Tuesday, January 26, 2010

Making Banks Pay

Making banks pay for their stupidity and for endangering the livelihoods of millions of people around the world, all the while making huge profits during the good times (and paying themselves exorbitant sums despite messing things up) seems like a good idea. But we all know how powerful banking lobbies can be and how effective the financial sector is at propagating the view that there is no alternative (TINA).

Obama is certainly heading in the right direction and let's hope that the loss of Kennedy's old senate seat does not lead him to shift to the right. While some people decry his supposed populism I think the US is due for some serious bank bashing.

Once again it appears that the Swedes are leading the way. See the NYT's "Swedish Bank Fee Sets Example for America". The idea is to get banks to pay a "'stability fee', or direct tax on banks so that they pay for their own bailouts".

Basically the idea is that a fee "would remain in place for at least 10 years and would be applied to all financial institutions with more than $50 billion in consolidated assets — at 0.15 percent of covered liabilities."

Expect some opposition to this.

Friday, January 22, 2010

Iron Ore Exports to China

The WSJ "Iron-Ore Math Is a Zero for China" outlines China's problems with Rio and BHP-Billiton's merger.
Planning to combine their mining operations in Western Australia, Rio and BHP will create the world's largest source of seaborne iron ore and hold considerable sway over prices. China is the world's largest buyer of the key steelmaking ingredient. So it's little surprise that the China Iron and Steel Association -- which describes the deal as a merger -- called for the global steel industry to unite to block it.
As always in China, though, it pays to notice who is doing the talking. It's telling that China's Ministry of Commerce, whose antimonopoly bureau holds the most power over any foreign dealmakers, hasn't joined the chorus.

The math might explain the ministry's reticence. In the year through November, 42% of China's iron ore imports -- more than 235 million metric tons - came from Australia, China's top supplier. It means China can't take any meaningful action -- outlawing or penalizing Australian ore imports -- without substantially denting its own steel industry.
Alternatives are lacking. The entire output of Brazil's Vale, some 300 million tons last year, doesn't quite equal the amount the Australians have shipped this year. Buying all of its needs from Brazil, anyway, would make China beholden to a single supplier. Other large exporters fall short as well, collectively.

This graphic is particularly telling:

It also partly explains why Australia has continued to do well over the last year or so.
It also helps to explain why Chinese authorities and Chinalco executives are still so annoyed about the eventual Rio rebuff of Chinalco ... made possible, of course, by Rudd government reticence to allow the deal to go ahead.

Thursday, January 21, 2010

Stephen Roach on China

Stephen Roach's comments on Asia and China are always worth noting. See "It's not yet Asia's world: Stephen Roach"
Once again I agree with this piece's argument that the jury is still out on whether all is hunky dory. Because commentators often like to imagine that tendencies are already established realities, China's rise is already seen as total victory over the US and the West. There is still a long way to go as I argue in Chapter 3 of The Vulnerable Country.

Roach argues that recovery will be weak:
"Headwinds linger in the form of write-downs by financial institutions, the breadth of the global recession, and chronic weakness in the demand side of the world — the American consumer — and the persisting imbalances in the supply side of the world — Asia, and in particular in China." ... "there’s a lot of complacency here, presuming that the post-crisis world is Asia’s for the asking"

He is not, however, overly pessimistic (neither am I) he just thinks that it's a big assumption to think that China can be the engine of global growth. It's just not there yet.

The real danger is a prolonged period of stagnation (or worse) in the US and a failure of China to adjust its growth model towards higher wages and greater domestic consumption.

All of this, of course, will affect Australia greatly.

Sunday, January 17, 2010

The Politics of Climate Change

Climate change is one of those issues that when push comes to shove politics rules. (Perhaps this is like most things.) We might all have grand ideas about doing things for the environment - like recycling, having shorter showers, driving smaller cars - but when it comes to sacrificing our way of life then we tend to think in terms of collective action problems - "there's no point in acting unless everybody else does".
A major collective action problem concerns China. Supporters of an ETS didn't like the argument that all of Australia's efforts to reduce emissions would count for nought if China continued to grow at a rapid rate. The problem for advocates of an ETS was that it was undoubtedly true, so other arguments were necessary. These related to how an ETS would encourage market propensities to shift away from emission intensive economic activities.
A better argument revolved around the notion that Australia should be at the forefront of developing green technologies. The development of cleaner forms of energy would lessen the problems of emissions. This is what really matters. The way that electricity is produced really matters. But how to make this happen is the issue.
Think about electric cars. While it undoubtedly would be better for pollution in cities if we had electric cars, the total equation must include the costs of producing the batteries of those cars and most importantly their source of electricity. If brown coal powers electric cars in Australia then this will lessen the benefits of electric cars. The same could be said about the shift of emission intensive production to countries that have a comparative advantage of a greater propensity to pollute!
Advocates of an ETS often argued that increasing the cost of carbon through a (constructed) market mechanism would encourage (eventually) a shift in resources to more energy efficient production and perhaps the development of green technology. The surprising thing about this is that many advocates of an ETS don’t trust markets in other circumstances, but trust this financialised market process to save the earth!
The ETS to me seemed to be a way to delay real action. Its complicated nature made it difficult to explain, but maybe this was part of its appeal. The preferred solution of a tax had the problem that it was a direct tax. Tony Abbott would have easier time calling a carbon tax “a great big tax”, but it would have simpler and more adjustable by governments over time.
Another important aspect of the politics of climate change concerns the political economy of development.
To think that China would make commitments that could undermine its rapid growth was naïve. While China is not a democracy, it is still subject to societal demands and pressures, perhaps even more so. On what basis does the Chinese Communist Party control China? Largely its hold on power is determined by rapid growth or in the absence of that attempts at authoritarian control or appeals to nationalism (it is this latter possibility that should be the major worry).
So am I surprised that Copenhagen failed? Not in the least. What I am surprised about is the faith that so many people seemed to have in the process. It’s time to give up on this process and for individual countries to think about ways to encourage shifts towards greener energy production. Just think if all the expenses of all the politician, bureaucrats, environmental activists and so on had been put into research into the development of non-carbon-emitting energy technologies then we would be further down the road towards a real solution to global warming.
An emissions tax that was hypothecated into green energy research and environmental cleans ups would have a double benefit. It would encourage shifts away from emissions intensive activities and provide money for research into the things that could replace them.

If the ETS was the answer, then the question was wrong.

Monday, January 11, 2010

... but China just keeps on keeping on

While people like me keep wondering about the China story and it's future impact on Australia, it's important to note that it does keep on passing milestones. As the New York Times Reports.
China Becomes World’s No. 1 Exporter, Passing Germany

Published: January 10, 2010

BEIJING (AP) — China overtook Germany as the world’s top exporter after China’s December exports jumped 17.7 percent for their first increase in 14 months, data showed Sunday.
Exports for the last month of 2009 were $130.7 billion, data from the General Administration of Customs showed.
That raised total 2009 exports to $1.2 trillion, ahead of the 816 billion euros ($1.17 trillion) for Germany forecast by its foreign trade organization, BGA.
China’s new status is largely symbolic, but it reflects the ability of its resilient, low-cost manufacturers to keep selling abroad despite a slump in global consumer demand as a result of the financial crisis.
December’s rebound was an “important turning point” for exporters, a customs agency economist, Huang Guohua, said on the government television network CCTV.
“We can say that China’s export enterprises have completely emerged from their all-time low in exports.”
Stronger foreign sales of Chinese goods could help to drive the country’s recovery after demand plunged in 2008, forcing thousands of factories to close and throwing millions of laborers out of work.
Helped by a 4 trillion renminbi ($586 billion) stimulus package, China’s economic expansion accelerated to 8.9 percent for the third quarter of 2009.
The government says full-year growth should be 8.3 percent.
Economists and Germany’s national chamber of commerce said earlier that the country was likely to lose its longtime crown as top exporter.
China is best known as a supplier of shoes, toys, furniture and other low-tech goods, while Germany exports machinery and other higher-value products.
China surpassed the United States as the biggest auto market in 2009 and is on track to replace Japan as the world’s second-largest economy soon.
China passed Germany as the third-largest economy in 2007.
Even though China overtook Germany as top exporter, the customs agency said total 2009 Chinese trade fell 13.9 percent from 2008.

A Renewed Boom for 2010?

It now appears that Australia has fully moved on from any notion of crisis and 2010 is now being seen as the year of "the return of the boom".

But there are, as usual for those of us negative vibe merchants (I prefer the notion of "vulnerability watcher"), some things to worry about:

What happens to China's economy will continue to be important. Chinese demand for Australian commodities fell away in late 2009 as David Uren points out in The Australian. "Commodity shipments to China fall as speculative stock build-up eases". But this is not necessarily an indicator of a collapsing market. There has been a lot of speculation and there are ongoing issues of stockpiling and stategic asset buying. (Certainly the Chinese appear to have messed up in the arena of iron ore purchases)

The job for policy-makers is to think about vulnerabilities and not get too carried away with the view that a renewal of a commodities boom is inevitable.

The US economy continues to be mired in recessionville and further stimulus is being contemplated.

2010 will provide some further evidence for the long-running debate over decoupling. The financial crisis bolstered the anti-decoupling case as world financial markets were universally shaken by events in the United States. Since this time, however, the decouplers' argument has looked more sound as some began to talk of a North Atlantic financial crisis rather than a GFC. Certainly, Asia did well in 2009 compared to what many thought lay ahead at the end of 2008. Govt stimulus in China has helped enormously, but even in China this can't go on forever.
No doubt we shall get further evidence about whether China and the rest of Asia is ultimately as export dependent as economists like Stephen Roach contend and whether the issue of final Western demand really does continue to matter.