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Notes by EMA: Credit Suisse Asian Investment Conference 2017 – Part 1

Credit Suisse Asian Investment Conference 2017

(Part 1)

Enrique Aboitiz Mendieta

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HOW ARE ECONOMIC, MONETARY AND FISCAL POLICIES BEING DEPLOYED AROUND THE WORLD TO ENSURE SUSTAINABLE GROWTH AND HOW CAN THEY SUCCEED

Glenn Hubbard

Dean and Russell L. Carson Professor of Finance and Economics, Columbia Business School

John Taylor

Professor of Economics, Stanford University; and Senior Fellow, the Hoover Institution

Fan Jianping

Research Fellow, State Information Centre, China

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What is being done to those that are left behind in this world of Globalization is key! There are certain transaction costs of Globalization.

Capital accumulation in the U.S. has been dropping for five years. This needs to be brought back up so people can get hired. It is not that China is taking away jobs, the U.S. losing them.

Regulation is a serious problem everywhere – small, medium & large.

“Regulation affects productivity”

THIS STATEMENT WAS REPEATED. REGULATION IS NOT ONLY COSTING TIME AND MONEY, IT IS DISCOURAGING INVESTMENT AND IS A CAUSE FOR THE UNEMPLOYMENT SITUATION – SIGNS OF REGULATION AS BEING THE NEW LEFT.

“Infrastructure is needed not mainly as a fiscal stimulus, but rather to raise productivity.”

I FOUND THIS TO BE A RED LIGHT OF INTEREST. THE PRODUCTIVITY ASPECT OF ANY INFRASTRUCTURE IS MORE IMPORTANT THAN ITS EFFECT AS STIMULUS, SO THE SIN OF OMISSION OVER THE PAST DECADES OF USING TAXPAYER MONEY TO FUND ERRONEOUS WARS IS VERY MUCH LARGER THAN WE THOUGHT. MANY OF THOSE JOBS COULD HAVE BEEN CREATED.

The lousy service in La Guardia and Kennedy Airports are not an infrastructure issue. It is a regulatory issue. It is managed by the New York Port Authority. Remove it from them and there will be plenty of capital and improvement.

“If a border tax happens, there would be 25% appreciation of the U.S. dollar.”

I am not so sure I agree here as the exporters in both Europe and Japan have withstood this effect in exchange swings. The euro has gone from 84 to 145, and the yet to 80 plus from memory back up.

CAN THE NEW POLITICAL LEADERSHIP IN CHINA SUCCEED?

Jing Huang

Lee Foundation Professor on U.S.-China relations; Director of Centre on Asia and Globalization, Lee Kuan Yew School of Public Policy, Singapore.

Qiang Wu

Independent Political Commentator and former Lecturer of the Department of Political Science, Tsinghua University.

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The 19th National Congress of the Communist Party of China is key. What political change? What leadership change? According to Huang, we must first understand the 18th Congress. It was the one in transition. It only had one term of 10 years, but it was a bad congress in terms of succession.

The 19th Congress under the Xi leadership is in transition, and the economy is also in transition. The economy, however, is running out of gas. There is a shift from a demand-driven economy to a supply-driven one. Anti-corruption means anti monopoly – the privileged had to be defanged. At the same time, China has to assume a greater leadership position in the world, post-Trump. It is the largest trading nation on earth.

Chinese President Xi Jinping (Photo by Lintao Zhang/Getty Images)
Chinese President Xi Jinping (Photo by Lintao Zhang/Getty Images)

The 19th Congress will be a watershed event. Structural changes are needed. Xi enhance his own leadership. He is looking for a successor. An assistant to be successor has to be selected

World leadership has changed dramatically from a year ago, and the main change is Trump.

Chinese leadership has also changed. For years, their relationship with the U.S. has been improving until a couple of years ago with Obama.

There are two major events for China. First was in 1955, post-Stalin China, which had a more direct role in foreign policy. Second was 1975, Tri-party system China during the Cold War. Then Deng Xiaoping took the helm as the leader – it was during his time when the benefits of globalization was felt in China. THERE WAS A PARADIGM SHIFT. THE RED REVOLUTIONARY DIVERSION WAS GIVEN UP. Now, China is at the crossroads. Global sharing from ethical buddhism is replacing Stalinism and Communism.

According to Huang, there are three contradictions: 1. If China increases its globalization and growth, there will be inevitable conflict with the interests of the U.S. But China cannot afford confrontation. 2. China is the only country that has risen within the existing world system without hard, military power. All others in history have had the capability to project world military power. However, China cannot protect itself beyond 200 miles of its coast. 3. As China rises, it faces forces from outside its boundaries – Human rights, democracy, Tibet, etc.

Key problems being those with the U.S. A stable working relationship with the U.S. is necessary.

China integrated with the world system, which is the U.S. system, since 1945. There is irrevocable interdependence with the U.S. in all areas – economic, trade, innovation etc. The relationship between them is in constant compromise. The situations in China and the U.S. drive these compromises. If they do something that is good for Shanghai, it might be bad for Schenzen. If New York is happy, Washington may not be.

Communication, cooperation and collaboration are necessary between both countries. Their issues are world issues – Trump cannot change this.

The Risk of Xi visiting the White House: 1. Trump has no team – 92 ambassadors are not appointed. 2. No team means no policy framework. 3. No strategic consensus, meaning the U.S. deeply divided.

Eventually, the Democrat and Republican establishments will reach a compromise. Unilateralism is very damaging, which is why we have multinational institutions guarding the order: UN – International Political Order. WTO – International Trade Order. World Bank – International Economic Order.

The Americanism brand has been damaged by Democrats. The U.S.’s soft power is its most important power. It is the last refuge of the world; the lighthouse.

The decision of Xi to go to Davos was made after Trump was elected.

MAJOR OPPORTUNITY FOR THE CHINESE: THE AMERICAN VACUUM. WE ARE GOING TO GET SWAMPED NOT ONLY BY TOURISTS AND PROJECTS, BUT ALSO LISTED COMPANIES – CHINOY COMPANIES BEWARE! THE LI KA SHINGS ARE COMING!

China’s political system is not compatible with world political system.

Xi belongs to the fifth generation. He is unique. This generation are the children of the founding fathers, and Xi has a personal mission. Xi started as a village leader. He went up and did not miss a step. He knows the system well. It all started after Deng Xiaoping, so he knows the pros and cons of reform. They are all exposed to the international system, they have all spent time abroad, and All of them have a personal mission.

The children of the third generation were soldiers, scientists etc. The fifth generation are all CEOs. Anti-corruption is personal for them. Accountability matters.

Leaders do not create situations – situations create leaders.

There were three challenges when Xi came in. First, the government was extremely corrupt. There are two centers to this – money and power. When the two join, it gets corrupt. You have to choose: power or money. If you want to make money, don’t enter politics. Second, China’s economy needed restructuring. Third, the leadership is in transition: transition from 18th Congress for 5 years as they leave, and transition of the 19th Congress for five years as they come in. He has to achieve all three or he and China are in trouble.

Xi has three hats: Party, Military, State. He has to pass it on to three people. He keeps the title of Chairman of the Party. He needs two vice chairmen, one military and one premier, running the state. Jiang was named and so was Hu Jintao.

He has to legitimize the electoral college and amend the constitution to give him 2 terms of ten years. Twenty years in total.

Japan

Japan is riling up China to get the U.S. firmly with Japan. China only has problems with Japan. Not the rest of the region – for this reason.

Young people in Japan have no chance to have a better life than their parents. Nothing worse than perder la ilusion (losing hope). Japan used to be subservient to U.S. However, its interests and U.S. interest with Russia may not be the same.

 

AMERICAN MONETARY POLICYREFLECTION PAST, PRESENT FUTURE

Dennis Lockhart

Former President and former CEO, Federal Reserve Bank of Atlanta

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Antonio Moraza and I heard him speak today. I believe that his conversation is relevant to the discussion on this email on interest rates and so forth.

Leadership at the Fed is coming up, and changes are imminent.

The Fed recently raised interest rates for the third time in a decade. This validates confidence in a steady and moderate growth to come.

(Source: Lombardi)
(Source: Lombardi)

Inflation targets are appropriately being achieved.

When the 2008 crisis occurred, they all thought that they could contain it in the real estate sector. They were wrong.

Lockhart speaks of four sub-plots: cyclical recovery, secular trends, policy changes and headwinds

Cyclical Recovery

  • GDP was restored to post 2007 levels plus 12%.
  • Unemployment was equivalent to seven to eight million jobs lost. Now, 8.5 million jobs have been recovered.
  • Household net worth dropped by an overall USD12 trillion. Now, it’s up 34 trillion from the bottom, or by a third.
  • Consumer confidence has been at its highest in the last 15 years.

Secular Trends

  • Non-farm jobs up from 135 million to 145 million
  • Labour force participation is down from 66 % to 62 %
  • Hourly earnings showed 3.4% growth in 2006, and 2.5% growth 2017
  • GDP growth per capita was USD49 trillion in 2006. In the fourth quarter of 2016, it was USD52 trillion.
  • Productivity growth was 2.2%, now .7%.
  • Business fixed investments are in decline.
  • Labor force dynamism, or the process where old occupations are dying and new jobs sprouting, is in decline.
  • Business dynamism, or new business formation, is also declining.
  • Household formation in decreasing – number of children living in their parents’ basements is at its highest since 1942.
  • Underlying factors that matter for secular trends:
  • Demographics – underappreciated
  • Immigration

Policy Changes

Are we back to normal? Don’t think of normal as returning to 2007. Are we at a point of moderate sustainable growth? Yes. 2006 Fed rate is 5.25%, In 2008, it was zero. Today, it’s plus .75.

The Fed balance sheet has grown from USD900 million to USD4.5 trillion.

There is a discussion today at the top level what the equilibrium should be, the rate at which there is balance. The Fed will not do anything to expand or contract. In the past, there was 2% inflation. Then the rate would be 4%. Now, they are talking of 1%.

The Fed could let its balance sheet slowly shrink via maturity and cease re-investment. The natural point is around USD1 trillion to USD2 trillion. Discussions are being held of how to keep it at USD4.5 trillion and be normal. The gravity of this is directed towards all treasury bills, but strategically, they may keep some mortgage-backed securities in case they have to expand again in the future.

There is also a manufacturing drought, caused by a lack of confidence in future demand.

Headwinds

In the last 10 years, there has always been something that has held the U.S. back: Greece, European weakness, European bank weakness, Brexit, etc. Going forward, there are two foreseeable challenges:

  • Better Demographics including immigration
  • Improving productivity

A 4% growth in the future is very unlikely, 2% is possible. Optimism of 3% plus over elections is also unlikely.

 

INDIA – A HOUSE UNDER RENOVATION

Neelkanth Mishra

India Equity Strategist, Credit Suisse

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In India, financial savings have begun to rise in 2016. Gold inflows are down and year-on-year loan growth is also down. There is excess savings from too little demand.

The government cannot spend money – same as the Philippines – the bureaucracy cannot build roads and railways. The government debt-to-GDP is at a 40-year low at 16%. The peak was 20% in 1966.

Bank rates and margins are also dropping. There is low demand and competition. Agriculture in the country is shredding people. Population growth is dropping. Construction is mainly driven by households; driven by the black market. That is down due to government crack down. People are scared so they do not spend. Real estate is 80% cash driven. It is currently down due to black market crackdown.

The state government action is driving up foreign direct investments, which increased from 1% to 2% of GDP.- USD45 billion. However, gross capital formation, power demand, road and rail building, and all broad-based demand are down. Oil and cement did not see growth.

 

JAPAN’S DEFENSE

Tomomi Inada

Japanese Minister of Defense

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Japanese policy allocates 1% of GDP exclusively for defense, per its constitution. If North Korean becomes serious enough of a threat, they will adapt – no question. The defense industry is mainly for local market. They are concerned with reputation, and it’s all risk-selling abroad. U.S. talk of burden sharing will increase Japanese defense budget.

 

Japan's miitary. (Source: Daily Mail)
Japan’s military (Source: Daily Mail)

(Second and final part continues in the June 15 issue)