China

By Kevin P. Gallagher, Boston University

As Western-backed development banks and the private sector are on the retreat from Latin America, China’s development banks are coming to the rescue, at least for now.

China’s two development banks, the China Development Bank and the Export-Import Bank of China, provided upwards of $29bn to Latin American governments in 2015, according to new estimates published by Boston University’s Global Economic Governance Initiative and the Washington-based think tank The Inter-American Dialogue.

A three-fold increase from 2014, China’s 2015 finance to Latin America was more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined. Read more

Investors’ attention remains focused on the minutiae of central bank policies in the developed world. But they might spare a thought for developments in China’s lending policies.

The implications of these dwarf anything being considered in Tokyo, Frankfurt, London or Washington, as the chart below highlights. It shows the changes since 2008 in official and shadow lending, which together constitute China’s total social financing (TSF). Read more

By Gordon French, HSBC

China’s “Belt and Road” infrastructure investment drive will help boost the flow of physical goods across large swathes of Eurasia, southern Asia and even parts of Africa and the Middle East. Less obvious is the impact that the vast amount of spending linked to the initiative will have in the financial arena – in the currency and bond markets in Asia and beyond.

First announced in 2013, the “Belt and Road” initiative is an essential part of China’s domestic economic rebalancing, and of its outbound ambitions. The initiative entails ploughing billions of dollars into the hardware – railways, highways and ports – that links mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while putting excess capacities to work. Read more

The Chinese are watching a new storm unfold in their financial markets, only months after being bombarded with news of their country’s “historical victory” when the renminbi was designated an official reserve currency under the IMF’s SDR regime in November.

Inclusion in the SDR has turned out to be a pyrrhic victory, as China’s capital outflows have only accelerated. China lost as much as $108bn in foreign reserves in December, despite a record trade surplus of over $60bn. From a peak of nearly $4tn a year and a half ago, it is now left with $3.33tn in foreign reserves. Read more

The recent inclusion of the renminbi in the IMF’s Special Drawing Rights is a major victory for the People’s Bank of China, which for years has claimed that the Chinese currency deserves to be in the club of top reserve currencies.

It is also a victory for the Europeans, who after the global financial crisis departed from the tough line advocated by the US, arguing that the RMB should be included in the SDR even though China applies controls on its capital account and intervenes massively in the exchange rate. The view in Berlin, Paris and London is that China has implemented a number of liberalising reforms over the past years, which should be rewarded and further encouraged. Read more

The aim of an equity market circuit breaker is to provide safeguards to address market volatility and inspire investor confidence. It’s hard to argue with the rationale, but this week’s new measure in China has had unintended consequences for the world’s second largest economy. And it’s not the first time that the China Securities Regulatory Commission (CSRC) has made such an error of judgement.

Under previous rules, trading in individual mainland Chinese stocks had to remain within a 10 per cent price limit based on the prior day’s close. Monday’s innovation extended restrictions to the entire CSI 300 index, however; this time at even tighter boundaries of 5 per cent and 7 per cent. In essence, if an upward or downward move exceeds 5 per cent, the index goes into auction mode (when trades may be submitted but not executed). A subsequent move to the 7 per cent boundary means all stocks are suspended. Read more

For much of the early 2000s, Brazil, Russia, India, and China (the Brics) were seen not just as “the engine of new demand growth and spending power,” as Goldman Sachs researchers put it in 2003, but also as the likely begetters of a new international order, in which the US – and the west more generally – would play a much less significant role.

Today, the idea that the Brics could lead the way to this new order seems more distant than ever. Read more

Reform is a pressing need across emerging markets, especially as global demand remains weak and rising US interest rates threaten to increase funding costs. For countries to revive growth, they will need to create a more favourable environment for business. Politicians in many countries acknowledge this and have put structural economic reforms at the heart of their governing agenda.

But everywhere the outlook for reform is heavily dependent on political leadership and the larger political economy: where leadership and popular support for reform is strong – as in India – the outlook is positive; but where politicians are more interested in power than leadership – such as in Turkey and South Africa – the prospects for positive change are dim. Read more

By Jayant Rikhye, HSBC

To the list of emerging Asia’s economic powerhouses, add one more: South East Asia and its 625 million inhabitants.

Spanning countries as diverse as Vietnam, Indonesia, the Philippines and Singapore, the Association of South East Asian Nations (Asean) is often considered an “also-ran” that gets far less attention than China and India.

To underestimate the region, however, would be a mistake. Read more

The move to confer reserve status on China’s currency is part of a process that could lead to nearly $3tn being injected into the country’s bond and equity markets. We’ve taken a close look at where the money could come from.

On its own, the inclusion of the renminbi in the International Monetary Fund’s basket of reserve currencies, known as the Special Drawing Right (SDR), could lead to capital flows of $30bn into China within the next 12 months. Read more

“Living in a world strewn with the wreckage of the Soviet empire it is hard for most people to realise that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the UN podium and declared, ‘We will bury you’, it was an economic rather than a military boast”. Paul Krugman (1994)

When in 1959, Nikita Khrushchev visited the Unites States, the spectacular economic growth recorded by the Soviet Union was commonly regarded as a challenge to the supremacy of the western model of democratic capitalism. Impressive statistics, such as its manufacturing output of tractors, mesmerised western opinion formers. Newsweek warned that the Soviet Union might well be “on the high road to economic domination of the world”. Read more

By David Mann, Standard Chartered

Economic ties around the world are evolving fast, even during the current period of relatively sluggish global growth. For Asia – the world’s most open region to trade – the question of which of the major economies matters most for external sector growth is critical.

If we just look at which economies dominate global growth, back in 2000, the answer to this question was clearly the US, and particularly the US consumer. The US economy accounted for a quarter of global GDP growth. Meanwhile, China accounted for just 7 per cent of world growth, despite its rapidly growing economy.

However, by 2014, the US share of global GDP growth had fallen to 16 per cent, whereas China’s share had risen to 30 per cent – despite the country’s slowdown. Read more

How times change. President Xi Jinping has just become the first Chinese president to attend a climate change conference. His presence in Paris could hardly have been more symbolic of the dramatic shift underway in China, under its New Normal economic policy. After all, it was only six years ago, at the Copenhagen Climate conference, that China’s then premier Wen Jiabao single-handedly wrecked any chance of agreement.

What has caused this dramatic policy turnaround in the world’s second largest economy? One factor is clearly Xi’s oft-stated belief that today’s levels of pollution – and of corruption – represent an existential threat to continued Communist Party rule. Read more

Chinese premier Xi Jinping’s visit to Africa this week will certainly cause an uptick in the hubbub in the China-Africa cottage industry in Washington and London. Over the past 15 years, China’s commercial relationship with African countries has expanded, grown and deepened, as China’s total trade with sub-Saharan Africa has grown from around $10bn to over $200bn.

Yet, suspicion and unsubstantiated myths are riddling the discussion of Chinese involvement in Africa among business leaders, politicians and policy influencers. Perhaps these tendencies are spillover from the Cold War; maybe there is an attractive simplicity to a rivalry of great powers in faraway places; or it could be that, despite intentions of removal, colonial paternalism in Africa is still buried in the forefront of western thought? Whatever the reasons may be, this week’s Summit of the Forum on China-Africa Cooperation (FOCAC) in Johannesburg – a gathering of African presidents and Chinese leadership that happens every three years – provides an excellent opportunity to rationalise the China-Africa discussion and dispel five common myths that are unfortunately becoming assumptions even at the highest levels of policy-making. Read more

There has been much focus on the price of iron ore recently, and understandably so. Cooling Chinese demand at a time of surging Australian supply saw spot prices fall to a new nadir of $44 a tonne CFR (cost and freight) for delivery in North China on Tuesday, November 24, according to Platts data.

In an effort to survive this price environment, smaller iron ore miners are trying to diversify their portfolios, with some buying up cattle and dairy businesses to cash in on rising Asian demand for other commodities. At the same time, steel mills have been using this cost advantage, and structural supply surplus, to pour steel into the global market, as has been well publicised.

However, ferrous scrap – which accounts for around a third of steel production outside China – has been comparatively overlooked by commentators. Read more

Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over. With few national branches, these local banks will have a much more difficult time spreading risk geographically, and are thus more prone to failure.

While there is very little information on local finances, we examined the IPO prospectuses for several banks about to list in Hong Kong and unearthed a treasure trove of information on the geographical breakdown of China’s banking system. Read more

By Gilliam Collinsworth Hamilton, NSBO

From Uber ratings to credit scores, the world has increasingly grown comfortable with the idea of assigning grades to human character. Behavioral quantification has become ever more fine-tuned, with online services using big data to predict recommendations and personalise the upsell.

Last year, China’s State Council (cabinet) released a planning outline for the “Construction of a Social Credit System,” the main objective of which is to establish “the fundamental laws, regulations and standard systems for social credit” by 2020, a vague term that is meant to encompass an individual’s personal, professional and financial history.

The point of the credit score is to judge your character, as well as your potential for contribution to society as a whole. Read more

Auto manufacturers, their suppliers and investors need to prepare themselves for a triple shock from China’s slowing economy.

The first shock is already under way. As the chart below shows, China’s slowdown has caused passenger car volumes to decline in the Bric economies – which accounted for one in three global sales last year. Volumes in Brazil and Russia have collapsed as their commodity exports have tumbled: Brazil’s sales are down 23 per cent and Russia’s down 33 per cent (January – September 2015 versus 2014). China’s market has also clearly plateaued. New car sales have fallen in three of the past four months and inventories are close to record levels. India’s sales are the only bright spot, up 7 per cent this year, but India’s market is just a tenth of total Bric volume. Read more