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Side Effects of a Difficult Transition

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Since China’s rise to the rank of second world economy in 2014, there is no country or industry on the planet that is not affected, in one way or another, by the political and economic decisions taken behind the closed doors of the Chinese Communist Party (CCP).

A good example is new title that was bestowed upon Xi Jinping last week, who will now be known as the “core of the Chinese Communist party.” This highly symbolic title was granted during the 6th plenum of the 18th Central Committee of the CCP and effectively makes President Xi Jinping not just the first among equals, but the clear leader of his generation.

Newly invested with the title, we can expect Xi Jinping to intensify his zeal in the fight against corruption and economic reform. This move has been seen in China as a clear message for both local and provincial officials – now with more power than ever, the Chinese President will be able to stand up to rival groups and to those who seek to protect their vested interests, such the powerful state enterprises and their associated political patrons.

It is too early to tell if this new title will in fact help President Xi Jinping’s “supply-side reform”, which aims to transform the Chinese economy from a high growth export-based regime to an average growth model based on domestic consumption. But one thing is sure: the effects of this reform – described by Prime Minister Li Keqiang as “painful” – will continue to be felt throughout the world, even more so in the European and North American aluminum industry.

Overcapacity problem

While the slowdown in Chinese growth is making headlines in the Western press, it is worth recalling that China’s services sector is undergoing “explosive growth”, as described by macroeconomic research firm BCA. The real problem is that this tertiary growth is not yet strong enough to offset the hardships affecting heavy industry and large state companies – the real losers of the economic slow-down.

Indeed, China’s massive investment in heavy industry during the 90s have created problems of production overcapacity that are visible today, as well as becoming the main obstacle for the sector to reform itself and transit toward to a new growth regime. It is therefore not surprising that Xi Jinping’s supply-side reform has been greatly hampered by the inertia and conservatism of China’s heavy industry, among which figures prominently the aluminum industry.

President Xi finds itself prisoner of a precarious balance where he needs to reconcile its goal of economic reform with the entitlements of Chinese aluminum smelters. If Xi wants to go ahead with his reform, he has no other choice but to adopt mitigation measures, even though such measures may hurt the initial objectives of his reform. His recently upgraded title may change things, but for now, one does not go without the other.

This is how Beijing came to strongly encourage Chinese aluminum companies to look for solution abroad, i.e. solve overproduction through what most industry insiders do not hesitate to call dumping. The overproduction was therefore dumped on the world market, with the tacit approval of Beijing – always anxious to ensure social stability by reducing the discontent among its industrial giants.

While aluminum production in China has doubled since 2005 (totaling 54.4% of world production), its exports rose by 250% from 2.6 million tons in 2005 to 6.7 in 2015. This trend undeniably contributed to the 40% drop in prices of the light metal over the past five years, raising the ire of foreign producers.

The problem with encouraging large aluminum producers to clear their extra stocks by flooding foreign markets is that, although it can seem an attractive solution on the short term, it remains counter-productive in the long term and controversial abroad.

Unanimous condemnation

Given the sheer size of China’s aluminum industry, accounting for more than 50% of the world aluminum production, immediate and disastrous effects of such policy abroad were unavoidable.

In reaction, foreign political and industrial leaders have multiplied admonitions toward Beijing, insisting on two points: the damage created by aluminum dumping and the risk of a too rapid production restart.

This is precisely the message that US Treasury Secretary Jack Lew communicated to his Chinese counterparts during his visit to Beijing in June, calling for a substantial reduction of Chinese aluminum production to stabilize world markets.

“Excess capacity is not just a domestic issue in China,” the US Treasury Secretary said. “The question of excess capacity is one that literally has an enormous effect on global markets for things like steel and aluminum, and we’re seeing distortions in global markets because of excess capacity.”

Before that, in February, European authorities also made known their dissatisfaction, emphasizing that the problem is primarily of political nature.

Joerg Wuttke, President of EU Chamber of Commerce in China, explained that this is partly the result of the inability to Beijing to fully control some well-established industrial giants who are very jealous of their prerogatives. “Local protectionism is very strong,” he said, “and the current role of the Chinese government in the economy is part of the problem.”

“China has not followed through on the attempts it has made over the last decade to address overcapacity,” Joerg continued. “Overcapacity has been a blight on China’s industrial landscape for many years now, affecting dozens of industries and wreaking far-reaching damage on the global economy in general, and China’s economic growth in particular. ”

This comes at a time where new anti-dumping probes into Chinese steel imports are being launched, with EU Trade Commissioner Cecilia Malmstroem warning: “We cannot allow unfair competition from artificially cheap imports to threaten our industry.”

These statements echo those of Russian aluminum giant UC Rusal last May, which warned Beijing against a too quick restart of production that could endanger the slight recovery seen in recent months, indicating that doing so would imperil global aluminum prices.

According to Oleg Mukhamedshin, UC Rusal’s Deputy Chief Executive, China’s smelters should exercise better control and have stricter discipline when it comes to their production to “ensure gradual improvement in prices and profitability.”

Chinese overproduction in the aluminum sector has thus managed to accomplish a feat at which many of the best diplomats have failed countless times – to reach unanimity in Moscow, Brussels and Washington.

A precarious balance

Despite difficulties, Aluminium Insider analyst Chistopher Clemence noted some signs pointing to positive developments. According to his information, Chinese banks are more and more recalcitrant to finance new projects in the aluminum sector, which is now increasingly known for its losses. This may very well calm the ardor of overly ambitious entrepreneurs wanting to build new smelters.

In addition, the aluminum domestic consumption is growing at a faster rate than expected – an increase of 9.9 million metric tons in the first quarter of 2016, a year-on-year increase of 8.1%.

But other signs point instead to a worsening of the situation, indicating that warnings coming from western capitals did not have the desired impact. Just a few weeks ago, Zhang Bo, CEO of China Hongqiao – one of the largest aluminum producers in the world – categorically denied fears of overproduction, while emphasizing that Chinese smelters had made significant progress in term of “self-discipline.”

This denial worries Paul Adkins, President of the consulting firm AZ China, who remains skeptical about the underlying desire of Beijing to genuinely proceed with economic reform. In view of the mantra of “supply-side economics” of the Chinese government, he asks, how can Beijing still allow restarts and capacity additions in the aluminum sector?

“Ultimately, the rhetoric on supply-side reform is nothing but empty words,” he wrote.

Adkins is also pessimistic about future price trend. He explained that China’s aluminum production record – 91,900 tons per day – was reached in June 2015, after which production began to slowly decline. With recent restarts and capacity additions, this production record may well be broken shortly (if it is not already the case). Once this psychological barrier has been broken, nothing will stop the pressure pushing down the price of the light metal to grow stronger and stronger.

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Economy

8 facts you don’t know about the money migrants send back home

MD Staff

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Here are eight things you might not know about the transformative power of these often small – yet major – contributions to sustainable development worldwide:

1. About one in nine people globally are supported by funds sent home by migrant workers

Currently, about one billion people in the world – or one in seven – are involved with remittances, either by sending or receiving them. Around 800 million in the world – or one in nine people– are recipients of these flows of money sent by their family members who have migrated for work.

2. What migrants send back home represents only 15 per cent of what they earn

On average, migrant workers send between US$200 and $300 home every one or two months. Contrary maybe to popular belief, this represents only 15 per cent of what they earn: the rest –85 per cent – stays in the countries where they actually earn the money, and is re-ingested into the local economy, or saved.

3. Remittances remain expensive to send

These international money transfers tend to be costly: on average, globally, currency conversions and fees amount to 7 per cent of the total amounts sent. To ensure that the funds can be put to better purposes, countries are aiming through Sustainable Development Goal (SDG) 10.C to “reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent by 2030”.

Technical innovations, in particular mobile technologies, digitalization and blockchain can fundamentally transform the markets, coupled with a more conducive regulatory environment.

4. The money received is key in helping millions out of poverty

Although the money sent represents only 15 per cent of the money earned by migrants in the host countries, it is often a major part of a household’s total income in the countries of origin and, as such, represents a lifeline for millions of families.

“It is not about the money being sent home, it is about the impact on people’s lives,” explains Gilbert F. Houngbo, President of the International Fund for Agricultural Development, IFAD. “The small amounts of $200 or $300 that each migrant sends home make up about 60 per cent of the family’s household income, and this makes an enormous difference in their lives and the communities in which they live.”

It is estimated that three quarters of remittances are used to cover essential things: put food on the table and cover medical expenses, school fees or housing expenses. In addition, in times of crises, migrant workers tend to send more money home to cover loss of crops or family emergencies.

The rest, about 25 per cent of remittances – representing over $100 billion per year – can be either saved or invested in asset building or activities that generate income, jobs and transform economies, in particular in rural areas.

5. Specifically, remittances can help achieve at least seven of the 17 SDGs

When migrants send money back home, they contribute to several of the goals set in the 2030 Sustainable Development Agenda. In particular: SDG 1, No Poverty; SDG 2, Zero Hunger; SDG 3, Good Health and Well-Being; SDG 4, Quality Education; SDG 6, Clean Water and Sanitation; SDG 8, Decent Work and Economic Growth; and SDG 10, Reduced Inequality.

If current trends continue, between 2015 and 2030, the timeframe of the 2030 Agenda, an estimated $8.5 trillion will be transferred by migrants to their communities of origin in developing countries. Of that amount, more than $2 trillion – a quarter — will either be saved or invested, a key aspect of sustainable development.

“Governments, regulators and the private sector have an important role to play in leveraging the effects of these flows and, in so doing, helping nearly one billion people to reach their own sustainable development goals by 2030,” IFAD’s Gilbert F. Houngbo stressed in a statement.

6. Half of the money sent goes straight to rural areas, where the world’s poorest live

Around half of global remittances go to rural areas, where three quarters of the world’s poor and food insecure live. It is estimated that globally, the accumulated flows to rural areas over the next five years will reach $1 trillion.

7. They are three times more important than international aid, and counting

Remittances are a private source of capital that’s over three times the amount of official development assistance (ODA) and foreign direct investment (FDI) combined.

In 2018, over 200 million migrant workers sent $689 billion back home to remittance reliant countries, of which $529 billion went to developing countries.

In addition, the amount of money sent by international migrant workers to their families in developing countries is expected to rise to over $550 billion in 2019, up some $20 billion from 2018, according to IFAD.

8. The UN is working to facilitate remittances worldwide

“It is fair to say that, in poor rural areas, remittances can help to make migration a choice rather than a necessity for so many young people and for future generations,” explained Mr. Houngbo.

As such, migrant contributions to development – through remittances and investments – is one of the Objectives of the Global Compact on Safe, Orderly and Regular Migration, adopted by the UN General Assembly in December of last year.

With half of all flows going to rural areas in developing countries, IFAD, the UN’s agency mandated with agricultural development, is working to make the development impact of remittances even greater. The organisation’s Financing Facility for Remittances programme (FFR) was designed to promote innovative business models in order to lower transfer costs and provide financial services for migrants and their families. Through partnerships across several sectors, the programme runs initiatives to empower migrants and their families through financial education and inclusion, as well as migrant investment and entrepreneurship.

“Over the past decade, IFAD has invested in over 40 countries, supporting more than 60 projects aimed at leveraging the development impact of remittances for families and communities,” said Paul Winters, IFAD’s Associate Vice-President, in an event held on Friday at UN headquarters in New York.

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Guiding a new generation of learners on inclusive green economy

MD Staff

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As population numbers continue to grow and material resource use rises to unprecedented levels, the limits of today’s dominant model of economic growth have become increasingly apparent: extraction of material resources, including biomass, fossil fuels and non-metallic minerals has tripled since 1970, reaching an approximate 90 billion tonnes in 2019. A comprehensive overview of alternative economic models that center around environmental sustainability – published by UN Environment, the Zayed International Foundation for the Environment and Tongji University – hopes to help guide efforts to move to inclusive, green economies.

The official launch today of The Inclusive Green Economy: Policies and Practice marks the successful completion of a long-standing collaborative project.

Nineteen million premature deaths are estimated to occur each year due to environmental and infrastructure-related risks and natural-resource use. Resource extraction has also been identified as the leading cause of global biodiversity loss. This has led to an increasing number of countries to rethink their economic development model.

“Since Rio+20, an increasing number of countries are embarking on pathways towards inclusive green economies. I hope this book will help guide these efforts globally”,  Dr. Mohamad Ahmed Bin Fahad, Chairman of the Zayed International Foundation for the Environment highlighted in his welcome address at the launch.

An inclusive green economy is defined by UN Environment as one that is low-carbon, efficient and clean in production, but also inclusive, based on sharing, circularity, collaboration, solidarity, resilience, opportunity and interdependence. The handbook aims to offer a comprehensive framework for analysing inclusive green economy issues, such as investing in natural capital and clean technologies, as well as policies to enable investments. 

“With this collection – based on a wide range of thinking on the transition to an inclusive green economy – we hope to provide a useful resource for students and other stakeholders” Fulai Sheng, co-editor of the publication, emphasised.

 “This new textbook makes an important contribution to our understanding of how poverty, inclusiveness and employment issues must be fully taken into account to ensure a fair and just transition to a green economy”, Steven Stone, Chief of UN Environment’s Resources and Markets Branch, said.

Commending UN Environment and its partners on their efforts, the Executive Director of the UN Institute for Training and Research (UNITAR), Nikhil Seth, further observed that “publications like the one launched today will be instrumental in transmitting novel ideas and concepts that can inspire leaders of tomorrow”.

Dr. Meshgan Al Awar, Secretary General of the Zayed Foundation and Co-Author of the textbook, summarized the implication and significance of this initiative by noting, “The Inclusive Green Economy textbook provides an inspiring framework for nations, organizations and individuals to follow and simulate as they endeavor in this direction”.

UN Environment

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Retirees worldwide will outlive their savings by a decade – and women will fare worse

MD Staff

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Retirees in six major economies can expect to outlive their savings by years. Women should prepare to bear the brunt of such shortfalls, going without retirement savings for at least two years longer than their male counterparts.

As government and employer-sponsored retirement plans are under strain globally, individuals have found themselves to be increasingly responsible for their retirement savings. Despite this, savings have not accelerated fast enough to make up for the deterioration of traditional retirement plans, suggests a new report by the World Economic Forum, Investing In (and for) Our Future.

In six economies analysed, most male retirees can expect to live past their savings by nearly a decade. Women can expect to go even longer without their savings, as they will likely live more than 10 years without retirement savings to rely on due to their longer average lifespans.

These shortfalls can vary greatly by country and gender; men in the United States are expected to outlive their savings by about eight years while women in Japan will live nearly 20 years past their savings account. Despite these vast differences, the average retiree in Australia, Canada, Japan, the Netherlands, the United Kingdom, or the US will not be able to last through retirement on savings alone.

Image: Investing in (and for) our Future, World Economic Forum

These shortfalls must be addressed, by both individuals and policy-makers, to ensure that seniors can enjoy life throughout their non-working years.

Governments must act to create retirement landscapes that prevent savings shortfalls. Currently, retirement policies in many countries, including India and China, can often hinder optimal retirement savings and investments.

Though governments should act, they would be wise to avoid implementing one-size-fits-all retirement policies as individual retirement needs can vary greatly from person to person. Instead, governments should change, or even roll back, their regulations to allow individuals to make investments that will increase their long-term returns.

A new report from the World Economic Forum identifies two key investment changes governments should allow so individuals can most effectively address their savings gaps. Both identified actions aim to optimize investment so retirement savers can achieve higher yields from their savings.

1. Consider risk from the perspective of someone saving for retirement

“The real risk people need to manage when investing in their future is the risk of outliving their retirement savings,” said Han Yik, Head of the Institutional Investors Industry, World Economic Forum. “As people are living longer, they must ensure they have enough retirement funds to last them through their longer lives. This requires investing with a long-term mindset earlier in life to increase total savings later on.”

Many people are far too risk-averse in their retirement investing. While consistent saving is important to build retirement money, being mindful of long-term returns on retirement portfolios is crucial to ensuring that an individual doesn’t outlive their savings. Many young to middle-age savers should change their risk outlook, understanding that outliving their savings is a far greater risk to them than short-term investment risk.

2. Diversify the investment of saving accounts, by geography and asset type

While focusing on long-term returns is often beneficial for retirement savers, diversification can preserve those returns by mitigating overall investment risk.

Currently, most retirement investment vehicles are largely based on traditional equity and fixed-income investments that have the advantages of being easy to value as well as having high liquidity. However, given the long-term nature of retirement savings, that liquidity comes at a cost. Although they require adequate understanding and sound financial advice, investment in alternative assets, particularly illiquid assets, can bring strong diversification benefits to a retirement investment portfolio.

In this area, again, policy-makers must ensure their retirement policies do not hamper the ability of individuals to make the best long-term choices for their portfolios. In most countries, default retirement options focus on liquidity and the ability to perform daily valuations at the expense of long-term growth. Governments should consider changing or even rolling back these regulations to allow retirement savers to invest in the assets best suited to their individual retirement goals.

In addition, many retirement portfolios also tend to have a heavy domestic focus. Diversifying the geography of investments in portfolios can reduce risk to home country economic events. By expanding the locations of their investments, retirement savers, particularly savers from smaller economies, can protect themselves from market or economic slumps in an individual economy while still maximizing their returns.

Decumulation, or spending in retirement, is another key area of well-being after the working years yet there is far less research dedicated to it.

For instance, today’s retirement spending projections are based on the rule that retirees will withdraw 4% of their portfolio each year they are retired. However, the World Economic Forum and Mercer suggest that this estimate does not match how retirees spend in the real world, with much higher spending in early retirement years and less as retirees age. This spending volatility highlights the need for new retirement solutions that both allow for flexible spending while also ensuring savings that last through retirement.

“With populations around the world living longer than ever before, we need far more creative decumulation solutions for longevity protection” says Rich Nuzum, President, Wealth at Mercer. “There are some alternative solutions emerging such as pooled annuity funds, but older individuals are going to need a more diverse range of financial tools to help protect against longevity risk.”

Some countries, such as the UK and the Netherlands, have begun to recognize the importance of robust policies for the decumulation period and are even considering rolling back regulations for retirement savings. However, there is much more to be done in this area to ensure that seniors can thrive during their period of enjoying the funds they have worked so hard to save over their working years.

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