Alibaba Is the Canary in China’s Coal Mine – BloombergView 09-01-15

Salient to Investors:

William Pesek writes:

Alibaba’s shares slide with each new report of middle-class Chinese raising cash and delaying spending. Alibaba’s $166 billion market cap exceeds the annual output of many countries.

The Chinese economy will weaken further: domestic and external demand is sliding along with the stock market. China will experience a negative wealth effect as stocks fall. Mass austerity has only just begun. Most Chinese under 50 only know annual growth of above 10%.  Sentiment will plunge as more and more mainland Chinese sense that the economy’s and stock market’s troubles are beyond the government.

The conventional wisdom is that few mainland Chinese own stocks, but it said the same about Americans in the late 1990s.

Beijing appears to have given up trying to save the market. Directing banks to buy shares, turning off half the market, loosening curbs on margin trading, suspending IPOs, letting stock speculators put up houses as collateral, are all signs of desperation.

Wang Tao at UBS said risks are to the downside despite policy efforts.

Morgan Stanley lowered its forecast for 2015 Japanese growth to 0.5% from 1%.

Glenn Stevens at Reserve Bank of Australia warned of downside risks associated with developments in China.

Read the full article at http://www.bloombergview.com/articles/2015-09-01/alibaba-is-the-canary-in-china-s-coal-mine

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Did Soros Just Predict a China Crash? – Bloomberg 01-08-14

Salient to Investors:

William Pesek writes:

George Soros believes the main risk facing the world is a Chinese debt disaster that is unfolding in plain sight. Soros said China’s restarting of the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. Soros sees eerie resemblances with the US in the years preceding the crash of 2008, but with a significant difference. In the US, financial markets tend to dominate politics, but in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises, so how and when this contradiction will be resolved will have profound consequences for China and the world.

Michael Pettis at Peking University and Jim Chanos at Kynikos Associates have been warning of this for years. Patrick Chovanec at Silvercrest Asset Mgmt said the “shadow” Chinese balance sheet would worry policy makers around the globe but for China’s obsessive opacity concealing the problem. China’s shadow-banking entities is its answer to Enron.

JPMorgan Chase estimates shadow banking is 69 percent of China’s 2012 GDP and is a wildly conservative guess. China fudges trade and other run-of-the-mill data, so you can imagine the lengths it goes to hide the magnitude of its credit bubble.

Stephen Roach warns of China’s propensity for thinking that slogans are sufficient. China can either restructure its economy or grow rapidly, but not both. The higher China’s growth rate, the less retooling that is going on and the more debt the nation is amassing behind the scenes.

The way such regional leaders win Beijing’s attention is rapid growth, causing dozens of nascent super cities all borrowing like mad to deliver big GDP numbers.

Read the full article at http://www.bloomberg.com/news/2014-01-08/did-soros-just-predict-a-china-crash-.html

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Pesek on Asia: China’s Balancing Act – Bloomberg 12-16-13

Salient to Investors:

William Pesek writes:

  • I agree with Tom Holland at The South China Morning Post that China cannot both maintain 7 percent-plus growth rates and implement huge reforms.
  • Thailand has seen 18 coups in the past 60 years.
  • The whole reason for being bullish on Japan Inc. so far has been a weaker exchange rate, a stronger yen as the Fed starts to taper is a big worry, along with large Japanese businesses paring their projections for capital spending this fiscal year, signaling economic headwinds as a sales-tax hike looms in April.

Read the full article at http://www.bloomberg.com/news/2013-12-16/pesek-on-asia-china-s-balancing-act.html

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Irrational Exuberance Overtakes Asia – Bloomberg 12-12-13

Salient to Investors:

William Pesek is  writes:

The “Greenspan put” that flooded markets with cash whenever things got dicey has become the default position in Washington, while in Asia there is an even more dangerous escalation of this policy in papering over cracks in economies that desperately need tougher, structural reforms.

Indian stocks have hit record highs, everyone is talking about India turning the corner, despite nothing really changing from 3 months ago when the rupee was plunging to record lows, politicians fumbled at every turn, talk abounded it would become the first BRIC to have its credit rating cut to junk. India’s current-account deficit is still a danger, just temporarily disguised by a charismatic new central banker. India remains politically corrupt, and the odds are that the BJP is no more a force for change than it was in 2004.

In Japan, the Nikkei 225 Stock Average is up 47 percent despite not one of Abe’s restructuring pledges being fulfilled. Japan is just as heavily regulated, uncompetitive and devoid of innovation as it was the day before Abe came to office. All that is new is a stronger punch recipe. Japan has an overpriced, unproductive and shrinking workforce, not to mention an economic structure geared for success in the 1970s.

PBC Governor Zhou Xiaochuan is deluded in believing China that can grow close to 8 percent a year, no matter what Communist Party leaders do or don’t do. President Xi Jinping’s vague pledges to let markets play a bigger role in the economy has made him seem like a Chinese Margaret Thatcher. Yet as China ends a crackdown on fraud and clears the way for over 700 companies to sell shares, the coming boom in IPOs will benefit from a kind of reform halo effect.

The policies of central bankers in China, India and Japan is no replacement for real reforms, like curbing corruption, lowering trade barriers, creating jobs, encouraging entrepreneurship, building social safety nets, promoting sustainable development and reducing their own role in the economy. Monetary policy can cushion the process of fixing flaws in economies, but it is no substitute.

America’s Greenspanization unfolded at a time in the 1990s of relative stability in a very mature economy. Asia’s Greenspanization is happening far too early in the development cycle, and much too broadly. Evidence of governments letting central bankers do their jobs can be found in Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam.

Read the full article at http://www.bloomberg.com/news/2013-12-12/irrational-exuberance-overtakes-asia.html

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Japan’s Secrets Bill Turns Journalists Into Terrorists – Bloomberg 12-02-13

Salient to Investors:

William Pesek writes:

  • According to one prevailing theory, China is creating an international storm to change the subject domestically away from income inequality, official corruption and China’s blackening skies.
  • Japanese Premier Abe is seizing the opportunity to rush a chilling official-secrets bill into law: which if enacted would allow government ministries to declare just about anything they want classified. Yet Abe has not implemented a single structural reform in almost 12 months in office. The vaguely written law could easily result in long jail terms for reporters and whistle-blowers.
  • Reporters Without Borders argues that Japan is making investigative journalism illegal, and is trampling on the fundamental principles of the confidentiality of journalists’ sources and public interest. It ranked Japan’s press-freedom 53rd out of 179 countries, 31 places lower than in 2012.
  • Jake Adelstein said the secrecy bill bears a resemblance to Japan’s pre-WWII Peace Preservation Law, which gave the government wide latitude to arrest and jail individuals who were out of step with its policies. Parts of the bill echo the Bush-Cheney power grab that was the Patriot Act.

Read the full article at http://www.bloomberg.com/news/2013-12-02/japan-s-secrets-bill-turns-journalists-into-terrorists.html

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Xi Jinping Overreaches in the East China Sea – Bloomberg 11-28-13

Salient to Investors:

William Pesek writes:

  • China’s declaration of a vast air defense identification zone belies all the talk of its peaceful, magnanimous rise as a world power. A tiny accident or miscalculation in the skies above the disputed islands could easily spiral out of control, dragging Washington into a clash that would shake the global economy.
  • Xi may be especially willing to risk a confrontation with Japan in order to distract opponents of his proposed reforms, as well as ordinary Chinese who are growing restless over pollution, income inequality and official corruption.
  • Abe is an unapologetic revisionist who remains intent on whitewashing Japan’s WWII aggression, including the government’s role in keeping military sex slaves; flexing Japan’s muscles in Asia; and perhaps revising its pacifist constitution.
  • In addition to Japan and Korea, China’s air zone is sure to worry Brunei, Indonesia, Malaysia, the Philippines and Taiwan, all of which are embroiled in territorial disputes with Beijing.
  • China took a big hit abroad for its initial $100,000 aid offering to the typhoon-devastated Philippines, so its inflammatory new policy will only further alienate neighbors in a region it’s seeking to woo away from the US.

Read the full article at http://www.bloomberg.com/news/2013-11-28/xi-jinping-overreaches-in-the-east-china-sea.html

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Pesek on Asia: Breakfast at Tiffany’s – Bloomberg 10-02-13

Salient to Investors:

William Pesek writes:

  • Asia represents more than half the global economy.
  • Softbank founder Masayoshi Son’s $326 million purchase of Tokyo’s landmark Tiffany Building may be a sign Japan’s long-suffering property market is turning around – the success of this investment will be a good barometer.
  • Every scrap of growth matters in a region struggling to reduce poverty and narrow wage gaps, so Asia is in for a rocky few months as the Fed decides on tapering.
  • Eventually the Chinese will discover tuna and begin outbidding Japan for it.
  • The BRICs are not a genuine collective endeavor with clear aspirations for humankind.

Read the full article at  http://www.bloomberg.com/news/2013-10-02/pesek-on-asia-breakfast-at-tiffany-s.html

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Indonesia Has Bigger Problems Than Bikinis – Bloomberg 09-19-13

Salient to Investors:

William Pesek writes:

Indonesians are outraged over bikinis but not over the right target of obscene levels of graft, and policies that have made the rupiah Asia’s most pathetic currency. The more voters obsess about exposed skin, the less the fraudulent class has to worry about being exposed.

The risk of Indonesia plummeting into free fall, like in 1997, is quite small because its banks are much healthier, the government is far more transparent, and the central bank is sitting on $93 billion of currency reserves, while short-term foreign-currency debt levels are manageable.

Foreign-direct investment trends still suggests Indonesia has a bright future, with vast stores of natural resources and 26 percent of the population of 250 million under 15.

The widening deficit and current account in shortfall for 7 straight quarters is causing hot money to flee.

Inadequate ports, highways, refineries and power grids are squandering Indonesia’s chances of attracting manufacturing jobs that are now going to China, the Philippines and Vietnam.

Corruption remains rampant. In 2012, Indonesia fell 18 places in Transparency International’s Corruption Perceptions Index.

Read the full article at http://www.bloomberg.com/news/2013-09-19/indonesia-has-bigger-problems-than-bikinis.html

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Where 500 Retweets Can Win You 3 Years in Prison – Bloomberg 09-12-13

Salient to Investors:

William Pesek writes:

China’s escalating war on free expression is unfolding in ways that even George Orwell could not have dreamed up, and clear evidence that China will not be serious about economic reforms and its leaders lack an ingredient vital to overhauling the economy: self-confidence.

Markets are looking for China to be bold and introduce reforms in November, but the latest Internet rules signal timidity rather than strength.

There has been a rollback of the campaign to clamp down on runaway credit growth – the broadest measure of new credit nearly doubled in August.

The primacy of state-owned enterprises is the biggest barrier to China switching from manufacturing to services and to ending corruption. Too many Communist Party power brokers are making tens of millions of dollars off state-dominated China Inc. while Beijing lacks the political will to irk these cronies.

A freer media and Internet could end this corrosive dynamic fast and empower would-be entrepreneurs China still lacks. If your Web comment gets more than 5,000 hits or is reposted more than 500 times, expect a knock at the door.

Read the full article at  http://www.bloomberg.com/news/2013-09-12/where-500-retweets-can-win-you-3-years-in-prison.html

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India’s New Central Banker Isn’t a Superhero – Bloomberg 09-05-13

Salient to Investors:

William Pesek writes that Raghuram Rajan at the RBI has no control over what really ails India, namely:

  • Politicians spending without accountability
  • Corruption
  • Government transparency
  • The red tape that is deterring investment and strangling growth.
  • Tax policies that limit revenue streams and encourage an explosion of startups
  • Education and training programs that need reform
  • Infrastructure improvements
  • A parliament in New Delhi at odds with powerful state leaders on virtually every upgrade the economy needs.
  • Barriers to imports and investment.
  • Corporate governance that need improving.
  • Reliance on foreign energy at a time of rising tensions in the Middle East
  • The competitive threat from China.
  • Gap between rich and poor.

Pesek writes:

  • Prime Minister Manmohan Singh is a spent force.
  • The double-digit output of the past decade was, in some ways, a debt-driven mirage enabled by short-term capital flows.
  • The real reforms that India needs are on hold until May’s election. 270 days to hit new lows on the rupee and for rating companies to mull downgrades.

Read the full article at  http://www.bloomberg.com/news/2013-09-05/india-s-new-central-banker-isn-t-a-superhero.html

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