Category: China

The Fed and EM Debt

 

Federal Reserve Chairman Jay Powell, unruffled by the bullying of President Trump and market commentators, raised interest rates this week and reaffirmed his commitment to unwind the extraordinarily loose monetary policies of the past decade. Suddenly, it is dawning on investors that the infamous Fed “put” – the firm commitment of the Federal Reserve to support the stock market in the name of financial stability and the “wealth effect” – can no longer be taken for granted. The Fed’s return to orthodoxy, if pursued, will not only unsettle the U.S stock market. It will have far-reaching consequences across financial markets, and certainly present a challenge for emerging markets.

The problem for emerging markets comes on two fronts. Tightened liquidity will lead to higher interest rates across global bond markets. As markets reprice the cost of credit, the “yield chase” which occurred in recent years will revert: investors will no longer have to pursue ever-more risky borrowers to achieve a modicum of returns. One of the best indicators of the changing market environment is the spread between the interest which high-yield lenders (“junk’) have to pay over the risk-free U.S. Treasury rate. As shown in the chart below, this spread has been surging. This is bad news for emerging markets because EM debt is a substitute for U.S. high yield debt.

Moreover, the higher cost of credit for emerging markets comes in the wake of a huge credit splurge. EM borrowers enthusiastically took advantage of the appetite of global yield-chasers over the past five years. As the tide now ebbs, borrowers will have to refinance at higher rates. Unfortunately, it appears that most of this lending did not go into productive investments and it did little to boost economic output. The chart below shows the increase in the total credit- to- GDP ratios for major EM countries, as reported in the data of the Bank for International Settlements (BIS).

The following chart shows the average GDP growth for the past five years compared to the past 20 years and also Fixed Capital Formation over the past five and 20 years.

 

These chart show that this debt accumulation has by-and-large not led to more investment or more growth. Quite the opposite, In many countries it appears that the marginal returns from debt are declining.

A few country-specific comments:

China’s debt load increase is unprecedented. Though it has financed increased capital formation it appears that a significant amount of investment has been in very low return infrastructure and real estate developments. Marginal returns from debt and investment are declining fast, and GDP growth is expected to fall below the current 6% annual rate.

Brazil’s debt load has increased at a very high rate and is now at very high levels for a country with high interest rates and prone to financial instability. The increase in debt of the past five years was used to finance current spending and interest expense.

Colombia’s debt increase is very large but absolute levels are moderately high and at least GDP growth has been sustained and capital formation has been boosted.

Chile’s debt ratio has increased sharply and debt levels are very high, but growth has sputtered. Though capital formation has increased, I suspect a significant amount of investment has been  in “glamour” real estate developments.

Turkey has seen a large increase in debt, much of it sourced in foreign currency. Debt levels are approaching high levels. The country has seen high growth in GDP and increasing capital formation, much of this in large infrastructure projects but also in glamour real estate. The crisis this year has thrown Turkey into what is likely to be a multi-year period of austerity and deleveraging.

Mexico’s debt has increased but remains at manageable levels. Growth and capital formation are steady at low levels.

India is the main outlier in EM. Debt is moderately high but it is has been declining. Both GDP growth and capital formation have increased. India appears well positioned for a new credit cycle.

 

Macro Watch:

  • The future of the dollar and U.S. diplomacy (Carnegie)
  • The emergence of the petro-yuan (APJIF)  
  • A users guide to future QE (PIIE)

Trade Wars

  • Europe is wary of Chinese M&A (SCMP)
  • Obama administration view on China issues (Caixing)
  • China’s tantrum diplomacy   (Lowy)
  • Making sense of the war on Huawei  (Wharton)
  • The war on Huawei (Project Syndicate)

India Watch

  • India’s potential in passive investing (S&P)
  • India’s food-delivery startup, Swiggy, backed by Tencent (SCMP)
  • Modi’s election troubles (WSJ)

China Watch:

  • China debates economic policy (FT)
  • China is stepping-up infrastructure investments again (Caixing)
  • China’s radical experiment (Project Syndicate)

China Technology Watch

Brazil Watch

  • John Bolton’s Troika of Tyranny (The Hill)
  • The rise of evangelicals in Latin America (AQ)

EM Investor Watch

  • Koc Holding’s digital transformation (Mckinsey)
  • Lowy Institute Asia Power Index (Lowy
  • In pursuit of prosperity (Mckinsey)
  • What drives the Russian state? (Carnegie)
  • Russia’s big infrastructure bet (WSJ)

Tech Watch

Investing

 

 

Emerging Markets Debt Bomb

Business and investment cycles follow predictable patterns, starting out with pessimism and plenty of idle capacity and ending with optimism and the economy running above potential. But, every cycle also has its particularities. In the case of emerging markets, this current investment cycle is characterized by a very large accumulation of debt.

While emerging market stocks have performed very poorly compared to the U.S. market since 2012 and are now relatively undervalued, they are likely to be constrained by this debt accumulation. Typically, a new period of outperformance for emerging markets would be marked by new capital inflows and credit expansion, but given the rapid debt accumulation of recent years this may not happen this time. In fact, under current conditions of dollar strength, rising interest rates and weak commodity prices, this debt load is proving to be a heavy burden for many countries and causing stock markets to fall further.

Of course, the reason that this cycle is proving to be so different is the unprecedented and sustained Quantitative Easing (QE) programs pursued by the central banks of the world’s main financial centers since 2010. The long period of extraordinarily low interest rates motivated investors to “chase” for yield where ever they could find it and banks and corporations around the emerging market world were more than happy to oblige them. As QE is now being unwound and interest rates are rising, emerging market borrowers are having to refinance at much higher rates. This new trend of rising rates is being compounded by a rising dollar and the return of volatile financial markets.

The charts below, based on data from the Bank for International Settlements (BIS), shows the increase in total debt to GDP ratios for the primary emerging markets for the past 10 years, five years and three years. Note the extremely high increase in this ratio for many countries. These increases would be remarkable under any circumstances but are especially concerning in that this has been a period of relatively low growth. Look at the example of Brazil: the very large increase in the debt was not used at all for investment and therefore will in no way produce the cash flows to service interest.

What is remarkable is how generalized and sustained the trend has been over this entire period.

China’s course is unprecedented. Though marked by the dominant role of public sector corporates and therefore, arguably, quasi-fiscal in nature, the unsustainable increase and the high level of debt raises concerns about a Japan-like “zombification” of the economy. Chile’s path is also very concerning.

India is the outstanding exception. High GDP growth, tight control over state banks and a reluctance to tap cross-border flows are the explanation, and this positions India very well for the future.

Not only have debt ratios for EM countries increased at a very high pace they are also approaching high levels in absolute terms. The rise in EM debt levels has occurred while debt levels in developed economies have been somewhat stable, rising from 251% of GDP to 276% over the past ten years. As the table below shows, China and Korea are now at levels associated with developed economies and Malaysia is not far behind.

Finally, external debt levels have also risen consistently, as shown in the charts below. If we consider a level above 30% of external debt to GDP to mark vulnerability, most EM countries find themselves in this condition, at a time when the dollar is strengthening and U.S. interest rates are rising.

Macro Watch:

  • The emergence of the petro-yuan (APJIF)
  • A users guide to future QE (PIIE)
  • Economic brake-lights (Mauldin)

Trade Wars

  • Trump pushes China to self-sufficiency (SCMP)
  • The road to confrontation (NYT)
  • The real China challenge (NYT)

India Watch

  • Election uncertainty clouds Indian stock market (FT)

China Watch:

  • China picks tobacco taxes above public health (WIC)
  • How free is China’s internet? (MERICS)

China Technology Watch

  • The Huawei security threat (Tech Review)
  • China’s Big Tech Conglomerates (IIF)
  • How China raised the stakes for EV  (WEF)
  • A profile of Bytedance, China’s short-video app (The Info)

Brazil Watch

  • John Bolton’s Troika of Tyranny (The Hill)
  • The rise of evangelicals in Latin America (AQ)

EM Investor Watch

  • In pursuit of prosperity (Mckinsey)
  • What drives the Russian state? (Carnegie)
  • Russia’s big infrastructure bet (WSJ)
  • Russia’s new pipeline (Business Week)
  • Indonesia’s elections (Lowy)
  • Chile’s renewable energy boom (Wiley)

Tech Watch

  • Bloomberg energy finance, 2018 report (Climatescope)
  • Fast-tracking zero-carbon growth (Ambition loop)
  • Why have solar energy costs fallen so quickly (VOX)
  • Asia leads in robot adoption (QZ)
  • The new industrial revolution (WSJ)

Investing

Billionaires in Emerging Markets

In April 2010 Brazil’s Eike Batista told the U.S. talk-show host Charlie Rose he would soon be the richest man in the world. As his vast oil discoveries came on stream, Batista said, his fortune would reach $100 billion, nearly double the $50 billion held by Bill Gates and Warren Buffet at the time. Three years later, after mostly dry wells, Batista’s oil company, OGX, filed for bankruptcy. Batista’s rise and fall is a good reminder of the ephemeral nature of great fortunes, particularly in the boom-to-bust conditions that characterize emerging markets. Huge wealth accumulation, particularly when it comes out of nowhere, is often a manifestation of extraordinary and temporary circumstances that have boosted asset prices to elevated levels. By looking at great wealth we can often identify where the greatest excesses are occurring in the markets. The chart below shows the ten-year evolution of the top ten richest individuals in the world, as compiled by Forbes magazine. Highlighted in red are the individuals who are based in emerging markets.

The first thing to note is the mercurial nature of the list. Only three names from 2008 remain on the list in 2018.

The changes in the list reflect economic and stock market cycles. Six out of the ten names in 2008 are from emerging markets, a consequence of the commodity-fueled liquidity boom that  greatly boosted asset prices in EM between 2002-2008.  India had an incredible four names on the list in 2008, the best possible indication of what has come to be known as the “billionaire Raj,” a process of enormous wealth accumulation and concentration based on “cozy” relations between business moguls and politicians.  Since 2012, India has disappeared from the top ten, as some of the excesses of the system have been curtailed.

Supported by the elevated commodity prices and global liquidity caused by China’s unprecedented credit-fueled construction boom, emerging markets remained active on the list until 2013. Eike Batista appears as the 8th name on the list in 2010, the year of the Charlie Rose interview, and peaks at seventh place in 2012.

After 2013, Carlos Slim has been the only representative of EM on the list, and his standing has been steadily declining because of the weakness of the Mexican peso and the very poor performance of his publicly-traded companies (since year-end 2012, Slim’s main asset, AMX, has lost 35% of its value while the S&P 500 has risen 110%.

Since 2012, the strength of the U.S. dollar, the remarkable outperformance of U.S. assets relative to the rest of the world and the surge of valuations for the FANG (Facebook, Amazon, Netflix and Alphabet-Google) and other tech stocks has led to the near-total domination of the top 10 ranking by Americans.  Bezos and Zuckerberg both appear on the list in 2016, and Bezos was crowned richest man in the world in 2018.

The most fascinating change of the past decade, the rise of China, is not done justice by the chart above. For this, we have to look at the top 100 names, as shown in the charts below.

 

There are many striking changes shown by these two charts, mainly driven by the end of the commodity/EM boom, the continued rise of China and the great rise of the QE-fueled U.S. bull market.

In 2018, China becomes the second largest contingent on the list with 19 names, compared to zero in 2008.

In 2018, 18 out of the top 30 are Americans and five are Chinese, compared to eight and zero, respectively, in 2008. Russia had seven names in the top 30  in 2008 but zero in 2018, and India goes from four to one.

The full list is shown below.

Macro Watch:

  • A users guide to future QE (PIIE)
  • Economic brake-lights (Mauldin)

Trade Wars

  • Henry Paulsen gets negative on China (WSJ)
  • U.S. accuses Cina firm of stealing Micron secrets (Wired)
  • Asia’s next trade agreement (Brookings

India Watch

  • India electrification to impact copper demand (Gorozen
  • Can the rupee become a hard currency? (Livemint)
  • Can India become the next $10 trillion economy ?(Wharton)
  • Apple is losing share in India to Chinese (Reuters)

China Watch:

  • China’s infrastructure investments in Latin America (The Dialogue)
  • China’s art-factory  town is evolving (Artsy)
  • China’s global infrastructure push (NYT)
  • Kevin Rudd on China reforms (Caixing)
  • 50 million empty homes in China (SCMP)
  • China and Myanmar approve port project (Caixing)
  • Four reasons to manage China’s rise  (Lowy)

China Technology Watch

  • China’s Electric Vehicle push (Bloomberg)
  • The rise of Asia’s research universities (The Economist)
  • China’s tech slowdown (Reuters)
  • China fights back on IP theft accusations (scmp
  • A graphic view on China’s tech progress (NYT)

Brazil Watch

  • The rise of evangelicals in Latin America (AQ)
  • Brazil’s new foreign minister says climate change is a marxist plot (The Guardian)
  • Brazil’s new finance tsar (Bloomberg)

EM Investor Watch

  • Russia’s new pipeline (Business Week)
  • Indonesia’s elections (Lowy)
  • Chile’s renewable energy boom (Wiley

Tech Watch

  • The new industrial revolution (WSJ)
  • Pathways for inclusive growth (BSG)
  • Paraguay is a bitcoin powerhouse (The Guardian)

Investing

  • The top 100 asset managers in the world (Thinking Ahead)
  • Interview with William Eckhardt (Turtle Trader)
  • Why momentum inveting works (Anderson)
  • Learning from investment history (Forbes)
  • The rise of “quantamentals” (FT
  • Monish Pabrai’s ten commandments (Youtube)
  • A profile of Paul Singer (New Yorker)

 

 

 

 

 

 

Promoting Business Initiative in Emerging Markets

 

The World Bank has conducted its “Doing Business” survey since 2006, ranking countries according to the ease of conducting business. The rankings provide a useful comparison between countries, and the survey has enough history to show which countries are implementing the reforms needed to allow entrepreneurs of all sizes to thrive.

The chart below looks at the evolution of the rankings for those countries  that are important for emerging market investors. This data covers 10 years, which is, more or less, two full business or electoral cycles and enough time for government policy reforms to have an impact. What we see are dramatic changes, both on the positive and negative sides. On the positive side, Russia, India, Indonesia, China, Poland, Taiwan and Turkey have achieved transformational results. On the negative side, we see a very concerning collapse occurring in South Africa, and significant declines in Colombia, Nigeria, Thailand and Peru.

Change in Ease of Doing Business Rankings.  Best to worst over 10 years
Russia 89
India 56
Indonesia 49
China 43
Poland 38
Taiwan 33
Turkey 30
Vietnam 24
Brazil 20
Philippines 20
S Korea 14
Malaysia 8
Argentina -1
Mexico -3
Chile -7
Peru -12
Thailand -15
Nigeria -21
Colombia -28
South Africa -48

 

The criteria that the World Bank uses in its Doing Business methodology are shown in the chart below.

The full rankings for the 18 countries that make up the core of our EM universe for investors are shown below. The chart shows the rankings from 2006-2019. The World Bank currently ranks 190 countries, and the full ranking can be found on the World Bank website (Link). 

We can consider the top 25 to be the global elite, the absolute easiest places to start and run a business. The top 50 can be considered good; 50-100, mediocre;  and 100-130, bad.  Any ranking above 130 indicates a very hostile environment for entrepreneurs.  Countries above 100 are highly dominated by inefficient bureaucracies and by extractive entrenched interests such as oligarchies and politically connected rent-seeking agents.  Typically, in these countries you have to be big and politically connected to be successful, and most entrepreneurs are  forced into the underground economy. Four important markets – Brazil, Philippines, Nigeria and Argentina –  persistently rank very poorly and show little sign of progress. India, Indonesia and Vietnam in recent years have moved out of this group of “dysfunctionals,” showing clear signs of improvement.

 

We can dig deeper into the survey by looking at the rankings on a regional basis.

Asia

The evolution of the rankings for Asian countries is shown below.  This is the world’s most dynamic economic region and also where we see both the best and the most improving business conditions. We can separate this group into two cohorts: the “Asian Tigers” and the Asian laggards. Of the Asian Tigers, South Korea, Malaysia, Thailand are in the elite and have been so throughout the period. Korea, Malaysia and Taiwan have continued to improve over the period, while Thailand has shown some moderate slippage. China is between the Asian Tigers and the laggards, but appears to be moving rapidly towards the former. We also see in recent years that the laggards are making significant progress. India, Indonesia and Vietnam all have made large leaps forward. The case of India is noteworthy; Prime Minister Modi publicly committed to improving India’s ranking when he took office, and he is delivering through a major deregulation push.  (The tweet below from Modi shows the focus that he has on this measure.) The main exception in Asia is the Philippines where we see very little progress. It appears that the all-powerful oligarchs in the Philippines are not being challenged.

Latin America

The evolution of the rankings for Latin America are shown in the chart below. This region is characterized by the “middle-income-trap” malady: after reaching middle-income status, these countries fail to both invest in public goods (human capital and infrastructure) and to implement pro-business reforms. Like Asia, the region is divided into the good (Chile, Mexico, Colombia and Peru) and the laggards (Argentina and Brazil).  Of the better-ranked countries, none has made progress over the period. Worse, Chile has seen a worrisome decline from its former elite status, and Peru, after showing signs of improvement, has regressed. On the side of the laggards, Argentina has deteriorated significantly while Brazil is stable.

Europe, Middle East and Africa

This region is diverse and shows great divergence in results. Both Nigeria and South Africa are cause for concern. Nigeria has joined the camp of highly dysfunctional economies, and South Africa has gone from elite status to mediocrity and it shows no signs of halting this trend downward. Fortunately, all the other countries in this group show positive trends. Turkey and Russia, both run by nationalistic, pro-business “law-and-order” autocrats, have made remarkable progress. Poland, in line with most countries in Eastern Europe, has also risen sharply in the rankings and now borders “elite” status.

Macro Watch:

Trade Wars

  • Henry Paulsen gets negative on China (WSJ)
  • U.S. accuses Cina firm of stealing Micron secrets (Wired)
  • Asia’s next trade agreement (Brookings
  • Wisconsin has econd thoughts about Foxconn deal (New Yorker)
  • Australia blocks China pipeline takeover (SCMP
  • Firms shifting plants to ASEAN (SCMP)

India Watch

  • Can the rupee become a hard currency? (Livemint)
  • Can India become the next $10 trillion economy ?(Wharton)
  • Apple is losing share in India to Chinese (Reuters)
  • India’s central bank under pressure (NIKKEI)
  • India-sponsored Iranian port is a problem for th U.S. (WSJ)

China Watch:

  • China and Myanmar approve port project (Caixing)
  • Four reasons to manage China’s rise  (Lowy)
  • The reforms China needs (Project Syndicate)
  • China’s Eastern Europe push (WSJ)
  • Self-reliance is the new mantra in Beijing (Washington Post)
  • China’s southern Europe strategy (Carnegie)
  • The big story in China; no talk of autumn policy meet (SCMP)
  • The world is awash in waste after China ban (FT)
  • Trump’s decoupling with China will hurt Asian allies (Lowy)
  • Cruise companies rethink China bet (WIC)

China Technology Watch

  • Tencent’s social responsibility drive (WSJ) (SCMP)
  • China’s giant transmission grid (Tech Review)
  • AI will develop under two separate spheres of influence (SCMP
  • BAIDU and Volvo team up 0n self-driving cars (SCMP)
  • An AI war would be a huge mistake (Wired)
  • China robotic firm seeks to buy German competitor (Caixing)

Brazil Watch

  • President Cardoso’s speech at the Wilson Institute (Wilson Center)
  • Brazil may move embassy to Jerusalem (WSJ
  • Brazil’s new president (Wharton)
  • Brazil’s economy boss looks to Chile (FT)
  • A european view on Brazil’s new foreign policy (GGPI)
  • Trumpism comes to Brazil (Foreign affairs)
  • How will Bolsonaro deal with China (Caixing)
  • Brazil’s new foreign policy (Brookings)

EM Investor Watch

  • The age of disruption, Latin America;s challenges (Wilson Center)
  • Rwanda, poster child for development (WSJ)
  • The passing of the conscience of Venezuela’s left (NYT)
  • Poland moving back to the center (NYT)
  • Why Mexico and the U.S are getting closer (Wharton)
  • The short term case for EM (Disciplined investing)
  • China’s inroads in the Andean amazonian basin (Asia Dialogue)
  • Are developing countries converging (PIIE)

Tech Watch

  • Pathways for inclusive growth (BSG)
  • Paraguay is a bitcoin powerhouse (The Guardian)

Investing

  • Learning from investment history (Forbes)
  • Interview with Doug Kaas (RIA)
  • Investment value in an age of booms and busts:
    A reassessment (Edelweiss)
  • Monish Pabrai’s ten commandments (Youtube)
  • A profile of Paul Singer (New Yorker)

 

 

 

 

 

AMLO Shoots Himself in the Foot

 

The ability to invest in fundamental public goods – human and physical capital — is a primary characteristic that differentiates one emerging market country from another. The process of building-out infrastructure is particularly fraught with risks because of the complexity and flexibility of contracts, so countries also differentiate themselves in their ability to conduct business ethically and complete projects at reasonable costs.

Over the past weeks, we have seen this process at work, with very different outcomes. On the one hand, in China two enormous infrastructure projects were inaugurated – 1. The Hong-Kong Macau Seabridge;2. The Hong-Kong to the Mainland Bullet-Train link. On the other hand, in Mexico the incoming president canceled the new Mexico City Airport, the country’s largest and most needed project.

The decision this week by Mexico’s President-Elect, Andres Manuel Lopez Obrador (AMLO), to scuttle the new $13.3 billion airport being built on the outskirts of Mexico City is emblematic of the political obstacles face by many developing countries to provide basic public goods.

No one disagrees that Mexico City needs a new airport. The city’s main  airport has been saturated since the 1990s, which is very problematic for a country with a growing tourisn industry. Nevertheless,  over the past two decades multiple proposals for a new airport have been abandoned after fierce opposition from indigenous communities and environmentalists.

AMLO’s opposition to the current project, which is about one third completed, has been known for over two years, and he expressed it many times during the presidential campaign. He decried the complexity and cost of the project, as well as environmental considerations. But his main objection has been a belief that the contracts were awarded without transparency to political cronies of the outgoing party.  During the campaign AMLO had said: “It has been proven that this airport is going to be very costly for the country… It’s a bottomless pit… This isn’t a good deal for the country, for Mexicans. It is for a small group of contractors, they are going to make a lot.”

In an essentially symbolic process aimed at justifying his decision, AMLO hastily organized a “popular referendum,”  to “let the people decide.” This occured this past Sunday and resulted in 70% of the one million votes counted agreeing with the candidate to cancel the project.

The following day, a visibly delighted AMLO held a press conference praising the exercise in direct democracy: “The citizens took a rational, democratic and efficient decision. The people decided. And we have to keep on creating the democratic habit. Where there is democracy, corruption does not exist.”

AMLO’s decision to cancel the project, the biggest infrastructure project of the administration of President Enrique Peña Nieto, will result in very large losses (estimated by the WSJ at $5 billion) for bondholders, suppliers and contractors, including Mexican magnate Carlos Slim, one the biggest supporters of the project.

What has just happened in Mexico is not unusual at all in emerging markets. Ironically, as many countries have become more democratic, they have also lost the capacity to invest in public goods. This is particularly true in Latin America where democratization since the 1980s has implied a more free and inquisitive press, a more activist judiciary and independent regulatory agencies captured by special interests. In a country like Brazil where this has been accompanied by a dramatic expansion of the welfare state aimed at providing “social justice,” the state has found itself handcuffed, without funds and facing an incredibly laborious process to get anything done.

Ironically, in many emerging markets when the “grease” of corruption is not allowed to work things come to a complete stop. One of the companies involved in the Mexico City airport project, Grupo Hermes, is related to Carlos Hank Gonzalez, a well known Mexican politician linked Pena Nieto’s party, who famously quipped “a poor politician is a poor politician.” In a similar vein, it used to be said about a former governor of Sao Paulo, “he may steal, but he gets things done.”

The case of China is interesting. China’s unprecedented build-out of public infrastructure since the 1980s is a truly remarkable achievement which has brought the quality of infrastructure from one of the worst in the world to a very high level. However, it is no secret that the construction sector is ridden with corruption and that many of the great fortunes of China have been created by the unethical ties between contractors and municipalities. Not surprisingly, when President Xi Xinping came to power several years ago promising a total crackdown on corruption, for a while, activity came to a stop.

The same goes for India, where kickbacks in construction contracts essentially finance all political campaigns. Politicians and construction contractors in India have long worked under the assumption that the relationship is mutually beneficial and sustainable as long as contractors deliver the promised service. This has resulted in a certain risk aversion, where politicians will only work with the most efficient and technically competent contractors.

A similar approach goes in Turkey, where construction firms have worked closely with the Erdogan regime. As in India, Erdogan has been a tough task-master, demanding competency from contractors.

It is interesting to look at the connection between infrastructure and corruption. We can do this by looking at both the World Economic Forum’s 2019 infrastructure ranking (WEF) and Transparency International’s Corruption Index (Link).The first chart below shows the top 100 of WEF’s infrastructure ranking of 142 countries. The next chart shows the top 90 of the 154 countries covered by the corruption index. A final chart looks at where the primary EM countries fall in this infrastructure-corruption matrix.

Transparency International, Corruption Ranking

 

We can draw some interesting insights from these charts. Basically, there are three distinct groups of countries:

Group 1 – Good Infrastructure with low cost of corruption.

  • This includes all developed countries. We can venture to say that the ability to provide public goods at a low corruption cost is an intrinsic characteristic of development.
  • In EM, only Chile, Taiwan and Poland make the cut, and, in this sense, these countries can really be considered developed. Korea is borderline. Corruption has become a major political and social-media issue in recent years, and it may well fall rapidly from the current high levels.

Group 2 – Relatively Good Infrastructure with High Corruption.

  • These are the “He may steal, but he gets things done” countries. Corruption is high and costly, but politician and contractors have worked it out so that both sides benefit and infrastructure gets built.
  • In EM, China is the master of this group; Mexico, Malaysia, Turkey, Thailand, India and South Africa also qualify.
  • The direction that Mexico will take under AMLO will be interesting to see.

Group 3 – Bad Infrastructure with High Corruption.

  • In these countries, politics have become so dysfunctional that the “return” on corruption is near zero. Included in this list are: Brazil, Argentina, Indonesia, Vietnam, Columbia, Peru and the Philippines. At the extreme of this category and in a class of their own are semi-failed states: for example, Venezuela and Nigeria.
  • Most emblematic of this condition has been Venezuela under its Bolivarian regime. Thirty years ago, Venezuela had one of the best infrastructures of any developing country; today it ranks 118th in the WEF report. Venezuela now has zero capacity to invest in public goods, all of its fiscal resources either dedicated to welfare programs or syphoned-off to the offshore accounts of regime cronies.
  • Brazil faces an interesting situation today. It currently has the worst-of-all worlds, with very high corruption and close to zero capacity to carry out infrastructure public works. The election of Jair Bolsonaro was a repudiation of the kickback-driven political system, so going back to that model is impossible. To a considerable degree, the success of the new government will depend on quickly finding a new way to do business.

Macro Watch:

  • Gary Shilling interview on the global economy (Shilling)
  • Martin Wolf comments on Paul Volcker’s book (FT)
  • Is the Business cycle dead? (Robert Gordon)
  • Trump pushes Japan and China closer (Brookings)
  • Trump’s misguided trade war (SCMP)
  • Trade conflict and systemic competition (PIIE)

India Watch

  • India’s central bank under pressure (NIKKEI)
  • India-sponosred Iranian port is a problem for th U.S. (WSJ)
  • India partners with Russia in energy deals (Lowy)

China Watch:

  • The big story in China; no talk of autumn policy meet (SCMP)
  • The world is awash in waste after China ban (FT)
  • Trump’s decoupling with China will hurt Asian allies (Lowy)
  • Cruise companies rethink China bet (WIC)
  • Xi’s sothern China trip (WIC)
  • Chinese buy homes in Greece (reuters)
  • Chinese farmr live-streams her way to fame and fortune (New Yorker
  • The world’s longest sea-bridge opens (CNN) (QZ)
  • China provinces compete for talent (EIU)
  • China’s influence on global tourism is growing (SCMP)

China Technology Watch

  • BAIDU and Volvo team up 0n self-driving cars (SCMP)
  • An AI war would be a huge mistake (Wired)
  • China robotic firm seeks to buy German competitor (Caixing)
  • China aviation industry’s steep climb (SCMP ) (SCMP)
  • China’s AI ambitions (SCMP)
  • U.S. attacks China chip industry (FT)
  • China’s smart-phone offerings (The Verge)

Brazil Watch

EM Investor Watch

Tech Watch

  • The plan to end malaria with CRSPR (Wired)

Investing

  • Learning from investment history (Forbes)
  • Interview with Doug Kaas (RIA)
  • Investment value in an age of booms and busts:
    A reassessment (Edelweiss)
  • Is your alpha big enough to cover taxes (Alpha Architect)
  • Systematic vs. discretionary investing (Integrating Investor)
  • KKR white paper on asset allocation (KKR)
  • Hedge funds fleecing investors (SL advisors)
  • Monish Pabrai’s ten commandments (Youtube)

 

 

 

 

 

 

Interview with Doug Kaas (RIA)

Xi Returns to Shenzhen

Shenzhen is where China’s “economic miracle” started four decades ago. In 1980, Deng Xiaoping gave the sleepy fishing village which lies north of Hong Kong the status of “Special Economic Zone,” embracing market mechanisms and the process of integrating China into the world economy.  After the political turmoil and the events of Tiananmen Square in 1992, Deng returned to Shenzhen where he reaffirmed China’s commitment to “modernization… through reform and opening.”

In China, symbolism and slogans carry great weight, so the visit of President Xi Xinping to Shenzhen this week should be seen as highly significant. Xi has been repeatedly accused by critics both inside and outside of China of returning China increasingly towards the state-controlled dirigisme of the past, and his visit to Shenzhen aimed to reaffirm support for the private sector entrepreneurialism which has made Shenzhen into the world’s only rival to Silicon Valley.

In Shenzhen, Xi made comments aimed at bolstering confidence in China’s economic prospects. He paid tribute to Deng and vowed to continue China’s reform and opening up.

The road of “reform and opening up” was the “correct path” and China could create “bigger miracles” by sticking to it, Xi was quoted as saying by the official Xinhua news agency.

Xi added:

“I come to Shenzhen again … so that we can declare to the world: China’s reform and opening up will never stop.”

“We will continue down this path, unswervingly continue down the path of enriching the country and the people, and will break new ground.”

“This year marked the 40th anniversary of China’s reform and opening up. In the last 40 years, China’s development achievements have impressed the world…“So, since we are getting better and better, then why don’t we continue along the chosen path? Although we have some difficulties and problems, we have to solve and overcome them by going along the chosen road. We must firmly walk down the road of reform and opening up.”

 

Macro Watch:

India Watch

  • Golden opportunities in Indian agriculture (Mckinsey)
  • India’s auto sector (Mckinsey)
  • India PM performance (SPIVA)
  • India’s Russia arm deal (WSJ)
  • India’s game-changing healthcare plan (Lowy)

China Watch:

  • The world’s longest sea-bridge opens (CNN) (QZ)
  • China’s influence on global tourism is growing (SCMP)
  • China,US, miscalculation, war (Axios)
  • Apple denies China hacking story (Buzzfeed)
  • US pork hit hard by China tariffs (WSJ)
  • China faces a debt iceberg (FT)
  • Hainan free trade zone to boost international tourism (Caixing )
  • Is there a new “cold war” (WIC)
  • China middle-class desperate to get money overseas (SCMP)
  • Yan Lianke’s forbidden satire of China (New Yorker)
  • Chinese actress to pay $129 million tax-evasion fine (WIC)

China Technology Watch

  • China’s smart-phone offerings (The Verge)
  • The battle for 5G (SCMP)
  • Dutch battery firm to build plant in China (FT)
  • Hacking accusations against China seek to undermine China tech (Lowy)
  • Big tech in China moving closer to Party (Lowy)

Brazil Watch

  • Dark times coming to Brazil (NYT)
  • Brazil’s Bolsonaro (New Yorker)
  • In Brazil, campaign promises but no money (WSJ)
  • Emerging markets’ lost decade (Blackrock)
  • Brazil’s gene-edited angus cow (WSJ)

EM Investor Watch

  • Are developing countries converging (PIIE)
  • Turkey, the 1994 crisis (Seeking Alpha)
  • What next for Turkish-American relations (GMFUS)
  • The Global Competitiveness Report  2018 (WEFORUM)
  • The World Bank’s Human Capital Report (World Bank)
  • Indonesia’s bullet-train is stalled (Caixing)
  • Russia’s missed tech opportunity (Hoover)

Tech Watch

  • The plan to end malaria with CRSPR (Wired)

Investing

  • KKR white paper on asset allocation (KKR)
  • Monish Pabrai’s ten commandments (Youtube)
  • SPIVA’s mid-year assessment of mutual fund performance (SPIVA)
  • Update on the Buffett indicator (Advisor Perspectives)
  • Factor investing in emerging markets (http://ETF.com)
  • Challenging the conventional wisdom on asset managers (SSRN)
  • What does an EV/EBITDA multiple mean? (Blue Mountain)
  • Joel Greenblatt’s talk at Google (Youtube)
  • Consequences of current account imbalances (Private Debt Project)

 

 

 

 

 

 

 

The U.S.-China “Cold War”

 

Until recently, China and the United States had a convenient symbiotic relationship whereby China supplied cheap consumer goods to the U.S. consumer in exchange for dollars which it then invested in U.S. treasury bills. The relationship was perceived to be largely benign and mutually beneficial. For China, access to the U.S. market allowed it to follow the path followed in the past by its Northeast Asia neighbors (Japan, Korea and Taiwan), gradually moving up the value chain from toys, to textiles to electronics…etc. For the U.S., cheap Chinese goods increased consumer purchasing power at a time of stagnant wages. Geo-political strategists in Washington imagined that as China prospered it would start to act more like a Western liberal democracy.

However, since the arrival of Trump the relationship has frayed, and the two countries are now on the verge of a full-fledged “cold war.” Though Trump’s  anti-globalization and protectionist rhetoric may have galvanized opposition to China, the change in Washington is deep-rooted and largely consensual. Today, China-bashing is one of the few things that unite republicans and democrats, and the Washington establishment has made a remarkable about-face and now actively demonizes China. What was once seen as a “win-win” relationship is now perceived to be heavily skewed in favor of Beijing.

The current line of thinking in Washington is that China has abused American goodwill. While the U.S. opened its markets for Chinese exports and investments, China gamed WTO rules, restricted access to its market for trade and investments and sponsored the theft of intellectual property. Moreover, it has suddenly dawned on the Washington intelligentsia that China does not intend to become a liberal democracy. This makes China very different from previous beneficiaries of the “Pax Americana,” such as Germany, Japan and the Asian tigers. China is also different because of its huge scale and a growing economy that may, if it follows its current growth path, surpass the U.S. economy over the next decade. For the first time ever, China is now seen as a potential hegemonic rival that must be thwarted.

Washington’s new-found condemnation of China grew in tandem with the ascendency of Xi Xinping, his consolidation of power and his “coronation” in October, 2017 as “leader for life.”  Prior to Xi, Chinese leaders had projected  diffidence and humility. This was best expressed by Deng Xiaoping who advised: “Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”  However, Xi has come to symbolize a new more militant, arrogant and ambitious China, with pretentions of global leadership. Most emblematic of this are Xi’s two core policy initiatives: One-Belt-One-Road, which seeks to project Chinese influence and investments outside of China, particularly along the old “Silk Road” and international shipping routes; and the “Made in China 2025” industrial planning policy which aims to move Chinese manufacturing up the value chain into frontier technologies.

The U.S. is critical of both of these initiatives because they are seen as anti-market products of a command economy, made possible by state subsidies and state companies. These policies and Xi’s stated objective of strengthening state capitalism and the role of the Communist Party are seen by Washington as indicative that China is a non-market economy that operates by different rules than Western economies. Topping off Washington’s grievances is the perception that Xi is taking China down a new path of military expansionism which threatens Asian stability.

With Trump at the helm, there is a very high probability of further deterioration in the relationship with China. As JPMorgan strategists wrote last week  “a full-blown trade war becomes our new base case scenario for 2019.” It is increasingly likely that a 25% tariff will be imposed on all Chinese goods early next year.

Currently, the two countries are at an impasse. Trump believes that the Chinese will surrender on his terms as the Chinese economy deteriorates. Xi believes the state-run Chinese economy is resilient, and China can wait patiently for changes in the U.S. political and economic cycles. China is convinced that the U.S. is now undermining the post-war economic order because it is determined to thwart China’s economic rise. Its response has been to act as a responsible member of the rules-based international community, gradually adapting to the legitimate demands of its commercial partners. An example of this is China’s recent elimination of joint-venture requirements in the auto sector (this week BMW announced it is taking full control of its JV with Brilliance China).

The two countries are probably underestimating each other’s resolve, which means that the quarrel with have long-term consequences. What may be these be?

  • Tariffs and disruption of supply chains will boost inflation in the U.S. and bring the late-cycle U.S. economy closer to recession. Over the short term, little can be done to substitute Chinese imports, and tariffs will act as a large tax on consumers. Over the medium term, countries like Vietnam, Bangladesh, and Mexico can replace China as manufacturing bases for the U.S. consumer. Over the long-term robotics may change everything and allow a contraction of manufacturing supply chains.
  • European and Asian firms will take advantage of the trade war to take market share from U.S. firms in the Chinese market.
  • As indicated by the poor performance of the stock market, the Chinese economy may become less stable. China already faces big challenges dealing with high debt levels and malinvestment, while it moves from an investment and export driven economy to one based on consumption. A trade war with the U.S. can only make this transition more difficult, and this may have significant negative consequences for the global economy. Given that EM stocks are mainly driven by events in China and the U.S., the disruption of the China-U.S. relationship will surely have very serious consequences.
  • Over the medium term, there may be a retrenchment in globalization and an acceleration of regional blocs and multipolarity. Firms will have to think about operating in increasingly separate ecosystems, each with its own supply chains and technological platforms: one supply chain will serve the U.S. market; another will be structured for the Chinese market. This process is in full acceleration: Huawei and ZTE have been banned from the U.S.; the U.S. is accusing China of hacking supply-chain components sourced in China; China is determined to become self-reliant in key components for the high-tech sector.
  • Initially, one of the few clear winners of this “Cold War” may be Mexico. The Mexican government smartly outmaneuvered Trump and secured the basics of NAFTA in exchange for a new name (USMCA). The deal allowed Trump to say that “the worst trade deal ever” has now become “a great deal, the most important trade deal we have ever made.” The new deal may make Mexico the manufacturing base of choice for firms seeking the combination of easy access to the U.S. market and cheap labor.

Macro Watch:

  • The weak fundamentals of the global economy (Project Syndicate)
  • Trump’s poison pill for China (Yardeni)
  • U.S. tariffs on China are not short term strategy (WSJ)
  • The decline of the dollar standard (Project Syndicate)
  • The U.S. will win this trade war (Gary Shilling)
  • New NAFTA is a relief (The Economist)
  • Brazilian democracy on the brink (Project)
  • The Tyranny of the US dollar (Bloomberg)
  • Trump’s rebranded NAFTA (Bloomberg
  • New NAFTA shows limits of “America First” (WSJ)
  • NAFTA to USMCA – What in a name? (Lowy)

India Watch

  • India’s Russia arm deal (WSJ)
  • India’s game-changing healthcare plan (Lowy)
  • Measuring Indian equities (S&P)
  • Modi is no populist (Foreign Policy)

 

China Watch:

  • Chinese actress to pay $129 million tax-evasion fine (WIC)
  • A strategy for dealing with China (PIIE)
  • China and Islam ( Hoover)
  • Gloves off in China-US conflict (Axios)
  • The garlic war (AXIOS)
  • Chinese U.S. investments plummet (SCMP)
  • China-U.S. ties now driven by conflict and containment (CSIS)
  • VP Pence’s cold war China speech (NYtimes)
  • U.S.-China trade relations forever broken (SCMP)
  • The U.S. will lose its trade war with China   (Project Syndicate)
  • Hong Kong mainland bullet-train link opens (WIC)
  • China’s embracement of Russia (SCMP)

China Technology Watch

  • BMW takes control of China venture (WSJ
  • China aircraft sector slow take-off (SCMP)
  • How the US halted China cyber-attacks (Wired)
  • Huawei’s new chips (WSJ) and (Tech Review)
  • Most Chinese patents are worthless (Bloomberg)
  • Chinese provinces keen to attract EV investments (Caixing)
  • How China sustematically steals technology (WSJ)

Brazil Watch

  • Brazil’s Bolsonaro (New Yorker)
  • In Brazil, campaign promises but no money (WSJ)
  • Emerging markets’ lost decade (Blackrock)
  • Brazil’s gene-edited angus cow (WSJ)
  • Brazil’s social media election (FT)
  • How to fix Brazil’s economy (Project Syndicate)

EM Investor Watch

  • Indonesia’s bullet-train is stalled (Caixing)
  • Russia’s missed tech opportunity (Hoover)
  • Emerging markets’ lost decade (Blackrock)
  • SPIVA Latin American Scorecard (S&P)

Tech Watch

  • The plan to end malaria with CRSPR (Wired)

Investing

 

 

 

 

Global Growth Trends and Emerging Markets

The OECD’s recent report on the long-term growth potential of the global economy  (Link) provides valuable insights on prospects for investing in emerging markets.  Any such exercise on long-term forecasting is fraught with difficulties, as it combines relatively certain variables (population growth and ageing, fiscal sustainability, the catch-up of emerging economies) with complicated assumptions (eg. globalization, technological development) and relies heavily on the extrapolation of the status quo. Nevertheless, the report provides a practical view on medium to long-term prospects for emerging market countries that can be useful in evaluating investment opportunities.

The first chart below shows the expected growth rate of the global economy.  OECD’s economists  expect a significant slowdown in global growth, from 3.7% to 2.7% over the next decade. This assumes steady 2% growth in the OECD, but a sharp slowdown in BRIICS (Brazil, Russia, India, Indonesia, China and South Africa), from 5.5% in 2017 to 3.6% in 2030. The slowdown in BRIICS comes  mainly from much  lower growth in China.

The following chart shows the impact of the expected slowdown in China on the dynamics of global output. China has been the main driver of global growth since 2006, and its contribution to global growth peaked at nearly 50% in 2010 during its massive debt-fueled fiscal expansion which it conducted in response to the global financial crisis. By 2030 China is expected to contribute only 30% of global GDP growth, no more than the  OECD’s share, and it is expected to fall further after that. However, the rapid rise of India will partially compensate for China’s decline, so that if we look at China and India together – a hypothetical “Chindia” – we see that over 60% of global growth will continue to come from these two economies through the middle of the next decade. Over half of global growth will continue to come from “Chindia” for the next 25 years.

 

In fact, as shown in the next two charts, China’s share of global output, will peak over the next ten years. While the OECD’s share of global output will decline from 55% to 47%, China’s share of global output will rise from the current 23% to around 27% by 2030 and then stabilize around that level. This is because China is moving up the technology frontier at a time when the ageing of the population will impact the size of the workforce.   India will take the helm from China to become the main driver of global growth. It faces an entirely different situation than China because it lies very low on the technology frontier and has enormous room to grow its workforce through urbanization and the incorporation of women in the workforce.   “Chindia’s” share of global output will rise from 31% to 40% by 2030 and equal the OECD by 2040.

 

The rise of China and India, and also Indonesia to a lesser degree, are shifting the center of gravity of the world’s economic activity towards Asia. This cause a “remoteness” effect detrimental to countries that are far from Asia. Countries that for past decades have benefited from being near the all-important U.S. consumer market will now bear a remoteness cost with regards to their role in Asia. The chart below shows the winners and losers from this effect.

 

Finally, the OECD decomposes the structure of GDP per capita growth for the past two decades, the proximate future (2018-30) and the long term (2030-60), showing the contributions from labor, capital, working age population and active workforce. The data shows that China’s past growth has come mainly from labor efficiency (migrants moving from farm to factory) and to a lesser degree from more active workers. All of these growth factors for China are declining decade by decade, with a growing negative effect from labor supply. It is interesting to note that by 2030, China’s GDP per capita growth will be only slightly higher that that of the United States while total GDP growth may actually be lower in China because of worse demographics.

The OECD data also illustrates that relatively few emerging markets will maintain a significant growth premium for the next decade (China, India, Indonesia, Turkey); most will have  GDP per capita growth not to different than the U.S. with similar demographic trends (Latin America and South Africa); and Russia has a significantly worse growth profile. These growth profiles need to be incorporated into valuations.

Conclusions

  • For the next ten years and well beyond global growth will be driven by “Chindia.” Given that well over half of global growth will come from these two countries and this may be sustained for an extended period of time creating very large compounding effects, it would seem foolhardy for emerging market investors to not focus most of their attention on these two markets.
  • Over the next decade and beyond,  the world’s center of economic activity will continue to move to Asia. This creates important proximity benefits for countries within the region or with close ties (eg., southeast asia, northeast Asia, Australia, Iran) and remoteness costs to distant nations (eg., Latin America)
  • India will increasingly drive growth. As China increasingly competes with developed economies its growth will slow.
  • Concerns that China will dominate the world economy are probably misplaced. It is likely to become the largest economy in the world over the next 10-15 years but this will be at at time when growth has slowed substantially due to demographic pressures. Also, China’s authoritarian model is likely to create impediments to growth as it becomes more prosperous.
  • Many emerging market countries need to implement reforms to boost their growth profiles. Brazil is a good example of a country that can significantly improve its growth profile through market-friendly reforms.

Macro Watch:

  • Long View scenario for global growth (OECD)
  • Brazil: The first global domino tips (Alhambra Partners)
  • Europe is working on alternative to SWIFT (Zero Hedge)
  • BOE’s Haldane take on Institutions and Development (BOE)
  • Emerging vulnerabilities in emerging economies  (Project Syndicate)

India Watch

  • 70% of rail tickets booked on smartphones (Mumbai Mirror)
  • Buffett invests in India payments platform (WSJ)
  • India’s growing clean air lobby (BNEF)

China Watch:

  • China is bracing for a new cold war (AXIOS)
  • China’s long term growth will slip below the U.S. (Bloomberg)
  • China’s greater bay area (FT)
  • What does a Chinese suerpower look like? ( Bloomberg)
  • The rise of China’s super-cities (HSBC)
  • China’s urban clusters fuel growth (Project Syndicate)

China Technology Watch

  • China’s authoritarian data strategy (MIT Tech Review)
  • China leads in CRISPR embryo editing (Wired)
  • China’s EV start-ups forced to seek state partners (QZ)

EM Investor Watch

  • Emerging markets are no bargains ( WSJ )
  • Par for the course in EM (Bloomberg)
  • Brazil’s health catastrophe in the making (The Lancet)
  • The burden of disease in Russia (The Lancet)
  • Brazil’s nostalgia for dictatorship (NYT)
  • Turkey’s problem is not going away (Bloomberg)

Tech Watch

  • Tesla; software and disruption (Ben Evans)
  • EV sales are ramping up (Bloomberg
  • China and Japan agree to EV charging standard (Nikkei)

Investing

 

 

 

 

 

 

A Reading List for Emerging Markets

Here is a list of books that I think are useful and interesting for any investor seeking to understand investing in emerging markets. The list reflects my bias for long-term investing rooted in knowledge of history and business cycles. I have included only books published in English, which is a big restriction. Also, I have not included basic investing books, which is an entirely sparate list.

The list is divided into three sections.

  • Macro Economics and Business Cycles
  • Development and Economic Convergence
  • Regions and Countries

The books in each section are listed in no particular order.

1 Macro-economics, business-cycles and financial bubbles

 The Volatility Machine by Michael Pettis

This Time is Different by Reinhart and Rogoff

The Bubble Economy by Chris Wood

Inflation and Monetary Regimes by Peter Bernholz

Money and Capital in Economic Development by Ronald McKinnon

How to Make Money with Global Macro by Javier Gonzalez

Business cycles: history, theory and investment reality by Lars Tvede

Emerging market portfolio strategies, investment performance, transaction cost and liquidity risk by Roberto Violi and  Enrico Camerini II (Link)

Against the Gods by Peter Bernstein

 Alchemy of Finance by George Soros

The Fourth Turning: What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny by William Strauss, Neil Howe

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay

Manias, Panics, and Crashes: A History of Financial Crises, by  Charles P. Kindleberger and Robert Z. Aliber

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

 

2 Development and Economic Convergence

 

 

Civilization and Capitalism, 15th-18th Century, Vol. I: The Structure of Everyday Life by Fernand Braudel

The  Pursuit of Power: Technology, Armed Force, and Society since A.D. 1000  by William H. McNeill

The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes

Energy and Civilization: A History  by Vaclav Smil

Barriers to Riches (Walras-Pareto Lectures) by Stephen L. Parente, Edward C. Prescott

The Great Convergence: Information Technology and the New Globalization

by Richard Baldwin

A Discussion of Modernization Li Lu (Link)

Slouching Towards Utopia?: AnEconomic History of the Long 20th Century, Brad Delong

Breakout Nations. In Pursuit of the Next Economic Miracles by Rushir Sharma

Why Nations Fail: The Origins of Power, Prosperity, and Poverty  by Daron Acemoglu and James A. Robinson

The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes

The Birth of Plenty : How the Prosperity of the Modern World was Created by William J. Bernstein

Why Did Europe Conquer the World?    by Philip T. Hoffman

Empire of Cotton: A Global History  by Sven Beckert

The Pursuit of Power: Technology, Armed Force, and Society since A.D. 1000 by William H. McNeil

The White Tiger by Aravind Adiga

How to get Filthy Rich in a Rising Asia by Mohsin Hamid

AI Superpowers: China, Silicon Valley, and the New World Order by Kai-Fu Lee

Growth and Interaction in the World Economy by Angus Maddison

 

 

3 Regions and Countries

 

Latin America

 

Guide to the Perfect Latin American Idiot by Plinio Apuleyo Mendoza, Carlos Alberto Montaner, Alvaro Vargas Llosa

Left Behind: Latin America and the False Promise of Populism by Sebastian Edwards

 

 

Brazil

 

Brazil: A Biography by Lilia M. Schwarcz and Heloisa M. Starling

The Military in Politics: Changing Patterns in Brazil by Alfred C. Stepan

Brazillionaires: Wealth, Power, Decadence, and Hope in an American Country 

by Alex Cuadros

Brazil: The Troubled Rise of a Global Power by Michael Reid

Lanterna na Popa by Roberto Campos

A Concise History of Brazil by  Boris Fausto

A History of Brazil by E. Bradford Burns

 

Mexico

 

The Course of Mexican History by Michael C. Meyer and William L. Sherman

Mexico: Biography of Power. A History of Modern Mexico, 1810-1996 by Enrique  Krauze

 

Turkey and the Middle East

 The Political Economy of Turkey by Zulkuf Aydin

Midnight at the Pera Palace. The Birth of Modern Instanbul, by Charles King

The Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin

The Yacoubian Building by  Alaa Al Aswany

 

Russia

 

Wheel of Fortune. The Battle for Oil and Power in Russia by Thane Gustafson 2012

Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice by Bill Browder

The Future Is History: How Totalitarianism Reclaimed Russia  by Masha Gessen

 

 

 

Asia

 

Asian Godfathers: Money and Power in Hong Kong and Southeast Asia by Joe Studwell

How Asia Works: Success and Failure in the World’s Most Dynamic Region

by Joe Studwell

Lords of the Rim by Sterling Seagrave

 

 

China

 

Factions and Finance in China by Victor C. Shih

Capitalism with Chinese Characteristics. Entrepreneurship and the State by Yasheng Huang

China’s Crony Capitalism: The Dynamics of Regime Decay  by Minxin Pei

CEO, China: The Rise of Xi Jinping by Kerry Brown

Factory Girls: From Village to City in a Changing China by Leslie T. Chang

Avoiding the Fall. China’s Economic Restructuring by  Michael Pettis

The River at the Center of the World by Simon Winchester

Mr. China by Tim Clissold

The China Strategy by Edward Tse

River Town  by Peter Hessler

The Economic History of China: From Antiquity to the Nineteenth Century

by Richard von Glahn

Understanding China: A Guide to China’s Economy, History, and Political Culture 

by John Bryan Starr

China’s Economy: What Everyone Needs to Know  by  Arthur R. Kroeber

Modern China by Jonathan Fenby

The Chinese Economy: Transitions and Growth by Barry Naughton

Wealth and Power. China’s Long March to the 20th Century by David Schell and John Delury

China’s New Confucianism by Daniel Bell

China Fireworks: How to Make Dramatic Wealth from the Fastest-Growing Economy in the World by Robert Hsu

Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong

by Yukon Huang

Little Rice: Smartphones, Xiaomi, and the Chinese Dream  by Clay Shirky

Alibaba: The House That Jack Ma Built  by Duncan Clark

 

India

 

India – A Wounded Civilization by by V. S. Naipaul

Behind the Beautiful Forevers by Katherine Boo

 India’s Long Road: The Search for Prosperity by Vijay Joshi

The Billionaire Raj: A Journey Through India’s New Gilded Age by James Crabtree 

Capital: The Eruption of Delhi by Rana Dasgupta

Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World by Rahul Saraogi

 

Macro Watch:

India Watch:

  • India’s strong economy leads global growth (IMF)
  • (King coal rules India (Economist)

China Watch:

  • China vs. the U.S.: the other deficits (Caixing)
  • Media warns to avoid Japan’s mistakes (SCMP)
  • China needs to get its house in order (SCMP)
  • China resumes urban rail incestments (Caixing)
  • Chinese firm will take over Iran gas project (Bloomberg)

China Technology Watch

  • How WeChat conquered China (SCMP)
  • Why do Western digital tech firms fail in China (AOM)
  • Hayden Capital on China tech investments (HaydenCapital)
  • A deep look into Alibaba’s 20F (Deep Throat)
  • China’s rise in bio-tech (WSJ)

EM Investor Watch

  • Turkey could be worse than Greece (dlacalle)
  • The West’s broken relationsip with Turkey (Project Syndicate)
  • Africa cannot count on growth dividend (FT)

Tech Watch

  • Drones in mining (Youtube)
  • The future of batteries (Wired)

Investing

  • Li Lu’s lecture at Beijing University (Himalaya Capital)
  • Charlie Munger and Li Lu Interview (Guru Focus)
  • Interview with Bill Nygren (Youtube)
  • The 8 best predictors of market returns (WSJ)

The Impact of Trade Wars on Emerging Markets

The main goal of American diplomacy now appears to be to disrupt the post-war rules-based global economic order. President Trump viscerally believes that the status quo is rigged against the United States and in favor of America’s most important trading partners. In this scheme of things, traditional allies like Canada, Mexico and Germany are “ foes” and a rising economic power like China becomes an existential threat to American hegemony. On the other hand, countries do not export large amounts to the U.S are irrelevant (e.g. South America) or potential friends (e.g. North Korea, Russia)

According to the Trump Doctrine, global trade and investment are zero-sum games which should naturally be dominated by the U.S. because of its heft and competitive advantages. Trump believes that the U.S. is entitled to dictate terms to those countries that seek access to its markets, capital and technology. Central to this view, the U.S. has only two real rivals that challenge its hegemony: Germany and China.

Germany is seen as having taken control of Europe through the European Union, exploiting divisions to its own benefit, in order to further its global mercantilistic ambitions. Trump fervently supports Brexit because a divided Europe weakens Germany. Brexit would allow the U.S. to impose its own terms on a bilateral U.S.-U.K. trade deal.

China is seen by Trump to be a highly disloyal competitor which exploits the current global order to its own advantage. Allowing China into the WTO was “the worst deal ever,” and caused enormous damage to the U.S. economy. According to Trump, China’s business practices are utterly unfair for the following reasons:

  • Currency manipulation.
  • High tariff and non-tariff trade barriers.
  • Violation of intellectual property rights.
  • Highly restricted access for foreign investment, and imposition of JV requirements and technology transfer agreements.
  • State control of the economy, with huge subsidies provided to both state-controlled and private Chinese firms.

Moreover, as China steadily moves up manufacturing value chains, the U.S. has become obsessed with potential  future competition in high-technology goods. The focus of Washington’s anger is President Xi’s “Made in China 2025” plan to promote Chinese competency in key industrial technologies. Trump’s recent tariffs imposed on China are heavily targeted on the sectors that Xi has determined to be strategic, as shown in the chart below.

Consequences of the Trump Doctrine

As the U.S. questions the transatlantic alliance and the post W.W. II global institutional framework it will abdicate its role as the leader of the project. Without U.S. leadership new alliances will form in unpredictable ways. Though the current situation is highly dynamic and the future is unpredictable, some thoughts are in order:

  • The Trump Doctrine is isolationist for America. As Henry Kissinger has pointed out, the U.S. stands to become a “geopolitical island… without a rules-based order to uphold.” Nevertheless, as the largest and most diverse economy, the U.S. may have the least to lose.
  • America’s neighbors Mexico, and Canada will have no choice but to begrudgingly cave-in to U.S. bullying and accept Trump’s terms. Any deal will be better than no deal.
  • As it undermines the Western Alliance, The Trump Doctrine furthers the interests of both Russia and China. Ironically, both these dictatorships are more comfortable  dealing on a bi-lateral transactional basis than the U.S. with its checks and balances and elections. China is in a good position to trade access to its growing consumer economy on a transactional basis.
  • American isolationism and unilateralism also strengthens China’s hand in its One Belt one Road (OBOR) initiative which has as its primary objective the control of the Eurasian steppes (the old Silk Road, linking China with Europe and the Middle East.) Russia and China are enjoying the warmest diplomatic ties since the 1950s as they see eye-to-eye on this Eurasian strategy; for the Chinese it secures its borders and opens up commerce; for Russia it extends its geo-political reach. As Kissinger has noted,  Europe may become “an appendage of Eurasia.” Key targets here are Iran and Turkey, both of whom are currently at odds with American policy.  China has become Iran’s main trading partner and investor and is committed to buying its oil.
  • Both China and Russia see American “sanctions diplomacy” as a fundamental violation of the global rules-based economic order. U.S. imposed restrictions on Russia, Iran and other countries on the use of the SWIFT global financial transfer system and recent sanctions on Chinese telecom firm ZTE on the import of U.S. components have highlighted the urgency for reducing dependence on the U.S.  This will strengthen China’s resolve to achieve competence in key technologies and further efforts to develop alternatives to the U.S. dollar.  India is also dismayed by American strong-arm tactics, as sanctions are interfering with its commercial ties to Iran and the Middle East and its strong ties with Russia.
  • American antagonism towards the E.U. may also push Germany towards China. Germany may increasingly play its cards in Asia, which is increasingly the center of gravity of the global economy. It is probably not a coincidence that as Trump has launched his trade war against Beijing there has been a sudden rapprochement between Germany and China, and the announcement of a slew of important business transactions. First, BASF was given the go-ahead on a $10 billion fully-owned petrochemical plant, an unprecedented concession by the Chinese in a sector where Germany and the U.S are chief rivals. Second, German companies are securing preferential treatment in the auto sector, now by far the largest in the world and the focus of activity for electric vehicles and, increasingly, autonomous vehicles. In recent weeks, Daimler was awarded a permit to test driver-less cars In Beijing, a first for a foreign firm. Daimler is partnering with Baidu Apollo, a leader in mapping and artificial intelligence applications in China. Also last week Chinese Premier Li Keqiang said BMW may get control of its JV with Brilliance by 2022. BMW, which already has China as its largest market producing about 25% of global profits, has committed to a large increase in capacity and a partnership with Baidu. BMW also secured the right to take an equity stake in CATL, the world’s largest electric vehicle battery producer by sales, after the carmaker agreed to purchase $4.7bn worth of battery cells from the Chinese company. Finally, Volkswagen announced a partnership with FAW for electric vehicles and autonomous cars.
  • The announcement by Tesla last week that it would build its cars in a fully-owned plant in Shanghai is another sign of how companies are adapting to the Trump Doctrine. Chinese tariffs on American cars have increased the price of Teslas in China at a time when dozens of very well-financed local start-ups are coming on stream. Though the move is a significant market opening benefit for an American firm, it can also be seen for Tesla as a desperate attempt to remain relevant in China’s EV market at a time when sales are expected to ramp up dramatically. Still, it may be too late for Tesla, as its plant will not come on stream until 2020.
  • Access to the Chinese market is of great importance to multinationals. In a transactional world, the Chinese can provide access judiciously to secure powerful allies in developed countries. In the case of the U.S., China continues to offer incremental access to financial services, a long-standing demand of American firms.
  • “Winners” in the age of the “Trump Doctrine” are large countries with strategic importance. China is likely to come ahead, as it has strategic importance, a huge market and leadership with long-term objectives. India is not considered a rival by the U.S. and has high strategic value, so it also is in a good position to secure favorable terms. Brazil, though of no strategic value for the U.S., is not considered a rival by Trump and is also in a good position to negotiate.
  • “Losers” are small countries with no strategic value for the U.S.. As global value chains are disrupted by American unilateralism, those countries most dependent on exports to the U.S. are the most vulnerable. The chart below from Pictet Bank gives a good idea of which countries face the most downside: Mexico, Korea, Vietnam, Thailand, Taiwan, Indonesia and Malaysia. They will face unclear rules which will hurt investment. At the same time, the two largest economies in the world,  the U.S. and China will become more insular and self-sufficient.

Fed Watch:

India Watch:

  • Samsung opens world’s largest smartphone factory in India (Bloomberg)
  • Scarsity of visas is shaking up Silicon Valley (SF Chronicle)

China Watch:

China Technology Watch

  • Interview with AI expert Kai-Fu Lee (McKinsey)
  • JD.com is driving commerce in rural china (Newyorker)
  • Tesla-foe Xpeng’s $4 billion valuation (SCMP)
  • China’s tech lag highlighted (SCMP)
  • Tesla’s move to Shanghai (FT)
  • Tesla’s China plan (NYtimes)
  • BMW enters China’s fast lane (WSJ)
  • Daimler and Baidu get ahead on driverless cars in China (Reuters)
  • China wants high-tech cars with German help  (NYT)

EM Investor Watch

  • An update to the big mac index (Economist)
  • Interview with Kissinger (FT)
  • Erdogan’s “New Turkey” (CSIS)
  • Why Bolsonaro is leading Brazil’s polls (Foreign affairs)
  • Pundits are down on EM (Research Affiliates)
  • Indonesia takes control of mega copper mine (WSJ)

Tech Watch

  • Seven reasons why the internal combustion engine is dead (Tomraftery)

 

 

 

 

 

 

 

 

Geopolitics and Asia’s growing role in the Oil Markets

British Petroleum’s annual energy outlook published this week (BP -energy-outlook-2018.pdf) highlights the enormous shifts taking place in the supply and demand for oil and other fuels. Energy consumption drives development and higher living standards, and, over the past 100 years, oil politics have heavily influenced international relations. Much of Post WW II geopolitics has been influenced by the growing dependence of the industrialized world on unstable sources of oil supplies from the Middle East. But the future is now starting to look very different, as dependence on the Persian Gulf oil  is moving from the U.S. and Europe to China and India.

Long the dominant oil importer, the U.S. will soon be self-sufficient, because of rising shale oil production. As shown in the charts below, U.S. oil output is returning to levels last seen in the early 1970s, and imports are approaching zero compared to a peak of 12.5 million barrels per day 15 years ago.

On the other hand, Asian demand, mainly from China and India, is ramping up.  China started to have a significant impact on oil markets in the early 2000s, and now  it is India’s turn. Asia’s growing share of global imports is shown below in a chart from the BP report.

I

As I discussed in a previous blog ( India-urbanization-and-a-new-commodity-bull-market), India is having  growing impact on commodity markets. Indian oil consumption has increased by nearly 5% a year since 1990, growing from 1.2 million barrels/day to 4.2 million b/d. In 2016, India surpassed China has the largest contributor to marginal global demand for oil. India’s production meanwhile it around 700,000 b/d, and not expected to grow much, so India’s impact on the oil market will only increase with time. China and India are expected to import 9.5 million  and 3.7 million b/d in 2018, respectively.

Over the next twenty years, according to BP, demand for oil will start to decline in the OECD countries. As shown in the chart below, almost all demand growth will come from Asia.

The global oil market over the next decade will become almost completely Asia-centric. With its geographical proximity to the Persian Gulf and its historical and cultural ties, it is highly likely that India will become increasingly influential in the region. Both India and China will step into the vacuum left by the U.S. as it loses interest in the region, and this may lead to fascinating developments in our increasingly multi-polar world.

Fed Watch:

India Watch:

China Watch:

China Technology Watch:

  • China on the leading edge of science (The Guardian)
  • China’s Uber killer ((Wired)
  • How China became a tech superpower (Wired)
  • China shows of tech in Spring Festival Gala (SCMP)

EM Investor Watch:

  • Unlocking Indonesia’s digital opportunity (McKinsey)
  • Transparency International 2017 Corruption Index (Transparency)
  • Turkey’s challenges in the Black Sea (CSIS)
  • The future of economic convergence (Project Syndicate)
  • The decline of governance in Turkey  (The Economist)

Investor Watch:

 

 

 

Emerging Markets and the Global Allocation Process.

Emerging market countries now represent over 40% of the global economy, and over 60% of its growth. This will only increase in the future. The IMF forecasts that emerging markets will grow a nearly three times the pace of developed markets over the 2017-2022 period, led by India and China. These two countries increasingly dominate EM investing. The two markets are relatively easy to invest in because of an abundance of large firms with liquid stocks, and they are becoming more and more attractive as companies tap into the world’s two fastest growing pools of middle class consumers.  Yet most investors in wealthy countries have very little invested in EM, and consider anything above a 10% allocation to be near-reckless. This is mainly because of “home-country bias” and investor preference for the familiar. However,  given the nose-bleed valuations in the U.S. and the relatively cheap stocks in EM, it is a risky allocation strategy to pursue. This was the point made recently by GMO strategist Jeremy Grantham when he encouraged his clients to put as much of their assets in EM as they can possibly stomach (GMO).

In addition to providing growth, emerging markets also provide significant diversification benefits. With only little over 40% correlation with the U.S., combining EM with an investment in the S&P500 reduces volatility by about 2.2%.

The diversification effect occurs because EM and the U.S. market tend to trend in opposite directions for extended periods of time. Because of links to the U.S. business cycle, Federal Reserve policy and the U.S. dollar, EM tends to perform well when the U.S. dollar weakens, providing a strong diversification benefit to dollar-based investors. The dollar typically weakens when global growth is strong and investors raise their appetite for “risky” EM assets. The weak dollar creates liquidity and credit in EM economies, resulting in strong upswings which are very rewarding for equity investors.

A simple strategy of rebalancing an EM index and the S&P500 provides surprisingly positive results. Rebalancing a 50/50 portfolio with the two assets increases returns while significantly reducing volatility over long holding periods. This is shown in the table below.

Moreover, significantly enhanced results can be achieved by adding some complexity to this strategy.

First, adding a timing tool, such as one-year relative momentum or a 200-day moving average, is effective. This allows the investor to stay fully invested during the long uptrends and avoid steep drawdowns. Such as strategy pursued over the past twenty years has produced annual returns of 13%, nearly double the returns provided by a 50/50 mix of and EM index and the S&P500 Index.

Second, the EM portfolio can be tilted towards the cheaper countries, also re-balanced on a periodic basis. Countries coming out of large down-cycles and trading with valuations well below their historic averages can be over-weighted as they initiate their recovery processes  (The Next ten years in EM ).   Boom-to-bust cycles are a feature of emerging markets, and the investor should have a well-defined methodology to exploit them for enhancing returns.

Lastly, an astute investor can create additional value (alpha) by  methodically tilting the portfolio to certain factors and picking superior stocks. My personal experience is that this can be achieved most effectively with a replicable,  formulaic approach. My preference is for a “Warren-Buffet-like” ranking of stocks in terms of both quality and profitability, building a screen which identifies stocks with the ability to compound high returns over time and that are valued at relatively low valuations.

 

Fed Watch:

  • China is the leading candidate for the next financial crisis (FUW)
  • The coming melt-up in stocks (GMO)

India Watch:

China Watch:

  • When will China become the biggest consumer economy (WIC)
  • Xi ally highlights financial risks (SCMP)
  • Davos; MNCs troubles in China (Holmes Report)
  • China’s rise is over (Stanford Press)
  • Dockless bike-sharing in China (Bikebiz)
  • Bridges to Nowhere, Michael Pettis (Carnegie)

China Technology Watch:

  • China and the U.S. wage the battle for AI on the cloud (Technology Review)
  • Hong Kong-mainland bullet-train links ready (Caixing)
  • China’s rental market takes off, led by techs (bloomberg)
  • The life of an express delivery man (FT)

EM Investor Watch:

 

Technology Watch:

  • Renewable power costs in 2017 (Irena)
  • Apple’s share of smartphone profits is falling (SCMP)

Investor Watch:

India, Urbanization and a New Commodity Bull Market

Around the turn of the century, China’s economy entered in a phase of very high growth which was fueled by investments in infrastructure and heavy industry and was extremely intensive in the use of hard commodities. A surge of demand from China caught producers by surprise and drove prices  for commodities, such as iron ore and copper, to very high levels for an extended period of time (2003-2011).  A typical boom-to-bust cycle ensued, with overinvestment by producers eventually resulting in over-capacity and a return to low prices.

Commodity markets have been depressed for the past five years and valuations for the stocks of the producer firms have reached record lows relative to stocks in other sectors.

China’s impact on commodity prices, though extraordinary, was not atypical. Historically, countries have entered periods of commodity-intensive growth when they reach a certain level of wealth and experience high urbanization rates: for example, the U.S. in the 1920s, Japan in the 1950s, Brazil in the 1960s and Korea in the 1970s. All these countries saw a period of massive growth in commodity consumption, which eventually leveled off. U.S steel consumption today is at the same level as in 1950, while the Japanese consume steel at 1975 levels.

We can see in the following chart the recurring pattern, when countries suddenly ramp up urbanization rates. High income nations have largely stabilized urbanization levels, while China, India and  all lower-income developing countries still have several decades ahead.

 

If we can identify the next countries experiencing high growth and urbanization, we can go a long way towards understanding the next upcycle in commodities. From looking at historical data, it is the case that urbanization rates ramp up when countries reach a level of wealth around $2,000 per capita (2016, constant USD). The table below shows the progression by decade of new countries entering this wealth level, according to IMF and World Bank data. During the decade ending in 1980, Korea, Poland and Thailand entered into this group; none entered in the 1980s; Russia (and other Eastern European state) appear in the 1990s; and China, Nigeria, Ukraine and Indonesia enter in the 2000s. In this current decade only Vietnam has appeared, so far; but if we look through 2022, we see a massive swell led by India but also including Uzbekistan, Myanmar and Kenya.

It is not the number of countries that matter, of course, but rather the population impact that they represent. The chart below shows the population impact by period, in terms of new entrants as a percentage of global population. We can see a huge surge representing 21.8% of the global population (23%, including Vietnam), surpassed only by the China-led surge of the 2000s.

Equally important, the upcoming surge will happen at a time when China sustains relatively high growth and increasing urbanization, so that we will have both China and India sustaining demand at the same time.

A new upcycle in commodity prices is obviously bullish for emerging market producers, such as Chile, Brazil, Indonesia, Russia and South Africa. It also likely points to a weak dollar and good performance for emerging market stocks in general.

Fed Watch:

India Watch:

China Watch:

 

  • US politics gets in the way of Ant Financial’s US plans (SCMP)
  • Making China Great Again (The New Yorker)
  • Geely invests in AB Volvo trucks (SCMP)
  • China’s commodity demand (Treasury)
  • Ground broken on China-Thai railroad (Caixing)

China Technology Watch:

EM Investor Watch:

 

  • France seeks closer ties with Russia and China (WSJ)
  • Latin America’s rejection of the left (Project Syndicate)
  • Indonesia’s bullet-train project stalls (Asia Times)
  • Boeing’s bid for Embraer (Bloomberg)

Technology Watch:

  • Apple’s share of smartphone profits is falling (SCMP)
  • Fanuc’s robots are changing the world (Bloomberg)
  • Battery costs coming down (Bloomberg)

Investor Watch:

 

 

 

 

Putin’s Embrace of “One Belt, One Road”

The national identity of Russia is intrinsically tied to the mastery  of the Eurasian steppes, the grassland plains that  stretch from Hungary to Northern China. The territorial expansion of Moscow, from the 16th century onward, required  wresting control of the steppes away from the Mongols and securing the fertile black earth plains of modern-day Ukraine and Central Russia. The eventual collapse of the Mongol empire in the 17th century allowed the extension of the Russian empire to the pacific. Russian geo-political control over the steppes, Siberia and the Pacific coast has been largely uncontested for centuries.

However, the economic rise of China over the past decades and its increasingly outward-looking pretensions, as highlighted by President Xi Jinping’s ambitious “One Belt, One Road Initiative” (OBOR) changes everything for Russia.  While Russia has seen the steppes mainly for their value in securing geopolitical control of the Eurasian center, Xi envisions a return to the commercial dynamism of the historical Silk Road, which united the Far East with the Middle East and Europe for centuries, until the collapse of the Mongol empire. The Chinese have been aggressively executing Xi’s vision, building infrastructure to connect China with the West and becoming the largest investor in the natural resources of the former Soviet Republics.

Surprisingly, perhaps because of pragmatism and acceptance of Xi’s promise that the OBOR is aimed at benefiting all participants equally, so far there appears to be little resistance on the part of Russia to Xi’s grand and transformative plan. To the contrary, there has been a rapprochement between Putin and Xi, who have met on frequent occasions over the past several years. In a recent state visit to Moscow, Xi announced $10 billion in agreements for OBOR-related infrastructure investments and told the media that relations between the two countries were currently at their “best time in history” and that Russia and China were each other’s “most trustworthy strategic partners.”

Russia’s cuddling up with China is probably its best strategic option at this time. First, neither China nor Russia have to worry about business relations being undermined by volatile domestic politics or high-minded demands for human rights, and, in that sense, they see themselves as reliable partners. Second, both parties have an interest in weakening what they consider to be the arbitrary and hegemonic power of the United States. For example, both would like to see a weakening of dominance of the U.S. dollar and America’s discretionary control of the global financial system, so it is no surprise that Russia is accepting payment in yuan for commodities and that China is setting up a Petro-yuan-gold trading infrastructure in Shanghai and Hong Kong to facilitate non-dollar transactions.

Most importantly, however, is the fact that Asia will be the driving force of global growth and that its center of activity will be in China and its Far East neighbors. Driven by China, Asia’s share of world GDP will grow to 35% by 2022 (IMF forecast), and almost all of global growth in marginal output will come from Asia.  With its abundant energy, mineral and farm resources, Russia is best positioned to meet growing demand for natural resources in Asia.

A remarkable essay written by President Putin this week clearly states Russia’s current state of mind regarding Asia, and the seemingly total embrace of Xi’s OBOR vision. In a remarkable turn of events, Putin and Xi have become the defenders of open markets and predictable rules of commerce, in stark contrast to Donald Trumps “America First” ideology.

Putin writes: (excerpts, full note available here.)

“As a major Eurasian power with vast Far Eastern territories that boast significant potential, Russia has a stake in the successful future of the Asia-Pacific region, and in promoting sustainable and comprehensive growth throughout its territory. We believe that effective economic integration based on the principles of openness, mutual benefit and the universal rules of the World Trade Organization is the primary means of achieving this goal.

We support the idea of forming an Asia-Pacific free-trade area. We believe this is in our practical interest and represents an opportunity to strengthen our positions in the region’s rapidly growing markets. Indeed, over the past five years, the share of APEC economies in Russia’s foreign trade has increased from 23 percent to 31 percent, and from 17 percent to 24 percent in exports. We have no intention of stopping there…

On a related note, I would like to mention our idea to create the Greater Eurasian Partnership. We suggested forming it on the basis of the Eurasian Economic Union and China’s Belt and Road initiative. To reiterate, this is a flexible modern project open to other participants.

Comprehensive development of infrastructure, including transportation, telecommunications and energy, will serve as the basis for effective integration. Today, Russia is modernizing its sea and air ports in the Russian Far East, developing transcontinental rail routes, and building new gas and oil pipelines. We are committed to bilateral and multilateral infrastructure projects that will link our economies and markets — such as the Energy Super Ring that unites Russia, China, Japan and the Republic of Korea, and the Sakhalin-Hokkaido transport link.

We are particularly focused on integrating Russia’s Siberian and Far Eastern territories into this broader network. This includes a range of measures to enhance the investment appeal of our regions and to integrate Russian enterprises into international production chains.

For Russia, the development of our Far East is a national priority for the 21st century. We are talking about creating territories of advanced economic growth in that region, pursuing large-scale development of natural resources and supporting advanced high-tech industries, as well as investing in human capital, education and health care, and forming competitive research centers…

We intend to engage in substantive discussions on all these topics at the 25th APEC Economic Leaders’ Meeting this week. I am confident that, acting together, we will find solutions to the challenge of supporting the steady, balanced and harmonious growth of our shared region, and securing its prosperity. Russia is ready for such a collaborative effort.”

Fed Watch:

India Watch:

China Watch:

China Technology Watch:

  • Google tries to enter China again with AI Bloomberg)
  • How China will rate its citizens with AI technology (Wired)
  • China’s focus on practical AI application (Arxiv.org)

EM Investor Watch:

Technology Watch:

  • The power plant of the future is your home  (WEF)
  • The Future of the car, Bob Lutz (Auto News)

Commodity Watch:

Investor Watch:

  • ETFs are no bonanza for Wall Street (WSJ)
  • Jeremy Grantham, why this time is different (WSJ)
  • Isaac Newton’s lesson on financial gravity (WSJ)
  • Caxton Partners on macro investing (Bruce Kovner)
  • The frustrating law of active management (Thinknewfound)
  • Fees on active share eat up returns (Thinknewfound)
  • What makes a great investor (Macro-ops)
  • Buffett and the power of compounding (Collaborative Fund)

 

 

 

 

 

 

 

 

 

 

 

 

China’s Awakening is Shaking the World

In his address to the 19th Communist Party Congress this week, Chinese President Xi Jinping humbly downplayed China’s global standing and stated that much work is still needed to achieve the “China Dream of Rejuvenation”  and become  “a mighty force” that could lead the world on political, economic, military and environmental issues. Particularly noteworthy was Xi’s comment that China would not have a world-class military until 2050.

On many measures China clearly does trail the US by a large margin. For  example, in 2016 the per capita GDP of the United States was still over six times that of China.  Nevertheless, in a growing number of economic areas the weight of China is already the primary source of marginal demand and the major driver of performance. Moreover, Chinese influence on markets will be felt more and more over the next decade, as the world evolves towards multi-polarity and the center of gravity of the global economy shifts to East Asia. To paraphrase Napoleon, during this continued awakening, China will shake the world.

Though the U.S. GDP will remain larger than China’s until around 2027, China’s marginal contribution to global GDP is already higher than that of the U.S. According to IMF forecasts, China will add $7.15 billion trillion to global GDP by 2022 compare to $4.88 trillion for the U.S. From 2016 to 2022, China’s GDP  will go from 60% to 80% of the U.S. GDP.

In terms of GDP calculated on the basis of purchasing power parity, China’s economy is already 14% larger than America’s and will be nearly 50% larger by 2022.

Over the past fifteen years, Chinese infrastructure and real estate investments already shook the commodity world, driving a frenzy in the markets for copper, iron ore and other materials.  Astonishingly, China consumed 50% more cement over three years (2011-2013) than the U.S. consumed in the entire 20th century.

As the Chinese middle class has grown, China also became the primary driver of soft commodity markets. For example, for the past ten years China has provided essentially all the growth in demand for market pulp used for consumer goods like tissue paper.

China  is also becoming the driving force in many consumer industries. China’s cinema box office is expected to pass the United States this year; and, increasingly, the success of Hollywood blockbusters depend on the response of the Chinese public. China’s cinema ticket sales are expected to grow 5-6% annually while ticket volumes  in the U.S. decline by 1-2% a year. China now has more movie theatres than the U.S. (stuck at 40,000 since 2013) and is adding 7,500 annually. IMAX has 750 screens in China, twice as many as in the United States.

More and more, the success of global brands will rely on sales in China. On this week’s quarterly results call with investors, NIKE’s CEO Mark Parker noted that “the target population of China for NIKE is really moving towards ten times what it is in the United States, and the appetite for  Nike in China as the number one brand is incredibly strong.”

The focus of the global auto industry has also shifted to China for both traditional and electric vehicles. Auto vehicle unit sales in China surpassed those of the United States in 2010. Expectations are for volumes in China to reach 28 million units in 2017, vs less than 18 million in the U.S. Unit sales in mature markets (the U.S., Japan and Western Europe) are at the same level as over a decade ago and are expected to experience no growth over the next five years. Meanwhile, auto sales in China are growing steadily and may reach double the level of U.S. volumes by 2023.

 

The situation is similar for electric vehicles, which are being heavily promoted in China by government policy.  EV sales in 2016 in China were double the level of those in the U.S, and they are expected to ramp up in coming years.

Finally, according to government statistics, China is estimated to have 750 million internet users, compared to 300 million in the United States. Growing access to smartphones has resulted in a boom in mobile e-commerce, so that mobile e-commerce in China now dwarfs that in the U.S. The growth in internet mobility in China, places China at the forefront of many new data-driven technologies such as the “internet-of-things,” e-commerce, artificial intelligence, robotics and self-driving vehicles.

Fed Watch:

India Watch:

China Watch:

  • Xi’s glittering solutions for China (Geopolitical Futures)
  • Xi’s plan for state-sponsored quality growth (Bloomberg)
  • Xi’s bureaucratic shake-up (CSIS)
  • Xi’s conservative, greener speech (CSIS)
  • Five things to know on Xi’s speech (The Guardian)
  • Spence on China’s challenge (Project Syndicate)
  • Asia now has more billionaires than the U.S. (Caixing)
  • The internationalization of China’s capital markets (Bloomberg)
  • Why the renminbi won’t rule (Project Syndicate)
  • China’s influence on global markets grows (Bloomberg
  • China’s economy is already the biggest and growing fast (Bloomberg)

China Technology Watch:

EM Investor Watch:

Technology Watch:

Commodity Watch:

 

Energy Market Disruption and Global Multi-polarity

 

Around the world, energy markets are being disrupted by a combination of technology and geopolitics. On the one hand, technology is having a huge impact on supply, with shale production exploding in the United States and alternative energies (solar and wind) becoming increasingly competitive everywhere. On the other hand, growing energy self-sufficiency in the U.S. is occurring at a time when demand for oil imports is still growing quickly in emerging markets, particularly in China. As the major importer of oil in the world, China’s future economic stability will depend on secure supplies, which is forcing it to become much more pro-active in global diplomacy. China also will become uncomfortable paying for oil imports in U.S. dollars, as has been the global custom for the past 50 years. China will increasingly insist on being paid in Chinese yuan, a trend that will slowly undermine the “petrodollar system” and U.S. financial hegemony.

Over the past decade, technological innovation has permitted the exploitation of enormous U.S. shale oil and gas deposits, leading to a renaissance for the American oil industry. This, jointly with growing output of renewable energy and higher fuel efficiency, is driving the U.S. towards energy self-sufficiency. BP in its BP 2017 Energy Outlook estimates this will happen in 2023.  U.S. net imports of oil have already fallen from 13 million b/d in 2007 to 3.7 million today.

The decline in U.S. oil imports will have important consequences for global financial markets, because the U.S. pays for imported oil in dollars and the trade receipts accumulate in the world’s Central Banks and sovereign funds and is redistributed into T-bills, bank loans and other investments. Since the 1970s the global economy has been frequently buffeted by violent changes in the price of oil, leading each time to financial instability and a sharp redistribution of wealth between exporters and importers.

U.S. oil production peaked in 1970 at 10 million barrels per day and then began a precipitous decline, reaching a low of 5 million b/d in 2008. The decline in U.S. production, coming at a time of steady increases in global demand, strengthened the hand of OPEC and led to price surges in 1974 and 1980, causing stagflation in the U.S. and eventually the emerging market debt crisis of 1981. The rise of Chinese demand during the past decade created another huge surge in oil prices, with a peak in 2008 and a rebound in 2011, with enormous consequences on global liquidity and financial markets.

Oil imports have been the primary component of chronic U.S. current account deficits, representing 40.5% of cumulative deficits between 2000 and 2012, and 55% in 2012 alone. In the early 1970’s, as the major importer of oil and the global hegemon, the United States was able to convince the Saudis to price their oil in dollars, which they have done along with other OPEC members since the early 1970s. This created the “petrodollar system” as a partial substitute for the gold standard abandoned by President Nixon in 1971, guaranteeing that the dollar would remain dominant in global trade and finance.

 

However, the conditions that led to the replacement of the gold standard by the petrodollar system no longer exist in 2017. The U.S. is approaching energy self-sufficiency, while China is now the dominant oil importer in the world, with demand for imports expected to reach nearly 10 million b/d in 2018.

This is happening at a time when U.S. hegemony is on the decline, and the world is seeing multi-polar leadership, with growing Chinese and European importance.

One of the Chinese government’s expressed objectives is to increase the international influence of the yuan. In a direct challenge to American economic hegemony, China has already started using oil imports to propagate the yuan. Breaking ranks with OPEC, Nigeria in 2011 and Iran in 2012,  both started accepting yuan for oil and gas payments and accumulating yuan Central Bank reserves. Russia did the same in 2015. For both Russia and Iran, the yuan payments allow them to skirt U.S. sanctions, and for Russia this also achieves the objective of undermining U.S. dollar hegemony. Moreover, last month, Venezuela, which owes China $60 billion, announced it will price its oil in yuan.

Also, in September the Nikkei Asian Review reported that China is on the verge of launching a crude oil futures contract denominated in yuan and linked to gold. This contract would be settled in Hong Kong and Shanghai and allow Asian importers to bypass USD denominated benchmarks and could greatly strengthen the financial infrastructure necessary to promote the yuan in Asian trade.

In another interesting development, China appears to be intent on solidifying diplomatic ties with Saudi Arabia. This is of critical importance, given the crucial role the Saudi’s have in maintaining the petrodollar system. As reported by Bloomberg,  the Saudi’s are looking to tighten energy ties with China by investing $2 billion in Chinese refinery assets in exchange for China taking a major stake in the upcoming ARAMCO IPO.

All of this oil diplomacy, comes at a time when China is already achieving success in expanding the role of the yuan in global financial markets. One years ago, the International Monetary Fund agreed to a long-standing Chinese request to give the yuan official Special Drawing Rights status, joining the U.S. dollar, euro, yen, and British pound in the SDR basket. China has also successfully lobbied the MSCI to increase the weighting of Chinese stocks in its Emerging Market Index by including locally traded “A” shares, a first step towards a major integration of China’s financial market into global financial markets which will further the propagation of yuan assets in global portfolios.

Fed Watch:

  • Rajan’s view on unconventional monetary policy (Chicago Booth)
  • Low returns expected long term for U.S. stocks (Macrovoices)

India Watch:

  • Tencent wants its share in India (Caixing)
  • India’s electrical vehicle dreams (CSIS)

China Watch:

  • 7 things we learned from China in September (WEF)
  • Buffett’s bet on BYD is working (QZ)
  • Meet China’s evolving car buyer (McKinsey)

China Technology Watch:

  • China’s airplane delivery drones (China Daily)
  • China, from imitator to innovator (Forbes)
  • China leads the world in digital economy (McKinsey)

EM Investor Watch:

Technology Watch:

  • Adidas robots (Wired)
  • Acemoglu on robots (AEI)
  • Germany has more robots and stable jobs (VOX EU

Commodity Watch:

Investor Watch:

 

 

 

 

 

 

 

 

China’s “Inevitable” Rise Through Protectionism

 

China’s rise as an economic power increasingly threatens the Asian and global geopolitical balance of power.  The growing realization in Washington that China’s ascent may be inevitable is based on the acknowledgement that Chinese policy makers are on a coherent and proven path of development, previously followed by the United States itself and later by Japan and the newly minted Asian tigers (Taiwan, South Korea, Hong Kong and Singapore). Japan and the Asian tigers were politically aligned with and militarily dependent on the United States and did not have the scale to upset the global order, but a resurgent China is a different matter.

The uniqueness of China’s rise cannot be over-emphasized. Every other country that has successfully broken out of the “middle-income trap” during the post-war period (the Asian tigers, Israel and today several eastern European countries) (China, the middle income trap and beyond) has done so with strong political, military and financial support from the United States. Most countries are not successful at building the institutions and executing the policies required to graduate beyond middle-income status, and many formerly “miracle economies,” face stagnation. Brazil is a case in point. Despite great natural resources and a vibrant entrepreneurial class, incoherent populist policies, an expansive state bureaucracy and oppressive taxes and regulations on business have caused stagnation since the early 1980’s. The result of Brazil’s stagnation at a time of great dynamism for China is an astonishing reversal in the relative importance of both countries to the global economy.

Source: World Bank

The Chinese model follows the well-worn protectionist path, embraced by the United States in the 19th century.  Once Great Britain had been well-established as the global hegemon, it espoused free-trade to facilitate the dissemination of its industrial production. The liberated Americans would have none of it. Alexander Hamilton’s Report on Manufacturers, submitted to Congress in 1791, which called for imports tariff and non-tariff barriers and subsidies for infant industries and innovation, provides a blueprint for the policies now followed by China. On the other hand, the U.S. as the new hegemon, has now assumed the role of the promoter of free trade.

China, with its huge market and high growth, has the same ability to attract capital and technology on its own terms that the U.S. had in the 19th Century. The Chinese have studied history and are simply following the path taken by the U.S. and the Asian Tigers. The Chinese know that to continue their rise they must now dominate high-value-added and technology-intensive industries, and they are determined to provide the protection and subsidies to facilitate this. In 2015, the government announced its Made in China 2025 and Internet Plus initiatives which aim to transform the country into a high-tech superpower by integrating artificial intelligence, robotics and social media. The plans are unabashedly protectionist and aim to substitute high tech imports by using the full regulatory and financial power of the state. This strategy of state supported industrial planning follows what Japan and Korea have assiduously done in the past, most recently with Korea’s full-fledged effort since 2001 to dominate robotics.

China’s plans have alarmed the world’s leading technology providers, such as the U.S., Japan, Germany and South Korea, and led to protests. President Trump last week signed an executive order asking his trade office to investigate China for theft of American technology and intellectual property.  But it is unlikely that China will change its path because it has history on its side and it believes that rival nations and corporations will cooperate to gain access to its markets. Moreover, there is no denying that the results of the policy so far are encouraging.

Many leading industries in the world today, from airplanes to internet search engines, have winner-take-all characteristics because of enormous capital intensity and/or network effects. China’s decision to restrict the freedom of American internet and ecommerce firms has promoted a vibrant domestic environment for tech start-ups unique in the world outside of Silicon Valley, and it has greatly facilitated the success of companies like Baidu, Tencent and Alibaba which are today the only global rivals to America’s tech hegemons.

The enormous amount of mobile phone and internet users, 751 million at last count, and the massive amounts of data they generate positions Chinese companies to become dominant players in the “internet of things,” artificial intelligence , data mining and related services. Neil Shen of Sequoia China, a leading venture capital investor in technology firms in China, succinctly states the bull case for the sector:

“I’m very optimistic about the prospects of the Artificial Intelligence industry in China, probably more so than back 20 years ago when china started with the online internet. The reasons being two: one is you need data for AI development and we have tons of data whether its Alibaba’s transaction data, social network data from Wechat, etc. And on top of that when you are looking at the researchers and experts in that space many are Chinese and if you are looking at quotations in research papers the Chinese AI research in the world has a very decent market share. And so, with that I think we have a very good chance to take a lead. In fact, fundamentally what is AI in the whole science field: its mathematics and statistics and China has very strong talent in these two areas.” Sequoia China’s Neil Shen (Bloomberg Interview).

China’s support of leading-edge practical technologies through subsidies, financing, R&D support, import protection and the leveraging of its huge market and the state’s purchasing power has led to significant breakthroughs. For example:

  • High-speed trains – Fuxing, the latest generation of Chinese bullet trains, with a maximum speed of 400 km/hour, was recently launched on the Shanghai-Beijing route, cutting travel time to 4 ½ hours. Fuxing is said to be 84% home-made standardized design, in contrast to previous generations which relied heavily on Japanese and French technology. The name, Fuxing, which means “revival,” is politically-loaded.(Caixin)
  • Over the past ten years, China has become the global leader in all aspects of the use and manufacturing of solar power. China is the world’s largest producer of photovoltaic power, and on track to add 40 gigawatts of capacity this year in its domestic market.
  • China also leads the world in the production and use of wind power and smart grid technologies.
  • China has become the global leader in the use and manufacturing of electric vehicles, selling 507,000 units in 2016, compared to 222,000 in Europe and 157,130 in the U.S.
  • China owns 70% of the world’s commercial drone market. For drones with communication-ability selling above $500/unit, Shenzen’s DJI is estimated to have around 70% of the U.S. market. DJI has become so dominant that competitors are abandoning hardware manufacturing to focus on software applications exclusively. Chinese military drones, with similar range and effectiveness as the U.S. military’s Predator and Reaper drones but selling at a fraction of the cost, have been gaining significant foreign market share, at the expense of the U.S. (WSJ).
  • Surveillance technology – Shenzen’s Hikvision, a subsidiary of CETC, a state conglomerate with close ties to the military, has become a global leader in internet-based digital surveillance systems which are being widely deployed in China and other countries through CCTV, ATMs and mobile phone applications. The company has become a leader in facial recognition and data harvesting.
  • Facial recognition – Beijing-based Megvii’s Face++ is the world’s largest face-recognition technology platform, currently used by more than 300,000 developers in 150 countries to identify faces, images, text and documents, such as government IDs. Baidu and SenseTime are also important players in this space.
  • Mobile Telephony – Chinese firms control over half the global market for mobile phones, with growing domination in emerging markets. China aims to be a leader in 5G mobile networks, and plans to spend $250 billion to have an operative system over the next five years.
  • Quantum Telecommunications – China appears to have the lead in the development of the new technology, “hackproof” quantum communications . China is said to be near completion of a 2,000 km “unhackable” fiber network linking Shanghai and Beijing. Moreover, Chinese researchers recently announced a breakthrough in successfully teleporting “entangled” photons from a quantum satellite 480 km above the earth to two terrestrial stations 1,200 km apart, and the government plans the deployment of a fleet of quantum-enabled satellites linking China nationwide and with Asia and Europe by 2020. The idea is to control a Chinese-centric hack-proof, cybersecure global network.

There are two new priority areas were the Chinese state is committed to deploying its financial and protectionist might:

  • Semiconductors – China has made it a national security priority to control the semiconductor supply chain. The government is lavishing money on the country’s chip makers, including $22 billion on state-owned Tsinghua Unigroup. Some 20 fabs are currently under construction in China. (WSJ)
  • Artificial Intelligence – China’s State Council in June announced a plan to provide tax benefits and state support to make China a global leader in AI by 2025 and Chinese companies major players in self-driving cars, smart robotics, wearable devices and virtual reality.

Us Fed watch:

India Watch:

  • India’s stock market is set for a huge bull run (Wisdom Tree)
  • Is India like East Asia or Latin America? (Livemint)

China Watch:

EM Investor Watch:

Investor Watch:

China, the Middle Income Trap and Beyond

Emerging market countries can be categorized according to the level of prosperity achieved by their populations.  Generally, poor countries, with lower GDP per capita, should grow faster than richer countries, as they adopt well-known technologies to boost productivity. Assuming a stable social and political environment and basic legal and economic conditions, high growth, driven by urbanization and basic manufacturing, can be achieved for long periods. India and Indonesia, for example, today are in this “catch-up” phase, growing their GDP at well above average global rates. China has achieved phenomenal growth since it launched economic reforms in the late 1970s, following the path previously taken by its neighbors South Korea, Taiwan and Japan.

However, once middle-income status has been achieved most countries are unable to further reduce the gap with the United States and the other highly developed countries. This is called the “middle-income trap.” Aside for a few city-states (Singapore and Hong Kong) and oil-rich sheikdoms,  few  have broken the trap.  The exceptions may be Taiwan, South Korea and Israel. These three have benefited from a special relationship with the U.S. hegemon and successfully pursued education-intensive, high-tech strategies. On the other hand, some countries regress after reaching middle-income level; Argentina, Venezuela and South Africa are examples of this. Brazil is another worry; it has grown GDP/capita at less than 0.9% per year since its “miracle” came to an end in the late 1970s.

China clearly sees itself following the path of Taiwan and South Korea. Though it will not enjoy U.S. support, some indicators point to good prospects.

For  a middle-income country to sustain high growth it needs to move up the value chain which means higher innovation and productivity, which requires a highly educated workforce. The Global Innovation Index ranks countries in terms of their innovative capacity and has been doing this for 10 years using the same methodology. In its 2017 report, GII highlights the stagnation of middle-income countries in bridging the gap with rich countries, but singles out China as the exception. GII ranks China as the 22nd most innovative economy, closing in on the elite. This compares to its 37th ranking in the 2008 GII report

China’s growing capacity to innovate is confirmed by its increase in patent filings. In fact, according to the World Intellectual Property Organization (WIPO),  in 2016 China filed for over 38% of international patents, surpassing the  United States with 20.4%.

The OECD Program for International Student Assessment (PISA)  evaluations point to China’s spectacular rise in science and technology and give credence to its ambitions. According to the 2015 PISA report, the most developed parts of China, as represented by Beijing-Shanghai-Jiangsu-Guangdong, already score in line with the best Asian performers and well above the United States and European levels, particularly in mathematics.

Chinese policy makers are well aware of the “middle-income trap,” and are determined to avoid it. The legitimacy of the authoritarian political regime to a degree rests on its ability to sustain growth and rising living standards. That is why promoting innovation was given the highest priority in the governments 13th Five-Year Plan for Economic and Social Development, 2016-2020, and a commitment was made to harness resources to achieve breakthroughs in key technologies. The 13th plan goes so far as to specify the technologies that China must dominate and makes an explicit commitment to provide the financial and institutional support to promote success.

 

Us Fed watch:

 

Brazil Watch :

India Watch :

China Watch:

Xi Jinping’s War on Financial Crocodiles (FT)

China and Africa (Mckinsey)

China Technology Watch:

China Shows off New Generation of High-Speed Trains (Caixin)

CRRC Wins Train Supply Deal in Montreal (Caixin)

Chinese Phones Take over Indian Market (SCMP)

Tech Titans in China Take Battle to a New Frontier (Bloomberg)

 

China Consumer Watch:

  • P&G Refocuses Strategy on Premiumisation ( SCMP)

 

Commodity Watch:

  • China Scap Metal Exports Balloon (Caixin)
  • “The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites…I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving.” —Caterpillar Resource Industries President Denise Johnson (Mining)
  • And this chart from Martin Katusa shows how weak demand and declining production costs lead to low prices, and commodity prices at all-time lows relative to the S&P 500.

  • The Collapse of South Africa’s Mining Sector Valuewalk

Technology Disruption Watch:

Anti-Globalization Watch:

 

Notable Blogs:

 

Notable Quotes:
• “Xi’an only has a little over 40 Starbucks at the moment. This is definitely not enough. I think 400 would be more appropriate.” Wang Yongkank, Party Secretary of Xi’an, as reported by Week in China.
• “The reality is that as a planned economy and with the government having control of the major banks and large companies, a financial crisis is simply not in the cards.” Mark Mobius, Templeton Investments on China.