become real. Last week Athens was also given a three-month ultimatum to improve the way it processes arrivals and polices its borders – at nearly 8,700 miles the longest in Europe – or face suspension from the passport-free Schengen zone. Closure of the Greek-Macedonian frontier would effectively cut it out of that fraternity. Those who have watched Greece’s rollercoaster struggle to keep insolvency at bay are united in their conviction that the move would be catastrophic. “It would place a timebomb under the foundations of Greece,” says Aliki Mouriki at the National Centre of Social Research. “Hundreds of thousands of refugees trapped in a country that is bankrupt, that has serious administrative and organisational weaknesses, with a state that is unable to provide for their basic needs?”
The question hangs in the air while she searches for the right word. “What we would witness,” she adds, “would be the definition of dystopia.” Like the mayors who have been forced to deal with the emergency on Greece’s eastern Aegean isles, federal politicians believe Turkey is the root of the problem. “With all due respect for a country that is hosting 2 million refugees, it is Turkey that must do something to stop the organised crime, the smugglers working along its coast,” Yannis Mouzalas, the minister for migration policy, told the Observer. “These flows are not Greece’s fault even if, it is true, we have been slow to set up hotspots and screening was not always what it should have been,” he said. “It is Turkey that turns a blind eye to them coming here. It is Turkey that must stop them. Why is Greece guilty? Because it doesn’t let them drown?”
Morals? Europe?
• Europe’s Immigration Bind: Morals vs Votes (Guardian)
The dream of free movement within the EU has also spawned paranoia about the movement of people into the EU. The quid pro quo for Schengen has been the creation of a Fortress Europe, a citadel against immigration, watched over by a hi-tech surveillance system of satellites and drones and protected by fences and warships. When a journalist from Germany’s Der Spiegel magazine visited the control room of Frontex, the EU’s border agency, he observed that the language used was that of “defending Europe against an enemy”. Many of the policies enacted over the past year give a sense of a continent at war. In June, an emergency EU meeting came up with a 10-point plan that included the use of military force “to capture and destroy” the boats used to smuggle migrants.
Soon afterwards, Hungary and other east European countries began erecting razor-wire fences. Germany, Austria, France, Sweden and Denmark suspended Schengen rules and reintroduced border controls. In November, the EU struck a deal with Turkey, promising it up to $3.3bn in return for clamping down on its borders. This month, Denmark passed a law allowing it to seize valuables from asylum seekers to pay for their upkeep. Despite the sense that the crisis is unprecedented, there is nothing new in it or the incoherence of the EU’s response. People have been trying to enter the EU, and dying in the attempt, for a quarter of a century and more.
Until 1991, Spain had an open border with North Africa. Migrant workers would come to Spain for seasonal work and then return home. In 1986, the newly democratic Spain joined the EU. As part of its obligations as a EU member, it had to close its North African borders. Four years after it did, it was admitted into the Schengen group. The closing of the borders did not stop migrant workers trying to enter Spain. Instead, they took to small boats to cross the Mediterranean. On 19 May 1991, the first bodies of clandestine migrants were washed ashore. Since then, it is estimated that more than 20,000 people have perished in the Mediterranean while trying to enter Europe.
Every day.
• 39 Greece-Bound Refugees Drown Off Turkish Coast (AP)
Turkey’s state-run news agency says at least 39 people, including five children, have drowned in the Aegean Sea after their Greece-bound boat capsized off the Turkish coast. Anadolu Agency says coast guards rescued 75 others from the sea Saturday near the resort of Ayvacik en route to the Greek island of Lesbos. The agency has identified the survivors as natives of Afghanistan, Syria and Myanmar. The International Organization for Migration says 218 people have died this year while trying to cross by sea from Turkey to Greece. Turkey is hosting an estimated 2.5 million refugees from Syria. In November, Turkey agreed to fight smuggling networks and stem the flow of migrants into Europe. In return, the EU has pledged €3 billion to help improve the refugees’ conditions.
