China Watch

Doug Nolan

I’ve held the view that Chinese finance has been at the epicenter of international market unease. The U.S./China trade war was not the predominant global risk.

It has had the potential, however, to become a catalyst for Chinese financial instability.

And there remains a high probability for an eruption of Chinese disorder to quickly reverberate through global markets and economies.

To be sure, rapidly deteriorating U.S./China relations were a major contributor to this summer’s global yield collapse and bond market dislocation.

At this point, I’ll assume some “phase 1” deal gets drafted and then signed by Presidents Trump and Xi next month in Chile.

In the grand scheme of things, little will have been resolved.

It appears many of the most critical issues between the world’s two rival superpowers have been excluded from the initial compromise, I’ll assume tabled for some time to come.

Short-term focused markets are content with a “truce,” welcoming a period of reduced risk of a rapid escalation of tensions.

Perhaps near-term financial risks have subsided in China.

A counter argument would point out that Beijing’s push to improve its negotiating position forced officials to once again hit the Credit accelerator.

Did Beijing push its luck too far?

I would point to the $1 TN of additional household (chiefly mortgage) debt accumulated over the past year.

China’s Household borrowings were up 15.9% in one year, 37% in two, 69% in three and 138% in five years.

Importantly, Beijing’s stimulus efforts stoked China’s historic mortgage finance and apartment Bubbles already well into “Terminal Phase” excess.

How deeply have fraud and shenanigans permeated Chinese housing finance?

Similar to P2P and corporate finance?

China’s Total Aggregate Financing (TAF) increased 2.273 TN yuan, or $321 billion during September.

This was almost 20% ahead of estimates – and 5% above September 2018.

After a slower July, Credit growth accelerated to place the quarter’s Credit expansion slightly ahead of comparable 2018. At $2.646 TN, year-to-date TAF expansion was 22% above 2018.

With rough estimates of $600 billion of Q4 TAF growth and a $600 billion 2019 increase in national debt, China’s total system Credit growth will approach $4.0 TN.

At $240 billion, September growth in Bank Loans was 24% ahead of estimates.

Loans grew at the fastest pace since March – and almost 14% above September 2018.

Bank Loans expanded $1.924 TN y-t-d, up about 4% from comparable 2018.

September Consumer Loan growth was only 1% above September 2018, with third quarter expansion down a notable 7.8% y-o-y.

Chinese GDP expanded at a 6.0% y-o-y pace during Q3, slightly below estimates (and the “lowest level since 1992”). According to Bloomberg, “Consumption’s contribution increased to 60.5% from 55.3%; Investment’s contribution slowed to 19.8% from 25.9%.”

That growth continues to slow in the face of 12.5% y-o-y Credit (TAF) growth portends instability ahead.

With surging household debt and inflating housing markets, the ongoing consumption boom comes as no surprise.

Property Investment was up 10.5% y-o-y, continuing the powerful momentum unleashed with Beijing’s 2016 stimulus measures.

Retail sales were up 7.8% y-o-y in September, in line with estimates.

Beyond the acute vulnerability to any weakening of Credit growth, the Chinese Bubble economy is demonstrating obvious signs of imbalances and price distortions.

While the housing boom for the most part is ongoing, auto sales have slowed markedly.

October 12 – Bloomberg: “Chinese auto sales fell in September for the 15th month in 16, extending their unprecedented slump despite government efforts to support the world’s largest car market. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles dropped 6.6% from a year earlier to 1.81 million units… The only increase since mid-2018 came in June, when dealers offered big discounts to clear inventory.”

Meanwhile, weaker-than-expected trade data point to waning economic momentum.

October 13 – Reuters (Yawen Chen and Gabriel Crossley): “A slide in China’s exports picked up pace in September while imports contracted for a fifth straight month, pointing to further weakness in the economy and underlining the need for more stimulus as the Sino-U.S. trade war drags on… September exports fell 3.2% from a year earlier, the biggest fall since February… Total September imports fell 8.5% after August’s 5.6% decline, the lowest since May, and were expected to fall 5.2%.”

Price data (i.e. CPI at six-year high and PPI at three-year low) also support the view of monetary disorder and an imbalanced economy:

October 14 – Market Watch (Grace Zhu): “Rising pork prices pushed China's consumer inflation to its highest level in nearly six years in September… The consumer price index rose 3% in September from a year earlier compared with the 2.8% expansion recorded August… The government aims to keep consumer inflation under roughly 3% for 2019. In the first nine months of the year China's CPI rose 2.5% from the same period a year earlier… Food prices in September surged 11.2% on year to set the strongest pace in nearly eight years and extend August's 10.0% gain.”

October 14 – Reuters (Yawen Chen and Gabriel Crossley): “China’s factory gate prices declined at their fastest pace in more than three years in September, reinforcing the case for Beijing to unveil further stimulus as manufacturing cools on weak demand and U.S. trade pressures. The producer price index (PPI), considered a key barometer of corporate profitability, dropped 1.2% year-on-year in September…”

The Shanghai Composite dropped 1.3% Friday, the largest decline since September 17th – giving back about half of last’s week’s gain.

According to Bloomberg, Chinese defaults this week reached an annual all-time high, with more than two months to spare.

There must also be some system stress smoldering below the surface.

October 16 – Financial Times (Don Weinland and Sherry Fei Ju): “China’s central bank made an unexpected Rmb200bn ($28bn) injection into the banking system on Wednesday, highlighting policymakers’ concerns over liquidity levels as economic growth falls to a 30-year low. Policymakers have worried that liquidity constraints over the past year have made banks less willing to lend to companies at a time when the Sino-US trade dispute is also proving a drag on economic activity. ‘It suggests that the [People’s Bank of China] feels the interbank market needs more liquidity,’ said Julian Evans-Pritchard, senior China economist at Capital Economics. ‘Whether or not the goal is to push down interbank rates or simply to keep them broadly stable is unclear at this stage.’”

I have suggested it was no coincidence China’s August money market instability was followed some weeks later by U.S. “repo” market tumult. I

t was interesting to see both the PBOC and Federal Reserve actively adding liquidity this week. A “phase 1” deal is at hand, while quarter-end funding issues have subsided.

Why then does pressure persist in both funding markets?

October 18 – Wall Street Journal (Michael S. Derby): “The Federal Reserve injected both temporary and permanent liquidity into the financial system Friday. The permanent addition came by way of $7.501 billion in Treasury bill purchases, which are aimed at growing the Fed’s nearly $4 trillion in holdings… The New York Fed also on Friday added $56.65 billion in short-term liquidity to financial markets. In a repurchase agreement operation that will expire on Monday, the Fed took in $47.95 billion in Treasurys, $500 million in agency securities, and $8.2 billion in mortgage-backed securities. The Fed’s operations on Friday are part of an effort to help tame volatility in short-term rate markets with temporary and permanent injections of liquidity… On Thursday, the Fed added $104.15 billion in temporary liquidity.”

Fed funds futures price in an 88% probability of a third Fed rate cut on October 30th.

Those sure seem like rather short odds considering the backdrop, including an easing of trade tensions and near-record stock prices.

There will be a number of dissents if the FOMC accommodates market expectations.

Shouldn’t the Fed’s restart of balance sheet expansion support the case for holding off for now on an additional rate cut?

Some bond selling on a rate cut announcement wouldn’t be all that surprising.

Curiously, a Friday evening announcement from the ECB: “ECB Policy Makers Don’t Expect More Easing in Coming Months.”

October 18 – Bloomberg (Piotr Skolimowski, Jill Ward and Paul Gordon): “European Central Bank policy makers don’t expect any more monetary easing in coming months despite a likely downgrade in their economic forecasts in December, according to euro-area officials. The interest-rate cuts and quantitative easing pushed through by President Mario Draghi in September are enough to see the euro-zone economy through its slowdown unless it’s hit by shocks such as escalating trade tensions or a no-deal Brexit, the officials said, speaking on condition of anonymity. The vehement opposition by some governors to those measures dampens the chance of more action any time soon, they added.”

October 18 – Bloomberg (Jeff Kearns): “The International Monetary Fund warned that global economic risks have risen as central banks reduce borrowing costs and that stronger oversight is needed to ease threats to an already shaky expansion… ‘The search for yield in a prolonged low-interest-rate environment has led to stretched valuations in risky asset markets around the globe, raising the possibility of sharp, sudden adjustments in financial conditions,’ the fund said. ‘Such sharp tightening could have significant macroeconomic implications, especially in countries with elevated financial vulnerabilities.’”

The entire world these days has “elevated financial vulnerabilities,” certainly including China.

Saturday's Brexit vote will be fascinating.

Global economic policymakers are playing with fire

Too much of what ails the world economy is the result of ‘stupid stuff’

Martin Wolf

House on fire

“Don’t do stupid shit.” With the last word turned demurely into “stuff”, this became known as the “Obama doctrine”.

It reflected the lessons Barack Obama had learnt from his presidential predecessor’s unnecessary Iraq war. For many, the doctrine was defeatist.

Today, I see its merits. It would be wonderful to see intelligent action in response to our many challenges. Yet, today, application of the Obama doctrine would be a relief.

This is true, not least, for the world economy.

As Kristalina Georgieva, the new managing director of the IMF, said in her curtain raiser for this week’s annual meetings in Washington DC: “In 2019, we expect slower growth in nearly 90 per cent of the world. The global economy is now in a synchronised slowdown.”

Joint research by the Brookings Institution and Financial Times is bleaker still, describing our situation as “synchronised stagnation”.

What is driving this slowdown, particularly stark in industry and trade? A big part of the answer seems to be rising uncertainty.

This, argue the Brookings authors, is due to the “persistent trade tensions, political instability, geopolitical risks, and concerns about the limited efficacy of monetary stimulus”.

Such uncertainty has, notes Gavyn Davies, become “entrenched”.

In its latest World Economic Outlook, the IMF forecasts growth of world output at just 3 per cent this year, down from 3.6 per cent in 2018.

In the high-income countries, aggregate growth is forecast at 1.7 per cent, down from 2.3 per cent last year.

In emerging economies, the decline is from 4.5 per cent to 3.9 per cent this year. Growth of the volume of world trade is forecast at just 1.1 per cent this year, down from 3.6 per cent last year.

This is far below the growth of output: it signifies deglobalisation, with respect at least to trade.

Chart showing trade leads the global slowdown

Crucially, risks are all on the downside. The trade conflicts between the US and its principal trading partners might get worse. If so, integrated supply chains, not least in high-tech products, could be badly disrupted. Brexit may be chaotic.

Geopolitical risks also abound, especially in the Middle East, but also in Asia. Above all, relations between the US and China are worsening. Significant financial fragilities exist too, notably the high debt of non-financial corporates. The threat of cyber attacks remains, as does mega-terrorism. We persist in failing to tackle climate change.

Depressingly, much of what threatens the world economy is due to “stupid stuff”. Donald Trump’s trade policy is wrecking the underpinnings of the postwar trading system, thereby creating huge uncertainty, in pursuit of the silly aim of bilateral balancing. Brexit is stupid: it will destroy a fruitful partnership with the UK’s neighbours and partners. The burgeoning friction between Japan and South Korea is stupid, too: it weakens both countries in a region ever more dominated by China.

Chart showing uncertainty is rising

We are collectively playing with fire. Worse, we are doing so while living in a flammable building. As Lawrence Summers tells us, the danger is not so much a global economic slowdown, as the difficulty of doing much in response.

In this context, the recent shift in Federal Reserve policy, towards lower rates, and the associated decline in interest-rate expectations are particularly telling.

Even in the US, it was impossible for the Fed to raise the short-term rate above 2.5 per cent in this cycle, before cutting it.

In other big high-income economies, the room for a conventional policy response to a slowdown is still more limited.

Chart showing tech supply chains have increasingly relied on China

Importantly, this tells us that structurally deficient aggregate demand, on which some of us have been writing since before the 2007-08 financial crisis, remains pervasive.

This forces us to recognise not just the “nationalist-populist-protectionist” stupid stuff noted above but, as lethal, the “austerity-as-secular-religion” stupid stuff.

This shows itself not only in terror of aggressive monetary policy, rightly rebuffed by former president of the European Central Bank Jean-Claude Trichet, but in the refusal to accept the alternative, namely, fiscal policy.

People are petrified of government borrowing even though lenders are prepared to pay for the privilege.

Chart showing China tech supply also relies on outside suppliers

It is elementary economics that prices matter. The astonishing fact is that the six largest high-income economies, including now even Italy, can borrow for 30 years at a fixed nominal rate of close to 2 per cent, or less, and so at zero-to-negative real rates, provided central banks deliver on their inflation targets.

One has to be desperately pessimistic about growth prospects to believe it is impossible to manage substantial borrowings, on such terms. This is especially true if borrowing was used to produce high-quality human, intangible and physical assets.

A fixation on eliminating budget deficits, in this context, is really stupid stuff. Should real rates rise again, this would reflect better perceived opportunities and so justify (and facilitate) curbing government spending. Meanwhile, the low cost of past borrowings would be locked in.

Moreover, as Olivier Blanchard has noted, it is usual for safe interest rates to be below growth rates. Today seems to be just an extreme version of this reality.

Chart showing dramatic downward shift in US interest rate expectations

These are fragile times. Some of that reflects the wave of populist nationalism that is now sweeping across high-income countries. But some of it reflects sterile orthodoxy. A modest slowdown is one thing. But a sharp slowdown we refuse to deal with, because of stupidity, would be another thing altogether.

As Ms Georgieva argues, we do need a “renewed commitment to international co-operation”.

This is also the theme of a recent compendium from the Bretton Woods Committee. Today, however, that might be too ambitious. But we could at least stop doing the stupid stuff.

Chart showing very long term borrowing is extraordinarily cheap

Are investors ready for the ‘Doomsday Dollar’ scenario?

What would it mean if the entire paradigm for long-term investing was to change?

Rana Foroohar

Future Dollar Fall

For decades, global savers, and American retirement savers in particular, have been taught that you should put most of your money in an S&P index fund — one that tracked the fortunes of the largest US companies — and then forget about it until you were close to retirement. Since the mid-1980s onwards, that has been more or less good advice. American multinationals were, after all, the best way to buy into globalisation, and globalisation was very good for the stock prices of many big companies.

But recently, I’ve begun to wonder — what would it mean if the entire paradigm for long-term investing was to change?

Globalisation as we have known it is on hold. This much we know. But what if we were also coming to the end of a very long period of financial repression, in which declining interest rates have masked another, more fundamental truth. America’s place in the world has changed, and so has the growth potential of its corporations. If that is the case, then we may be in for a correction not just in the stock prices of US multinationals, but in the dollar itself. That would have profound implications for investors everywhere — from individual savers in the US to giant pension funds in Europe and Asia.

It’s a scenario that AG Bisset Associates has dubbed “the Doomsday Dollar”. At first glance, the idea of US stocks and the dollar going down at the same time seems unlikely. For one thing, the two often go in opposite directions, with a weak dollar making the exports of many US companies relatively more competitive in the global marketplace, as has been the case in recent years.

What’s more, despite some countries like China and Russia moving out of dollar-denominated assets for reasons both political and economic, the dollar remains the world’s reserve currency.

As a study last week from the Brookings Institution pointed out, the dollar’s share of global foreign exchange reserves has declined by only two percentage points since 2007, while the euro’s share is down six points. And, as we all know, neither American politicians nor many of the country’s largest companies have covered themselves in glory during that period.

charts on dollar vs Euro -  features

But shifts in the global reserve system take time. Currency movements can happen more quickly — in fact, as Ulf Lindahl, AG Bisset chief executive, points out, the world’s major currencies tend to move up and down in 15-year cycles. According to his calculations, which track currency movements from the early 1970s onwards, we began a new cycle in January 2017, and despite the dollar’s strength since April 2018, that cycle is still intact. If the thesis holds, the dollar is poised to fall against the euro and yen over the next few years, and by as much as 50 to 60 per cent.

What would be the implications of such a shift? For starters, investors outside the US, like European and Japanese pension funds, the family offices that manage the finances of wealthy individuals, and large financial institutions, would be hit hard by depreciating dollar assets. If they began to shift their investment portfolios away from dollar assets, it could exacerbate a downturn in US equities — this is something that many analysts believe is coming anyway, given that stocks are at their second most expensive period in 150 years. That would, in turn, hurt US savers who keep the majority of their retirement portfolios in those S&P index funds.

Some savvy investors already see the writing on the wall and have moved into gold. I would expect other commodities to rise, too.

If the “Doomsday” scenario plays out, investors might also pile into the euro and the yen, which would force US bond yields to rise. That is something that few expect — the conventional wisdom is that we are in an environment of low rates forever. But if yields were to rise, it could help savers who are holding bonds rather than stocks — it would also, however, penalise debt-ridden companies. And as we have already been warned by the Bank for International Settlements, there are plenty of “zombie” firms out there that will have trouble servicing their debt and staying in business if rates rise.

Over the past few decades, we’ve seen not only a bull market for US equities, but plenty of financial engineering. Companies have done what they could to defy economic gravity using everything from the tax code to share buybacks. Central bankers have facilitated this with loose monetary policy. That is why, in my opinion, both US stocks and dollar-denominated asset prices have remained so high, despite so many risk factors in the political economy, and the challenges for business.

Ultimately, if US companies are perceived as no longer being the most competitive in the world, their share price will fall, as will the dollar. Are we at that point? Not yet. But given the erosion of America’s skills base, its ailing infrastructure and lack of research investment, I wonder if we might be soon.

Companies themselves seem to be voting with their feet. A recent EY report shows that the number of Fortune Global 500 companies headquartered in the US declined from 179 in 2000 to 121, while the number headquartered in China grew from 10 to 119. This signals a shift in where companies expect growth to come from in the future — Asia. If that is the case, many of us will need a new investment strategy for a new world.

Gold Could Get a Boost From a Weak Dollar

By Randall W. Forsyth

Photograph by Chung Sung-Jun/Getty Images

You wouldn’t know it from the constant barrage of news on the political and international fronts, but there are positive developments in the background for the financial markets. To be sure, there has been good news with a “Phase 1” tentative trade deal with the U.S. and China, and maybe, just maybe, some Brexit agreement (although it ain’t over until Parliament votes this weekend).

But there is a more positive monetary backdrop developing from lower short-term interest rates and a weaker dollar. And that would be bullish for most risk assets, including U.S. stocks, emerging market debt and equities, and commodities—notably precious metals.
The federal-funds futures market is putting an 89.3% probability of the Federal Open Market Committee voting for a one-quarter percentage-point reduction in its key policy interest rate on Oct. 30, according to the CME Group’s FedWatch. While a number of economists have pushed back on the notion of another rate cut this month, and most Fed officials remain noncommittal, if not opposed, to further easing, the central bank has a long history of not disappointing market expectations. While the betting line can change by game time, the odds now favor a rate reduction at the next policy confab.
The Fed also has begun buying $60 billion a month of Treasury bills, which it contends doesn’t constitute a policy move like past quantitative-easing, or QE, purchases. (See this week’s Economy column.) In actuality, the buying reverses the quantitative tightening, or QT, that occurred as the Fed reduced its assets, while on the other side of the balance sheet, liabilities, notably currency, increased, resulting in an even sharper shrinkage in bank reserves.

Quantitative tightening was supposed to be like “paint drying,” as former Fed Chair Janet Yellen described it, but resulted in the equivalent of 7.5 percentage points of tightening, nearly three times as much as the actual rate hikes, Julian Brigden, chief economist at MI2 Partners, has estimated. QT has kept the dollar stronger than fundamentals would have predicted, he writes in a client note.

A weaker greenback would provide the missing “cornerstone of a reflationary move,” along with lower rates and higher equity prices. Global investors have been piling into U.S. growth stocks, taking advantage of strong currency and equity returns. As the dollar turns, Brigden looks for a rotation from growth to value stocks, which showed signs of starting in early September.

A weaker dollar and negative interest rates also have boosted hedge funds’ interest in gold, according to Société Générale. The so-called barbarous relic, and exchange-traded funds that track it, such as the SPDR Gold Shares (ticker: GLD), have moved mostly sideways around the $1,500-an-ounce level since late August.

But the bank’s strategists recommend a maximum bullish allocation to gold (5% in its portfolios) because the metal “is increasingly seen as an alternative to cash.” They’re especially bullish on gold since they also expect further Fed rate cuts and a lower dollar. While the bank isn’t advocating a return to a gold standard, it notes that central banks such as the People’s Bank of China are diversifying into the metal.

President Donald Trump has made no secret of his desire for a weaker dollar, which would be consistent with his barrage of tweets calling on the Fed to slash rates. An end to the tariff wars would further ease the upward pressure on the dollar. And that would benefit corporate earnings, as 40% of sales of S&P 500 companies originate abroad. So there’s good reason to bet your bottom dollar that the greenback is close to a top.

Can the US and China Make a Deal?

Driven by domestic nationalist forces and the need to save face, US President Donald Trump and his Chinese counterpart, Xi Jinping, have continued to escalate the bilateral trade war, despite their shared interest in resolving it before the end of the year. To make a deal, both sides need to start taking substantive steps immediately.

Kevin Rudd

rudd8_Thomas Peter-PoolGetty Images_trumpjinpingsoldiers

NEW YORK – Now that the celebrations marking the 70th anniversary of the founding of the People’s Republic of China are over, it is time to direct attention back to the Sino-American trade war. That conflict may well be about to enter its endgame. Indeed, the next round of negotiations could be the last real chance to find a way through the trade, technology, and wider economic imbroglio that has been engulfing both countries.

Failing that, the world should start preparing for its rockiest economic ride since the 2008 global financial crisis. There is a real risk that America will slide into recession, and that the global economy will experience a broader decoupling that will poison the well for Sino-American relations far into the future. There is also a widening window of opportunity for nationalist constituencies in both countries to argue that conflict is inevitable.

Thus far, the trade war has gone through four phases. Phase one began last March, when US President Donald Trump announced the first round of import tariffs on Chinese goods. Phase two arrived with the “Argentine reset” at the G20 summit in Buenos Aires last December, when Trump and Chinese President Xi Jinping announced that they would conclude an agreement within 90 days. That truce imploded in early May of this year, with each side accusing the other of demanding major last-minute changes to the draft agreement.

Phase three could best be described as the “summer of our discontent”: the United States imposed a fresh round of import tariffs, and China retaliated in kind, while also unveiling its answer to the US “entity list.” In response to the blacklisting of Huawei and five other Chinese tech companies, China’s poetically titled “unreliable entities list” threatens to target US firms for exclusion.

Given these developments, why should anyone expect the next round of talks to succeed?

For starters, the US and Chinese economies are both in trouble. In the US, recent poor manufacturing and private-sector employment figures have reinforced pessimism about the economy’s prospects. If conditions were to deteriorate further, Trump’s bid for re-election in November 2020 would be endangered. Likewise, Xi would be weakened by any significant slowdown on the eve of the Communist Party of China’s centenary celebrations in 2021, which will be a prelude to his bid for an already controversial third term starting in 2022. 
Each side says publicly that the trade war is hurting the other side more. But, of course, it is hurting both, by destabilizing markets, destroying business confidence, and undermining growth. Each side also claims to have the economic resilience needed to ride out an extended conflict. On this question, it is unclear who has the stronger argument. America is certainly less trade-dependent than China; but China, though weakened by poor domestic policy choices enacted before the trade war, still has stronger fiscal, monetary, and credit tools at its disposal.

In any case, both sides recognize that they are each holding an economic gun to the other’s head. Hence, despite the political posturing, both Trump and Xi ultimately want a deal. Moreover, they need it to happen by the end of the year to prevent further damage from big tariff hikes currently scheduled to take effect on December 15. That timeline requires that both sides start taking symbolic and substantive steps immediately.

As a first step, China should propose an agreement using the same text as the previous 150-page draft, but with revisions to satisfy its three “red lines.” Specifically, China should remove the US provisions for retaining tariffs after the agreement is signed, and for unilaterally re-imposing tariffs if the US concludes that China is not honoring the agreement. And it should add a commitment that China will execute the agreement in a way that is “consistent with its constitutional, legislative, and regulatory processes.”

Second, China should improve its original offer of a $200 billion reduction in the bilateral trade deficit over time. This negotiating point is based on lousy economics, but it is important to Trump personally and politically.

Third, while China will want to avoid banning state subsidies for Chinese industry and enterprises, it must retain the draft agreement’s existing provisions on the protection of intellectual property and the prohibition of forced technology transfers. Moreover, it may be possible to have each country declare its position on state industrial policy in the official communiqué accompanying the signing of the agreement. Such a statement could even specify the domestic and international arbitration mechanisms that will be used to enforce all relevant laws on competitive neutrality.

Fourth, both sides must create a more positive political atmosphere. In recent weeks, there have been signs that this may happen, including reports of renewed Chinese purchases of American soybeans in September. Though purchases are still well below historical levels, this increase will help Trump to placate angry farmers in his base. The US, meanwhile, has already deferred a 5% tariff hike that was originally scheduled for October 1. It could also issue exemptions for some US firms to sell non-sensitive inputs to Huawei.

Fifth, both sides should regard the November 14-16 Asia-Pacific Economic Cooperation Summit in Santiago as the last chance for signing a deal. Following high-level negotiations between Chinese Vice Premier Liu He and US Trade Representative Robert Lighthizer this month, outstanding problems should be agreed in Beijing in early November. Getting the deal done before Thanksgiving will be critical to undergird US business and consumer confidence for the Christmas season.

I am one of the few commentators who have argued all year that, despite the political fireworks, Trump and Xi’s underlying interests make a deal more likely than not. But the recently announced impeachment proceedings against Trump could throw a wrench into this process. A weakened Trump may be emboldened to take a tougher line against China than US economic interests demand. On balance, however, Trump still cannot afford the risk of a 2020 recession, meaning that a deal remains more probable than not.

Nonetheless, a failure to manage the next two critical months could still cause the entire process to collapse. Both sides have already spent much time preparing a Plan B for 2020: to let loose the dogs of economic war, foment nationalist sentiment, and blame the other side for the ensuing damage. Should that happen, the risk of recession in the US, Europe, and Australia next year will be high, though China would seek to soften the domestic blow through further fiscal and monetary stimulus.

The choice now facing the US and China is stark. For the rest of the world, the stakes could not be higher.

This commentary is based on a recent address to the US Chamber of Commerce in Beijing.

Kevin Rudd, a former prime minister of Australia, is President of the Asia Society Policy Institute in New York.

The Next Phase of China’s Reform and Opening Up

Over the last four decades, China has made major progress on integrating into global networks. But it has a lot more work to do – and must do it while confronting an increasingly hostile external environment.

Andrew Sheng , Xiao Geng


HONG KONG – Over the last four decades, China has integrated into global networks in trade, finance, data, and culture (encompassing social values, religion, and political beliefs). But, as the United States embraces protectionism, continued progress on global integration will require China to adjust its approach.

Since the 1980s, China’s approach to development has centered on experimentation and phased implementation. Thanks to this “pilot and expand” strategy, in 2013 – 12 years after acceding to the World Trade Organization – China became the world’s largest trading economy (for goods). In 2018, its trade-to-GDP ratio stood at 38%, substantially higher than that of the US (27% in 2017).

As for financial markets, China’s leaders have been adamant about ensuring that liberalization will occur only when domestic exchanges and the regulatory framework are robust and credible enough to manage the relevant risks. So policymakers have pursued a two-tier, phased strategy that capitalizes on Hong Kong’s unique position in the Chinese and international markets.

In the 20 years since China’s state-owned enterprises began listing shares and raising funds in Hong Kong, the city – with its low taxes and strong infrastructure for enforcing the rule of law – has become a global financial center. In the process, Hong Kong has served as a catalyst and intermediary for broader financial-market liberalization in China, offering a kind of buffer zone for experimenting with the interactions between mainland and offshore renminbi financial markets.

Thanks to this approach, China’s share of global debt and equity markets has increased sharply. In 2004, China accounted for 1.2% of the world bond market, compared with 42.2% for the US, 26.5% for European Union, and 18.7% for Japan. By the end of 2018, China’s bond market had expanded to account for 12.6% of world total, while America’s had shrunk to 40.2%, the EU’s to 20.9%, and Japan’s to 12.2%.

Similarly, mainland China’s share of global equity-market capitalization rose from 1.2% in 2004 to 8.5% in 2018; add to that Hong Kong’s share, and China’s total rises to 13.6%. Over the same period, America’s share of global equity-market capitalization fell from 45.4% to 40.8%; the EU’s dropped from 16.3% to 10.8%; and Japan’s shrank from 16.3% to 7.1%.

Yet China still has a lot of work to do on integration. As a recent McKinsey report showed, more than 80% of the revenues of China’s 110 global Fortune 500 companies are domestic, and foreign ownership in China’s banking, securities, and bond markets remains below 6%. Moreover, the barriers to continued progress are significant. To continue China’s integration into global networks, the authorities will need to overcome at least four major strategic challenges.

The first challenge is to rein in debt, which has increased more than fivefold economy-wide over the last decade, and now exceeds 300% of GDP – similar to advanced-country levels. While China can afford to consume and invest more, given its high domestic savings rate, it will also need to deepen its equity markets, in order to lower long-term debt risks.

Second, China must find ways to advance renminbi internationalization. Since 2009, China’s government has been working hard to expand the currency’s international use. But, according to the Bank for International Settlements, the renminbi accounted for just 2.1% of total daily foreign-exchange trading in April of this year – far behind the US dollar (44%), the euro (16%), and the Japanese yen (8.5%).

China will also need to adjust to having a broadly balanced current account, after decades as a major surplus country. In order to maintain a healthy balance of payments and avoid taking on too much risk, China must now ensure that its capital outflows are roughly balanced with inflows of foreign funds.

The fourth challenge China faces in achieving further global integration lies in the unfriendly external environment, shaped by anxieties over excessive or uneven flows of goods, capital, data, people, and culture. Nowhere is this more apparent than in US President Donald Trump’s administration and its assault on the global trading system, including an escalating trade war with China.

With negotiations having failed to end that trade war – not least because of fundamentally different worldviews – the Trump administration is doing everything it can to “win.” Most recently, it proposed new regulations that would expand the government’s authority, through the Committee on Foreign Investment in the United States (CFIUS), to block transactions relating to technology, infrastructure, personal data, and real estate on national-security grounds. The rules would affect actors, such as China, that trade with countries that are subject to US sanctions.

The escalating conflict with the US puts severe pressure on China’s gradual “pilot and expand” strategy. To be sure, China has broadened its two-tier approach to integration in recent years, incorporating a growing number of mainland provinces into pilot projects like the Shanghai free-trade zone. China hopes that, much like Hong Kong, these pilot cities can sustain its integration momentum, helping it gradually align its legal and regulatory regime with global frameworks for trade, finance, taxation, and other transactions.

But China will need to expand and augment these efforts if it is to protect its linkages to global finance, data, and knowledge networks. Only with bold, smart, and innovative action can policymakers ensure that China’s pilot cities continue to lead the way toward a more open, integrated, peaceful, and prosperous future.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis. 

Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor and Director of the Research Institute of Maritime Silk-Road at Peking University HSBC Business School.

Too dicey

Betting on bitcoin prices may soon be deemed illegal gambling

Regulators increasingly think crypto-derivatives are unsuitable for retail investors

ON SEPTEMBER 24TH the price of a single bitcoin, the best-known cryptocurrency, fell by $1,000 in 30 minutes. No one knows why, and few people cared. There have been similar drops nearly every month since May. Yet for one obscure corner of the market, it mattered.

Exchanges that sell “long” bitcoin derivatives contracts, with which traders bet that prices will rise without buying any coin, soon asked punters for more collateral. That triggered a stampede. By the end of the day $643m-worth of bitcoin contracts had been liquidated on BitMEX, a platform on which such contracts trade. Bets on other cryptocurrencies also became toxic.

Crypto-derivative products, which include options, futures and more exotic beasts, are popular. More than 23bn have been traded so far in 2019, according to Chainalysis, a research firm. But tantrums such as last month’s have put them in regulators’ cross-hairs. Japan is considering stringent registration requirements.

Hong Kong bars retail investors from accessing crypto funds; Europe has had stiff restrictions since last year. Now the Financial Conduct Authority (FCA), a British watchdog, is proposing a blanket ban on selling crypto-derivatives to retail investors. A consultation ended on October 3rd. Its decision is expected in early 2020.

It would take an earthquake for the FCA not to press ahead. In the real world, importers buy derivatives as a defence against slumps in their domestic currency. But crypto-monies are not legally recognised currencies. They do not reliably store value, rarely serve as a unit of account and are not widely accepted. Peddlers of crypto-derivatives, the FCA says, cannot claim their wares are needed for hedging purposes.

That explains why most such derivatives are marketed as investment products. Yet they are not tempting places to park savings. The assets they track are hard to value: virtual monies promise no future cash flows. Prices across cryptocurrencies are strongly correlated, suggesting that demand does not stem from usage or technological advances. Instead it responds to hype (for which Google searches are a proxy; see chart). Thin trading means that prices differ widely between crypto-exchanges, making them a poor reference for derivative contracts. Illiquidity also amplifies swings: bitcoin is four times more volatile than risky physical commodities.

The FCA thinks crypto amateurs fail to understand all this. It estimates that investors in Britain made total losses of £371m ($492m) on crypto-derivatives from mid-2017 to the end of 2018 (net profit was £25.5m, but was mostly captured by the largest investors). Two other features can make losses catastrophic: leverage (platforms typically allow derivative traders to borrow between two and 100 times what they put in) and high trading costs. The FCA thinks its mooted ban could reduce consumer losses by up to £234m a year.

Insiders disagree. “This is a knee-jerk reaction,” says Jacqui Hatfield of Orrick, a law firm. “Crypto-derivatives are just as risky as other derivatives.” A ban could mean consumers invest directly in unregulated cryptocurrencies instead. Exchanges could relocate. In any case, says Danny Masters of CoinShares, which sells crypto vehicles, the regulator should not be choosing which technology thrives or fails.

Yet it is part of the FCA’s mandate to protect consumers against predators. Nearly $1bn in virtual coins were stolen from crypto-exchanges and infrastructure last year, 3.6 times more than in 2017. Such thefts hit the value of derivatives. Manipulation is also rife. “Retail investors are diving in a pool of sharks,” says David Gerard, a bitcoin sceptic. As regulators close in on market abuse, defenders of crypto-derivatives are swimming against the tide.

What a Power Struggle in Beijing Might Look Like

The president won’t fall completely, but his authority could wane.

By Phillip Orchard


On Oct. 1, 2019, exactly 70 years since Mao Zedong stood in triumph at the gates of the Forbidden City and declared the creation of the People’s Republic of China, Chinese President Xi Jinping was doing his best imitation of the great helmsman. Dressed in a black tunic identical to the one worn by Mao in his famous portrait at Tiananmen Gate, Xi echoed Mao’s boasts that only the Communist Party of China is capable of protecting China from foreign exploitation. Xi, like Mao, then inspected the People’s Liberation Army – though, this time, instead of American tanks captured by Mao’s forces from the nationalists in 1949, Xi reviewed an extravagant parade of new indigenous weapons systems, including new hypersonic missiles and intercontinental ballistic missiles meant to keep the U.S. at bay.

The message of the meticulously choreographed affair was obvious: The CPC has vanquished the ghosts of the century of humiliation and transformed China into a unified emerging power – and Xi has the unquestioned mandate from heaven to carry forward the project of national rejuvenation started by Mao. But those with a stake in Beijing’s opaque power politics may have been watching for more subtle messages: A curious choice of words in Xi’s speech, or the unexpected presence of a certain official on the rostrum with Xi, or a quiet shift in state propaganda themes – anything that would hint that, as was often the case with Mao himself, Xi’s grip on power was not so absolute.

Some were likely disappointed; the ceremonies were clearly tailored to the purpose of deifying Xi, with state media crowning him the “people’s leader” – a title not used since Mao. Still, in recent months, the frequency of supposed hints of discontent with Xi has picked up again, both among those who believe he is too much like Mao and those who believe he is not enough like Mao. Given China’s socio-economic pressures, along with the trail of purged rivals and discarded norms Xi left behind as he consolidated power, it’d be naive to assume the president is immune to challenge altogether. So it’s worth asking: What might a major power struggle look like?
Reading the Tea Leaves
Power struggles in China typically spill into the public sphere with thumb-biting and coded taunts rather than bare-knuckle brawls. The media is too tightly controlled, and the risks of open speculation too high, for the case to be otherwise. Observers are typically stuck parsing sodden tea leaves for clues about unrest beneath the surface. Still, as in any country, rival factions in China have incentives to find ways to weaken each other in the public eye and use the state’s megaphones to build popular support for their objectives. And since state propaganda, official speeches and personnel moves are so carefully scripted, and thus so pregnant with symbolism, even small deviations from established trends can carry enormous meaning. Silence can also be deafening.

One prominent example: Following the death of Premier Zhou Enlai in 1976, with Mao effectively on his own death bed, the infamous Gang of Four (including Mao’s wife) used state media to accuse acting Premier Deng Xiaoping of counterrevolutionary activities, betraying the power struggle raging behind the scenes. Deng, of course, came roaring back after Mao’s death and was promptly rehabilitated in state media, which in time announced the gang’s arrest long after purging them from state propaganda.

Despite the arrival of the information age, little has changed. If anything, Xi’s embrace of a cult of personality, which was frowned upon by Deng, has made problems somewhat easier to detect. When Xi is at the center of nearly everything produced by state media organs, any sudden downtick in official adulation over the president becomes very conspicuous. In late 2017 and early 2018, for example, state media made it clear that Xi was effectively untouchable. Sure enough, at the epochal 19th Party Congress in November 2017, Xi was enshrined in the party’s constitution and succeeded in stacking the Politburo with loyalists. Three months later, at the National People’s Congress, Xi eliminated presidential term limits and, arguably more important, pushed through a staggering reorganization of the machinery of the state.

But cracks began to show. In July 2018, for example, several prominent portraits of Xi in cities across China, as well as one portraying Xi’s father, Xi Zhongxun, as the real architect of the success of Shenzhen, disappeared. The Shaanxi Academy of Social Sciences abruptly announced the end of a highly touted research project into Xi’s time as a student in a rural village during the Cultural Revolution. And the Xinhua News Agency published an article criticizing former Chinese leader Hua Guofeng for cultivating a Mao-style cult of personality – a veiled critique of Xi. For several weeks in late July and August, amid rumors of a coup, Xi disappeared from the front pages of the People’s Daily altogether. Around this time, two of Xi’s most powerful loyalists, propaganda chief Wang Huning, who oversees the effort to deify Xi, and Vice President Liu He, responsible for several contentious issues, including trade negotiations with the U.S. and SOE reforms, also disappeared from the front pages.

If Xi was ever truly threatened, he quickly bounced back and by September was once again monopolizing the media’s attention. But hints of discontent have continued. For example, ideological divisions between Deng advocates (including Deng’s son) and Xi supporters were laid bare in the run-up to the 40th anniversary of Deng’s reform and opening. Xi’s speeches and state propaganda subsequently changed, emphasizing more than before the notions of ideological purity and loyalty to party leadership – and threatening to impose autarky and take the country on a new “long march” if that’s what unity required. But while in 2017, every high-profile speech he made spurred ritualistic demonstrations of loyalty and support among key officials, now they are perfunctory and scarce, even among the president’s closest allies, some of who have remained silent. Perhaps most conspicuous, Xi has repeatedly pushed back the Fourth Plenum of the 19th Central Committee, suggesting concern about exposing the party’s internal divides. Last month, Xi mentioned “struggle” 56 times in a single speech – reviving a theme favored by Mao at the height of intra-party battles in the 1960s and 1970s.
There’s a risk of reading too much into these sorts of things, of course, and of measuring Xi’s control against unrealistic expectations. Some hints could go either way. Does the lack of high-profile purges this year, for example, suggest that Xi is immune to backlash, or simply that there are no potential rivals left worth targeting? If criticism of Xi’s policies increases, does that mean the opposition is more emboldened, or that Xi is confident enough to allow for the level of honest debate needed to avoid the policy pitfalls inherent to an echo chamber? Are tightened capital controls that target private sector tycoons politically motivated or merely meant to fight corruption and rein in reckless financial speculation?

Ultimately, divining the motivation behind certain choices is perhaps less important than understanding the nature of the choices themselves. Right now, Xi has only bad options.

He can’t, for example, micromanage the economy more than he is without prolonging trade tensions with the West, scaring off foreign investment, risking a credit crisis and 
creating a fracture along China’s historical fault line between the interior and the coasts. But he can’t push reform or liberalize too much without abandoning Beijing’s favored tools for staving off an existential socio-economic crisis. And as the global economic slowdown intensifies, the next few years are likely to make disagreement over things like reform and opening an order of magnitude more intense.

Absent a worst-case economic scenario, it’s hard to imagine Xi abruptly falling from power. The Communist Party has probably wrapped its own legitimacy too tightly in Xi’s cult of personality to avoid falling with him. During his first term, moreover, Xi’s sweeping purges smashed up traditional factions, took down extraordinarily powerful figures and their proteges, and reconfigured critical patronage networks that now have him at the center. Xi also took tight control of the PLA, the guarantor of CPC rule.

But even if his formal position is bulletproof, Xi’s real authority – over policy direction, over personnel choices at the next Party Congress in 2022, over lucrative patronage networks – could theoretically be taken from him. And this could prove deeply problematic by, say, reviving crippling factional struggles and leading to paralysis in a crisis. After all, Xi’s consolidation of power in his first term wouldn’t have happened without widespread recognition among Chinese leaders that the turbulent waters ahead necessitate a strongman at the helm. The CPC’s embrace of Xi’s dictatorship may now be causing as many problems as it was intended to solve. But so too would paddling in opposite directions midstream.

China’s 70 Years of Progress

Much of the West, as well as Asia, continues to assume the worst about China – a habit of mind that could have catastrophic consequences. As Albert Camus once wrote, “Mistaken ideas always end in bloodshed, but in every case it is someone else’s blood."

Keyu Jin


BEIJING – The celebration of the 70th anniversary of the founding of the People’s Republic of China on October 1 will be an exuberant affair, involving glitzy cultural events, an extravagant state dinner attended by Chinese and foreign luminaries, and a grand military parade in Tiananmen Square. And, at a time of high tensions with US President Donald Trump’s administration, it will be imbued with an extra dose of patriotic enthusiasm. But while China has much to celebrate, it also has much work to do.

The first 30 years of rule by the Communist Party of China (CPC) are judged harshly, owing to the disastrous Great Leap Forward and the Cultural Revolution. But these were not lost decades. On the contrary, major strides were made in modernizing China: local and national power grids were established, industrial capacity was strengthened, and human capital rapidly improved.

As a result, China’s human-development indicators, on par with India’s 70 years ago, surged ahead. From 1949 to 1979, the literacy rate rose from below 20% to 66%, and life expectancy increased from 41 to 64 years. All of this set the stage for Deng Xiaoping’s program of “reform and opening up,” which unleashed China’s rapid economic growth and development over the last 40 years.

Today, China’s to-do list remains long, but its leaders are working consistently to check off agenda items, from reducing inequality and reversing environmental degradation to restructuring the economy. If they are to succeed – thereby solidifying China’s development model as a viable alternative to Western-style liberal democracy – they will need to deliver on two key imperatives in the coming years.

First, China needs to reach high-income status. So far, China has relied on the massive size of its markets and rapid output growth to raise incomes. But these forces only take an economy so far, and China’s institutions, technology, and prevailing mindset remain more closely aligned with today’s $10,000 per capita income than with the $30,000 level to which the country aspires.

Second, China must ensure that the Belt and Road Initiative (BRI) is a success. This means implementing an inclusive program of cost-effective, environmentally sustainable infrastructure construction that does not result in unsustainable debts.

Neither of these goals will be easy to achieve, especially given a challenging external environment. While China revels in its birthday celebration, the outside world – beginning with the United States – is worrying about China’s aspirations to become a global leader in technology and in geopolitical terms.

When a large ship sets sail, its wake will agitate other boats, no matter how skillfully it is steered. And yet China faces the daunting task of keeping other countries calm as it sails on. This will require, above all, open, frank, and consistent communication between China and the outside world.

But the onus is not entirely on China; Western leaders also must be receptive to the country’s efforts. China has long promised the world a “peaceful rise.” Unlike the nineteenth-century US, it has no Monroe Doctrine, which attempts to guarantee its sphere of influence, and claims no “manifest destiny” to expand its territory at all costs. In fact, since Deng, all but one of China’s border disputes have been settled through peaceful negotiations. It took China 11 years to negotiate, inch by inch, its borders with Russia.

Yet much of the West, as well as Asia, continues to assume the worst about China – a habit of mind that could have catastrophic consequences. As Albert Camus once wrote, “Mistaken ideas always end in bloodshed, but in every case it is someone else’s blood. That is why some of our thinkers feel free to say just about anything.”

To avoid falling into the trap of war, Western political and intellectual leaders must not blindly believe those who assume that confrontation with an ascendant China is inevitable. If any historical experience should be brought to bear, it is that of near-misses and miscalculations – reminders of how easily a standoff can become a calamity.

Past incidents – such as the 1999 bombing of the Chinese embassy in Belgrade by NATO forces, or the 2001 collision of US and Chinese aircraft off Hainan Island – have been settled through negotiation. But, given rising antagonism toward China, there is no telling whether leaders would manage to replicate that outcome were a similar incident to occur today.

The first 70 years of CPC rule brought rapid development, but ultimately only modest prosperity. Now, China must shift its attention to raising incomes and implementing the BRI effectively. These goals can be achieved only in a peaceful, stable context. China’s leaders understand that. But they still must convince the West that they do.

Keyu Jin, Professor of Economics at the London School of Economics, is a World Economic Forum Young Global Leader.

The $5tn diaspora: Dimon’s lieutenants take top roles

JPMorgan Chase alumni flex the network as Scharf moves to Wells Fargo

Robert Armstrong in New York

Former lieutenants of Jamie Dimon, second from left. Top roles at other financial institutions include, left to right: Jes Staley of Barclays, Matt Zames of Cerberus and Bill Winters of Standard Chartered © FT montage / Bloomberg

The appointment of Charlie Scharf as chief executive of Wells Fargo is not just a crucial turning point for the troubled San Francisco bank. It also represents further consolidation of the most powerful professional network in global finance: the JPMorgan Chase executive diaspora.

Former JPMorgan executives now lead banks with assets totalling some $4.7tn. Add in JPMorgan itself, where Jamie Dimon is into his 14th year as chief executive, and the sum reaches $7.4tn.

In the UK, Barclays is run by Jes Staley, who previously ran both JPMorgan’s asset management and investment banking divisions, and Standard Chartered is led by Bill Winters, who also did a stint leading the JPMorgan investment bank. In the US, in addition to Wells, PNC Financial, the eighth-largest bank in the country, is run by Bill Demchak, who ran JPMorgan’s structured finance and credit businesses.

Mr Scharf’s JPMorgan career culminated with his leadership of the retail banking division from 2004 to 2012, before he become chief executive of Visa and then BNY Mellon.

The Dimon network does not stop at the banking industry. Frank Bisignano, former JPMorgan chief operating officer, is the chief executive of First Data, the payments company that was sold to rival Fiserv for $22bn in January. Matt Zames, another former chief operating officer, is president of the private equity company Cerberus. Ryan McInerney, now president of Visa, once ran consumer banking at JPMorgan.

Investors and analysts give much of the credit to Mr Dimon’s own management skills. “The skills he teaches, the qualities he looks for, if I was [Wells’ chair] Betsy Duke or head of another search committee, I would look right to JPMorgan,” said Tom Brown, a longtime bank investor and commentator. “The highest praise I can give someone is that they make complicated issues simple, and Jamie and Charlie [Scharf] are so much alike in that way.”

Certainly, the credentials of any JPMorgan alum are burnished by the outstanding performance of JPMorgan shares, which have almost tripled over the past 10 years, far outpacing all other big US banks. The bank did not go through the near-death experiences that convulsed so many rivals during the financial crisis.

“JPMorgan being JPMorgan definitely helps,” said Jeffrey Harte, an analyst Sandler O’Neill. “Managers could focus on running their businesses during the crisis when others were in survival mode.” He cites strategic consistency and an emphasis on accountability in both good times and bad as hallmarks of the Dimon regime.

Several industry insiders note that JPMorgan’s outsize influence is not without precedent, pointing out how executives at Citigroup in the 1980s and 1990 went on to play important roles at other institutions. One of these was Mr Dimon himself. The list also includes Richard Kovacevich, who went on to lead Wells Fargo.
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Not everyone thinks that the enthusiasm for executives who have worked under Mr Dimon is entirely benign. “Whenever we have a hero, we develop cultures around that — look at Silicon Valley and Steve Jobs, and everyone walking around in black turtlenecks. There is definitely too much emphasis on the persona and not enough on the leadership behaviour,” said Lindred Greer, faculty director at the Sanger Leadership Center at the University of Michigan.

Dave Ellison, who runs a portfolio of financial stocks at Hennessy Funds, thinks that the world of banking has become too cosy. “These boards of directors is a moneyed club — they all know each other . . . I was hoping Wells Fargo would take a chance on someone new, someone out of the box who would shake things up.”

The world of very low rates and increasing technological competition requires that banks think in new ways, Mr Ellison said. “But here is another case where they are bringing in someone else who is in the club, rather than taking a chance on someone new.”