In a spin. A bearish perspective on the market in 2011

Dec 29th 2010 | from PRINT EDITION
Economist.com/blogs/buttonwood

BEFORE reality TV ruled the airwaves, the Saturday night schedules on the BBC would often feature a variety show with singers, comedians and novelty acts. One favourite was a man spinning plates on top of poles, an act that involved a lot of dashing about to avoid disaster.

Central banks have been performing a version of that act for the past three years. In 2008 they were racing around trying to save one bank after another, and were unable to prevent a few smashes. In 2010 the fragile plates were the sovereign countries of the euro zone. The authorities just managed to keep them intact.

But the loss of just one tiny saucer could result in a lot of broken crockery. The banks are still in a delicate state with many dependent on the European Central Bank (ECB) for finance. The advice of Walter Bagehot, a 19th-century editor of The Economist, was that central banks should lend freely in a liquidity crisis, against good collateral. But this support was supposed to be short-term, not continuous: a central bank should be an emergency room, not a hospice.

Indeed, for all the efforts of governments and central banks, many of the global economy’s long-term problems have yet to be solved. The banks are weak, the American housing market is still in the doldrums and the global imbalances have not gone away.

Just as the ECB bought time for European banks, rescues have been attempted for the struggling governments of Greece and Ireland. But these seem like temporary expedients: lending the countries money for extended periods at rates neither can afford. The packages have not been sufficient to calm the markets or stop the rot from spreading: 2010 ended with Fitch downgrading Portugal and putting Greece on negative rating watch.

The rest of Europe is now talking about imposing penalties on private-sector lenders in future rescues. That will turn each crisis into a game of chicken as bondholders sell before they get penalised. And financing packages do not deal with an underlying lack of competitiveness in many European economies. Without the ability to devalue, the restoration of competitiveness requires painful austerity measures and wage restraint.

That leads to another potential flashpoint for 2011: the lack of global co-ordination. Gone is the consensus seen at the G20 meeting in April 2009. Europe will be pursuing austerity, China is trying to rein in bank lending but America has opted for another fiscal stimulus. This is a throwback to pre-crisis 2007, with American deficit-financed consumption set against Chinese surplus-creating exports.

It seems certain that the Federal Reserve will continue to accompany fiscal stimulus with the monetary equivalent in the form of near-zero interest rates and further quantitative easing. The need for such extraordinary measures is an indication of how weak the economy continues to be. But while the developed world is still fighting off deflation, the developing world is worrying about inflationary pressures, with gold near $1,400 an ounce and oil back above $90 a barrel.

Easy monetary policy in America also creates the incentive for further speculative money to flow into emerging markets via carry trades and other strategies. That creates a dilemma for developing-country governments: they may want to head off inflation with higher interest rates but that would only encourage the speculators. Some have tried capital controls instead but it is not clear such measures are effective. Bubbles in emerging markets are likely to develop in 2011.

Whether all-out currency wars (in the form of trade protection) will emerge in 2011 is harder to tell. The aim of most developing countries is to prevent their currencies rising against the dollar at a faster pace than the Chinese yuan. Oddly enough, the European fiscal crisis eased some of the strains in late 2010: a weaker euro meant a stronger dollar.

But it is quite possible that the dollar could suffer another round of weakness in the coming year. After all, the currency has no yield support, a continuing trade deficit and the prospect of endless fiscal deficits. The sorry condition of municipal and state finances could yet be the trigger for a loss of confidence.

This list of problems is the reason why it is so hard for Buttonwood to join the bullish consensus for 2011. The authorities have kept the plates spinning by dint of an enormous effort and some unprecedented monetary measures. But the underlying problems have not been solved. And the law of gravity cannot be suspended for ever.

Economist.com/blogs/buttonwood

from PRINT EDITION | Finance and Economics

Avant le G20, Pékin admet une appréciation limitée du yuan

[ 21/06/10 - 01H00 - Les Echos - actualisé à 00:36:16 ]

Samedi soir, la banque centrale chinoise a solennellement annoncé que le régime de change du yuan allait être progressivement assoupli. Les économistes n'anticipent toutefois qu'une poussée graduée de la devise chinoise.

YANN ROUSSEAU, Les Echos

DE NOTRE CORRESPONDANT À PEKIN.

A18 heures, samedi soir, le ministère des Affaires étrangères chinois a solennellement informé plusieurs ambassadeurs occidentaux basés à Pékin que le pays était sur le point de dévoiler une réforme politique d'importance capitale pour la planète. Une heure plus tard, la banque centrale révélait que le régime de change du yuan allait être progressivement assoupli et laissait même entendre que la monnaie chinoise allait abandonner, pour la première fois depuis près de deux ans, son ancrage à l'évolution du dollar. A compter de ce matin, la monnaie chinoise pourra voir sa valeur évoluer chaque jour sous le contrôle permanent des autorités autour d'un panier de devises étrangères de référence.

Pour justifier ce virage stratégique que les Etats-Unis et plusieurs grands partenaires commerciaux du pays réclament depuis des mois, Pékin a expliqué qu'il avait en partie confiance dans la qualité de sa reprise et pouvait dès lors mettre un terme à la « politique exceptionnelle » d'indexation sur le dollar mise en place à la mi-2008 pour protéger la croissance domestique de la crise financière mondiale.

Pékin, qui avait gelé l'appréciation de sa monnaie, après lui avoir laissé gagner 21 % sur le dollar entre juillet 2005 et juillet 2008, avait tenté, en stabilisant la valeur du yuan, de défendre ses exportateurs déjà violemment touchés par la baisse de la demande mondiale. « C'est le début d'une nouvelle ère », a assuré Li Daokui, l'un des conseillers de la banque centrale. Si plusieurs dirigeants étrangers ont salué, au fil du week-end, l'annonce de Pékin (voir ci-dessous), les analystes s'interrogeaient, eux, sur les conséquences exactes de ce retour à un système de « taux de change flottant administré ». Hier, tous s'entendaient pour exclure une réévaluation forte et rapide de la monnaie chinoise dans les prochains mois. Ils notaient d'ailleurs que la banque centrale avait, elle-même dans un communiqué, mis en avant la réduction récente de ses surplus pour écarter l'hypothèse « d'une appréciation de grande envergure ».

Sur le même sujet

Satisfaction en Europe et aux Etats-Unis, critiques voilées en Chine

Une lettre d'Obama aux membres du G20 : « Priorité à la reprise »

Mesure préventive

Dans une note à ses clients, Andy Rothman, un économiste de CLSA, anticipait, ce week-end, une appréciation d'à peine 0,2 % par mois jusqu'à ce que la situation en Europe se soit réellement stabilisée. « Ensuite, nous pouvons envisager le retour à une appréciation annuelle de 5 % à 7 % comparable à la période 2005-2007 », assure-t-il. « Cette annonce ouvre la voie à une petite réévaluation dans un avenir proche », a confirmé Jin Dehuan, un économiste du Shanghai Securities and Futures Institute, qui remarque que la décision intervient à une semaine d'un sommet du G20, annoncé houleux pour les défenseurs de la politique monétaire chinoise. « C'est une mesure préventive contre les pressions auxquelles la Chine pourrait être confrontée au G20 », assure l'expert.

Cherchant à modérer le probable enthousiasme des marchés financiers, les économistes rappellent que les récentes appréciations du yuan face au dollar n'ont jamais enclenché de véritable mouvement de rééquilibrage des grands flux commerciaux mondiaux et n'ont eu que des impacts restreints sur les performances des grandes multinationales domestiques ou étrangères. Les autorités communistes prennent d'ailleurs elles-mêmes plaisir à rappeler que le déficit commercial américain avec la Chine avait continué à se creuser entre 2005 et 2008 alors qu'elles avaient orchestré, sur la même période, l'une des plus spectaculaires hausses de la valeur de leur monnaie.

Chinese banks

Hole sale

Feb 25th 2010 | HONG KONG
From The Economist print edition

Capital calls by Chinese financial institutions elicit questions

THE bill for China’s bank-lending spree is coming due. An announcement on February 23rd by China’s fifth-largest lender, the Bank of Communications (BoCom), of a 42 billion yuan ($6.15 billion) rights offering, created a stir in Asian financial markets—not because it was unexpected, but because it represents the biggest fund-raising effort by a mainland company since the heady days of 2007.

The move follows similar announcements by two other Chinese financial institutions, the Bank of China and China Merchants Bank. Smaller institutions have also been busily raising money, either through initial public offerings or direct placements to state-owned industrial companies. All told, some 200 billion-250 billion yuan has been raised in the past six months, according to Bill Stacey, an analyst with Aviate Global, a Hong Kong brokerage firm.

At the very least the money is needed to offset a massive lending boom last year. To augment stimulus spending by the central government, China’s state-controlled banks expanded their balance-sheets by one-third, or almost 10 trillion yuan. An increase in loans inevitably requires an increase in capital in order to maintain prudent buffers. When expansion of credit occurs gradually, this can come from reinvested profits. When lending explodes as it did in China, fresh funds are a necessity.

By raising money, BoCom’s core Tier-1 capital ratio will jump from a barely adequate 8% to more than 10.4%. Believers in China’s banking system will say this not only fills the capital hole but creates room for yet more growth ahead. Sceptics will lean toward another conclusion, wondering whether the capital boost is an effort to get ahead of a massive surge in bad debts that will emerge from the remarkable surge in credit last year.

There is no hard evidence yet for this concern. Quite the opposite. Ratios tied to non-performing loans held by Chinese banks have been improving. But that is arguably a worry in itself: turbocharged credit creation rarely, if ever, comes without a cost. Anecdotal reports abound that regulators are requiring banks to put aside reserves for as much as 200% of non-performing loans, an egregious amount unless the underlying accounts are suspect.

Such opacity in book-keeping may have been common several years ago, say the system’s supporters, but is less feasible now because Chinese banks have been listed on exchanges, and so answer not only to the Chinese government but also to shareholders, who would not permit credit to be subject to political goals. Reports this week that Chinese banks have been told by their regulators to lend more to small businesses and less to the financing arms of local governments suggests that the truth is rather different.

Chine : la politique bancaire inquiète les marchés

[ 26/01/10 - 10H20 - Reuters ]

SHANGHAI, 26 janvier (Reuters) - L'entrée en vigueur mardi du relèvement des réserves obligatoires pour certaines banques chinoises a déstabilisé les marchés boursiers, très sensibles désormais aux modifications de la politique monétaire de Pékin.
Les marchés sont d'autant plus inquiets qu'un article de presse a révélé que les efforts de la Chine pour freiner les prêts bancaires, et éviter la surchauffe économique, rencontraient un succès mitigé. Les marchés craignent désormais l'annonce de nouvelles mesures restrictives.
Les banques chinoises ont octroyé 1.450 milliards de yuans (150 milliards d'euros) de nouveaux prêts sur les 19 premiers jours de l'année, selon le 21st Century Business Herald. Les banques chinoises avaient prêtés 1.100 milliards de yuans sur les 15 premiers jours de janvier, selon des chiffres obtenus par Reuters la semaine dernière.
Les marchés asiatiques ont fini dans le rouge et les places européennes reculaient en matinée, malgré la clôture en légère hausse de Wall Street lundi.
A Taiwan, l'indice TAIEX a perdu 3,48%, enregistrant sa plus forte baisse quotidienne en six mois tandis qu'à Shanghaï, l'indice composite reculait de 2,4% pour toucher son plus bas niveau depuis près de trois mois en clôture. A Hong Kong, le Hang Seng reculait de 0,7% en matinée.
Les matières premières et les devises considérées à haut rendement ont été affectées tandis que le yen japonais , jouant son rôle de valeur refuge, était très recherché.
La pression mise sur les banques fait suite à de premières mesures mises en place par la banque centrale chinoise pour rompre progressivement avec la politique monétaire ultra-accommodante qui a contribué au rebond rapide de la croissance économique chinoise et de celle des pays voisins.
PAUSE POUR LE NOUVEL AN
La banque centrale a toutefois surpris les marchés mardi en laissant inchangé le rendement de ses titres obligataires à un an, à 1,9264%, alors qu'on attendait 1,97%. Lors de chacune de ses deux précédentes adjudications, la Banque populaire de Chine avait augmenté ce rendement de huit points de base.
La banque centrale, qui retire des liquidités des marchés depuis plusieurs semaines, s'est également abstenue de drainer des fonds du marché monétaire via des accords de rachats de papier à court terme, signalent des traders.
Mais, selon les spécialistes, il ne s'agit sans doute que d'une pause dans le tour de vis monétaire. Cette pause viserait à maintenir suffisamment de liquidités dans le système en prévision des congés du Nouvel an lunaire, qui dureront une semaine à partir du 14 février.
De nombreux analystes anticipent déjà une reprise du resserrement monétaire en Chine après les vacances du Nouvel an, ce qui pourrait déboucher sur une augmentation des taux directeurs.
Reuters avait rapporté la semaine dernière que Citic Bank , septième établissement de crédit du pays, et Industrial and Commercial Bank of China (ICBC) avaient reçu pour instruction de relever leur ratio de réserve après des prêts jugés excessifs.
Ce relèvement s'ajoute à celui, général, de 50 points de base, décidé le 12 janvier et entré en vigueur six jours plus tard. (Plus de détails: )
(Victoria Bi et Jason Subler, version française Marc Angrand et Danielle Rouquié)

Russia's ailing economy

Red square blues
Jun 4th 2009
From The Economist print edition
Russia’s failure to diversify away from oil should worry the Kremlin

NOT long ago, Russia proudly counted itself as one of the BRICs—with Brazil, India and China, the four emerging-market giants that were outgrowing the rich world. Yet it now makes more sense to talk of the BICs. With GDP shrinking by almost 10% in the year to the first quarter, Russia is in deep recession.
This is upsetting and worrying for the country’s political masters in the Kremlin. Upsetting because, as late as last autumn, they dismissed the economic crisis as a Western problem that would leave Russia unscathed. But the collapse in the oil markets has shown just how much Russia still depends on getting a good price for its natural resources. Neither President Vladimir Putin in 2000-08 nor (since last May) President Dmitry Medvedev has done anything like enough to diversify the economy—indeed, it depends more on oil and gas now than it did. The government has utterly failed to create a legal and political infrastructure to support business and enterprise.

The Kremlin may not care much about either of these shortcomings, especially now that oil once again costs $70 a barrel. Yet even at this price it must worry, for it can no longer honour its side of Mr Putin’s original bargain: that, in return for a guaranteed rise in living standards, ordinary Russians would accept curbs on the media, rigged elections and a slide into autocracy. The Russians are now lumbered with the second part of this deal without gaining the benefits of the first. Not since Mr Putin came to power have high inflation and shrinking GDP caused such a fall in real incomes.

Why has this not led to more protests? Partly because the Kremlin is firmly in charge and partly because many Russians built up savings in the boom years and have yet to feel the full impact of recession. Besides, faith in the “good tsar” and low expectations of government mean that few blame Mr Putin, now Mr Medvedev’s prime minister.

In the past few months the Kremlin has also tried to show a friendlier face. Mr Medvedev gave his first full Russian interview to Novaya Gazeta, an opposition newspaper, on the grounds that its journalists “did not suck up to anyone”. He has acknowledged critics among non-governmental organisations. He hailed Barack Obama in their first meeting in London in April, inviting the American president to Moscow in July.

The trouble is that this has yet to produce any change. The second sham trial of Mikhail Khodorkovsky, former boss of the Yukos oil company, makes a mockery of judicial independence. Better relations with America are portrayed in Russia as a belated American recognition of past errors and a vindication of the Kremlin’s assertiveness, notably over Georgia.

Nor is there any sign of the promised falling-out between a hardline Mr Putin and a liberal Mr Medvedev. In fact, the differences between the two men are largely of style. After a year of Mr Medvedev’s presidency, only 12% of Russians feel that he is in charge, whereas over 30% believe that power remains with Mr Putin. And Mr Putin has hinted once again that he may resume the presidency for two more six-year terms in 2012.

Bear markets

The risk for the Kremlin is not that it will lose control or collapse into internecine fighting—Mr Putin’s grip is too firm. Nor is it that Russia will go bust, as the Soviet Union almost did in the late 1980s and Boris Yeltsin’s Russia did in 1998. Foreign reserves of $380 billion mean there is enough money to pull through. But without legal, political and economic reform, Russia could well lapse into stagnation. It has squandered one oil-price boom. The price of doing nothing again would be to condemn Russia to the vagaries of the oil market. Mr Putin and Mr Medvedev must not make the same mistake twice