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China’s Stimulus Addiction

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As President Xi Jinping turns Beijing’s stimulus-industrial complex up to 11, ‘Minsky moment’ risks only increase

Suddenly, this president for life thing is looking less like a win for Xi Jinping as China loses altitude. Last year, he won the Communist Party’s approval to stay on indefinitely – all part of his plan to out-reform Deng Xiaoping.

But as the world’s second-largest economy cools, Xi seems to be losing the plot on an array of fronts.

Had he used his vast powers since 2013 to upend a state-owned enterprise model dating back to Deng’s day, China might not be stumbling into 2019.

Had his team worked harder to recalibrate engines from exports to services, China might not be such an easy target in the trade war with the United States.

Had Beijing been more confident, Xi might have realized a free press and internet are allies in eradicating corruption.

Had he walked the walk on giving market forces a “decisive” role, Chinese stocks might not be stuck in a perpetual cycle of boom-bust-government-support-boom-bust, repeat.

Now, Xi has one option, stimulate the hell out of 2019. And to do so in ways that add to China’s long-term risk profile – and the world’s.

Asia’s year ahead is darkening by the day because of Chinese data. Look no further than recent export drops in Singapore, South Korea, Taiwan and, most recently, Japan. Figures released in neighboring economies belie Beijing’s claims to have grown at 6.6% in 2018.

The slowest growth since 1990 surely understates the downshift in Chinese manufacturing. Numbers on fixed-asset investment, retail sales, property, autos (the biggest car market just shrank for the first time since 1990), construction and dollar-denominated debt coming due may have Xi wishing he had passed the baton on to another leader to eventually grapple with these, and other, challenges.

Optimistic take

There is, indeed, an optimistic take on 2019. The nation of 1.4 billion people is expanding from a much larger base than, say, five years ago.

Domestic demand is doing its part to offset a narrowing trade surplus. Xi’s team, meantime, is working behind the scenes to avoid the zombie-fication of China Inc. The bad news is these positive trends are only sustainable with the help of massive stimulus.

Conventional wisdom that Xi will tread carefully on fresh debt and credit growth misses the point. His ability to stay on indefinitely hinges on keeping wages, living standards and rapid-growth bragging rights in the plus column.

When policymakers rule out pumping a “flood” of new steroids into the economy’s veins, it’s a statement of aspiration, not reality.

Already, for example, we’ve seen a series of overlapping tax cuts, moves to boost business lending, fast-tracked construction projects and reserve-requirement cuts by the People’s Bank of China.

5598337 26.07.2018 July 26, 2018. President of China Xi Jinping during a restricted meeting of the BRICS leaders. Aleksey Nikolskyi / Sputnik

President Xi Jinping Xi will do his best to maintain the illusion that China can beat the inevitable crash that befalls every economy. Photo: Aleksey Nikolskyi / Sputnik / AFP

Lots of buzz, too, about big infrastructure spending to come. While juicing growth rates will add to the mountain of debt already worrying investors, this is a circle-the-wagons moment for Xiconomics.

It’s also a cautionary one for China in 2020. The odds of the economy falling below 6% growth in 2019, or admitting it even if it does, are low. Yet as Xi turns Beijing’s stimulus-industrial complex up to 11, “Minsky moment” risks only increase.

The reference here is to when a debt-and-credit-driven boom meets a nasty end. Examples abound: Japan in 1990, Southeast Asia in 1997, Russia in 1998, Wall Street in 2008.

By shelving efforts to beat Beijing’s stimulus addiction, Xi ensures that when China’s reckoning arrives, it will be even more spectacular and globally impactful. China’s US$14 trillion hitting a wall would make the 2008 “Lehman crisis” look like a minor ripple.

The reason global investors tend to look past the roughly $34 trillion pile of public and private debt hanging over China’s future is Xi’s resolve to sort things out. The reason global investors tend to look past the roughly $34 trillion pile of public and private debt hanging over China’s future is Xi’s resolve to sort things out. 

Global Crisis

Less recognized, though, is that the bill from an explosion of stimulus after the 2008 global crisis is coming due.

In the months after the collapse of Lehman Brothers shoulder-checked the globe, Beijing pumped unprecedented amounts of stimulus into the economy. It won the government of Xi predecessor Hu Jintao plaudits.

Team Xi largely kept the spigot open. In 2008, banking sector assets in China were about $9 trillion. By 2017, analysts like Charlene Chu, of Autonomous Research Asia, were putting the figure north of $33 trillion. The epic buildup in local government debt offered its own eye-popping figures.

One key crack in the veneer of invulnerability is $3 trillion of dollar-denominated debt, according to Daiwa Capital Markets. It’s quite a vulnerability should the yuan weaken versus the dollar or Trump escalate his tariff arms race.

Another is the economic law of diminishing returns. Over time, the gross domestic product bang derived from new dams, airports, six-lane highways and other white-elephant projects lose potency.

You need to pump bigger and bigger doses into the economy, adding to debt burdens, overcapacity and environmental degradation. The PBOC needs to print ever greater piles of yuan to jolt credit conditions. All risks that will make China’s next few years dicier.

Clearly, Xi will do his best to maintain the illusion that China can beat the inevitable crash that befalls every industrializing economy. He will dazzle executives from Silicon Valley to Wolfsburg in Germany with his ambitious “Made in China 2025” scheme. But that’s putting the cart before the proverbial horse.

Nothing about investing hundreds of billions of dollars in dominating tech reduces the role of SOEs, ends graft, increases transparency, curbs the shadow-banking menace, makes corporate China more shareholder-friendly or addresses bubbles in assets, credit and debt.

Xi still needs to build strong economic foundations to underlie his grand ambitions. Unfortunately, those building efforts are off the agenda until further notice. Atimes

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Automaker Daimler AG to pay $1.5 billion to settle emissions cheating probes

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Daimler AG Chief Executive Officer Dieter Zetsche (C) speaks to the media after he unveiled the Mercedes-Benz Concept Style Coupe at Auto China 2012 in Beijing April 23, 2012. China's premium car market should grow 15-20 percent this year, Zetsche said on Monday, adding that Daimler's sales should at least match that rate. Zetsche also said he expects the company's Mercedes-Benz luxury brand to post a sales increase in Europe this year. REUTERS/Jason Lee

Automaker Daimler AG and subsidiary Mercedes-Benz USA have agreed to pay $1.5 billion to the U.S. government and California state regulators to resolve emissions cheating allegations, officials said Monday.

The U.S. Department of Justice, Environmental Protection Agency and the California attorney general’s office say Daimler violated environmental laws by using so-called “defeat device software” to circumvent emissions testing and sold about 250,000 cars and vans in the U.S. with diesel engines that didn’t comply with state and federal laws.

The settlement, which includes civil penalties, will also require Daimler to fix the vehicles, officials said. In addition, the company will pay $700 million to settle U.S. consumer lawsuits.

The Stuttgart, Germany-based automaker said on Aug. 13 that it had agreements with the Justice Department, Environmental Protection Agency, Customs and Border Protection, the California Air Resources Board and others over civil and environmental claims involving about 250,000 diesel cars and vans.

Environmental Protection Agency Administrator Andrew Wheeler said Daimler did not disclose all of its software, which included “devices designed to defeat emissions controls.”

In a statement, Daimler said it denies the allegations that it cheated and does not admit to any liability in the U.S. The settlements resolve civil proceedings without any determination that Mercedes and Daimler vehicles used defeat devices, the company said. Plus, Daimler said it did not receive a notice of violation of the Clean Air Act from the EPA or California regulators, which is common when defeat devices are used.

The company said it is not obligated to buy back the vehicles, as Volkswagen was, nor will it have an independent monitor to track its progress on the settlement. “By resolving these proceedings, Daimler avoids lengthy court actions with respective legal and financial risks,” the company said.

Daimler also said the emissions control system in the U.S. vehicles is different than models sold in Europe because of different regulatory and legal requirements.

Daimler AG said the settlement would bring costs of about $1.5 billion, while the civil settlement will bring a one-off charge of $875 million. It estimated that “further expenses of a mid three-digit-million” euros would be required to fulfill conditions of the settlements.

Daimler said it owners of model year 2009 through 2016 Mercedes cars and 2010 through 2016 Sprinter vans with “BlueTEC II” diesel engines will be notified of recalls to fix excessive vehicle emissions. Customers will be notified by mail starting late this year, and the company will set up a customer website, Daimler said in a statement.

Owners also will get mailed notices and a website with details of the civil lawsuit settlement including a claim form, Daimler said. The company also will pay attorneys fees of around $83 million.

Steve Berman, a lawyer involved in the class-action lawsuits against Daimler, said in a statement that current owners can get $3,290 or more, while former owners can get $822.50.

“Owners of Mercedes’ dirty diesel cars will finally be able to receive the compensation they deserve and repairs to ensure their vehicles are not emitting illegal levels of harmful pollutants,” Berman said.

Deputy Attorney General Jeffrey Rosen said the cost of the Daimler settlement is likely to send a message to deter other companies from engaging in similar conduct.

“We expect that this relief will also serve to deter any others who may be tempted to violate our nation’s pollution laws in the future,” Rosen said.

As part of the U.S. government settlement, Daimler will pay an $875 million civil penalty — about $3,500 for each vehicle that was sold in the U.S. The company will also be required to fix the vehicles and will need to replace some old locomotive engines with newer, low nitrogen oxide-emitting engines that should offset the illegal emissions from its vehicles, Rosen said. A Justice Department official said the company did not have to admit guilt as part of the settlement.

In addition, officials in California will receive $17.5 million for future environmental enforcement, as well as to support environmentally-beneficial projects in the state, officials said.

“Long term, cheating isn’t the smartest way to market your product. Daimler is finding that out today. But they’re not the first — nor likely the last — to try,” said California Attorney General Xavier Becerra.

Daimler’s pollution practices also are under investigation in Germany.

In April 2016, the Justice Department asked Daimler to conduct an internal probe into its exhaust emissions certification process. The request came as the EPA began checking all diesel engines after the Volkswagen cheating was revealed.

Volkswagen, ended up paying $2.8 billion to settle a criminal case due to emissions cheating. Fiat Chrysler also is being investigated for allegedly cheating on emissions.

VW admitted that it turned on pollution controls when vehicles were being tested in EPA labs, and turning them off when the diesel vehicles were on real roads. The company duped the EPA for years before being discovered by a nonprofit climate group and researchers at West Virginia University. In September 2019, federal prosecutors charged a Fiat Chrysler engineer with rigging pollution tests on more than 100,000 diesel pickup trucks and SUVs sold in the U.S., the first indictment since a wave of similar cases against Volkswagen and its managers.

The alleged scheme isn’t as large as the Volkswagen emissions scandal, which involved nearly 600,000 vehicles. But the charges showed that investigators are still on the case, even after Fiat Chrysler agreed to a $650 million civil settlement.

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Bitcoin’s ascent will be slow & steady: Bloomberg

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Megabulls such as PlanB are predicting parabolic short- to medium-term price moves for bitcoin, but Bloomberg analyst Mike McGlone believes the leading digital asset’s ascent to $100,000 will be a slow, steady and almost inexorable grind.

The senior commodity strategist at the financial news service believes bitcoin will steadily appreciate because of its fixed supply combined with a growing demand.

“I don’t see what [could] make it stop doing what [it’s] been doing for the last 10 years. And that’s going up,” he told Cointelegraph in a video interview.

McGlone thinks bitcoin could become a better store of value than gold, the traditional safe haven, because its supply is capped. Unlike gold, the total potential supply of which is unknown, bitcoin is inherently scarce; there will never be more than 21 million , and many of the ones already mined have been lost forever, thus increasing the potential value of those that remain accessible.

As demand for the digital asset grows, the price will inevitably go up, explained McGlone. He pointed out that the number of active bitcoin addresses is increasing rapidly and that more and more bitcoin is flowing into regulated exchanges, both of which are strong indications of increasing demand.

But he said investors shouldn’t expect bitcoin to soar to gobsmacking new highs on the short term as it has historically following its reward halvings – it climbed from around $1,000 to nearly $20,000 in the last bull run, before crashing hard in early 2018. Now that it is a mature asset, he said its price behaviour will be less dramatic.

When asked about Pantera Capital’s prediction that bitcoin will soar to $115,000 in just a year, McGlone said, “Bitcoin 10x? Maybe over 10 years, that makes a lot of sense.”

Read: Bitcoin is set to become digital gold: Bloomberg

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world’s first benchmark cross sector Chinese Bond Indices. Read ATF now. 

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Investors offload risk after Fed gets real

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A man with a protective mask walks in the rain past an electronic stock board showing Japan's Nikkei. AP Photo/Eugene Hoshiko

Hong Kong: Financial markets in Asia retreated on Thursday over disappointment that the US central bank did not expand its asset purchase programme, although it did reiterate its ‘lower for longer’ message.

The Bank of Japan’s decision to keep rates unchanged was expected by the market but investors sold off stocks as a dovish Fed weakened the dollar against the yen, whose strength in turn hammered exporters’ prospects.

The Japanese yen strengthened 0.2% to 104.7 to the dollar.

“The yen currently sits at around ¥105 against the dollar – that’s a little stronger than in the summer but far weaker than what the current spread between JGBs and US Treasuries would usually point to,” Capital Economics analysts Tom Learmouth and Marcel Thieliant said, referring to the narrowing of the spread. “While we expect the yen to remain close to ¥105 the risks are tilted slightly towards a stronger yen.”

The drag from exporters pulled down Japan’s Nikkei 225 index which fell 0.67%, while Australia’s S&P ASX 200 slipped 1.22% as investors worried about a rollback of stimulus after data released showed a drop in the unemployment rate.

Hong Kong’s Hang Seng index also retreated 1.56% as investors prepared for a slew of IPOs including the world’s biggest – the Ant Financial $30-billion bonanza expected next month. At least three share offerings are expected next week as well, as issuers avoid a clash with Ant Financial’s mammoth offering. Delivery company ZTO Express, biotech company Zai Lab and online retailer Baozun are in a race for cash.

China’s CSI300 eased 0.53% as the region remained under pressure following disappointment over the US central bank’s unchanged asset purchase programme.

‘Congress must step up’

“And while risk assets might love the intravenous drip of monetary stimulus, it is time to focus on policies that the real economy needs, and for that, Powell is dead right, it’s time for Congress to step up to the plate,” Robert Carnell, ING Bank’s Regional Head of Research in the Asia-Pacific, said.

“Perhaps the market reaction here is more a realisation of this and the fact that any resolution to the current impasse is unlikely until the Presidential election outcome is determined.”

US Treasuries picked on the Fed’s ‘dot plot’, extending its gains with the 10-year yield declining 2 basis points to 0.68%.

The Federal Reserve’s dot plot, which the US central bank uses to signal its outlook for the path of interest rates, projects no change in policy this year and borrowing costs near zero through till 2023, based on median estimates. It said they must achieve maximum employment and inflation at a rate of 2% over the longer run.

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4% and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

Asia Stocks

· Japan’s Nikkei 225 index dropped 0.67%

· Australia’s S&P ASX 200 slipped 1.22%

· Hong Kong’s Hang Seng index retreated 1.56%

· China’s CSI300 eased 0.53%

· The MSCI Asia Pacific index fell 0.70%.

Stock of the day

Times China bonds rose and shares fell after it announced a plan to buy back its bonds due in 2021.

This report appeared initially on Asia Times Financial.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world’s first benchmark cross sector Chinese Bond Indices. Read ATF now. 

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