The decade of Xi Jinping

November 25, 2012 4:47 pm

by Gavyn Davies

The transfer of power in China from the outgoing regime led by Hu Jintao to the incoming leadership of Xi Jiping has occurred without a hitch. This is a mark of increased political maturity in China.

In fact, the hand-over has been described by Citigroup economists as the first complete and orderly transition of power in the 91 year history of the Chinese Communist Party.

During President Hu’s decade, China’s real GDP per capita rose at 9.9 per cent per annum. China accounted for 24 per cent of the entire growth in the global economy, and Chinese annual consumption of many basic commodities now stands at around half of the world total. Perhaps the most important question in the world economy today is whether China’s economic miracle can continue in the decade of Xi Jinping. The IMF forecasts shown in the graph above suggest that the miracle will persist, but many western economists disagree.

China’s re-emergence as a global economic powerhouse is by now fairly well understood. Following the Deng Xiaoping reforms after 1978, and the opening of the economy to domestic and international markets, China has engaged in a process of economic catch-up similar to that which Japan and Korea achieved in earlier decades.

The question for the next decade is whether this growth process will prove to be self-limiting. The experience of other Asian economies suggests that, one day, this will indeed happen. The supply of under-employed labour in rural areas will be drained, the growth of manufacturing will peak, and the ability to import superior technology from other economies will run out of rope. A slowdown in growth is therefore inevitable. The only questions are when, and by how much?

The recent pattern of growth in the economy has caused some economists to become very pessimistic about the answers to these questions. Although the Hu administration was able to maintain the growth rate of real GDP, it did so after 2008 only by boosting the ratio of fixed investment in the economy to compensate for the declining share of net trade and the sluggish performance of household consumption. Fixed investment is now around 50 per cent of GDP, with consumption standing at only 35 per cent.


These are very unusual figures by any international standards, markedly exceeding the investment shares in countries like Japan and Korea during their economic miracles. There are certainly reasons for concern. In a recent paper for Lombard Street Research, Charles Dumas points out that the additional output achieved per unit of extra investment has been falling in recent years, suggesting that returns on capital are falling. He thinks that there has been substantial over-investment and estimates that the desirable share of fixed investment in GDP is only around 33-34 per cent.

If this downward adjustment in fixed investment happened too rapidly, it would certainly cause a deep recession. It would also cause recessions in some western economies which have become heavily dependent on exporting capital goods to China. As the accompanying graph from a recent IMF study shows, a drop of 2.5 per cent in the level of fixed investment in China would reduce global GDP growth by around 0.2 per cent, with German GDP being hit by 0.6 per cent. If Charles Dumas is right about the scale of the adjustment needed, the eventual impact on global GDP would be much larger than the graph shows.

Other economists, however, point out that China’s capital stock still remains extremely low relative to developed economies like the US (eg in terms of the housing stock per family, etc), and argue that it does not matter very much if this investment is brought forward relative to the growth of consumption. These economists argue that this sort of “pre-investment” will not create any problems, especially if funded by the government sector rather than by the creation of excessive private leverage and debt. The houses, railways and roads will still be there, and will be fully utilised in future years.

What can we learn from the experience of other economies at similar stages in their growth process?

The most informative research paper which I have been able to find on this question was written in 2011 by Barry Eichengreen and colleagues. This paper identifies all of the growth slowdowns which have occurred since 1957 in economies which have attained a middling level of GDP per capita (over $10,000 per annum in 2005 prices according to the Penn World tables).

The key result of this study is that major growth slowdowns are triggered, on average, when per capita GDP reaches $16,700 per annum, or on an alternative measure when it reaches 58 per cent of the per capita GDP of the lead economy (ie the US). When these levels of income are reached by a developing economy, it tends to experience a growth slowdown of at least 3.5 percentage points. Both Japan (in 1970 and 1992) and Korea (in 1997) suffered growth slowdowns larger than this when their income levels exceeded the critical levels.

China has not yet reached either of the key levels identified by Eichengreen. On my estimates, the level of per capita GDP will exceed $16,700 only in 2016, and the ratio of Chinese to US GDP will not approach the 58 per cent level before the 2020s.

Based on this analysis, the development process in China might still have a long way to go before a major slowdown becomes inevitable. This is presumably one key reason why the IMF’s medium term forecasts for China still show real GDP rising at a healthy rate of about 8.5 per cent per annum up to 2017.

However, the Eichengreen study does add some specific warnings about the future for China. Apart from levels of GDP per capita, the study concludes that several other variables which impact the probability of a major growth slowdown are flashing warning signals in China, including the low share of consumption in GDP, the ageing of the population and the undervalued real exchange rate.

Because of this, Eichengreen’s estimates show that, in the absence of corrective policy action, the probability of a major Chinese slowdown at some point in the next few years is already running at over 70 per cent.

The test for the decade of Xi Jinping is whether policy can head off all or some of the impending slowdown. The good news is that the incoming administration is extremely well aware of the challenge of excess investment, and will act to mitigate its worst effects. China has faced greater economic challenges in the past three decades, and has succeeded in overcoming them. It can do so again.

Russia’s European Prospects

Igor S. Ivanov

23 November 2012


MOSCOWIn 1966, Charles de Gaulle’s vision of a Europe “that stretched from the Atlantic to the Urals” was provocative. Today, Russian President Vladimir Putin has advanced an even more ambitious goal: “a common market stretching from the Atlantic to the Pacific.”
In the race toward globalization, the stakes are high for both Russia and Europe. If Russia continues on its current path toward becoming solely a raw-materials producer, it will not only become increasingly vulnerable to global energy-price fluctuations, but its scientific, cultural, and educational potential will decay further, eventually stripping the country of its global clout.
If Europe, for its part, fails to respond to the challenges of the twenty-first century, it will face chronic economic stagnation, rising social tension, and political instability. Indeed, as industrial production migrates to East Asia and innovation remains in North America, Europe risks losing its position in the most attractive international markets. As a result, the European project itself could be called into question.
To avoid these outcomes, Russia and Europe must identify where their interests converge, and work to establish a mutually beneficial partnership in those areas. But, in order to foster such a partnership, they must first alter their negative perceptions of each other.
Many Russians do not regard Europe as a political and economic partner, or even as an ally. In their view, Europe has already lost the battle for innovation and economic development, and is gradually becoming an “industrial museum.” Russia, they argue, should form partnerships with more dynamic countries.
Likewise, many Europeans believe that, while a partnership with Russia might be an asset now, it would corrode Europe’s economies and politics in the long run. If Europe wants to lead and prosper, according to this view, it should limit its ties with Russia as much as possible.
Ongoing disputes between Russia and the European Union reflect this mutual distrust. Russians accuse Europeans of taking too long to liberalize visas, blocking Russian energy companies’ access to Europe’s downstream markets, instigating anti-Russian sentiment in the post–Soviet era, and trying to interfere in Russia’s domestic politics.
Meanwhile, Europeans have serious reservations about Russia’s human-rights record, legal system, failure to adhere to European values, and position on international crises, especially in the Middle East. As a result, the prospect of closer cooperation remains distant.
Without a fundamental reset, relations between Russia and Europe will continue to decay, eventually becoming characterized by benign neglect. Despite their common geography, history, and economic interests, their strategic trajectories will diverge.
An alternative scenario relies on the powerful unifying impact of human capital, the defining factor in the quest for global influence. Human capitalnot natural resources, production capacity, or financial reserves – should constitute the foundation of Russian and European development policies.
Cultivating human capital requires a supportive cultural environment, a well-developed educational system, and research and innovation centers. Many argue that, in both Russia and Europe, such social infrastructure has become so costly that it is hindering the development of a more efficient and dynamic economy. Only by dismantling the welfare state, critics contend, can progress be made.
But curtailing social programs in both Europe and Russia would jeopardize human capital, their most valuable comparative advantage. By enhancing the welfare state’s efficiency, economic progress can occur without sacrificing this crucial source of long-term growth.
Given their strong traditions of building human capital – and their motivation to continue to do soRussia and Europe have much to offer one another. By focusing on the areas in which their modernization agendas overlap – from education to public health to environmental protection – they can identify ways to increase their human capital’s efficiency.
While Europeans have reason to criticize Russia’s shortcomings, they should also recognize that only two decades ago, Russia’s political, economic, social, and legal systems underwent a fundamental shift, which significantly affected its people’s psychology, self-perception, and behavior. Given Europeans’ complicated experience with European Union enlargement, they should understand the challenges that accompany such a profound change.
With this understanding should come recognition that Europe’s current policy of demanding that Russiamature” as a condition for cooperation is counterproductive. Russia will mature much more slowly in isolation than it will if it is integrated into European institutions.
Some progress has already been made. For example, participating in the Council of Europe has helped Russia to improve significantly its prison system.

Likewise, launching initial public offerings on European stock exchanges has strengthened Russian corporations’ governance, social responsibility, and treatment of minority shareholders. In short, more interaction, not less, should be actively encouraged.
Of course, Russia will probably not become a full NATO member in the foreseeable future, owing to the many structural, technical, and psychological obstacles blocking its path. But political integration is feasible. Greater political cooperation would provide a context for discussing issues like the future of Afghanistan, international terrorism, and nuclear proliferation, as well as for creating joint initiatives and strategies that address crucial issues affecting both powers.
The institutional integration of Russia into greater Europe will require strong commitment from both sides. But, in this globalized century, it is the only option.
Igor S. Ivanov, Russia’s former foreign minister, is President of the Russian International Affairs Council.

martes, noviembre 27, 2012



Getting Technical


The Trend is Gold's Friend Again


After being written off months ago, the precious metal is showing sustainable upward movement.



Last week, while investors were enjoying a nice stock-market rally, gold quietly broke out to the upside. After months of floundering, the yellow metal has now confirmed the resurgence of its long-term rising trend.

If there ever was an asset that embodied the spirit of Mark Twain's famous quote, "The reports of my death have been greatly exaggerated," it is gold. From calls of a burst bubble in September 2011 to an apparent, albeit incorrect, view of a major trend breakdown in May 2012, the precious metal has ignored the consensus opinion that its best days were behind it.

Analysts argued that low levels of inflation would render its hedging qualities unnecessary. And a strong U.S. dollar, thanks to the continuing economic problems in Europe, would continue to pressure it. Since the metal is priced in dollars, a rising dollar can buy more ounces of gold, all other factors held constant, and that results in lower prices.

Gold is now trading above its 50-day moving average for the first time in a month after recently bouncing off its longer 200-day average (see Chart 1).

Chart 1


Its Nov. 23 gain also moved it above short-term resistance at $1,740 an ounce and confirmed the end of an October correction. In Monday's session, gold traded at $1,750, down slightly from Friday's close.

The next hurdle for the market is in a zone around $1,800, a resistance level set by short-term highs made in November 2011, February 2012 and early last month. If the bulls are successful there, I see no technical reason why it will not top last year's all-time high of $1,923 within just a few months.

While gold is just now confirming its bullish tone here in the U.S., Europeans were already quite aware of its bull market. When priced in euros, gold moved to an all-time high in September of this year (see Chart 2).

Chart 2

Gold Priced in Euros

With exchange-traded funds as proxies, investors can use any charting software, such as the free, to plot this relationship. Simply create a ratio of the SPDR Gold Trust (ticker: GLD) divided by CurrencyShares Euro Trust (FXE).

The rising trend from 2008 is clear and intact. And while gold priced in euros backed down from its all-time high during October, the configuration on the chart suggests nothing more than a normal correction in a bull market.

Indeed, most of the world's major currencies show similar long-term bull markets in gold. Japan might be the exception as the chart of gold priced in yen shows a large trading range, rather than a correction and upside breakout, since last year's all-time high.

Gold priced in yen is in the midst of a strong short-term rally that is now about to reach the top of the larger trading range. That suggests it is nearing a price at which previous rallies stalled.

Last week, I wrote here that gold mining stocks had taken a different path from the metal but were in an area representing good long-term value (see Getting Technical, "Gold-Mining Stocks for the Long Run," Nov. 19). Gold stocks are still struggling as the rest of the stock market started the new week with a loss. But I consider a breakout in the metal to be a good reason to continue to look at these stocks favorably, albeit with an expectation for a bumpy road ahead.

The long-term trend remains to the upside and supporting technicals such as moving averages and momentum are starting to add to the bullish case. With or without mining stocks in tow, investors should not write off the metal, no matter what many experts say.

Michael Kahn, a long-time columnist for, blogs about technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

November 25, 2012 7:55 pm

Washington must stop the creeping rust
COMMENT PAGE illustration©Matt Kenyon

Last summer India had the largest power outage in human history affecting 600m people. So it stung when my visiting Indian mother-in-law pointed out that America’s east coast, including Washington, was “as bad as India”. Then it was a so-called derecho storm, which left 6m US homes without power for days in the searing heat. Last month it was Superstorm Sandy, which left 10m households shivering. Forecasters predict a heavy late December cold snap that is bound to cause blackouts.

It is hard to pinpoint the date at which Americans developed an Indian – or perhaps Britishfatalism about the declining quality of their infrastructure. When my British mother spent several months in the US in the 1950s, it was dazzlingly futuristic. There was air-conditioning, an icebox in every fridge, ubiquitous neon lights and an open road on which even the working class could afford to drive. But bit by bit over the past 30 years, the world’s first truly modern infrastructure has shown its age. It has been starved by a generation of under-investment. And Americans have adapted around it.

At some point in the next 12 months, we will discover whether the US has the will to bring its infrastructure into the 21st century. If all goes well, Congress will take steps to avert a fiscal cliff before January 1.

As part of that deal lawmakers will schedule another ticking time bomb for late 2013, before which they will have to strike a larger bargain or hit another fiscal cliff. The likelihood is that Congress will shrink the already meagre federal investment budget. The hope, as the Brookings Institution Metropolitan Center puts it, is that Congress will “cut to invest” rather than doing so crudely across the board.

There are three reasons to worry. First, there is remarkably little public outrage over the dilapidation in the power grid, public roads, domestic airports and waterways. This means that lawmakers will be feeling stronger pressures in other directions (such as defending the existing low level of capital gains tax, for example, or maintaining job-creating defence budgets). It is hard to fly domestically in the US and not at regular intervals face heavy delays, cancellations or being bumped off your flight. It is also hard not to miss the impressively stoical reaction of most passengers.

A big chunk of America’s domestic flying woes could be solved by building NextGen, which would switch the US from its second world war radar network to a satellite-based flight-tracking system.

The existing arrangement is built on a hub and spoke model, whereby airlines route all traffic via a regional headquarters. Any seize-up in the hub can have a knock-on effect on the entire schedule.

NextGen would make flying safer and hub and spokes unnecessary. But Congress has little stomach for the bill, which would come to at least $25bn.

Second, most Americans are unaware of how far behind the rest of the world their country has fallen. According to the World Economic Forum’s competitiveness report, US infrastructure ranks below 20th in most of the nine categories, and below 30 for quality of air transport and electricity supply.

The US gave birth to the internet – the kind of decentralised network that the US power grid desperately needs. Yet according to the OECD club of mostly rich nations, average US internet speeds are barely a 10th of those in countries such as South Korea and Germany. In an age where the global IT superhighway is no longer a slogan, this is no joke.

The budding US entrepreneur can survive gridlocked traffic. But a slow internet can be crippling.

Third, it may be asking too much of Washington in its present state of polarisation to give the green light to an ambitious infrastructure plan. According to the American Society of Civil Engineers, the US needs to spend $2,200bn in the next decade simply to maintain the existing quality of infrastructure. Under the current budget, Washington will spend less than half that amount. It requires a leap of faith to assume it will double, say, rather than fall sharply, when the bipartisan fiscal bargain is struck next yearif indeed it is.

In a departure from their party’s traditions, many Republicans are now ideologically opposed to any serious federal role in infrastructure and want to decentralise it to the states. It is thus also a stretch to imagine Congress setting up a public infrastructure bank, as President Barack Obama has requested.

The bank would use $10bn in seed money to leverage a multiple of that in private money for cross-state projectsmuch like the European Investment Bank. The chances are it will stay on the drawing board.

Building bridges, occasionally to nowhere, was once a bipartisan pursuit. As the US heads towards a consequential reckoning with its fiscal future, it is worth stressing that Washington will be aiming to set federal budgetary parameters for many years ahead.

Before lawmakers do so, they should take a trip to east Asia – say from JFK to Changi, or Chek Lap Kok, or any number of airports – and feel the difference. Though they would have to ignore the medieval conditions around it, they could even go via New Delhi’s new airport and travel on the city’s air-conditioned new metro system. My mother-in-law would be delighted to welcome them with a cup of chai masala and some gentle finger-wagging about the US power grid.

Copyright The Financial Times Limited 2012.