Saturday, January 25, 2014

Reflections on the current state of the Chinese economy

The moderation in Chinese economic growth in September was not a blip. That is confirmed by the December macro-economic data now available.

As retail sales and manufacturing investments remained stable, the main reason for the continuing slowdown appears to be less infrastructure investment and (more worryingly) slower export growth.

Further, since November, liquidity has been tight, and credit growth is expected to slow further in 2014.

So the PBoC was forced to inject funds into the market ahead of Chinese New Year.

Money market rates may therefore calm down next month, though financial reforms and the PBOC's bias towards tightening will probably mean volatile interbank rates - volatility may be great for day traders but is also not good for the economy as a whole.

And more regulations on shadow banking are expected in 2014; there may or may not be a major crackdown, but there could be an improvement in regulatory supervision - at least I hope so.

Meanwhile, the risk of defaults in shadow banking has risen, and I fear that there may be systemic risk.

What all that means is that the slowdown (possibly catastrophic) that I had expected to hit the Chinese economy last year, only started hitting it last year, and its full impact is going to start being felt this year.

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Friday, January 24, 2014

The current tide of anti-corruption efforts around the world

A friend who is at present in a developing country, writes to me today as follows:

I am not sure whether or not you remember, but we met the first time when you gave a presentation about bribery and corruption. Very often, I think back to that time and your presentation. Being now in (country xxx) with the new leadership and their anti-graft campaign, I see a lot of change. Also, in (company YYY), we all have been subject to very, very strict integrity and compliance rules as well as the related monitoring. What was possible and even acceptable a few years ago is now strictly banned. It is amazing to see how fast the world is changing in this regard – and I think in a very positive way!

Another friend writes from another developing country:

As you certainly know, we had the probably most prominent case of corruption and abuse of power in modern history in our municipality.... The raise and the fall of (person ZZZ) have been an impressive lesson about (how the country is changing). Having met ZZZ a couple of times personally, this case had my full attention.

India has seen the astonishing spectacle, in the capital, of a political party which did not even exist a year earlier, having formed the government, principally because of its high-profile commitment to fighting corruption.

China has seen the same kind of rising sentiment, partly of course because of the economic situation, which seems to be slowly deteriorating, as I forecast (though I had thought it would already start happening by the middle of last year).

In the West, the sort of rise in corruption which has taken place over the last generation, seems also to be in abeyance at present.

Historically, such trends have lasted a few years and then abated (with the exception of the Protestant Reformation, whose impact over a couple of centuries was so deep that Protestant countries still remain the least corrupt overall). As an example of the short-lived nature of most anti-corruption drives, consider Japan after WWII, China after Mao's rise to power, India under Gandhiji's leadership, Russia after the October Revolution, East Africa and uhuru, and so on.

So the question is whether the current global mood will deliver results, and whether it will last.

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