What the Nordic mixed economy can teach today’s new left

Much of Scandinavia’s success is not rooted in direct state intervention

Martin Sandbu




The most predictable phenomena can also be the most surprising. Just look at the revival of “socialism” as a politically viable idea in the US and UK.

Ten years ago, the global crisis laid bare the failures of financial capitalism. This gave the political left an opportunity to win support for its agenda. Yet almost every established centre-left party in the developed world bungled this shot at political dominance.

Instead of a comeback, we seem to be getting a throwback. The only leftwing politicians to prosper have been those who reject the “third way” centre-leftism of the 1990s. In the UK, Jeremy Corbyn has taken over the Labour party with the support of a hugely expanded membership. In the US, Bernie Sanders’ socialist primary campaign gave Hillary Clinton a run for her donor class money in 2016. In recent local results, like-minded politicians Alexandria Ocasio-Cortez and Rashida Tlaib have won safe-seat Democratic party nominations to Congress. Polls show that about half of young Americans now favour “socialism” over “capitalism”.

This has triggered a debate about what the new socialists mean by “socialism”. On one reading, it is just an aspirational label for Scandinavian social democracy, with policies such as universal healthcare or better conditions for workers.

But some of its most thoughtful proponents argue in favour of socialism because it is opposed to capitalism. The political theorist Corey Robin, for example, advocates “socialism” because it makes workers free, while capitalism leaves them unfree. Such claims see socialism and capitalism as rival and incompatible systems.

This semantic difference matters politically. The either/or view may have made sense during the cold war. But even when the dichotomy was real, the Nordic countries were clearly arrayed on the capitalist side of the dividing line. To oppose “socialism” against “capitalism” is to refuse to learn from the experience of the societies that have probably come closest to the new socialists’ own ideals.

The Nordic countries have been called “mixed economies” precisely because they combine elements of socialism and capitalism: state and private ownership of the means of production; public regulation and market competition; redistributive taxes and wages determined by employers and employees.

If the socialists of today ignore capitalism’s role in that mix, they fail to follow their own leading lights. Here are three lessons they should heed from the Nordic model, whether or not they call it “socialist”.

First, it embraces globalisation. It was no coincidence that the Nordic mixed model emerged in countries with high exposure to international trade. Public understanding that trade brings prosperity, but that global fluctuations hit hard and unpredictably, increased support for the insurance elements of the Nordic welfare states.

So if “socialism” it is going to be, it should be a socialism confident about economic openness. The US left’s opposition to trade deals weakens any affiliation it may try to claim with the Nordic model. So does British socialists’ seduction by “ Lexit” — the alleged leftwing case for escaping the rules that smooth trade between European countries.

Second, while the Nordics’ economic egalitarianism is well known in broad terms, the detail is not. But the detail matters. The achievement of the Nordic model is something very specific: a highly compressed distribution of market wages (before taxes and transfers). In comparison, the distribution of wealth and capital income, and the degree of income equalisation through policy, is unexceptional. The Nordics succeeded not through maximal redistribution but by engineering an economy that did not need to overburden the state’s redistributive power.

This leads to the third lesson. Much of the Nordic model’s success is rooted not in direct state intervention but in the finely balanced interplay between social organisations, especially in the labour market. Admirers appreciate the role of unions in the Nordic economies; they are less aware of the equal importance of coherent employers’ associations.

A blinkered workers-against-bosses view of the world suggests anything that makes capital owners better organised must harm the interests of workers. The Nordic experience shows the opposite is true. Coherent organisation encourages employers to recognise how what may seem like a burden on an individual company benefits business as a whole.

In Scandinavia, a compressed wage structure has been good for productivity. If it is expensive to use labour unproductively, and if high-skilled labour is relatively cheap, companies accelerate investment and quickly adopt new technology. Similarly, an organised employer sector helps workers, businesses and the government to adjust in the face of technological disruptions. If this is socialism, it is one that makes for a more flexible capitalism.

The Nordics, then, give vindication to the insight of great liberal centrists of the interwar years: that wise government intervention is good for capitalism, and makes capitalism good for workers. Progressive centrism may have earned itself a bad name in the run-up to the crisis and its aftermath. But if socialists reject it out of purism, they will find their own goals frustrated as well.

 More Emerging Market Chaos – How Long Before It Spreads To The Developed World?  

Emerging market chaos is now front page news. Let’s start with Argentina, where the peso has resumed its plunge:

Argentine peso emerging market chaos

In response:
Argentina Central Bank hikes interest rate to 60 percent
(AP) — Argentina’s Central Bank has increased its benchmark interest rate to 60 percent in efforts to halt a sharp slide in the value of the peso. 
The sliding value of the currency prompted Argentina to seek a financing deal earlier this year with the International Monetary Fund and President Mauricio Macri now is asking for an early release of those funds. 
The peso slipped about 7 percent againstthe dollar Wednesday and was down another 5 percent early Thursday. It’s been trading at 35.9 to the dollar.
The Central Bank said Friday that it was hiking its benchmark interest rate in response to the current currency scenario and the risk of greater impact on local inflation. The rate was set to 45 percent earlier this month.

It’s hard for developed world readers to grasp the implications of 60% interest rates. Suffice it to say normal life is on hold – in some cases permanently – for most Argentines.

Brazil, meanwhile, has currency issues of its own, with the real falling hard in the past year. But a much bigger problem is looming just across the border, where Venezuela is in the throes of a full-on hyperinflation that’s sending its citizens fleeing in every direction. In response:
Brazil sends army to border as Venezuelans flee crisis at home
(Reuters) – Brazil said it was sending armed forces to keep order near the Venezuelan border area, while Peru declared a health emergency, as a regional crisis sparked by thousands of Venezuelans fleeing economic collapse escalated on Tuesday. 
In Brazil, where residents rioted and attacked Venezuelan immigrants in a border town earlier this month, President Michel Temer signed a decree to deploy the armed forces to the border state of Roraima. He said the move was aimed at keeping order and ensuring the safety of immigrants. 
Peru, meanwhile, declared a 60-day health emergency in two provinces on its northern border, citing “imminent danger” to health and sanitation. The decree, published in the government’s official gazette, did not give more details on the risks, but health authorities have previously expressed concerns about the spread of diseases such as measles and malaria from migrants. 
The exodus of Venezuelans to other South American countries is building toward a “crisis moment” comparable to events involving refugees in the Mediterranean, the United Nations said this week. 
Temer blamed the socialist Venezuelan government of President Nicolas Maduro for the migration crisis. 

“The problem of Venezuela is no longer one of internal politics. It is a threat to the harmony of the whole continent,” Temer said in a televised address. 
There are close to 1 million Venezuelans now living in Colombia and more than 400,000 in Peru, the countries said in a joint statement after the meeting on Tuesday. Just 178,000 of those in Peru have legal permission to stay or are being processed.

Turkey, whose authoritarian government is causing turmoil both at home and with its NATO allies – most notably the US – has been trying to manage a currency crisis for months, but this week central bank officials started leaving and the the lira’s plunge resumed.

Turkish lira emerging market chaos

Turkish lira extends slide amid reports central bank deputy governor resigning

(MarketWatch) – The Turkish lira extended its slide Thursday amid news reports the deputy governor of the nation’s central bank will step down. The U.S. dollar hit an intraday high of 6.84 lira in earlier action and remains up 4.6% near 6.76 lira.  
Reuters, citing two persons familiar with the matter, reported that the deputy governor and Monetary Policy Committee member, Erkan Kilimci, was set to resign. Lira weakness this year has been exacerbated, analysts say, by Turkish President Recep Tayyip Erdogan’s pressure on the central bank not to raise rates. The lira is down more than 40% versus the dollar in the year to date, a slide that raised concerns about potential ripple effects on other emerging markets and about exposure to Turkey by some European Banks.

Last but not least, Italy has to be included in any discussion of emerging market chaos because compared to most of the rest of the EU it fits the profile, which is to say it’s financially and politically unstable and is thus always teetering on the edge of crisis. This might be the year it finally drops into the abyss, as its interest rates have risen to levels where the numbers no longer work.

Italian 10-year bond yield emerging market chaos


Note that as recently as May Italy was able to borrow 10-year money for less that the US could.

But lately it’s having to pay quite a bit more. The only reason its financial markets and banking system even exist in their current form is the artificially cheap money engineered by the ECB’s unlimited buying of Italian bonds. Take that away – which is now happening as the ECB stops indulging what it sees as an unreasonable new Italian government – and interest costs will bankrupt the country in short order. Stay tuned on this one.

So here we are with emerging markets in crisis but US financial markets completely oblivious.

There are two reasons for this, one reasonable at least in the short run, the other both baffling and infuriating.

Reason one is that in a world of emerging market chaos, the US – even with an unpredictable government – looks like the safest place to park capital. In other words, Amazon shares and Miami condos, even at record-high prices, are less risky than, say, a Brazilian bank account.

Fair enough.

Reason two is that since the 1990s the Fed has responded to every crisis anywhere in the world by bailing out the US banking system, and everyone has concluded that that’s just how the world works.

Trouble starts, the Fed cuts rates, and stocks, bonds and houses go up, problem solved. Without the slightest doubt, the Fed will respond that way again should the current EM crisis start to metastasize unacceptably. But will it work this time, with global debt roughly double what it was the last time the world was bailed out by its central banks? And how big will the financial market crisis have to be to shift the Fed and ECB from tightening to next-gen QE?

If events follow this script, we can expect a scary few months followed by plunging interest rates and massive, coordinated asset purchases by central banks. Which ought to be great for gold.

domingo, septiembre 23, 2018

WHALE OF A TIME: CHINA´S BANKS / THE ECONOMIST

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Whale of a time: China’s Banks
 
Industrial and Commercial Bank of China, the world’s largest bank by assets, reported strong mid-year results today, with net profit 5.8% higher than the same period last year. But beware of extrapolating to the rest of the financial system. Fortunes have diverged sharply. Big banks are in good shape but their smaller peers are hurting. As the government tries to defuse economic risks, it has curtailed dodgy lending practices and reined in overall credit growth.  
 
Defaults have jumped: for the banking sector as a whole, non-performing loans increased by a record last quarter. In order to limit the pain, regulators have called on well-capitalised big banks to expand their lending. They are seizing the opportunity to gobble up market share and cherry-pick the safest borrowers. This is far from ideal for the economy. Large state-owned banks favour stable, stodgy state-owned enterprises over scrappy, innovative private firms. The big get bigger.
 


With Ships and Missiles, China Is Ready to Challenge U.S. Navy in Pacific

By Steven Lee Myers


China’s first aircraft carrier, the Liaoning, at sea in April. First launched by the Soviet Union in 1988, it was sold for $20 million to a Chinese investor who said it would become a floating casino, though he was in reality acting on behalf of the People’s Liberation Army Navy.CreditCreditAgence France-Presse — Getty Images


DALIAN, China — In April, on the 69th anniversary of the founding of China’s Navy, the country’s first domestically built aircraft carrier stirred from its berth in the port city of Dalian on the Bohai Sea, tethered to tugboats for a test of its seaworthiness.

“China’s first homegrown aircraft carrier just moved a bit, and the United States, Japan and India squirmed,” a military news website crowed, referring to the three nations China views as its main rivals.

Not long ago, such boasts would have been dismissed as the bravado of a second-string military. No longer.

A modernization program focused on naval and missile forces has shifted the balance of power in the Pacific in ways the United States and its allies are only beginning to digest.

While China lags in projecting firepower on a global scale, it can now challenge American military supremacy in the places that matter most to it: the waters around Taiwan and in the disputed South China Sea.

That means a growing section of the Pacific Ocean — where the United States has operated unchallenged since the naval battles of World War II — is once again contested territory, with Chinese warships and aircraft regularly bumping up against those of the United States and its allies.

To prevail in these waters, according to officials and analysts who scrutinize Chinese military developments, China does not need a military that can defeat the United States outright but merely one that can make intervention in the region too costly for Washington to contemplate. Many analysts say Beijing has already achieved that goal.

To do so, it has developed “anti-access” capabilities that use radar, satellites and missiles to neutralize the decisive edge that America’s powerful aircraft carrier strike groups have enjoyed. It is also rapidly expanding its naval forces with the goal of deploying a “blue water” navy that would allow it to defend its growing interests beyond its coastal waters.

“China is now capable of controlling the South China Sea in all scenarios short of war with the United States,” the new commander of the United States Indo-Pacific Command, Adm. Philip S. Davidson, acknowledged in written remarks submitted during his Senate confirmation process in March.

He described China as a “peer competitor” gaining on the United States not by matching its forces weapon by weapon but by building critical “asymmetrical capabilities,” including with anti-ship missiles and in submarine warfare. “There is no guarantee that the United States would win a future conflict with China,” he concluded.

Last year, the Chinese Navy became the world’s largest, with more warships and submarines than the United States, and it continues to build new ships at a stunning rate. Though the American fleet remains superior qualitatively, it is spread much thinner.

“The task of building a powerful navy has never been as urgent as it is today,” President Xi Jinping declared in April as he presided over a naval procession off the southern Chinese island of Hainan that opened exercises involving 48 ships and submarines. The Ministry of National Defense said they were the largest since the People’s Republic of China was founded in 1949.

Even as the United States wages a trade war against China, Chinese warships and aircraft have picked up the pace of operations in the waters off Japan, Taiwan, and the islands, shoals and reefs it has claimed in the South China Sea over the objections of Vietnam and the Philippines.

When two American warships — the Higgins, a destroyer, and the Antietam, a cruiser — sailed within a few miles of disputed islands in the Paracels in May, Chinese vessels rushed to challenge what Beijing later denounced as “a provocative act.” China did the same to three Australian ships passing through the South China Sea in April.

Only three years ago, Mr. Xi stood beside President Barack Obama in the Rose Garden and promised not to militarize artificial islands it has built farther south in the Spratlys archipelago. Chinese officials have since acknowledged deploying missiles there, but argue that they are necessary because of American “incursions” in Chinese Waters.

When Defense Secretary Jim Mattis visited Beijing in June, Mr. Xi bluntly warned him that China would not yield “even one inch” of territory it claims as its own.




Ballistic missiles designed to strike ships on display at a military parade in Beijing in 2015.CreditPool photo by Andy Wong



‘Anti-Access/Area Denial’

China’s naval expansion began in 2000 but accelerated sharply after Mr. Xi took command in 2013. He has drastically shifted the military’s focus to naval as well as air and strategic rocket forces, while purging commanders accused of corruption and cutting the traditional land forces.

The People’s Liberation Army — the bedrock of Communist power since the revolution — has actually shrunk in order to free up resources for a more modern fighting force. Since 2015, the army has cut 300,000 enlisted soldiers and officers, paring the military to two million personnel over all, compared with 1.4 million in the United States.

While every branch of China’s armed forces lags behind the United States’ in firepower and experience, China has made significant gains in asymmetrical weaponry to blunt America’s advantages. One focus has been in what American military planners call A2/AD, for “anti-access/area denial,” or what the Chinese call “counter-intervention.”

A centerpiece of this strategy is an arsenal of high-speed ballistic missiles designed to strike moving ships. The latest versions, the DF-21D and, since 2016, the DF-26, are popularly known as “carrier killers,” since they can threaten the most powerful vessels in the American fleet long before they get close to China.

The DF-26, which made its debut in a military parade in Beijing in 2015 and was tested in the Bohai Sea last year, has a range that would allow it to menace ships and bases as far away as Guam, according to the latest Pentagon report on the Chinese military, released this month. These missiles are almost impossible to detect and intercept, and are directed at moving targets by an increasingly sophisticated Chinese network of radar and satellites.

China announced in April that the DF-26 had entered service. State television showed rocket launchers carrying 22 of them, though the number deployed now is unknown. A brigade equipped with them is reported to be based in Henan Province, in central China.

Such missiles pose a particular challenge to American commanders because neutralizing them might require an attack deep inside Chinese territory, which would be a major escalation.

The American Navy has never faced such a threat before, the Congressional Research Office warned in a report in May, adding that some analysts consider the missiles “game changing.”

The “carrier killers” have been supplemented by the deployment this year of missiles in the South China Sea. The weaponry includes the new YJ-12B anti-ship cruise missile, which puts most of the waters between the Philippines and Vietnam in range.

While all-out war between China and the United States seems unthinkable, the Chinese military is preparing for “a limited military conflict from the sea,” according to a 2013 paper in a journal called The Science of Military Strategy.

Lyle Morris, an analyst with the RAND Corporation, said that China’s deployment of missiles in the disputed Paracel and Spratly Islands “will dramatically change how the U.S. military operates” across Asia and the Pacific.

The best American response, he added, would be “to find new and innovative methods” of deploying ships outside their range. Given the longer range of the ballistic missiles, however, that is not possible “in most contingencies” the American Navy would be likely to face in Asia.





Soldiers with the People’s Liberation Army Navy patrolling Woody Island in the disputed Paracel archipelago in 2016.CreditReuters


Blue-Water Ambitions

The aircraft carrier that put to sea in April for its first trials is China’s second, but the first built domestically. It is the most prominent manifestation of a modernization project meant to propel the country into the upper tier of military powers. Only the United States, with 11 nuclear-powered carriers, operates more than one.

A third Chinese carrier is under construction in a port near Shanghai. Analysts believe China will eventually build five or six.

The Chinese military, traditionally focused on repelling a land invasion, increasingly aims to project power into the “blue waters” of the world to protect China’s expanding economic and diplomatic interests, from the Pacific to the Atlantic.

The carriers attract the most attention but China’s naval expansion has been far broader. The Chinese Navy — officially the People’s Liberation Army Navy — has built more than 100 warships and submarines in the last decade alone, more than the entire naval fleets of all but a handful of nations.

Last year, China also introduced the first of a new class of a heavy cruisers — or “super destroyers” — that, according to the American Office of Naval Intelligence, “are comparable in many respects to most modern Western warships.” Two more were launched from dry dock in Dalian in July, the state media reported.

Last year, China counted 317 warships and submarines in active service, compared with 283 in the United States Navy, which has been essentially unrivaled in the open seas since the collapse of the Soviet Union in 1991.

Unlike the Soviet Union, which drained its coffers during the Cold War arms race, military spending in China is a manageable percentage of a growing economy. Beijing’s defense budget now ranks second only to the United States: $228 billion to $610 billion, according to estimates by the Stockholm International Peace Research Institute.

The roots of China’s focus on sea power and “area denial” can be traced to what many Chinese viewed as humiliation in 1995 and 1996. When Taiwan moved to hold its first democratic elections, China fired missiles near the island, prompting President Bill Clinton to dispatch two aircraft carriers to the region.

“We avoided the sea, took it as a moat and a joyful little pond to the Middle Kingdom,” a naval analyst, Chen Guoqiang, wrote recently in the official Navy newspaper. “So not only did we lose all the advantages of the sea but also our territories became the prey of the imperialist powers.”

China’s naval buildup since then has been remarkable. In 1995, China had only three submarines. It now has nearly 60 and plans to expand to nearly 80, according to a report last month by the United States Congressional Research Service.

As it has in its civilian economy, China has bought or absorbed technologies from the rest of the world, in some cases illicitly. Much of its military hardware is of Soviet origin or modeled on antiquated Soviet designs, but with each new wave of production, analysts say, China is deploying more advanced capabilities.

China’s first aircraft carrier was originally launched by the Soviet Union in 1988 and left to rust when the nation collapsed three years later. Newly independent Ukraine sold it for $20 million to a Chinese investor who claimed it would become a floating casino, though he was really acting on behalf of Beijing, which refurbished the vessel and named it the Liaoning.

The second aircraft carrier — as yet unnamed — is largely based on the Liaoning’s designs, but is reported to have enhanced technology. In February, the China Shipbuilding Industry Corporation disclosed that it has plans to build nuclear-powered carriers, which have far greater endurance than ones that require refueling stops.

China’s military has encountered some growing pains. It is hampered by corruption, which Mr. Xi has vowed to wipe out, and a lack of combat experience. As a fighting force, it remains untested by combat.

In January, it was embarrassed when one of its most advanced submarines was detected as it neared disputed islands known as the Senkaku in Japan and the Diaoyu in China. The attack submarine should never have been spotted.

The second aircraft carrier also appears to have experienced hiccups. Its first sea trials were announced in April and then inexplicably delayed. Not long after the trials went ahead in May, the general manager of China Shipbuilding was placed under investigation for “serious violation of laws and discipline,” the official Xinhua news agency reported, without elaborating.





Fiery Cross Reef in the South China Sea. The deployment of missiles on three man-made reefs in the disputed Spratly Islands — Subi, Mischief and Fiery Cross — has prompted protests from the White House.CreditDigitalGlobe, via Getty Images


Defending Its Claims

China’s military advances have nonetheless emboldened the country’s leadership.

The state media declared the carrier Liaoning “combat ready” in the summer after it moved with six other warships through the Miyako Strait that splits Japan’s Ryukyu Islands and conducted its first flight operations in the Pacific.

The Liaoning’s battle group now routinely circles Taiwan. So do Chinese fighter jets and bombers.

China’s new J-20 stealth fighter conducted its first training mission at sea in May, while its strategic bomber, the H-6, landed for the first time on Woody Island in the Paracels. From the airfield there or from those in the Spratly Islands, the bombers could strike all of Southeast Asia.

The recent Pentagon report noted that H-6 flights in the Pacific were intended to demonstrate the ability to strike American bases in Japan and South Korea, and as far away as Guam.

“Competition is the American way of seeing it,” said Li Jie, an analyst with the Chinese Naval Research Institute in Beijing. “China is simply protecting its rights and its interests in the Pacific.”

And China’s interests are expanding.

In 2017, it opened its first overseas military base in Djibouti, on the Horn of Africa, saying that it will be used to support its participation in multinational antipiracy patrols off Somalia.

It now appears to be planning to acquire access to a network of ports and bases throughout the Indian Ocean. Though ostensibly commercial, these projects have laid the groundwork for a necklace of refueling and resupply arrangements that will “facilitate Beijing’s long-range naval operations,” according to a new report by C4ADS, a research organization in Washington.

“They soon will be able, for example, to send a squadron of ships to somewhere, say in Africa, and have all the capabilities to make a landing in force to protect Chinese assets,” said Vassily Kashin, an expert with the Institute of Far Eastern Studies of the Russian Academy of Sciences in Moscow.

The need was driven home in 2015 when Chinese warships evacuated 629 Chinese and 279 foreigners from Yemen when the country’s civil war raged in Aden, a southern port city.

One of the frigates involved in the rescue, the Linyi, was featured in a patriotic blockbuster film, “Operation Red Sea.”

“The Chinese are going to be more present,” Mr. Kashin added, “and everyone has to get used to it.”





Fighter jets on the Liaoning in the East China Sea in April.CreditAgence France-Presse — Getty Images



Olivia Mitchell Ryan and Claire Fu contributed research.


Florence’s Floodwaters Breach Defenses at Duke Energy Plant, Sending Toxic Coal Ash Into River

By Glenn Thrush and Kendra Pierre-Louis


NAVASSA, N.C. — With floodwaters continuing to rise in the wake of Hurricane Florence, state officials and environmentalists are closely monitoring the breach of a dam that has flooded a hazardous stockpile of coal ash, some of which has spilled into the Cape Fear River.

On Friday, Duke Energy shut down a power plant near Wilmington after a dam breach between 100 and 200 feet wide, at the south end of Sutton Lake, allowed floodwaters to swamp two basins containing huge stockpiles of arsenic-laced ash.

Duke’s L.V. Sutton facility has been a focus of increasing concern for environmentalists and regulators since last week, when rains from Hurricane Florence caused a coal ash landfill at the site to erode, spilling waste onto a local roadway.

Coal ash is the powdery substance that remains after burning coal. The Environmental Protection Agency links the substances that it contains — including heavy metals like arsenic and lead — to nervous-system problems, reproductive issues and cancer. 
It was not immediately clear how much ash was released. The extent of the threat will depend on how quickly the breach can be stopped, state officials said.


The state is still reeling from record-breaking flooding that has left many of the region’s roads, including a long stretch of Interstate 95 south of the Virginia border, closed to traffic.


And the danger of more flooding remains. The Cape Fear River is scheduled to crest tomorrow morning at 31.3 feet, more than seven feet above its historic flood stage. Water levels will remain high through Tuesday.

Coal ash is not the only pollutant to cause North Carolina woes in the wake of Florence. The state is home to 9.7 million pigs that produce 10 billion gallons of manure each year. Most of that manure is stored in large earthen lagoons. In the wake of Florence and the record-breaking amount of water the storm has poured onto the region, a growing number of those lagoons are flooding.

As of midday on Friday, at least 54 lagoons have discharged their waste into the environment, another 76 are at risk of doing so, and six have some form of structural damage that may have led to the release of pig feces. The number is expected to increase as more farmers return to their land. 
State inspectors, who conducted a drone survey of the area on Friday, said there appeared to be “no structural issues” with the inner containment walls, or impoundments, of the basins, according to Bridget Munger, spokeswoman for the North Carolina Department of Environmental Quality.




They are monitoring the situation in “real time” and plan to conduct an investigation into the causes of the failure once the situation has stabilized, Ms. Munger said in an email.


The dam was inspected within the last month and no major problems were discovered, state officials said.

“This is a crisis that we’re addressing but it’s in the context of a huge state emergency, so that’s just part of the big picture for us,” Ms. Munger said.

Gov. Roy Cooper of North Carolina said in a statement on Friday that “a thorough investigation of events will soon follow to ensure that Duke Energy is held responsible for any environmental impacts by their coal ash facilities.”

A spokesperson for the Environmental Protection Agency said the agency had not been out to the site, and that it would lend its support to state officials at their request.

As state officials fretted over the plant, residents and workers in the surrounding area were impatient to get back to their daily routines and were concerned about potential damage. 
“The dam really worries me. The idea that it could spill over and spread chemicals is really concerning,” said Charles Holliday, 27, who was clearing out debris from his family’s yard in the small town of Navassa, the nearest residential area to the plant. “This whole area has a lot of industrial plants and chemicals and that kind of thing. So you add it all up and, yes, it’s something we are all going to get a little panicked about.”

The river has already spread hundreds of yards beyond its banks, turning the piney flats west of Wilmington into a muddy lagoon punctured by tilting trees and half-submerged railroad bridges.


The plant itself, cordoned off by security but visible from a highway overpass, was covered by a thin pool of water, with the area closest to the lake appearing to be the most inundated.

Peter Harrison, a lawyer with Earthjustice, an environmental nonprofit, took a boat on the river to see the site himself. He said that there were multiple places where the dam around the lake had breached, and that the lake water was pouring into the river. From what he could see, he added, the lake water appeared full of coal ash.

“You can just see that swirling down the river for like miles and miles,” Mr. Harrison said.

Avner Vengosh, a professor of earth and ocean sciences at Duke University, said, “We’ll probably never know how much has spilled into the river.” Because the spill stems from large-scale flooding over a wide area, it’s difficult to calculate how much ash is entering the river.

The breach of the dam imperils two unlined coal ash ponds on site, which contain a combined 2.1 million cubic yards of coal ash, according to a report prepared for Duke Energy this year. That amount of coal ash would fill a large sports stadium.

Scrutiny of coal ash has increased since 2008, when the Kingston Fossil Plant in Harriman, Tenn., spilled 5.4 million cubic yards of coal ash into the environment. The cleanup cost more than $1 billion. 
Last week, the storm caused a coal ash landfill at the Duke plant to erode, spilling about 2,000 cubic yards of the ash onto an adjacent roadway.

The spill was quickly cleaned up, the company said. But the Waterkeeper Alliance, an environmental group, disputed that, saying at least some of the coal ash remains in the area.


In 2014 Duke Energy’s Dan River plant in Eden, N.C., spilled 39,000 tons of coal ash into the Dan River, prompting the state to order all of Duke’s coal ash ponds closed. That process is not yet complete.

In May 2015, the Justice Department announced a $102 million fine against Duke Energy after the utility pleaded guilty to nine criminal violations of the Clean Water Act at several of its North Carolina facilities.

The fine included a $68 million criminal penalty and $34 million for environmental projects and land conservation to benefit rivers and wetlands in North Carolina and Virginia. Four of the nine charges were related to the Dan River spill. The other violations were based on allegations of historical violations at the company’s other operations.

The L.V. Sutton plant now burns natural gas, but until 2013 it housed a three-unit, 575-megawatt coal-fired plant. The coal ash from that operation remains on site, with the oldest of the ash basins dating back to 1971.

The coal ash landfill at Duke’s L.V. Sutton plant, which spilled last week, was supposed to provide secure storage for the site’s two coal ash ponds, but the fact that it is already failing now has some environmental groups questioning its structural integrity.
“You know the thing with the Tennessee Valley river spill, and the same thing with the Dan River spill, a lot of that ash was never recovered,” Lisa Evans, a lawyer with Earthjustice, said. “If you spill into a lake and that lake water continues to spill into that river rapidly, you’re going to have maybe even a bigger cleanup problem.”

“If you have two million tons of ash going into that lake,” Ms. Evans added, “that lake is dead.”


Ivan Penn contributed reporting from Los Angeles.
Kendra Pierre-Louis is a reporter on the climate team. Before joining The Times in 2017, she covered science and the environment for Popular Science. @kendrawrites






Germany must abandon its record surplus and rebalance

The economy needs higher domestic investment and to tackle low pay

Anke Hassel


Discount store Aldi, a German retailer. Germany has the largest low-wage sector in western Europe © Alamy


Germany’s current account surplus, the balance of trade between exports and imports, is set to hit almost $300bn, or 7.8 per cent of gross domestic product, the world’s largest. This has drawn criticism from the Trump administration and international organisations such as the IMF.

They point to the increasing global imbalances between countries with deficits and surpluses, and the risks that high levels of overseas assets pose for the stability of financial markets.

Germany’s response is to insist on the benefits of free trade for all, the demand for high-quality German products and the needs of an ageing society.

Those arguments are not entirely convincing as high exports could partially be offset by stronger domestic demand, and higher wages would enable Germans to save for old age.

Germany is an extreme instance of the combination of high export rates and depressed domestic demand. Despite its size, it has this in common with Benelux and Scandinavian countries, also strongly export driven. Part of the explanation for Germany’s export performance is the undervaluation of the euro, but this does not explain low wage growth over the past two decades and sluggish domestic demand.

So why does Germany behave this way? Key to understanding the obsession of German policymakers and business leaders with export-driven growth is the effect of re-unification in 1990. The re-unified German economy was first hit by a major recession in 1992-93 when 500,000 manufacturing jobs were lost and the labour market of the former East Germany collapsed.

Unemployment there hovered around 19 per cent in the 1990s, despite generous early retirement and retraining schemes. By 1999 Germany was being labelled the “sick man of Europe”.

There were two important responses to this. First, manufacturing companies in western Germany and their trade unions started major restructuring efforts to regain competitiveness. This was negotiated in company-level agreements and based on the condition that employment for the core workforce of those companies was secured and that wage increases remained moderate.

The second response was to restructure the east German labour market. Wages in the deindustrialised regions of the east fell to low levels, reflecting weak industry structures and productivity.

Wage and income inequality rose across Germany during the 1990s. The size of the low-wage sector in Germany also grew, rising from 15 per cent in 1995 to 22.6 per cent in 2006, roughly where it remains today. It took Germany until 2015 to introduce a moderate minimum wage. As a result, Germany today has the largest low-wage sector in western Europe, even bigger than that of the UK.

Contrary to what is sometimes claimed, the labour market reforms of the early 2000s, named after Peter Hartz, former head of human resources at Volkswagen, did not cause Germany’s low-wage economy.

But they did reinforce pre-existing trends by cutting unemployment insurance to a comparatively meagre 12-18 months of income-related benefits. This added to pressure on big manufacturing companies to avoid lay-offs and, in turn, on unions to accept low wage increases.

In the east, the cuts in unemployment benefits and other aspects of the Hartz reforms pushed the low and medium-skilled long-term unemployed into low-paid service sector jobs. In-work benefits were introduced in a way that encouraged part-time work for the low and medium-skilled.

Wage increases have been held down by other policies. Income tax splitting for married couples results in a reduction in women’s working hours and low wage earners in Germany face the highest effective tax rate among the OECD club of mostly rich nations.

Finally, the debt brake, which came into force in 2011, puts additional pressure on the federal and regional governments to prioritise savings over investment. Compared with other European countries, Germany has a particularly bad record of public investment.

Rebalancing the economy is necessary and would benefit Germany and its trading partners. The country needs higher domestic investment and better pay, especially in the service sector. Although a tight labour market might push wages up a little, the German strategy is seen as successful at home and is firmly enshrined in laws and institutions. This means that real change will require a significant, and painful, shift in policy.


The writer is research director of the Institute of Economic and Social Research and professor of public policy at the Hertie School of Governance


The Current Account Counts

Stephen S. Roach  

china usa trade treaty

NEW HAVEN – In an increasingly interconnected global economy, cross-border trade and financial-capital linkages have come to matter more than ever. The current-account balance, the difference between a country’s investment and saving position, is key to understanding these linkages. The dispersion of current-account positions tells us much about the state of global imbalances, which are often a precursor of crises.

The same is true of trade tensions, such as those now evident around the world. Current-account disparities often pit one country against another.

Economies running current-account deficits tend to suffer from a deficiency of domestic saving. Lacking in saving and wanting to invest, consume, and grow, they have no choice but to borrow surplus saving from others, which gives rise to current-account and trade deficits with the rest of the world. The opposite is the case for countries with current-account surpluses. They are afflicted by subpar consumption, excess saving, and chronic trade surpluses.

There is a long-standing debate over who is to blame for this state of affairs – the deficit countries, which draw freely on the saving of others to finance economic growth, or the surplus countries, which choose to grow by selling their output in foreign markets. This blame game, which has long been central to disputes over international economic policy and trade tensions, is particularly contentious today.

The United States has the largest current-account imbalance in the world. It has recorded a deficit for all but one year since 1982, the sole exception being 1991, when foreign contributions to its military campaign in the Persian Gulf underpinned a miniscule surplus (0.05% of GDP).

During the 2000-2017 period, the US amassed $9.1 trillion in cumulative current-account deficits. That is larger than the $8.9 trillion of cumulative surpluses run collectively by the three largest surplus economies – Germany, China, and Japan – over the same period.

Many observers believe that the US is doing the rest of the world a huge favor by running chronic current-account deficits – namely, supporting the large surplus countries, which tend to suffer from a shortfall of domestic demand. Others, including me, are more critical of America’s long-standing penchant for excess consumption and the role that surplus economies play in enabling it. While there is undoubtedly some validity to both points of view, I worry more about the destabilizing role of the US.

America’s consume-now-save-later mindset, which is at the heart of its current-account deficit, is deeply embedded in its political economy. The US tax code has long been biased toward low saving and debt-financed consumption; the deductibility of mortgage interest, the absence of any value-added or national sales tax, and a dearth of saving incentives are especially problematic.

So, too, are the wealth effects from a profusion of recent asset bubbles. Aided and abetted by the Federal Reserve’s über-accommodation since the late 1990s, there was no stopping the interplay between America’s asset-dependent economy and an equally pernicious leverage cycle underwritten by bubble-inflated collateral. Why save out of income when frothy asset markets can do the job? The preference for asset-based saving over income-based saving is central to America’s current-account deficit.

The surplus countries have been delighted to go along for the ride. It didn’t matter that the US consumption binge was built on a foundation of quicksand. Excess export growth in the large surplus economies enabled the excesses of the world’s largest consumer.

That was especially the case in China. Spurred by Deng Xiaoping’s “reform and opening up,” China’s export sector increased sixfold – from 6% of GDP in 1980 to 36% in 2006.

Mirroring America’s massive current-account deficit, China’s current account went from relative balance in 1980 (+0.1% of GDP) to a massive surplus of 9.9% in pre-crisis 2007. The same was true in major developed economies, albeit to a lesser extreme: Germany’s export share of GDP went from 19% in 1980 to 43% in 2007, while Japan’s went from 13% to 17.5% over the same period.

In many respects, a marriage of convenience between the surplus and deficit countries eventually blossomed into full-blown codependency. But then, with the wrenching global financial crisis in 2008, the music stopped. Since then, frictions between deficit and surplus countries have intensified, now risking the possibility of a full-blown trade war.

President Donald Trump’s administration has played an especially antagonistic role in asserting that the US is being victimized by large trade deficits. Yet America’s trade gaps have, in fact, been spawned by a chronic deficiency of domestic US saving. Despite the government’s recent upward revision to a still-depressed personal saving rate, the overall US national saving rate, which drives the current account, remains woefully deficient, averaging just 1.9% in net terms (adjusted for depreciation) over the post-crisis 2009-17 period. That is less than one-third the 6.3% average during the final three decades of the twentieth century.

Large and growing federal budget deficits over the next several years will only exacerbate this problem. Blaming China misses the obvious and important point that the Chinese current-account surplus has fallen sharply in recent years, from 9.9% of GDP in 2007 to an estimated 1% in 2018. In 2017, China’s current-account surplus of $165 billion was well below that of Germany ($297 billion) and Japan ($195 billion).1

As China presses ahead with consumer-led rebalancing, it will continue to move from surplus saving to saving absorption, with the distinct possibility that its current account will shift into permanent deficit (a small deficit actually was recorded in the first quarter of this year). That will leave a deficit-prone America with one less surplus country to draw on in funding the growth of its saving-short, excess-consumption economy. Maybe the rest of the world will step up and fill the void. But with the Trump administration now disengaging from globalization, that seems less and less likely.

History suggests that current-account imbalances ultimately matter a great deal. A still-unbalanced global economy may be forced to relearn that painful lesson in the coming years.


Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

 Let The Emerging Market Bailouts Begin: “We Don’t Have Much Choice”

To understand why Europe is watching Turkey’s financial crisis with alarm, you just have to see this chart:


Bank exposure to Turkey emerging market bailout


Spanish – and to a lesser extent French and Italian – banks have lent a lot of money to Turkey.

So as that country spins closer to default, those banks and their governments are in danger of having massive holes punched in their financial structures.

With Greece its usual mess and Italy’s bond yields spiking, the last thing Europe needs is a banking crisis. So, as today’s Wall Street Journal reports, the Continent is looking – as it always does – for Germany to step in and fix things:

As Turkey Teeters, Germany Considers Offering a Financial Lifeline
ISTANBUL—The German government is considering providing emergency financial assistance to Turkey as concerns grow in Berlin that a full-blown economic crisis could destabilize the region, German and European officials said. 
While the talks are at an early stage and may not result in any aid, the possibilities being discussed range from a coordinated European bailout similar to the kind deployed during the eurozone debt crisis to project-specific loans by state-controlled development banks and bilateral aid. 
Berlin fears a meltdown of the Turkish economy could spill over into Europe, cause further unrest in the Middle East and trigger a new wave of immigration toward the north. 
“We would do a lot to try to stabilize Turkey,” a senior German official said. “We don’t have much choice.” 
Other European governments have grown equally concerned. Hosting his Turkish counterpart in Paris on Monday, French Finance Minister Bruno Le Maire said it was important to support Turkey’s efforts to repair its economy. 
Why You Should Care About Turkey’s Meltdown
But economists say it is too early to pin down how much money Turkey, a member of the North Atlantic Treaty Organization, might need because much of its potentially troubled debt is in private hands. They have pointed to Argentina, a smaller emerging economy facing similar problems, which received a $50 billion credit line from the International Monetary Fund in June. 
Two senior officials in Berlin said German Finance Minister Olaf Scholz had discussed some of the options with his Turkish counterpart Berat Albayrak in recent conversations. 
Such aid would mark a striking rapprochement between Germany and Turkey, which despite having been close allies for over a century have become increasingly estranged in recent years as Turkish President Recep Tayyip Erdogan’s rule has grown more authoritarian. 
Mr. Erdogan is due to visit Berlin on Sept. 28. Financial aid will be on the agenda a week earlier, when Messrs. Scholz and Albayrak are expected to meet in Berlin to prepare the president’s trip. 

Germany’s attitude contrasts with that of the U.S., which has shown little interest in calming markets as they pummeled the Turkish currency, the lira, earlier this month.  
On the contrary, President Trump, locked in a dispute with Mr. Erdogan over the detention of a U.S. pastor in Turkey, has piled sanctions and new tariffs on the country. 
German officials said such policies might have amplified Turkey’s woes and reduced market confidence. 
“This is an absolutely insane and ill-informed policy,” said one senior German oficial. 
Berlin’s main concern is that a crisis could undo a landmark deal with Turkeyunder which Ankara has cracked down on Europe-bound refugees passing through its territory in exchange for funding. Germany experienced a popular backlash after the country took in nearly two million asylum seekers since 2015. 
The collapse of the lira—it has lost 40% of its value against the dollar this year—has pushed up inflation and put pressure on companies and individuals who have loans denominated in foreign currency. The threat of mass defaults, in turn, has been weighing on Turkish Banks. 
Ultimately, however, Europe may find it inevitable to provide some form of assistance to Turkey, a senior EU diplomat in Ankara said. 
“We cannot just sit and watch Turkey go down the drain. The migration pressure and the geostrategic importance, as well as the economic links, are too important,” this person said.

Note that the first step in the process doesn’t involve any actual money changing hands.

Germany just announces that it’s “considering” helping out and hopes that this will be enough to stabilize the Turkish lira, giving its government breathing room to bring its finances – and its relationship with President Trump – back into balance.

This step usually fails, alas, because by the time a country enters a currency crisis as severe as Turkey’s, everyone understands that its problems are deep-seated and systemic, and thus not something that a little breathing room will fix.

Next up apparently will be an emerging market bailout in the form of a Europe-wide set of loan guarantees (managed and backstopped by Germany) that will, hopefully, not have to be activated.

This might work if the guarantee is big enough relative to the debts coming due. But in effect the result is the swapping of Spanish loans to Turkey for German loans. And there’s a limit to how much of the world’s debts even Germany can take on.

Turkey, meanwhile, is just the beginning. Tunisia is teetering, Brazil’s currency is falling, and a big chunk of the Middle East has external debt but little in the way of resources to cover it.

Brazilian real to USD emerging market bailout


By the time this latest emerging market bailout is complete, the amount of debt added to developed world balance sheets could be enough to spread the pain pretty widely.


Beijing's Banking Overhaul

China is considering a central bank reform to give itself more clarity and control.

By Phillip Orchard        


The Chinese central bank is quietly considering a change that says a great deal about the progress and perils of China’s broader reform project. According to Caixin, Beijing may abolish the nine regional branches of the People’s Bank of China, each of which oversees several provinces, and replacing them with more than 30 provincial-level branches – effectively returning to a system it abandoned in 1998. The plan is expected to kick in by the end of the year.

Now, we realize that a bureaucratic overhaul in China is not very dramatic. But as we discussed following President Xi Jinping's overhaul of the state bureaucracy during the spring, Xi is in a make-or-break wrestling match with the system he heads, and there are still several rounds to go. China is a big and unwieldy place that's ill-suited for micromanagement. Chinese history is littered with sclerotic, unresponsive governments getting blindsided by crises bubbling up from the provinces. And if the Communist Party of China has any chance of surviving amid slowed growth and trade tension with the West, it will need all the help it can get.
 
Reversing Course
On the surface, at least, this change seems like an admission of defeat. Until 1998, the PBOC had a branch in each of China’s 31 provincial-level administrative units (i.e., provinces, autonomous regions and biggest cities) that answered directly to the central bank leadership – a similar structure to the one under consideration. The problem with this setup was that local governments simply proved too adept at hijacking monetary policy and financial resource allocation to support their immediate interests, often at the expense of Beijing’s macroeconomic goals. Part of the problem was that the incentives of local governments and provincial PBOC branches were too tightly aligned. The quickest way to gain promotion up through the Chinese system, whether as a local administrator or a central bank branch official, was to ensure that your province was producing sparkling economic data. PBOC branches were also too dependent on assistance from local governments, which since the 1980s have had considerable sway over local economic activities and ample wariness of prying eyes, to be able to carry out their mandate.

Thus, a province’s success was the branch’s success, creating incentives to overlook financial risk and support reckless lending and development in the name of economic growth. (And, if all else failed, there were mutual incentives to simply cook the books.) In other words, what Beijing wanted from the bank branches was a clear view into local economic activity and prudent allocation of liquidity. What it got was regulatory capture. This was just the latest manifestation of an age-old problem in China, where the center has always struggled to control the country’s disparate parts.

And so, in an effort to boost the central bank’s independence, the PBOC was restructured to resemble the U.S. Federal Reserve. The provincial branches were abolished, replaced by nine regional branches responsible for overseeing several provinces. More than 300 municipal sub-branches and more than 1,000 county-level sub-branches remained, but their responsibilities were confined to financial supervision, with little ability to alter policy or issue credit independently – and thus leaving local governments with less influence over the PBOC. But this system fostered its own problems. In particular, the regional branches have reportedly struggled to uniformly meet the needs of multiple provinces, in which economic conditions could vary widely.
 
What Has Changed Since 1998
That the PBOC is reversing course says three things about China’s reform effort. The first is merely that the party leadership feels it now has the tools to prevent regulatory capture and keep local governments in check. For example, Xi’s sweeping anti-graft campaign has extended to every conceivable level of government and, increasingly, into the private sector and civil society as well. Of the nearly 1.5 million officials jailed, purged or otherwise disciplined, the vast majority have not been the high-profile “tigers” (i.e., senior officials ousted, at least in part, as threats to Xi’s consolidation of power), but rather lower-level “flies” – those with the most ability to gunk up the machinery of governance and hijack reform implementation. And Xi’s domestic surveillance apparatus is only growing: In March, Xi unveiled a new and improved National Supervisory Commission, which will embed units across the national, provincial, city and county levels to try to ensure adherence with contentious reforms. Already, this has shown some success in reducing the common practice of lower-level governments cooking their books to stay in Beijing’s good graces.

Second, it says that Xi isn’t done peeling away layers of the bureaucracy that have the capacity to dilute the center’s power and subvert its reform initiatives. With the PBOC, this process has been underway for some time. By 2004, according to unnamed officials quoted by Caixin, the regional branches had largely been defanged, with the sub-branches taking primary responsibility for local execution of monetary policy and financial market supervision. The regional branches had become redundant middle men. Given the scale and complexity of risk in China’s financial system, any bureaucratic bottlenecks, turf wars or conflicting regulations are threats to the party’s agenda that it cannot abide.

Indeed, this is just part of a much broader effort to overhaul China’s sclerotic and chronically overmatched financial supervisory system. For much of the past year, Xi has been gradually wringing the primary institutions responsible for provincial development into submission. In March, for example, Xi stripped the all-powerful National Development and Reform Commission – which has dominated economic planning in China since the Mao era, but which had become rife with corruption – of a wide range of its powers, including some of its oversight responsibilities. The party has also been inserting political committees into state-owned enterprises, which likewise are principal agents for local development. Perhaps most important, the party has been reining in local governments’ ability to sidestep restrictions on how they raise funding and how it’s spent.

Notably, the Communist Party has also focused on tightening its control of the PBOC itself, while simultaneously expanding the bank’s powers to allow it to function as China’s core policymaker on a range of economic matters. (Unlike the Federal Reserve, the PBOC has duties far beyond monetary policy.) Its new powers have come at the expense of China’s top insurance and banking regulatory bodies, which have been merged and stripped of any major role in drafting new laws and rules for the finance sector. In other words, Xi has become confident enough in his control over the PBOC to use it as the party’s pre-eminent tool to rein in other institutions. And by doing away with the regional PBOC branches, the provincial branches will be empowered to carry out Beijing's wishes more capably at lower levels. Theoretically, at least, this new system will allow Xi’s writ to be felt more clearly down the line.
 
Reform Whack-a-Mole
The third thing this move tells us is that the CPC’s ambitious economic reform agenda is turning into a game of whack-a-mole, with each success breeding a new problem somewhere else. And this game is going to become only more difficult as growth slows in China and as the sting from the trade war worsens.

For example, the success of Beijing’s sweeping deleveraging campaign and crackdowns on shadow lending has come with downsides. For one, China is grappling with a liquidity crunch that risks sparking a cascade of defaults. For another, the crackdown on shadow lending has merely pushed firms, local governments and investors to look for loopholes and embrace even riskier or more opaque fundraising channels.




 


 

This risk has been most evident in the private sector, with dozens of firms defaulting on dollar-denominated debt in recent months and a wave of online peer-to-peer lending platforms going belly up since June, leading to small-scale protests by burned investors in Beijing and Shanghai. Meanwhile, at least four times in the past month, Beijing has issued pleas for Chinese banks to boost lending to small-to-medium enterprises, as anxiety among banks about slowing growth, increased regulatory scrutiny and uncertainty stemming from the trade war has compelled them to focus on lending to safer assets such as SOEs, which banks think Beijing would rescue in a crisis.

 


 

With heavily indebted local governments, meanwhile, Beijing is simultaneously cracking down on their traditional forms of financing, such as banning state-owned banks from lending to what are known as “local government financing vehicles,” but also making it easier for banks to purchase bonds issued by local governments and help accelerate infrastructure investment (which contracted year-over-year for the first time in modern Chinese history in July). Notably, Beijing is still trying to get a handle on just how big of a risk local government debt poses to the Chinese economy. According to Reuters' calculations, China’s outstanding local government debt rose 7.5 percent to 16.47 trillion yuan ($2.56 trillion) at the end of 2017 from the previous year. Yet, in July, Caijing reported that authorities have launched yet another nationwide investigation into hidden local government debt, suggesting that things might be considerably worse.

In short, Beijing needs the PBOC to have a better understanding of conditions on the ground and the authority to adapt on the fly. Uncertainties surrounding the trade war only heighten this need, given that Beijing has only limited ability to anticipate how hard any particular sector will be hit and for how long. And considering the high degree of variance in economic risk profiles from one province in China to the next, the regional banks had become blunt hammers at a time when scalpels are needed.