miércoles, agosto 06, 2014



Hunting Tigers in China

Minxin Pei

AUG 1, 2014

CLAREMONT, CALIFORNIAIn the boldest move yet since President Xi Jinping launched his anti-corruption campaign, China has announced the start of a formal investigation into serious disciplinary violations by one of the Chinese Communist Party’s most senior figures, Zhou Yongkang. Though rumors of Zhou’s political demise had been circulating for nearly a year, anyone familiar with Chinese political intrigue knew that, until the CCP made it official, Zhou’s many powerful patrons and cronies could still save him. Now it is official: a “mega-tiger” has been brought down. But is that what China really needs?

Since 2012, when Xi beganhunting tigers,” as he put it, three dozen government ministers, provincial governors, and other high-level officials have fallen into his net. But Zhou is no ordinary tiger. A former member of the Politburo Standing Committee, the CCP’s top decision-making body, Zhou was considered untouchable.

Since the end of the Cultural Revolution, the CCP has adhered to the implicit rule that members of the Politburo Standing Committee, sitting or retired, enjoy immunity from criminal prosecution. Some have, of course, been purged in power struggles, such as the one that led to the fall of Hua Guofeng, Mao’s immediate successor, in the early 1980s. But the defeated have typically retired quietly, and never faced formal corruption charges.

Given this history, the prosecution of Zhou is a watershed event far more significant than the riveting trial of the disgraced former Chongqing Communist Party Secretary Bo Xilai a year ago. It unambiguously demonstrates Xi’s personal authority and political resolve. But the question remains: What exactly does Xi hope to achieve with China’s most fearsome anti-corruption campaign in more than three decades?

The conventional wisdom is that the threat of prosecution serves Xi’s goals of consolidating power and compelling the bureaucracy to implement economic reforms that run counter to its interests. The two prongs of Xi’s political strategy cleansing the Party and reinvigorating China’s economy – are thus complementary and interdependent.

This strategy has considerable merit. But even the Machiavellian dictum that a ruler should encourage his citizens’ fear rather than their love can go only so far. The most successful political leaders are skilled coalition-builders.

Consider Deng Xiaoping, China’s most successful reformer (the Tiananmen Square massacre of 1989 notwithstanding). The grand coalition that he forged, against all odds, upon his return to power in 1979 was essential to bringing about the economic transformation that followed.

The question today is thus not whether Xi has amassed enough authority to effect change in China (he has), but whether he has built a coalition capable of advancing his declared goal of reviving pro-market reforms. And, so far, the answer seems to be no.

Since taking over the presidency, Xi’s actions have been both resolute and contradictory. On one hand, he has been aggressively pursuing tigers” and “flies” (lower-level officials), while curbing, at least temporarily, the privileges enjoyed by Chinese officials. On the other hand, he has launched an equally ferocious campaign against political liberalization, arresting and jailing leading human-rights activists and cracking down on China’s once-vibrant social media.

The risks of waging a two-front war are obvious. If Xi’s fight against corruption is genuine, it will engender fear and resentment among the Chinese bureaucracy. 

While officials feign compliance with Xi’s economic-reform agenda, they will seek any opportunity to stymie it. The absence of significant real progress since Xi unveiled his economic blueprint last November suggests that this is already happening.

At the same time, Xi’s tough stance against political reform is diminishing hope among liberals. Of course, this group – including intellectuals, social activists, journalists, and progressive private entrepreneurs – has little institutional power. What it does have is the capacity to influence ordinary Chinesemaking them a valuable addition to a pro-reform coalition. Deng recognized this potential in the 1980s; unless Xi follows suit, he will find it increasingly difficult to rally the public behind his vision for China’s future.

This is not to say that caging Zhou was not a good move. But Xi must now shift his focus from bagging another quarry to winning over new and perhaps unexpected allies. His long-term success – and that of China depends on it.

Minxin Pei is Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States.

August 4, 2014 9:48 am

Investors blow froth off junk bond market

“The first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond, or a job, the commodity quickly becomes overvalued.”

So wrote Michael Lewis in Liar’s Poker, his account of life as a bond salesman during the boom years of 1980s Wall Street.

For the past five years few asset classes have been chased as much and by so many as the junk bonds issued by low-rated companies.

Lured by the higher returns on offer from investing in the risky debt, investors have poured $80.7bn into UShigh-yieldbond funds since the Federal Reserve began its emergency economic policies in 2009not far from the $126.3bn that went into global stocks in the same period.

The push into junk bonds has sparked concerns that valuations are stretched and that the inevitable exit from what has been a historic bull run is likely to be messy.

“We have been in extreme valuations for months,” says Marty Fridson, chief investment officer at LLF Advisors. Investors are well aware that they’re not being compensated particularly well for their risk, but they don’t have a good alternative to meet their return requirements.”

In fact, the namehigh-yield” is beginning to look outdated when it comes to the returns currently on offer from investing in the debt. Low interest rates have herded investors into junk bonds, pushing yields on the securities ever lower and creating a feedback loop as companies take advantage of cheaper refinancing costs to issue more debt.

Average yields on junk bonds touched a record low of 4.82 per cent in June, according to Barclays data – a far cry from the 22.9 per cent seen in 2008. At the same time, sales of the debt totalled $210.8bn in the first seven months of the year – the highest period of issuance since at least 2000, according to Dealogic.

Potentially frothy credit markets have not gone unnoticed by regulators. Earlier this month Janet Yellen, Fed chairwoman, warned that valuations in the high-yield marketappear stretched” – alarming investors and triggering a flight from the sector that resulted in its worst monthly performance in more than a year.

Now investors must figure out whether this is a blip or the first sign of a turn in the corporate credit cycle. Some are particularly fearful that a reversal in the junk bond market could be more severe than in previous downturns.

While sales of the debt have jumped, investors’ ability to trade the bonds in the secondary market is said to have dropped sharply. Banks, under pressure from new regulation, have pared the amount of risky bonds held on their balance sheets, meaning there may be less of a cushion to absorb sales of the debt during a market rout.

Many commentators, however, refute the idea that banks would be much of a buffer. Mr Fridson says: “The reality is when the market starts to go down they stop answering the telephones.”

Whatever the reason, most market participants agree that liquidity available in corporate bonds has declined markedlyyet the dramatic change has so far been masked by strong sales of the debt in primary markets and hefty investor demand.

“We should be mindful of significant primary market volumes compared to lacklustre secondary markets,” says Jim Esposito, co-head of the global financing group at Goldman Sachs. Recently, investors have not required large amounts of secondary market liquidity but at some point they will.”

Compounding matters is the fact that more than a third of US corporate bonds are now owned by “mom and popinvestors who have piled into fixed-income funds and exchange traded funds (ETFs) that offer instant access to the debt.

“There is no underlying bid in the [high-yield] market once people decide to start selling. That is compounded by the amount of ETFs issued backed by high-yield debt,” says Raymond Nolte, managing partner at SkyBridge Capital.

“A lot of that is in the hands of retail, which see ETFs as a resolution to liquidity problems. And they will be able to sell in a down market, but at what price?”

Despite such concerns, many fund managers say it may be too soon to fear a sell-off. Corporate default rates remain low and the Fed has said it is committed to keeping rates near zero until at least mid-2015.

In addition, a healthier US economy and buoyant stock market has traditionally been beneficial for junk-rated companies.

High-yield bonds tend to do well in a stronger-economy, rising stock market environment,” says Sabur Moini, high-yield fund manager at Payden & Rygel.

“It may even be healthy for the market if we see a ‘mini correction’, with spreads widening another 20 to 30 basis points. For people like us, that would provide a good buying opportunity.”

Mr Collins at Prudential says investors should avoid the “temptations” that are so often found during memorable market booms.

“It is important not to be too greedy, and not sacrifice too much credit quality in order to capture a bit more yield. You don’t want to be the guy picking up pennies in front of a steam roller.”

With additional reporting by Nicole Bullock

Copyright The Financial Times Limited 2014.

The Internet’s Next Act

J. Bradford DeLong

JUL 29, 2014

BERKELEY Ten years ago, the world emerged from the dot-com bust and started to look more soberly at the Internet’s potential. While speculative greed and fear of missing out might have overplayed the short-term outlook, the Internet’s immense longer-term prospects were never in doubt. I, and other optimistic economists, assumed that free information and communication would herald an era of rapid productivity growth and improved wellbeing – to a greater or lesser extent – for everyone, regardless of their skills, wealth, or social background. Were we right?

In many respects, the revolution in information and communications technology (ICT) has delivered more than it promised – and often in unpredictable ways. For many, the true marvel of the digital age is its creation of a parallel universe. Anyone with a laptop and an Internet connection can gossip with (or about) virtual friends; witness extraordinary events that may or may not have happened; or play games in a mock world of incomparable complexity.

The Internet has created a dreamscape that is accessible to all and that can inspire us to still greater heights of imagination. Indeed, those who scoff at the value of this should remember that ever since Homer sang around the hearth fire about the wrath of Achilles, dreams have been our greatest source of pleasure and inspiration.

But the benefits of the Internet have come not just to those who work or play online. Everyone has gained to some degree. Go to a WalMart, Costco, Tesco, or Lidl superstore anywhere in the world, and compare the price, quality, and range of today’s goods with those of a generation or two ago. This dramatic change for the better largely reflects the rapid development of global supply chains, with real-time monitoring of customer preferences enabling manufacturers located on the other side of the world to know instantly what, when, and how much to produce.

There is much more to come. Companies are using the Internet to “crowdsourcenew ideas, and even let customers co-design their own products. New Web-based platforms allow ordinary peoplewithout money or special skills – to share their cars, spare bedrooms, or even do-it-yourself tools, thus challenging the dominance of global corporations. The “Internet of Things” is connecting simple household itemslike a thermostat – to the Web, helping owners to save money and even reduce their carbon emissions.

And yet we must still ask: Is everyone really benefiting in the new economy? Only a fortunate few, especially those who combine innovative thinking with financial acumen, have fully captured the monetary profits of the ICT revolution, becoming its poster children in the process.

Lower down the economic scale, most people, though enjoying easy access to technology and low prices, have lost ground, with real wages falling for many years. This is not a temporary decline: labor in advanced Western economies can no longer command a large wage premium, and workers’ situation may worsen further.

Moreover, white-collar managers and employees – the brainpower that keeps the intricate global corporate machinery whirring, and once the backbone of the middle class – are no longer in such high demand. Many of their skills, which long underpinned their status, careers, and livelihoods, are becoming redundant.

For today’s ordinary middle-class family, a medical mishap can become a financial catastrophe. Owning a home involves a life of indebtedness. Providing a decent education to one’s children requires struggle and sacrifice. The assumptions that defined middle-class households – and many working-class households – for at least two generations are disappearing before our eyes.

Who is speaking out for them? Most households stand to gain from the continuation of the ICT revolution. But middle-class and working-class families would benefit more if the hyper-cheap products and services, free information, and virtual leisure experiences augmented, rather than eroded, their marketable skills. The politician who can figure out how to steer the revolution accordingly might never lose another election.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.