Chile threatens Venezuela with blockade over crisis

Foreign minister demands free elections and warns refugee exodus could destabilise region

Benedict Mander in Santiago

Venezuelan migrants waiting at an immigration control point on the Ecuador-Peru border in June. The crisis in Venezuela has created a parallel refugee crisis that is affecting the whole region
The crisis in Venezuela has created a parallel refugee crisis that is affecting the whole region © AP

Chile’s foreign minister has vowed to work with allies to cut off Venezuela’s communications, shut down its air space and implement a naval blockade if Nicolás Maduro refuses to hold free elections.

Amid an escalating humanitarian crisis that is destabilising the region, causing more than 4m Venezuelans to emigrate, “ever stricter” measures must be taken to put pressure on Caracas to comply with demands to restore democratic order, Teodoro Ribera said.

“The solution to the crisis has to be soon . . . Venezuela is a problem for hemispheric security,” Mr Ribera told the Financial Times. He pointed out that some 400,000 Venezuelans now live among Chile’s 18m-strong population. “We have to make Maduro understand that it is preferable to call elections than not to call them.”

Sanctions have failed to persuade Caracas to heed calls for elections from the international community acting through the Inter-American Treaty of Reciprocal Assistance, whose members also include the US, Brazil and Argentina. Mr Ribera said that the “logical next steps” include blocking communications and access to the country by air and sea.

“All countries in the region have to advocate for forcing the Maduro government to call free, democratic elections, with international observers,” he said. Mr Ribera added that the opposition had to be pragmatic and recognise that democratic political transitions “demand reciprocal sacrifices. No one leaves power to go to hell voluntarily.”

Chile’s own transition to democracy after the 1973-90 dictatorship of General Augusto Pinochet was negotiated and drawn out, but also peaceful and did not harm the economy, said Mr Ribera. Human rights violators should be prosecuted, he said, but a “witch hunt” had to be avoided.

He warned that if the number of Venezuelan immigrants rose to 7-8m, as he fears could happen next year if action is not taken, “that will put very, very great pressure on countries in the region and it could have a destabilising effect”. The foreign minister emphasised that the solution had to be peaceful as military intervention could trigger “an explosion in immigration that we cannot cope with”.

Chile’s hardening stance towards Venezuela comes as Sebastián Piñera, the centre-right president, takes on a stronger leadership role in the region and beyond. Santiago is preparing to welcome delegates in December for the United Nations Climate Change Conference, known as COP25, after Brazil pulled out of hosting the event.

Chile, one of the countries most committed to free trade in the world, is also hosting the Asia-Pacific Economic Cooperation summit meeting next month amid fears expressed by Mr Ribera of a “deglobalisation” that threatens its open economy.

Observers expect the balance of power to shift in the region if the leftist Alberto Fernández is elected president in Argentina this month, as is widely expected, replacing the centre-right Mauricio Macri. Mr Macri has played a leading role in the region’s opposition to Mr Maduro and in supporting his rival Juan Guaidó.

In recent interviews, Mr Fernandez has resisted calling Mr Maduro a dictator and argued that his government was legitimate. Mr Fernandez did, however, express concerns about the Maduro regime’s authoritarian tendencies.

Mr Ribera suggested that a swing to the left in Argentina could be offset by the election of a centre-right government in Uruguay, which will also hold elections this month. Like Mexico, Uruguay’s leftist Broad Front, which has held power since 2005, has refrained from recognising Mr Guaidó as the interim president of Venezuela.

Banks Bounce, but Rates Still Exert Gravitational Pull

Beneath the surface of banks’ decent quarter are some troubling trends

By Telis Demos

Some negative effects of falling interest rates were visible in quarterly results at JPMorgan Chase & Co. and other big lenders. Photo: Victor J. Blue/Bloomberg News 

Beneath the surface of banks’ decent quarter are some troubling trends.

There were pockets of strength that helped drive a respectable kickoff to third-quarter earnings reports by big lenders.

JPMorgan JPM +4.33%▲ Chase & Co. recorded a jump in revenue from investment banking and trading, for example.

Citigroup C +1.87%▲ continued to benefit from a rise in revenue in its core U.S. card business.

Credit costs remain historically low.

But across three of the biggest banks—JPMorgan, Wells Fargo, WFC +3.55%▲ and Citigroup—many of the negative effects of falling interest rates and economic worry were visible.

Net interest income fell 2% across those banks in the third quarter from the second.

Total loans were essentially flat at those banks, and average net interest margin was 2.54%, down from 2.66% in the second quarter.

JPMorgan did raise its net interest income forecast slightly from when it last gave guidance, bringing up its full-year forecast to slightly below $57.5 billion from what it said in September, which was: “A lot closer to $57 billion.”

The bank told reporters that the improved forecast was predicated in part on moving from an expectation of two more Federal Reserve rate cuts this year to just one.

Given uncertainty about U.S.-China trade talks and the broader economy, that could easily change.

Consumers remain the bulwark for banks’ lending businesses.

Citigroup in particular is benefiting from the roll-off of promotional zero-interest offers on cards, which drove North American branded card revenue higher by 11% from a year earlier.

Revenue from JPMorgan’s card and auto-lending unit was up by 9%.

It remains to be seen how long the consumer can stay strong as business confidence falters.

Some of the improvement in investment banking may be temporary.

JPMorgan grew investment-banking revenue 8% from a year earlier, led by a 22% gain in equity capital markets despite the failure to launch WeWork’s big initial public offering in the quarter.

But the bank noted that it expected a decline for the fourth quarter both sequentially and year over year.

It is notable also that the bankers at Goldman Sachs GS +0.17%▲ didn’t have the same kind of quarter, with investment-banking revenue dropping 15% from a year ago.

Banks also already have made some big adjustments to their asset mix that they may not be able to do again regularly, or at the same magnitude.

At JPMorgan, for example, its average deposits with banks over the quarter dropped 35% from a year earlier, while it increased its average investment securities portfolio by 49%, capturing yields of 2.92% versus just 1.33% on that cash.

However, JPMorgan Chief ExecutiveJames Dimonacknowledged that fresh concerns about banks’ nimbleness with cash are well founded. He said that the bank’s required reserves prevented it from taking advantage of the spike in repo rates in mid-September.

“We could not redeploy [cash] in the repo market,” he said.

Overall, JPMorgan’s yield on interest-earning assets was up 0.03 percentage point from a year ago, even as Libor and other key borrowing rates moved lower.

Still, that was swamped by higher liability rates, in part due to corporate clients asking for better returns on their cash.

“We’re not going to lose valuable client relationships over a few ticks,” Chief Financial OfficerJennifer Piepszaksaid.

Despite it being a quarter in which many nonlending businesses outperformed, investors were bidding up shares of lenders JPMorgan, Citigroup and Wells Fargo on Tuesday morning, while selling Goldman Sachs, whose business is far more dependent on trading and investment banking.

That may be the wrong lesson for investors to take away from the quarter so far.

The People’s Republic of China at 70: Of Opium and 5G

By George Friedman


China celebrates the 70th anniversary of the founding of the People’s Republic of China today. It has been a great and terrible time for China, as history has been for most countries. But China is a nation on a scale that dwarfs other countries – and, therefore, both its greatness and tragedy dwarf those of other countries.

The story begins a century before the PRC’s founding. In the mid-19th century, British merchants approached China, as they approached most of the rest of the world. When they arrived in the 1840s, China was the largest economy in the world. Industrialization had only just begun, so the machinery did not yet define the size of an economy. Rather, it was defined by land and labor, and in these areas, China towered over most of the world. Meanwhile, Britain’s industrial revolution was accelerating, and it was searching for raw materials to fuel its industry and markets in which to sell its products. It was inevitable that British industrialism and mercantilism and Chinese pre-industrialism and mercantilism would meet, and meet violently.

The British wanted to sell more than just industrial products to China; they wanted to sell opium. The British were coming to dominate India, which had vast amounts of opium. The drug was banned by the Qing Dynasty that ruled China, so the British smuggled opium into China, first covertly and then by force of arms. The opium destroyed many lives in China, as it did in all countries, while the British made vast amounts of money from the trade. As they discovered China, they discovered potential markets for many goods and labor to produce them. They demanded that areas like Hong Kong be ceded to British rule to protect their economic interests. The Qing Dynasty, weakened by the British, had no choice but to concede. Over time the British were joined by the French, Germans, Japanese and Americans, among others.

By the 1990s and 2000s, China was the place for foreigners to go, hoping to make their fortune and find exotic adventure.

Foreigners operated along the coast, and the coast was tied to foreigners. They sold items to China, and in China, they manufactured items for sale in their home countries. The coast remained Chinese, but economically it faced outward to the world, not inward to the rest of China. The coast was where concessions were under the control of foreigners, and many Chinese who lived there prospered from this relationship. But over time, this generated complex systems of conflict. Chinese factions fought over relationships with foreigners. Foreigners conspired with each other. The central government was deeply divided and fought internally. Interior regions fought to secure some of the coastal wealth. It is hard to capture the complexity of the violence and the suffering it imposed. Coastal dwellers became wealthy. The peasants of the interior became, if anything, poorer.

The Chinese had cheap labor, which meant that manufacturing in China gave foreign companies a price advantage in their own markets. The Chinese were also hungry for foreign-manufactured products that they could sell in China or use to manufacture more complex products. Those Chinese who participated in this trade prospered enormously and therefore gained political power. But they depended on their foreign business relationships for trade. They had to subordinate themselves to the foreigners economically and politically to maintain that power. To do so, they had to reach out to the West to maintain an internal balance of power that focused on fighting each other rather than threatening their business interests on the coast.

This resulted in a multi-sided civil war, defined not by great issues like in the United States but numerous complex local issues, almost incomprehensible to any but those who lived as part of them. And caught in the middle was the vast number of Chinese who simply wanted to live, or live a little better, and found themselves surrounded by ruthless violence. This was not new to China. Such conflicts had been present long before the foreigners came, and when they exploded, dynasties fell. And so too did the hapless Qing Dynasty, giving way to the Republic of China under Sun Yat-sen, a Honolulu-educated Christian who represented to many Chinese the foreign influence that was tearing their country apart.

The Communist Party of China emerged from this situation. On the surface, it was a Marxist party, focusing on class struggle and the creation of a communist paradise. But that Marxism was intertwined with nationalism. The class struggle had to be against foreign interests and their Chinese partners. Therefore, class interest and national interest intersected. From the beginning, the CPC could not define itself except as a party committed to freeing China from foreign imperialism. Indeed, when Mao Zedong tried to stage a worker’s uprising, it failed. The workers had interests in common with the foreigners – they were wealthier than their cousins in the interior. Mao led the legendary Long March to the interior to raise a peasant army to resist the foreigners’ Chinese allies and expel the foreigners altogether. This appealed to the peasant class, and even if “Das Kapital” did not regard them as a revolutionary class, they were enemies of foreigners and the Chinese coast, and that was good enough.

Japan’s World War II defeat in China was followed by the defeat of the United States, who advised Chiang Kai-shek, a leader who sought to maintain the system founded a century before. Mao understood that China could never be secure while the concessions operated in any way. When China was engaged in global trade, parts of it became wealthy, other parts sank into worse poverty, and worst of all, China was divided and weak. Without internal strength and cohesion, China would always be exploited. Mao slammed the door shut on most trade and imposed the party’s will over internal decisions, rooting out alternative centers of power as best he could with the Great Leap Forward and the Cultural Revolution, designed to ensure that the bureaucracy would not usurp his power. He made China secure and united but terribly poor. China’s paradox was that it could be wealthy through trade but remain divided or be united by isolationism and remain poor. Mao pursued the latter path, into a kind of logic that ultimately looked more like madness.

Once Mao was dead, Deng Xiaoping made the great bet – that this time, China could open the doors to trade, become wealthy but remain united and avoid becoming dependent on foreigners. On the 70th anniversary of the founding of China, Deng’s bet is being called. The Chinese have once again become dependent on foreigners and foreign investment in the coastal regions’ factories. It is not the concession of the 19th century, nor is it the autonomy Mao wanted. As the United States presses its demands on China and China pretends to be impervious, the power of the foreigner is felt again. So too are the divisions. The tension between the wealthy coast and the poorer interior has reemerged. It has not yet resulted in conflict, and the government seeks urgently to relieve any tension.

The Opium Wars opened China. Mao tried to enclose China, and Deng reopened it. We are now, 70 years after the founding of the PRC, facing the question of whether a nation so constituted can long endure, or more precisely, endure without internal conflict. It is an old question in China and repeats itself in different ways. But in the end, it seems to terminate either in conflict or in ruthless suppression. Xi Jinping has signaled that he wishes to suppress conflict with minimal ruthlessness. The question is whether there is such a choice in China. The idea is that 5G and its brethren will allow China to leap over the question. Perhaps, but 5G will be sold to foreigners, and the customer has power. And in China, that power has always been dangerous.

Hong Kong in the Balance

After months of large-scale protests in Hong Kong, the city's future as a bridge between mainland China and the outside world is in serious jeopardy. Fortunately, all sides share an interest in pursuing more inclusive growth within the "one country, two systems" framework that has been critical to Hong Kong's success.

Michael Spence


MILAN – Hong Kong has long played an integral role in Asian and global economic development. But its future as a key nerve center for global business and finance is in serious jeopardy, as is its role as a bridge between mainland China and the outside world.

Hong Kong has long been a place where global companies are welcome, and disputes are adjudicated impartially, transparently, and according to the rule of law. If that is no longer the case, it represents a tremendous loss for China, for Asia, for global business and finance, and especially for Hong Kong citizens.

Hong Kong has experienced an unprecedented 17 weeks of mostly peaceful demonstrations (occasional episodes of violence have attracted disproportionate media attention). The trigger was a proposed extradition law that many feared would extend the mainland’s reach into Hong Kong’s judicial system. The absence of any plan to bring together various protest groups and the Hong Kong government has become a source of growing concern.

Such a plan would need to do at least two things. First, all parties (including China’s central government in this case), need to recommit to the “one country, two systems” framework.

Second, and perhaps more important, a coalition of representatives from government, business, and Hong Kong’s influential financial community should develop an aggressive plan for countering rising inequality and the disappearance of opportunities for those who are already struggling to make ends meet. Affordable housing for younger citizens is an especially urgent need.

Hong Kong is hardly unique in confronting the need to restore inclusive growth patterns. Many high-income economies have experienced years of rising economic inequality, which has been followed by social fragmentation and a broad rejection of established political parties and elites.

There is a striking similarity between the Hong Kong demonstrations and the “yellow vest” protests in France, which were triggered by a modest increase in tax on diesel fuel, but driven by a part of the population’s deeper anxieties about economic disparities and declining prospects.

Among the Hong Kong protesters’ demands are that the extradition law be formally withdrawn and that the rallies not be described as “riots.” They also want an independent inquiry into police tactics and brutality, the release of all detained demonstrators, and more control over the selection of their own leaders.

Notably absent from this list is any direct reference to the economic circumstances of Hong Kong’s people. The protesters most likely regard a greater role in choosing Hong Kong’s leaders as a step toward addressing inequality. The widely held perception among ordinary citizens is that Hong Kong’s political and economic elites have been more focused on pleasing the central government in Beijing than on achieving more inclusive growth patterns.

Under these tense conditions, some might view the Greater Bay Area (GBA) plan to develop an integrated regional economy in the Pearl River Delta as another potential encroachment on Hong Kong’s autonomy under the 1997 Basic Law, which established the city as one of two Special Administrative Regions for 50 years.

But the GBA could have a tremendous positive impact on Hong Kong and the already dynamic and innovative southern Chinese economy, and many believe that the plan can be implemented in a way that preserves the “one country, two systems” principle. Foreseeable obstacles, such as different rules governing data, should not be insurmountable.

For its part, China’s central government is justified in rejecting demands for full independence for Hong Kong. Only a small minority of the demonstrators supports those demands, which are inconsistent with the Basic Law and the principle of territorial integrity. The leadership in Beijing needs to maintain some role in the selection of Hong Kong’s political leaders, lest it end up having to deal with a vocally pro-independence government, as happens periodically in Taiwan.

China is also justified in worrying about foreign interference in Hong Kong, as any country would be. Requests for foreign support from the United States and Britain by a small subset of the protesters are counterproductive, at best. But China’s central government could help itself by voicing strong support for the principle of “two systems” and backing plans by the Hong Kong government to address distributional concerns and other economic issues.

There is no doubt that the Communist Party of China has exercised greater control over business, the economy, and society in mainland China in recent years. Some of those interventions may have spilled over into Hong Kong, exacerbating the tensions inherent in the “one country, two systems” framework. Chinese leaders now must be extremely careful not to undercut the authority of the Hong Kong government or the city’s fair and impartial judicial system, which has been a crucial asset in attracting business and finance from abroad.

Clear communication and responsiveness will be key to resolving the crisis. On this front, the Hong Kong government has underperformed. The millions of Hong Kong people who have taken to the streets need to know that their government is listening to them, understands their concerns and challenges, and is on their side, provided that their demands are consistent with the Basic Law. The Chinese authorities have exercised some restraint in their communications, presumably to avoid undercutting the authority of the Hong Kong government and its chief executive, Carrie Lam. But that makes it all the more important for the Hong Kong government to communicate effectively.

Finally, other countries, including the United States, should stay out of it. Hong Kong is far too valuable to be used as a pawn in a larger confrontation between great powers. And the people who live and work there deserve better.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World (Farrar, Straus and Giroux).

Stimulus, Inequality and the Chinese Dream

China’s economy is slowing but, without reforms, stimulus may just help the rich get richer in an already unequal society

By Nathaniel Taplin

Deng Xiaoping, who launched China’s economic reforms, famously said that it was fine for some people to get rich first. As long as everyone got rich eventually, it was a price worth paying for the communist leader.

That narrative, call it the original Chinese dream, was borne out for a long time. China’s opening to the world generated many millionaires and billionaires but also remade China overall into an upper-middle-income society.

There are increasing signs, however, that those Chinese who haven’t yet gotten rich will face a far harder time doing so in the future.

Following steep falls in the early 2010s, inequality is rising again while real income growth has flatlined.

Not only will that make it tougher for Beijing to address today’s slowdown but it could spell trouble for the region and even the world.

Two subtle changes in China’s economy tell the story. Following a long fall from 2008 to 2015, China’s Gini Coefficient, a measure of income inequality, has begun rising sharply again.

Second, since 2016 housing prices have mostly grown much faster than incomes, the opposite of the situation from 2011 to 2015. Young home buyers in China have sources of support that Americans lack; parents often contribute.

But they still face a steepening path and moving onto the housing ladder increasingly requires taking on debt, further eating into incomes.

Gavekal Dragonomics estimates that debt service hit 8.1% of household income in 2018, up from below 5% in 2010 and comparable to U.S. levels.

As in the U.S. prefinancial-crisis bubble economy that pumped up housing prices but also stoked indebtedness and inequality, policy is partly to blame.

Chinese policy makers have repeatedly dodged tough reforms since 2012—particularly to the nation’s dysfunctional banking system, which tends to channel cash into property and state enterprise coffers rather than to entrepreneurs.

Stimulus efforts in 2015 and 2018 boosted housing prices, helping people who already own homes but stoking indebtedness and doing little to arrest the long-term slide in China’s growth.

Policy makers, aware of the ugly side effects, have been far more restrained responding to this latest slowdown.

Worryingly, however, they continue to duck bold measures to fix the banking system or slim down the state sector.

More export-led growth could provide a solution, but Beijing’s unyielding approach to trade disputes—and President Trump’s erratic deal making—have undermined that, too.

Beijing knows it can’t afford nonstop rapid house-price appreciation, but it can’t allow a real property downturn either because that would tank its financial system.

Barring some radical free-market reforms or an unexpected productivity boom, the next decade could witness continually slower income growth and a further widening of the divide between the already-rich and everyone else.

For investors, this is a worrying and volatile mix.

Unless housing prices start dropping or financial troubles at state companies significantly worsen, China’s central bank seems likely to continue its drip feed of support rather than aggressive easing.

Tax cuts may help shore up consumption on the margin, but also mean more government-debt issuance hogging already limited credit supply.

Over the longer run, Beijing may turn even more to nationalism to paper over the cracks in a slower-growing, less-equal society. That could have grave consequences for growth and stability throughout Asia and the world.