lunes, noviembre 20, 2017



Gold Investment Stalled

By: Adam Hamilton

Gold has largely been drifting sideways for the better part of a couple months now, sapping enthusiasm. Gold investment demand has stalled due to extreme stock-market euphoria. 

Investors aren’t interested in alternative investments led by gold when stocks seemingly do nothing but rally indefinitely. But once stock-market volatility inevitably returns, so will gold investment demand which fuels major gold uplegs.

Like nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows. When investors are buying gold in a meaningful way, demand exceeds supply which drives gold’s price higher. When they’re materially selling, supply trumps demand thus gold’s price naturally retreats. The past couple months have been stuck in the middle, with gold investment flows neutral on balance.

The World Gold Council is the leading authority on global gold supply and demand, publishing quarterly Gold Demand Trends reports that offer the best fundamental reads available on the gold markets. The latest Q3’17 GDT was just released early yesterday morning. While it doesn’t cover the ongoing Q4 where gold is drifting, it does offer great insights into what’s happening with gold investment demand.

Overall world gold demand was quite weak in Q3, dropping 8.6% YoY to 915.0 metric tons. 

That made for an 86.1t absolute drop. Investment demand, though it only accounted for just over a quarter of the total, was responsible for this entire demand decline. Gold investment demand plunged 27.9% YoY in Q3, or 93.4t! The WGC further breaks down that category into bar-and-coin demand and ETF demand.

The traditional physical-bar-and-coin gold demand was actually quite strong in Q3, surging 16.9% YoY to 222.3t. That’s up a healthy 32.1t YoY. But the stock-market gold demand via exchange-traded funds far more than offset this, plummeting an astounding 86.9% YoY or 125.4t! If ETF demand had been stable in Q3, overall global gold demand would’ve climbed a healthy 3.9% YoY. Gold has stalled because of ETFs.

Gold exchange-traded funds act as conduits enabling vast amounts of stock-market capital to slosh into and out of physical gold bullion. These big changes in collective buying or selling really move gold. Since the gold ETFs seek to mirror the underlying gold price, they have to shunt excess ETF-share supply or demand directly into actual gold bars. There’s no other way for gold ETFs to successfully track their metal.

The world’s leading and dominant gold ETF is the venerable American GLD SPDR Gold Shares. Every quarter the World Gold Council also ranks the world’s top-ten gold ETFs. At the end of Q3, GLD alone accounted for a whopping 36.9% of their total gold-bullion holdings! GLD was 3.8x larger than its next biggest competitor, which is the American IAU iShares Gold Trust. GLD is the behemoth of the gold-ETF world.

The supply and demand of GLD shares, and all gold ETFs, are totally independent from underlying gold’s own supply and demand. So when stock investors buy GLD shares faster than gold is being bought, the GLD share price starts decoupling from gold to the upside. That is unacceptable, as GLD would fail its mission to track gold. So GLD’s managers must vent this differential buying pressure directly into gold.

They do this by issuing sufficient new GLD shares to meet the excess demand. All the money raised by these GLD-share sales is then plowed into physical gold bars that very day. This mechanism enables stock-market capital to flow into physical gold. Of course this is a double-edged sword, as excess GLD-share selling pressure forces this ETF to sell real gold bars to raise the capital to buy back its share oversupply.

What American stock investors are doing with GLD shares is the primary driver of gold’s trends! GLD has grown massive since its launch 13 years ago this month, and acts as a direct pipeline into gold for the immense pools of stock-market capital. So nothing is more important for gold prices now than GLD inflows and outflows. These are very transparent, as GLD reports its physical-gold-bullion holdings daily in great detail.

I call stock-market capital inflows into GLD as evidenced by rising holdings builds, and outflows as seen by falling holdings draws. In recent years there have been plenty of quarters where GLD builds and draws accounted for the entire global change in gold demand! That wasn’t the case in Q3 though. While the world gold-ETF demand fell 125.4t YoY, GLD’s holdings were actually up 12.1t in Q3. So gold edged up 1.4%.

But if American stock investors had been buying or selling GLD shares aggressively, gold certainly would’ve risen or fallen accordingly. Gold has been drifting in recent months because GLD’s holdings are flat, with stock investors neither buying nor selling GLD shares at differential rates relative to gold. That’s why gold investment demand has stalled. GLD has grown into the tail that wags the global-gold-price dog!

Amazingly many if not most investors still don’t grasp GLD’s critical role in gold price trends. 

They attempt to understand today’s gold’s price action in historical pre-gold-ETF-era terms. 

But for better or for worse, the gold world is radically different now. GLD, and to a lesser extent the other large gold ETFs trading in foreign stock markets, changed everything. Gold investors ignoring GLD’s holdings are flying blind.

This chart drives home this critical point. It superimposes GLD’s daily physical-gold-bullion holdings in blue over the gold price in red. Carved into calendar quarters, gold’s performance in each one is noted above GLD’s quarterly holdings changes in both percentage and absolute terms. The correlation between GLD’s physical-gold-bullion holdings and gold prices is very strong. GLD capital flows explain much for gold.

Rising GLD holdings reveal stock-market capital is flowing into gold bullion via GLD, due to differential GLD-share demand. Conversely falling GLD holdings show stock-market capital coming back out of gold, thanks to differential GLD-share selling. When American stock investors are either buying or selling GLD shares at much-faster rates than gold is moving, their collective capital flows greatly impact its price.

This is readily evident in strategic and tactical terms. GLD’s holdings are highly correlated with gold price levels. American stock investors sold down GLD’s holdings in 2015, and gold fell in lockstep. But that all reversed sharply in early 2016, when stock investors flooded back into GLD which catapulted gold into a new bull. Gold kept surging as long as differential GLD-share demand persisted, then stalled when it abated.

After Trump’s surprise election win a year ago, stock investors dumped GLD shares at dizzying rates and gold plunged. Then since GLD’s holdings have largely drifted sideways on balance this year, so has gold. GLD capital flows and gold prices are joined at the hip. So what American stock investors are doing and likely to do with GLD shares collectively is absolutely critical for gaming where gold is likely heading next.

Thus the key question for gold investors is what motivates American stock investors to buy or sell GLD shares en masse? The answer is simple, stock-market fortunes. Gold is effectively the anti-stock trade since it tends to move counter to stock markets. So gold investment demand via GLD shares surges as stock markets suffer major selloffs, and withers when stock markets rally to lofty euphoria-generating highs.

The entire reason gold investment demand has stalled out in recent months, which has left gold drifting, is the extreme euphoria in US stock markets. Wall Street constantly claims there’s no euphoria, but that’s not true. The words “euphoria” and “mania” are often confused. Mania means “an excessively intense enthusiasm, interest, or desire”. In the stock markets, manias are associated with bubbles at bull-market tops.

Euphoria is a milder term meaning “a strong feeling of happiness, confidence, or well-being”. 

While the stock markets haven’t rocketed vertical in a mania, there’s no doubt euphoria is extreme. Investors feel happy and confident about stocks after this past year’s incredible Trumphoria rally. Polls now universally show investors are the most confident stocks will keep rallying over the next year since 2000, a bubble peak!

Following gold’s usual summer doldrums, gold investment demand as evidenced by rising GLD holdings was robust until late September. Differential GLD-share demand started petering out as the flagship S&P 500 stock index (SPX) started powering to seemingly-endless new record highs with no meaningful selloffs in between. Gold peaked at $1348 in early September right before the first SPX record close in 5 weeks.

The 43 trading days since then have seen a mind-boggling 23 record stock-market closes! The worst SPX down day in that entire surreal span was merely -0.5%, trivial. The SPX’s VIX implied-volatility fear gauge has averaged just 10.1 since then, exceedingly-low levels betraying extreme complacency. The stock investors as a herd don’t have a care in the world. They are totally convinced stocks can rally indefinitely.

So why bother with gold? Why prudently diversify stock-heavy portfolios with counter-moving gold if the perceived risk of a major stock-market selloff is nil? Investors have little interest in gold when the stock markets are trading near record highs after an exceedingly-long and exceptionally-massive bull. Gold investment demand has always had a strong negative correlation with stock-market fortunes, they are opposed.

That new Q3 GDT from the World Gold Council said overall global gold demand last quarter was actually the weakest since Q3’09. In Q3’17 the SPX powered 4.0% higher, seeing 15 new all-time record closes. Back in Q3’09, the stock markets were also exciting. Coming out of a once-in-a-century stock-panic low, the SPX rocketed 15.0% higher in that single quarter! Exciting stock markets really retard gold demand.

Conversely one of gold’s best global-demand quarters was Q1’16, when stock markets were weak. The SPX suffered two corrections in a row leading into early 2016, after going a near-record 3.6 years without a single one. The first 10 trading days of January that year ignited much fear. In that short span the SPX suffered serious down days of 1.5%, 1.3%, 2.4%, 1.1%, 2.5%, and 2.2%! So gold investment demand exploded.

Gold had been deeply out of favor before that, suffering a 6.1-year secular low in mid-December 2015 just after the Fed’s first rate hike of this cycle. GLD’s holdings slumped to a 7.3-year low of their own that same day. Yet once the stock markets started rolling over, investors were quick to remember gold’s role as the ultimate portfolio diversifier. Total global gold demand rocketed up 17.1% YoY or 185.8t in Q1’16!

American stock investors were overwhelmingly responsible, as GLD’s colossal 176.9t quarterly holdings build accounted for 95.2% of that total jump in world gold demand per the latest WGC data! Gold was catapulted into a new bull market on a mere couple of stock-market corrections. Q2’16 saw this major GLD-share buying momentum continue, with GLD’s 130.8t build alone driving gold’s entire 120.2t world demand growth.

Make no mistake, gold investment demand will explode again and drive gold sharply higher when today’s lofty hyper-complacent bubble-valued stock markets inevitably roll over again. 

Leading into Q1’16 the SPX corrections were only 12.4% and 13.3%, not serious. Corrections can grow as big as 20% before they become new bear markets. Imagine what an SPX selloff around 20% would do for gold investment demand.

And that’s coming far sooner than most think. Investors as a herd are always wrong at major market turning points. Major bull-market toppings are always marked with extreme euphoria just like today’s. Countless sentiment indicators are showing investors are now the most complacent or most bullish since late 2007 or early 2000. Those were the last bull-market toppings before brutal 49.1% and 56.8% SPX bears!

Stock-market bulls fail once valuations grow excessive. Over the past century and a quarter, the stock markets have averaged a 14x trailing-twelve-month price-to-earnings ratio which is fair value. Twice that at 28x is formally bubble territory, exceedingly dangerous. As October ended, the simple-average TTM P/E of all 500 SPX companies was a terrifying 30.1x! Stock markets can’t trade at bubble valuations for long.

But these super-bearish sentiment and fundamentals pale in comparison to what’s coming from the Fed and European Central Bank in 2018 and 2019. This stock bull grew so monstrous because major central banks were injecting hundreds of billions of dollars a year into markets via quantitative easing, which is a euphemism for money printing. Next year this QE stock-market rocket fuel will slam to a screeching halt.

A couple weeks ago I explained what’s coming in depth in an essay on the Fed and ECB strangling this stock bull. Because of the Fed’s new quantitative tightening reversing its QE, and the ECB just starting to taper its own QE bond buying, 2018 will see these dominant central banks effectively tighten by $950b compared to 2017! Then again in 2019 that will expand to another $1450b of tightening compared to this year.

The QE era that helped levitate stock markets is over, with $2.4t of central-bank liquidity that exists this year vanishing over the next couple years. There’s nothing more ominous for QE-inflated stock markets than the Fed starting to reverse QE through QT and the ECB greatly slowing its own QE. There’s simply no way possible that won’t eventually fuel a major stock-market selloff, a large correction or more likely a new bear.

When these stock markets roll over materially, when investors face a couple weeks of big down days like in January 2016, gold investment demand will explode again. Investors will stampede back to counter-moving gold to stabilize their bleeding stock-heavy portfolios. GLD’s holdings will soar again like they did in the first half of 2016, which catapulted gold 29.9% higher igniting a major new bull. Gold stocks fared far better.

The leading HUI gold-stock index skyrocketed 182.2% higher in essentially the first half of 2016 on that gold rally! When American stock investors aggressively buy GLD shares in response to stock-market selloffs reintroducing fear, gold surges and gold stocks soar. This well-worn pattern will play out again in the next major stock-market selloff. Once differential GLD-share buying resumes, gold is off to the races.

So if you want to understand why gold is doing what it’s doing and where it’s likely heading next, it’s imperative to follow GLD’s holdings. Stock investors’ capital flows into and out of gold via that key ETF conduit have utterly dominated recent years’ gold trends. Quite literally, gold is hostage to stocks! The higher the stock markets, the less gold investment demand. The more they sell off, the more gold demand surges.

With stock euphoria so extreme today after this past year’s incredible Trumphoria rally, gold investors need to focus on the stock markets. As long as stocks remain high which stalls gold investment demand, gold will likely continue to drift on balance. But once stocks sell off long and deep enough to rekindle sufficient fear, gold investment demand will explode again. Big GLD-share buying will catapult gold sharply higher.

Gold and especially its miners’ stocks remain deeply undervalued today due to the extreme stock-market euphoria. But that never lasts. Gold’s bull market will resume with a vengeance once American stock investors get interested in GLD shares again. That should coincide with the coming months’ major winter rally, the strongest seasonal span for gold and its miners’ stocks. Gold miners have enormous upside potential.

At Zeal our core mission has always been profitable real-world trading, so we doggedly focus on what’s actually moving the markets and why. And really since 2013, the dominant driver of gold’s fortunes has been American stock investors’ capital flows via GLD. Following GLD’s holdings and the stock-market trends driving them is crucial for all gold and gold-stock investors and speculators, enabling better trading decisions.

Staying informed is essential for market success, which is why we’ve long published popular weekly and monthly newsletters. They are easy to read and affordable, with an explicitly-contrarian focus to help you avoid being deceived by herd sentiment. They draw on my decades of experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. We’ve recommended and realized 967 newsletter stock trades since 2001, with average annualized realized gains including all losers of +19.9%! Subscribe today to get smarter and make better trades!

The bottom line is gold investment demand has stalled out in recent months, condemning gold to drift sideways. American stock investors in particular aren’t doing any differential GLD-share buying, which is essential to fuel gold uplegs. Mesmerized by the extreme stock-market euphoria, they no longer fear any material stock-market selloff. Thus they feel no need to diversify their portfolios with counter-moving gold.

But this anomaly can’t and won’t last for long. Sooner or later the hard bearish realities of bubble-valued stock markets and looming epic central-bank tightening will shatter today’s hyper-complacency. Then once again vast amounts of stock-market capital will migrate back into gold, catapulting it dramatically higher. As always the prudent contrarians who invest before the herd arrives will reap massive gains.

House of Commons crumbles amid a culture of decay

Politics is profoundly destabilised, so the latest scandals may achieve lasting change

by Bronwen Maddox

© Jonathan McHugh

The physical decay of the Palace of Westminster is more than a metaphor. Like the culture and conventions inside, the building’s failings contribute to the problems of running a respected 21st-century democracy. Scaffolding obscures the view of Big Ben, the world’s most famous clock, its bongs silenced to allow repair.

In the subterranean dining rooms, carpets reek from years of spilled alcohol, and one MP memorably tweeted that urine was leaking through his office ceiling (from toilets, not another member’s office, he later clarified). Contractors peer at the wiring wondering what they can safely patch up — and if they win the tender for the great renovation, whether it will prove a poisoned chalice. Yet MPs duck a decision on repairs, fearing that public opinion will damn them for the costs if work is done while they are still in residence, or prevent them returning if they decamp.

The culture is the greater problem, though. It is hard to get a better illustration of how it needs to change than Michael Fallon’s assertion on resigning that “what might have been acceptable 15, 10 years ago is clearly not acceptable now”. As the former defence secretary would have it, he was wrongfooted by the passage of a few years — not that he was wrong back then. Even more tone deaf was his remark that his inappropriate advances to women had “fallen below the high standards that we require of the armed forces”. Not those of Westminster.

Revelations about Harvey Weinstein, the predatory Hollywood producer, have triggered a cascade of accusations of sexual harassment in parliament. The firestorm, fanned by the fragility of the government and fractures in the main political parties, is driven too by MPs’ own impatient fear that something needs fixing if they are to have a chance of countering public contempt. With a new taste for Twitter and referendums, many voters seem to be questioning the value of a representative in parliament.

What should be done? For a start, this latest round of sleaze shows how odd it is that MPs’ offices are like mini fiefdoms, with members employing their staff directly. MPs are the main recourse for complaints — but what if the complaint is about the MP?

Recent weeks show that parties cannot be the ultimate regulators of MPs’ behaviour. They want to preserve the reputation of their MPs and will have every temptation, as recent stories suggest, to tell aggrieved staff with a complaint to shut up if they want a career.

Theresa May is right to call for a new independent regulator. The Independent Parliamentary Standards Authority, created in 2010 after the expenses scandal, covers only pay and expenses. That earlier scandal has made it impossible to debate whether MPs should be paid more, or whether members of select committees, as well as the chair, should be paid for that work: a pity.

The strains, risks and sheer career uncertainty of being an MP have rarely been greater. How they are to be compensated needs discussion. Select committees, whose healthy contribution to the scrutiny of government and legislation is growing, depend on MPs putting in time to master specialist areas.

In general, the parties have been poor defenders of their MPs, at a time when being a politician is ferociously tough. They have been slow to clamp down on abuse and threats — which can, as the murder of Jo Cox appallingly showed, be lethal.

But the problems go deeper than MPs’ behaviour and conditions of work. Parliament is faltering in its basic job of holding the government to account, passing well thought out legislation, and doing so in a way that commands public trust.

Brexit has squeezed out almost all other legislation from the timetable. A minority government’s struggles to survive mean that much debate is stalled or simply avoided. The general election result this year gave an entirely misleading picture of the health of the two main parties; the rifts within them are deep — over region, generation and wealth, as well as Brexit. They are barely functioning within Westminster as conventional parties, and voters have every reason for struggling to see their own concerns reflected there. It would not be surprising if the question of changing the voting system reared up again. Above all, the EU referendum set up a clash between the people’s vote and their representatives in parliament.

True, some things have improved. There are far more women MPs, and more younger ones. John Bercow, Commons speaker, encourages more backbenchers to speak. The committees are stronger and — almost — offer a satisfying career outside government. The whips are correspondingly less powerful. Portcullis House offers modern, secure offices for some MPs.

Most of all, there is some attempt at reform. Mrs May has tried to press ahead with the boundary review, cutting the number of MPs from 650 to about 600, but while she may be too weak to get it through, the principle is right. Even more worthwhile is the proposal to cut the number of peers in the Lords from around 800 to about 600 and to limit terms to 15 years is sensible.

These steps will not on their own repair trust. Public distaste for Westminster has deep roots. The financial crash a decade ago, and the expenses scandal, bear much blame; but voters resent many of the messages that politicians feel obliged to deliver, such as the constraints on spending. Meanwhile, MPs are braced for Brexit to disappoint even those who voted for it. People are angry, and have got used to saying so.

Those are issues with which the UK has grappled for years. But the fury about sexual harassment promises to achieve what those debates failed to — forcing a change in how Westminster runs itself. In theory at least, that should be quicker and cheaper than repairing eight acres of a gothic revival building on the banks of the Thames.

The writer is director of the Institute for Government, a think-tank

Gone missing

As the global economy picks up, inflation is oddly quiescent

But central banks are beginning to raise interest rates anyway

A FEW years ago, the news about the euro-zone economy was uniformly bad to the point of tedium.

These days, it is the humdrum diet of benign data that prompts a yawn. Figures this week show that GDP rose by 0.6% in the three months to the end of September (an annualised rate of 2.4%). The European Commission’s economic-sentiment index rose to its highest level in almost 17 years. Yet when the European Central Bank’s governing council gathered on October 26th, it decided to keep interest rates unchanged, at close to zero, and to extend its bond-buying programme (known as quantitative easing, or QE) for a further nine months.

The central bank said it would slow down the pace of bond purchases each month, to €30bn ($35bn) from January. But Mario Draghi, the bank’s boss, declined to set an end-date for QE.

A hefty dose of easy money will be necessary, he argued, until inflation durably converges on the ECB’s target of just below 2%. It shows few signs of doing so, despite the economy’s strength. Underlying, or core, inflation, which excludes the volatile prices of food and energy, fell from 1.1% to 0.9% in October, according to data published a few days after the ECB meeting. The euro zone’s miseries of 2010-12 were unique. But in its present, happier state of vigorous activity, low inflation and easy monetary policy, it is like many other big economies (see chart).

After a decade of interest rates at record lows, those central banks that are inclined to tighten policy naturally attract attention. The Bank of England’s monetary-policy committee raised its benchmark interest rate from 0.25% to 0.5% on November 2nd, the first increase since 2007.

On the same day, the Czech National Bank raised interest rates for the second time this year.

The Federal Reserve kept interest rates unchanged this week, having raised them in March and June, but a further increase is expected in December.

In Turkey, perhaps the only big economy that is obviously overheating, the central bank—which has been browbeaten by the president, Recep Tayyip Erdogan, who believes high interest rates cause inflation—opted on October 26th to keep interest rates on hold. Yet in most biggish economies, underlying inflation is below target (see chart) and monetary policy is being relaxed. Brazil’s central bank cut interest rates on October 25th from 8.25% to 7.5%. Two days later, Russia’s central bank trimmed its main interest rate, to 8.25%. This week the Bank of Japan voted to keep rates unchanged and to continue buying assets at a pace of around ¥80trn ($700bn) a year. These economies are gathering strength. It is a puzzle that, in such circumstances, global inflation is stubbornly low.

To figure out why, consider the model that modern central banks use to explain inflation. It has three elements: the price of imports; the public’s expectations; and capacity pressures (or “slack”) in the domestic economy. Start with imported inflation, which is determined by the balance of supply and demand in globally traded goods, such as commodities, as well as shifts in exchange rates. Commodity prices have picked up smartly from their nadir in early 2016. The oil price, which fell below $30 a barrel then, has risen above $60.

This has put upward pressure on headline inflation: in the euro zone it is 1.4%, half a percentage point higher than the core rate. Where inflation is noticeably high, it is generally in countries, such as Argentina (where it is 24%) or Egypt (32%), that have withdrawn costly price subsidies and whose currencies have fallen sharply in value, making imported goods dearer. In Britain, rising import prices linked to a weaker pound have added around 0.75 percentage points to inflation, which is 3%.

A second influence on inflation is the public’s expectations. Businesses will be more inclined to push up their prices and employees to bid for fatter pay packets if they believe inflation will rise. How these expectations are formed is not well understood. The measures that are available are broadly consistent with the central bank’s inflation target in most rich economies. Japan is something of an outlier. It has struggled to meet its 2% inflation target in large part because firms and employees have become conditioned to expect a lower rate of inflation. Japan’s prime minister, Shinzo Abe, recently called for companies to raise wages by 3% in next spring’s wage round to kick-start inflation.

Leave aside the transient effects of import prices, and inflation becomes a tug-of-war between expectations and a third big influence, the amount of slack in the economy. The unemployment rate, a measure of labour-market slack, is the most-used gauge. As the economy approaches full employment, the scarcity of workers ought to put upward pressure on wages, which companies then pass on in higher prices. On some measures, Japan’s labour market is as tight as it has been since the 1970s. America’s jobless rate, at 4.2%, is the lowest for over 16 years. Inflation has nevertheless been surprisingly weak.

In other words, the trade-off between unemployment and inflation, known as the Phillips curve, has become less steep. A paper last year by Olivier Blanchard, of the Peterson Institute for International Economics, found that a drop in the unemployment rate in America has less than a third as much power to raise inflation as it did in the mid-1970s.

The central banks that see a need for tighter monetary policy are worried about diminishing slack. There are tentative signs of stronger pay pressures in Britain and America, and firm evidence of them in the Czech Republic, where wage growth is above 7%. Even so, with inflation expectations so steady, the flatter Phillips curve suggests that the cost for central banks in higher inflation of delaying interest-rate rises is rather low. The ECB is quite a way from such considerations. The unemployment rate is falling quickly, but remains high, at 8.9%.

There is still room for the euro-zone economy to grow quickly without stoking inflation. The dull routine of good news is likely to continue.

China’s soft power comes with a very hard edge

Even ‘panda diplomacy’ is not nearly as warm and cuddly as it seems

No animal in the world is more adored than the giant panda. There is a reason: the panda’s proportions — short fat limbs, oversized heads and big eyepatches — trigger the same neural reaction in us as the sight of human babies.

Anyone who has worked closely with these animals will, however, tell you they can be vicious.

Almost every year there are reports of panda attacks in the small area of south-west China where they still exist in the wild.

The panda has become a symbol of China, abetted by the ruling Communist Party’s practice of “panda diplomacy”. Since the 1950s, China has sent scores of the bears to dozens of countries.

From North Korea and the Soviet Union, to Nixon’s America and Angela Merkel’s Germany, China has gifted or loaned the animals to governments it wants to befriend or reward.

The pandas come with hidden costs. China charges countries $1m a year for a pair of pandas and reserves the right to repatriate any offspring if it is displeased by the host country.

President Xi Jinping signs off on every panda loan, but not until recipient countries have jumped through hoops and endured years of negotiations. China-based foreign diplomats complain about how skilful Beijing has become at manipulating governments and constituents in their home countries to increase demand for panda loans.

The Chinese government’s focus on breeding captive pandas to show in zoos and loan to foreign countries has come at the expense of efforts to protect the fragile forests in south-west China, where some 2,000 bears still survive in the wild. The recent success of panda breeding has even led some in China to question the value of protecting the species in the wild.

A tragedy looms if the Chinese government does not redouble its efforts to protect the panda’s habitat, home to numerous other rare species as well.Soft power is about the organic cultivation of mutual advantage and trust.

All of this, of course, has the marking of a rather obvious — but nonetheless very apt — metaphor. China’s efforts to build soft power outside its borders goes far beyond pandas — and in these areas, too, the People’s Republic needs to tread more lightly, and take a more reciprocal and less authoritarian approach.

China is entitled, as is any significant power, to bolster its soft power around the world. That Beijing should do so is particularly understandable. It is not part of the western club of nations.

Its history, ideology, and economic system are all very different and so it needs to work hard to win acceptance from the group of countries that have held sway since the second world war.

But what China should realise is that while western powers — and indeed the world — may well be prepared to accept its rising influence, they will not be amenable to outright interference.

There are many examples of intrusive uses of soft power by China. The forcing of publishers to censor their publications, the use of the United Front Work Department to infiltrate overseas Chinese groups in countries around the world, and the co-opting of Chinese student groups in Australia and elsewhere to protest against free speech are just a few. Companies are caught up, too. When South Korea’s government got on Beijing’s bad side for deploying a missile-defence shield, the South Korean chain Lotte saw its stores in China hit with fire-code violations. A government-backed boycott kept Chinese tourists out of South Korea, too.

Soft power is about the organic cultivation of mutual advantage and trust. In too many cases, China prefers to bully instead. There are not enough pandas left in China to obscure the difference between the two.

Big Tech Meets Big Government


Facebook, Google and Twitter executives testify before congress

SINGAPORE – Impressive quarterly results from the biggest technology companies show that they are nowhere near saturating their consumer markets, exhausting their innovation cycles, or reaching growth maturation. Dig a little deeper, and those reports also illustrate the sector’s substantial and growing systemic importance. Yet, for the tech sector, there is a distinct downside to this development.

With increased systemic importance often comes greater scrutiny. And, indeed, today’s prosperous and innovative tech giants now face the prospect of redoubled efforts to regulate and tax their activities. The longer it takes for these companies to recognize their systemic importance, the greater the likelihood of a more powerful backlash by governments and the public, hurting the companies and undermining their ability to continue producing innovations that genuinely boost consumers’ wellbeing.

When the tech sector began its evolution toward systemic importance, it comprised a collection of hungry start-ups possessing breakthrough technologies. Beyond disrupting existing economic sectors and activities, these technologies ended up producing new demand for the altogether new goods and services that they enabled.

Tech companies’ track record – time and again proving their capacity for exceptional growth – enables them to attract massive investment. They are thus able not only to strengthen their market position in their core activities, but also to develop innovative capabilities in new areas, by taking over smaller competitors, whether actual or prospective. And some are even able to self-disrupt repeatedly – and thus consistently to remain at the technological frontier.

Fueling Big Tech’s remarkable growth further, many of these companies’ services are ostensibly free, facilitating quick adoption by consumers. It helps that these services often can be provided as seamlessly abroad as they are within their country of origin, to the point that the very concept of “abroad” has become rather elastic.

Over time, the major tech companies’ rapid accumulation of market power has led to the rise of oligopolies in some sectors, and monopoly players in a few. Their social, economic, and even political influence has soared in some cases. Facebook and Twitter, for example, played a pivotal role in galvanizing protesters during the Arab Spring uprisings of 2011.

This raises serious risks: as beneficial as Big Tech’s innovations are, they can also serve as important channels for state or non-state actors to bring about their own disruptions. In the run-up to last year’s presidential election in the United States, some social media platforms inadvertently enabled the spread of disinformation. More menacing, extremists like the Islamic State have relied on social media for recruitment and propaganda purposes.

It should come as no surprise that Big Tech firms tend to move much faster than governments and regulators. As such, what began as a laissez-faire attitude of benign neglect– largely a result of ignorance and inattention – is evolving into something more forceful. As tech firms reach systemic importance, attitudes toward them change markedly.

This shift has become increasingly apparent in recent years, as major tech firms have faced intensifying scrutiny of their competitive practices, tax behavior, data uses, and privacy policies. Broader questions about their contributions to labor displacement and effects on wage growth have also arisen, even as societies increasingly recognize that technological disruption implies the need for education reform and improvements in skills acquisition and retraining.

Yet the tech sector itself still seems to underestimate its growing systemic importance. As a result, firms can lag in recognizing the need to update their operations, resources, and mindsets to reflect their shift from small disruptor to powerful incumbent. That means building more comprehensive and integrated business models, informed by experienced talent with expertise in a broader array of areas, in order to move beyond these companies’ laser focus on innovation.

The longer this process takes, the greater the risk that tech firms will lose control of the narrative.

Beyond fueling a rise in outside monitoring, regulation, and supervision, there is the risk of a consumer backlash – or even the further exploitation of innovations by malicious actors.

In an ideal world, major tech companies would recognize and adjust to their changing role in step with external actors, including governments and consumers, thereby striking the right balance between innovation, consumer benefits and protection, and national security. But this is not an ideal world. And, so far, internal and external forces have been out of sync, in terms of perceptions, capabilities, and actions. Add to that conscious and unconscious biases and considerable temptation for political manipulation, and the risks become only more profound.

Big Tech can and should play a larger role in helping the entire economy to evolve in an orderly and mutually beneficial manner. This will require, first and foremost, that they internalize their own systemic importance, and adjust their perspectives and behaviors accordingly. But it will also demand far better communication, with firms’ objectives and operations becoming much more transparent.

And, finally, it will call for a commitment to enhanced monitoring both of themselves and of their peers, together with more effective collective action, as appropriate.

If the tech sector fails to make such changes, government oversight and regulation will inevitably intensify. And it is far from certain that the net result will be positive for society, much less for business.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.