David Fuller and Eoin Treacy's Comment of the Day
Category - General

    China Banks Endure Record Costs as Squeeze Leaves No Choice

    This article from Bloomberg News may be of interest to subscribers. Here is a section:

    When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai- based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer- term and less liquid assets, such as debt and investment in loans and receivables, she added.

    The PBOC has begun to take note of the stress on the financial system.

    The monetary authority has injected a net 160 billion yuan through open-market operations this week, the most since the five days through May 19. The central bank-run Financial News said on June 10 that the “abnormal market swings” of June 2013 won’t happen again -- a reference to a record cash crunch four years ago.

    Still, China’s seven-day repurchase rate -- the money- market benchmark -- has averaged 2.74 percent so far in 2017, compared with 2.32 percent a year ago. The gauge climbed four basis points this week to 2.95 percent, while the one-day rate rose three basis points to 2.86 percent.

    “Some lenders don’t have better sources of funding to replace NCDs,” said Moody’s Wan. “Issuing such debt at such a high price will have a negative impact on their profitability.”

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    A Hard Brexit Risks No Brexit at All

    Here is the latter section of this forceful and inevitably controversial column by Ambrose Evans-Pritchard for The Telegraph:

    Like others, I have floated the Norwegian option as a half-way house for five to ten years. The European Economic Area allows to Britain to retake farming and fisheries, and to remove itself from the EU's widening competence of foreign, policy, defence, justice, and home affairs.

    It would give Britain access to the EU single market without being a member of the customs union, which we should avoid like the plague. Outside the customs union the UK could negotiate trade deals with the US, China, India, Japan and others over time. To remain in the union - the latest media fashion -  is completely wrong-headed. It would leave the UK trapped inside the EU trade net.

    The elegance of the EEA is that if we wish to withdraw  later, we could do so in less traumatic circumstances than withdrawal from the EU today under the cliff-edge clause of Article 50. 

    It would become progressively easier to break free entirely - if desired - as trade deals stacked up. This would create some implicit leverage. Britain would probably have just as much effective say over EU market legislation as it does now under qualified majority voting, where it has no veto.  

    Outside the customs union, the UK would have to comply with rules of origin codes to prevent China, the US, or any other third country, using our market a duty-free back-door into the EU market. Companies already do this routinely to comply with NAFTA rules in North America. It amounts to no more than a minor friction for large firms using modern software.

    The EEA option greatly reduces the reach of the European Court (ECJ), and certainly stops euro-judges creeping into all areas of law through the Charter of Fundamental Rights. The ECJ would still have sway (through the EFTA court) over market matters but this would be tightly focused.

    I do not wish to rehearse the argument over whether you can control free movement in the EEA. Clearly there is a bias towards free flows, but some controls are possible. There is already a precedent for Australian-style quotas. Liechtenstein does exactly that. I have no problem with this.

    One can overstate the attraction of the EEA. Lorand Bartels, an international law don at Cambridge and senior counsel at Linklaters, has convinced me that Britain UK would have to join as a new member, subject to veto by others.  

    It would not inherit the right of membership automatically as it steps out of the EU, as I previously thought. This would make us a supplicant - more vulnerable to horse-trading on other matters - and somewhat reduces the appeal of the EEA. 

    There are others ways to skin a cat. John Springford from the Centre for European Reform has written an excellent paper on the possibilities of the EFTA-based 'Swiss' option. 

    The Helvetophile Tory MEP Dan Hannan - once of this parish - has been a tireless advocate for such an arrangement, deeming it the closest possible relationship with the EU that is also compatible with full sovereignty. Call it medium-soft if you want.

    What we hear instead are war cries from Tory ultras telling us that a soft Brexit is code for no Brexit. My fear is that the Government, frightened of such backbenchers, will bluff and bluster its way into the coming Brexit talks, with the wrong priorities, with too little public support, and against the backdrop of a deteriorating economy. 

    This will lead to a showdown that can end only one way, since Downing Street has no credible back-up plan. Europe would call that bluff. Such a 'Greek' debacle would discredit Brexit beyond repair. 

    The cardinal objective is to restore the primacy of UK law and to escape the expanding writ of the ECJ. It is to regain self-government under the supremacy of Parliament. How this is achieved is a secondary. How long it takes is immaterial. Ten years is nothing in the life of a nation.

    To those readers who balk at any compromise, needed both to smooth this extraction process and to keep the great middle of British society on side, I can only reply: you risk losing the one chance in over forty years to jump off the federal express. The best is the enemy of the good.

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    Broke and Angry is a 'Circus'

    MOSCOW —  Facing a wave of popular unrest not seen in years, Russian President Vladi­mir Putin took to the nation’s airwaves Thursday to assure citizens that their lives will be getting better. Judging from the questions the Kremlin leader fielded over four long hours, Russians aren’t feeling it.

    Just three days after tens of thousands of people turned out in more than 180 cities across Russia to express their dissatisfaction with the government, Putin used his annual “Direct Line with the President” call-in show to say that the Russian economy is showing signs of growth after a long recession and that “in general things will start moving to where people feel a change for the better.”

    The questions that came in from viewers across the country reflected little of that. A Siberian teacher asked him how she’s supposed to live on $280 a month. The residents of a Moscow suburb complained about a giant pile of garbage that they said is visible from space. A 24-year-old cancer patient from a polar mining town demanded to know why health care is in a shambles.

    And:

    The carefully choreographed show has traditionally been a showcase for Putin to show he understands his people’s problems, and how he’ll get to the bottom of them.

    But unedited texts from viewers that popped up on the bottom of the screen revealed the anger and frustration some Russians feel about their leader and the system he has created.

    “Putin, do you really think people believe in all this circus with staged questions?" read one.

    “All Russia believes you have sat on the throne too long,” read another.

    Yet another asked when Putin would get around to firing officials who have faced corruption allegations, including Prime Minister Dmitry Medvedev.

     If Putin saw these comments — he said he was watching them — he did not react. When a young man in the Moscow studio where Putin sat asked a sharply worded question about official corruption, the Russian leader shot back, “Did you prepare that yourself, or did someone suggest it to you?”

    “Life prepared me for it,” the man responded.

    More than 1,700 people were arrested in protests on Monday, the most widespread in Russia since Putin returned to the presidency in 2012. The nationwide rallies were spearheaded by anti-corruption crusader Alexei Navalny, who was jailed for moving a Moscow demonstration from its designated venue to a central street where it disrupted official Russia Day festivities

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    Email of the day

    On Markets Now

    It was good to hear your usual excellent presentation at Markets Now and I hope you have recovered from your exertions – an amazing performance, considering! It was also good to hear David Brown talking on a big picture theme – that’s my favourite subject.

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    The Old Are Eating the Young

    This article by Satyajit Das for Bloomberg may be of interest to subscribers. Here is a section: 

    This growing burden on future generations can be measured. Rising dependency ratios -- or the number of retirees per employed worker -- provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

    Budgetary analysis presents a similarly dire outlook. In a 2010 research paper, entitled “Ask Not Whether Governments Will Default, But How,” Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP. In effect, these states have mortgaged themselves beyond their capacity to easily repay.

     

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    Miners Drop as South Africa Escalates Black Ownership Rules

    This article by Paul Burkhardt and Kevin Crowley for Bloomberg may be of interest to subscribers. Here is a section: 

    South African regulators unveiled a new mining charter to force companies to give more ownership to black shareholders, sparking a selloff across the industry.

    Anglo American Plc and Sibanye Gold Ltd. shares tumbled after the Department of Mineral Resources introduced requirements that local companies must ensure 30 percent of their shareholders are black, up from a previous level of 26 percent. Several of South Africa’s biggest mining companies may have to sell new stakes, raising the risk of dilution for existing owners.

    The new rules “could pull the rug right from under the industry’s feet,” said Andy Pfaff, chief investment officer of Vanguard Derivatives, a South Africa-based broker. “It’s certainly not going to help with attracting foreign investment into South Africa.”

     

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    Goldman-backed startup Circle launches no-fee foreign payments service

    This article from Reuters may be of interest to subscribers. Here is a section: 

    Circle Internet's international money transfer service, built on a type of blockchain called Ethereum, will allow customers to send payments between U.S. dollars, British pound sterling or euros on their mobile phones. There are no fees or foreign exchange mark-ups.

    International payments, according to Circle's chief executive officer and founder, Jeremy Allaire, should not take days to be processed and should be as easy and frictionless as sending an email.

    "When's the last time you sent a 'cross-border email'?" Allaire said in an interview. "The idea of cross-border payments is going to completely go away. ... Our vision is for there to be no distinction between international and domestic payments."

    Circle, which processed over $1 billion in transactions in 2016 and whose customer base increased more than 10-fold in the year up to last month, does not make money from its payments service, nor does it plan to, as it reckons consumers expect these services to be free.
    "We don't think there is any money to be made in payments anymore," said Allaire. "The entire business model of extracting a toll or having time delays around the movement of value is going away completely."

    Instead, the company makes money by trading bitcoin and other cryptocurrencies, both on digital currency exchanges and over the counter, at a time when the value of such web-based currencies has reached record highs. Last month alone, Circle traded over $800 million in digital assets, it said in a statement.

     

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    Germany Faces An Uncertain Future As the Eurozone's Magic Money Tree

    The EU has had a good few weeks, starting with the election of Emmanuel Macron as President of France, backed up by a series of strong economic figures from just about everywhere in Europe, and culminating in the Remainers’ Revenge last Thursday in the UK.

    Given the UK’s profound political uncertainty, it is now even possible that Brexit will not happen at all.  Yet the EU is facing a potentially bigger challenge.

    Last week, I berated Germany for being partly responsible for the eurozone’s huge current account surplus and urged a relaxation of German fiscal policy. Such a relaxation would indeed contribute something to improving European economic performance and stabilising the euro. But on its own, it will not be enough. 

    Leaders such as President Macron who want to ensure the euro’s survival support the construction of a fiscal union, which would ultimately involve the pooling of spending, taxing and borrowing. This is a much bigger deal than mere monetary union. Indeed, it is potentially much bigger than any integration yet attempted.

    Forming the monetary union simply meant that member countries used the same currency. Forming a fiscal union means that they will share the same bank account. I fully understand why most German citizens are wary of this.  Interestingly, from a reading of most of the economics literature, you would not think that they had much to be concerned about.

    In the imaginary unions discussed there, different parts undergo different shocks from time to time, and therefore alternate with regard to which part of the union helps out which. One of the defects in the design of the single currency was precisely that the system did not have this characteristic. Monetary union without fiscal union meant that there was no natural economic mechanism for the relief of less fortunate members on those occasions when the economic dice rolled against them.

    By contrast, within existing fiscal unions such temporary transfers occur all the time.  But often this sharing of alternating ups and downs is not fiscal unions’ most important feature and it is not what German voters should be most worried about.

    In most existing fiscal unions, as well as economic fluctuations that affect different parts differently, there tends to be a persistent discrepancy in the level of prosperity of different parts, and sometimes even in their growth rate, with the result that there is a one-way flow of fiscal transfers that persists over decades, and possibly over centuries. 

    For instance, the Office for National Statistics announced last month that London effectively subsidises just about all of the rest of the UK, while England subsidises Scotland.  These features of our Union are not here today and gone tomorrow. They are deep-rooted in the nature and structure of the Union.

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