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The Chinese debt issue

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Despite the “phase one” trade agreement signed between the United States and China in January 2020, the coronavirus issue has greatly distorted the Chinese economy.

It should be recalled that China had pledged to buy 200 billion U.S. dollars of U.S. goods and “specific products” over a two-year period.

Certainly the Chinese government has reacted to the coronavirus crisis with acceptable speed, injecting a huge amount of liquidity into the economy, through the Central Bank,as well as proportionately reducing financing costs and increasing credit to businesses by 67%.

 The Chinese authorities still have some room for providing more stimulus through monetary and fiscal policy, since the central government’s debt alone remains below 25% of GDP and is mainly refinanced at national level.

 But there is the excessive level of debt in real estate and the increase in costs for infrastructure and protection-sanitation activities, which could put the public budget at risk in the short term.

 The debt of non-financial private Chinese companies accounts for 155% of Chinese GDP, but there is a strong increase in household debt, which has been going on for at least five years.The local governments’ debt is currently worth 60-70% of Chinese GDP.

 There has been a significant increase in the insolvencies of companies, especially small and medium-sized ones, given the reorientation of the whole Chinese economy from the export to the domestic market, with the expansion of the formal economy, which has knocked out the companies that produced at very low cost, especially for the export markets.

 This adds to the U.S. request for cancelling part of the its public debt securities held in Chinese banks.

The underlying logic is the following: China is immediately blamed for hiding news about the coronavirus and hence the cancellation of at least part of the U.S. debt held in Chinese hands is requested.

It should also be recalled that China has approximately 20% of the North American public debt available.

It is the first time that a financial operation of such magnitude is based on a “conspiracy theory”, i.e. the hypothesis – currently denied by all experts – that the Covid-19 virus has been artificially processed in the Wuhan laboratories, which are located a few hundred metres from the even more famous wet market of the city.

 There is purely strategic relevance in all this: China’s ability to make debt is also at the basis of the Belt and Road Initiative, i.e. the economic and geopolitical project which is more disliked by the United States than we can imagine.

 That is probably the U.S. real goal.

 Therefore, asking for default on part of its debt held in China is a way to make Chinapay the bill for the pandemic and, above all, to stop the development of China as the U.S. only challenger in terms of global economic and military power.

This is one of the best moments for the United States: approximately 60 million Chinese are still in quarantine and, while SARS cost 1.5 points of GDP in 2003, nowadays – according to the most optimistic forecasts -Covid-19 is expected to cost China 2.1 points of GDP.

 Hence, while the risks of recession in China were low after the January 2020 agreements with the USA, currently the combination of the coronavirus crisis and the U.S. financial and legal pressure makes us think that the Chinese recession could be fast and strong, if these two factors persisted.

A solution could be China’s acquisition of a large part of the debt of the poorest nations that the Covid-19 crisis has bankrupted.

It has already happened with Pakistan or Sri Lanka, given that the debt service granted by China has led to the actual requisitioning of the infrastructure already built in those countries by China itself. The Chinese government, however, has mainly followed the indications of the International Monetary Fund and the World Bank, which advise to cancel the debt partly or totally.

China replies to the U.S. accusation of having produced or spread a truly “Chinese” virus throughout the world by saying that the World Health Organization itself has established that the virus has no precise development area and cannot therefore be associated with any specific country.

Furthermore, China does not accept at all the fact that, while Covid-19 has appeared for the first time in Wuhan, this necessarily means that it was “born” in Wuhan, considering that the appearance or even the very traceability of the virus are issues which are still being studied by scientists.

Obviously China reiterates that the coronavirus is not “artificial”, but completely natural, as all the most authoritative virologists in each country have established.

China also maintains that Covid-19 has not been “made” in Wuhan, since the P4 laboratory in that city is a partnership between China and France (with some activity even funded by the United States) and there have been no virus infections among the staff.

 But all this is not enough: over 5,000 American citizens have signed a class action in Florida to claim damages from the Chinese government for the coronavirus infection.

 Similar lawsuits have been initiated in Nevada and Texas, others in Minnesota and even in California.

 Under international law, the legal proceedings started by the U.S. government against the Chinese government for damage resulting from Covid-19 could be worth 1.2 trillion U.S. dollars.

 The legal basis for these legal proceedings and appeals is, above all, the delay with which the Chinese government provided data to the WHO, but the institutions where to appeal against China could be the WHO itself, the International Court of Justice, but also the Permanent Court of Arbitration or the ordinary civil courts in Hong Kong and the USA itself.

Nevertheless, considering that pandemics may break out anywhere, no country has an interest in “setting the precedent” for the coronavirus. What if a new pandemic were to break out in Lithuania or Madagascar?

 The International Liability Act for Health and Environmental Damage caused by one country to another applied, for the first time, in a 1920 lawsuit in which a factory in British Columbia released dangerous fumes to and across the Canadian-U.S. border.

 Many North American legal experts tell us that there is a parallel between the current coronavirus situation and the old dispute between Canada and the United States in which Canada paid damages without question.

 As far as current private international law is concerned, in principle States cannot be sued for public activities related to their sovereignty.

 To be entitled to sue China, it would be necessary to demonstrate that the activity carried out in the Wuhan P4 laboratory was completely private and hence aimed at simply manufacturing or marketing pharmaceutical products.

 From this viewpoint, domestic courts can never be called upon to judge the dispute.

Furthermore, in Italy, a foreign State may still be brought to trial, but only when its activities end up infringing the mandatory principles of international law.

However, when there is no possibility of damages action, there may also be the option of an inquiry committee made up of independent members.

 It could operate under the aegis of the U.N. Security Council, or even of other equally relevant international bodies.

Furthermore, according to other financial and economic analysts, the economic crisis from Covid-19 will not lead to recession in China, but even to a very strong public economic stimulus and hence to greater future short-term debt.

 After the first signs of epidemic, besides other “dedicated” financial operations, the Chinese Central Bank has injected the equivalent of 170 billion U.S. dollars of liquidity into the economy.

It is probably the largest and fastest response to the current pandemic economic crisis ever provided in the world.

 Certainly, the Chinese economy is now much different from the one that withstood the pressure of SARS in 2003.

Nowadays the service sector is the primary one, with a contribution to economic growth which is 40% higher than in the days of SARS.

 Meanwhile, however, the outflow of capital from China is increasing. The renmimbi is about 7 to the dollar, and some professional Western investors are wondering whether the Chinese economy can carry the new debt burden, which is necessary to push the economy forward, during and after the coronavirus pandemic.

 How much is China’s domestic debt support capacity? 250%? No one knows until the debt to GDP ratio reaches the ceiling.

 Obviously, the U.S. claim for damages will only exacerbate internal tensions within the Chinese economy and will temporarily enable the United States to economically and strategically outdistance China from it.

Again in economic and financial terms, in 2020 China will certainly record its first GDP decline since 1976, but the United States is not doing very well either.

 About half of the American population is now locked up at home.

 In the last week for which we have data, the cost of unemployment insurance has reached 3.5 million, the highest level in the history of the ambiguous North American welfare state.

 The International Monetary Fund also predicts a reduction in world income of at least 2 trillion U.S. dollars.

 The real issue is whether there will be any recovery at the end of 2020.

What are the variables at stake? Simply the amount of stimulus to the State economy, consumer confidence, as well as the number of Covid-19 infection cases.

 In the worst case scenario, there will be a yearly 3.5% reduction in Chinese GDP in 2020. A second wave of crisis can be expected in early 2021, but if there is no new virus infection, China’s GDP decrease is expected to level off at 2% in 2021 and then stabilize in mid-2023.

In the E.U. case, the crisis is expected to lead to a 9% GDP reduction in all Member States, which will certainly not mean a decrease in internal tensions.

On the worst possible assumption, the persistence of a significant amount of infections and of lockdowns could lead to structural recession and it would take at least four to five years to go back to pre-Covid-19 rates.

 It will be necessary to reduce spending significantly, from 20 to 30%, as well as advance receipts and provide more aid to companies and consumers.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Finding Fulcrum to Move the World Economics

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Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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Economy

Evergrande Crisis and the Global Economy

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China’s crackdown on the tech giants was not much of a surprise. Sure, the communist regime allowed the colossus entities like Alibaba Group to innovate and prosper for years. Yet, the government control over the markets was never concealed. In fact, China’s active intervention in the forex market to deliberately devalue Yuan was frequently contested around the world. Ironically, now the world awaits government intervention as a global liquidity crisis seems impending. The Evergrande Group, China’s largest property developer, is on the brink of collapse. Mounding debt, unfinished properties, and subsequent public pressure eventually pushed the group to openly admit its financial turmoil last week. Subsequently, Evergrande’s shares plunged as much as 19% to more than 11-year lows. While many anticipate a thorough financial restructuring in the forthcoming months, the global debt markets face a broader financial contagion – as long as China deliberates on its plan of action.

The financial trouble of the conglomerate became apparent when President Xi Jinping stressed upon controlled corporate debt levels in his ongoing drive to reign China’s corporate behemoths. It is estimated that the Evergrande Group currently owes $305 billion in outstanding debt; payments on its offshore bonds due this week. With new channels of debt ceased throughout the Mainland, repayment seems doubtful despite reassurances from the company officials. The broader cause of worry, however, is the impact of a default; which seems highly likely under current circumstances.

The residential property market and the real estate market control roughly 20% and 30% of China’s nominal GDP respectively. A default could destabilize the already slowing Chinese economy. Yet that’s half the truth. In reality, the failure of a ‘too big to fail’ company could bleed into other sectors as well. And while China could let the company fail to set a precedent, the spillover could devastate the financial stability hard-earned after a strenuous battle against the pandemic. Recent data shows that with the outbreak of the delta variant, the demand pressure in China has significantly cooled down while the energy prices are through the roof. Coupled with the regulatory crackdown rapidly pervading uncertainty, a debt crisis could further push the economy into a recession: a detrimental end to China’s aspirations to attract global investors.

The real question, therefore, is not about China’s willingness to bail out the company. Too much is at stake. The primal question is regarding the modus operandi which could be adopted by China to upend instability.

Naturally, the influence of China’s woes parallels its effect on the global economy. A possible liquidity crisis and the opaque measures of the government combined are already affecting the global markets: particularly the United States. The Dow Jones Industrial Average (DJIA) posted a dismal end to Monday’s trading session: declining by more than 600 points. The 10-year Treasury yields slipped down 6.4 basis points to 1.297% as investors sought safety amid uncertainty. The concern is regarding China’s route to solve the issue and the timeline it would adopt. While the markets across Europe and Asia are optimistic about a partial settlement of debt payments, a take over from state-owned enterprises could further drive uncertainty; majorly regarding the pay schedule of western bondholders amid political hostility.

Economists believe that, while a financial crisis doesn’t seem like a plausible threat, a delayed response or a clumsy reaction could permeate volatility in the capital markets globally. Furthermore, a default or a takeover would almost certainly pull down China’s economy. While the US has already turned stringent over Chinese IPOs recently, a debt default could puncture the economic viability of a wide array of Chinese companies around the world. And thus, while the global banking system is not at an immediate threat of a Lehman catastrophe, Evergrande’s bankruptcy would, nonetheless, erode both the domestic and the global housing market. Moreover, it would further dent Chinese imports (and seriously damage regional exchequers), and would ultimately put a damper on global economic recovery from the pandemic.

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Economy

Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage

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The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.

The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.

The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.

According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.

Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.

While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.

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