Archive for August, 2015

Yuan to become global currency

August 15, 2015

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In the 19th century, the British pound was the dominant currency. In the twentieth century, tikw as the greenback. We are now seeing China’s yuan moving into the ascendency.

China’s devaluation of the Renminbi (yuan) came as a surprise to many observers. At the start of the week, the People’s Bank of China debased the yuan 1.9 per cent against the US dollar. That was followed up today by another 1.6 per cent devaluation.

This was important because until now, the yuan had been pegged to the US dollar. Now the People’s Bank of China (PBOC), acting on the instructions of the Chinese government, were letting market forces take over.

Why? Because this devaluation is latest step in the yuan’s ascendency towards reserve currency status. China has ambitions to join the International Monetary Fund’s (IMF) basket of currencies. The so-called Special Drawing Rights (SDRs) are long touted as the long-term replacement for the US dollar’s hegemony over global finance. China wants the yuan to replace the US dollar’s control over markets.

As Bloomberg tells us, IMF requirements that reserve currencies must be freely usable played a role in the PBOC’s move, according to Commerzbank AG. The IMF  keeps saying that the yuan needs to be more flexible. It needs to be unpegged from the greenback. Hence the devaluation.

“The yuan exchange rate will be more market-oriented going forward,” Zhou Hao, an economist at Commerzbank in Singapore, wrote in a report. “Volatility of both the onshore and offshore rates will pick up significantly.”

YaleGlobalOnline maintains that any inclusion of the Renminbi is centred in demonstrating China’s status as an equal among world powers, arguably a superpower, to the rest of the world and especially to Chinese citizens. In any case, the yuan is still loosely pegged to the dollar.

But that’s the case for now. The ground is shifting. What we are seeing is the start of China’s complete integration into the global economy. Until now, the only bit of China’s economy that was integrated into the global economy was the trading of goods and services. We can now expect to see China’s financial system play a greater role with greater trade of the yuan in currency markets. The yuan will become the new global currency.

China’s impossible emissions battle

August 14, 2015

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In the lead up to the Paris summit in December, it’s important to look at what China is doing to wind back climate change. There’s a good reason for that. China accounted for nearly 30 per cent of global CO2 emissions in 2013 so its actions have profound global implications.

This is why it’s carbon emissions scheme is so important. China’s plan is to reduce the carbon intensity of the economy by between 60 per cent and 65 per cent by 2030. It also contains significant targets for non-fossil energy and forests.

That’s way ahead of the rest of the world with the US promising cuts of 41 per cent by 2030, the European Union by around 34 per cent and Canada 30 per cent. And don’t even talk about Australia which has given a commitment to reduce its emissions by only 26 per cent.  Since being elected in 2013, the Liberal National Coalition has unpicked Australia’s climate and energy policies, repealing carbon and mining taxes, scaling back renewable energy targets and trying to abolish the Clean Energy Finance Corporation, a state lender to the renewable sector.

Mind you, the problem with that plan is it’s not legally binding, it’s just a goal. The bottom line is that China currently has a population of 1,268,853,362. It’s pumping out vast amounts of noxious, poisonous gases into the atmosphere, and contributing to pollution that defies measurement causing irreparable damage to the ozone and environment. And regardless of its carbon emissions scheme, it will continue to do that.

That’s why it’s so disturbing to read reports that air pollution is killing an average of 4,000 people a day in China. According to the study by Berkeley Earth, an independent research group funded largely by educational grants, deaths  related to the main pollutant, tiny particles known as PM2.5s that can trigger heart attacks, strokes, lung cancer and asthma, total 1.6 million a year, or 17 percent of China’s mortality level.

A 2008 study in the journal Energy Policy estimated that one-third of China’s greenhouse gas emissions were produced in manufacturing electronics and other goods for export worldwide. Those emissions soared from 230 million tonnes in 1987 to 1.7 billion tonnes of carbon dioxide in 2005.

For those of us in countries purchasing Chinese and other foreign goods, it is worth considering how what we buy affects other people. If this thought makes you uncomfortable when choosing gifts this Christmas, we do have a choice

Russia and NATO preparing for war

August 12, 2015

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War between Russia and the NATO alliance should be unthinkable but a European think tank says both sides are preparing for it.

The Financial Times reports that the European Leadership Network which comprises former military figures, politicians and policymakers is presenting an analysis of recent military exercises by the two blocs that indicates each side is “preparing for the worst”.

The analysis is based on its observations of  the two biggest military war games this year — Nato’s Allied Shield exercises and Russia’s “snap” drills — to assess dispositions and strategic thinking on both sides.

In March 2015, Russian conducted “snap exercises” that saw 80,000 troops engaged in long-range deployments and simulate combat on a scale that made the United States or Nato the only possibly adversary.

Nato’s exercise “Allied Shield,” in June this year, saw 15,000 allied troops engaged in a series of mock operations including response to a Crimea-style infiltration of irregular forces.

Now officially, both exercises are supposed to have hypothetical opponents in mind but “the nature and scale of the operations indicate otherwise”, says the ELN report

“Each side is clearly training with the other side’s capabilities and war plans in mind.”

“Whilst spokespeople may maintain that these operations are targeted against hypothetical opponents, the nature and scale of them indicate otherwise: Russia is preparing for a conflict with NATO and NATO is preparing for a possible confrontation with Russia.”

Greece finally strikes a bailout deal

August 11, 2015

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So the big story is that after months of agonised negotiations, Greece has reached an accord with its creditors

Greek newspapers report that the deal came close to being struck at around 8am Tuesday following talks that began Monday morning

Details aren’t clear yet but the Greek government has to implement measures including changes to tonnage tax for shipping firms, reducing the prices of generic drugs, a review of the social welfare system, strengthening of the Financial Crimes Squad (SDOE), phasing out of early retirement, scrapping tax breaks for islands by the end of 2016, implementation of the product market reforms proposed by the Organization for Economic Cooperation and Development (OECD), deregulating the energy market and proceeding with the privatization program already in place.

Finance Minister Euclid Tsakalotos told reporters that it’s very close to being finalised.

“There are a couple of very small details remaining on prior actions.”

Once it’s finalised, it will go to Greek Parliament to be ratified.

Still, the country is not out of the woods yet.

Bloomberg reports that Greece’s ruling Syriza party will hold an emergency congress in September as Prime Minister Tsipras tries to quell internal opposition. This could split the party and force early snap elections.

And then in October, the European Central Bank will conduct a stress test of the Greek banks.

This could still unravel. The big question is what happens politically in Greece. Will the deal hold? Or will we be back here discussing it again in three years’ time?

Greece’s health care system in turmoil has resulted in the growth of illegal clinics

August 10, 2015

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The financial crisis has devastated the health care system in Greece. Greece’s once-massive public health system has been a top target for spending cuts to finance the country’s debts to international creditors. The healthcare budget has been cut by almost 50 per cent since 2009, as the prices even insured patients pay for medicines have shot up.

As reported here, Greek hospitals are on the brink of collapse. Government health spending plummeted 25 percent between 2009 and 2012. Spending on drugs has fallen by 32 per cent since 2010.

As a result, public hospitals have had to drastically cut their budgets, in some cases by as much as 50 percent, firing staff, cutting back on testing kits and supplies and abstaining from hiring new doctors to replace those who have retired or have left the country.

Add to that the 2.5 million Greeks, a quarter of the population, left uninsured.

As a result, illegal clinics are springing up around the country. As reported here, there are now more than 40 ‘solidarity’ health clinics across Greece run completely by volunteer doctors and regular citizens. No one gets paid, it’s completely voluntary driven by a sense of solidarity in the community.

The clinics are unregulated and illegal.  But government regulators have turned a blind eye. They know the system is crippled and they know how much the public health system has come to rely on this small army of volunteers.

China stock market protection racket

August 8, 2015

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So China is desperately trying to keep its stock market together, to stop another crash.

The Wall Street Journal reports that the Chinese government is getting China’s securities brokers and fund management firms to step up supervision of margin trading.

Margin trading is the term for leveraged investment practice that utilizes borrowed money to purchase stocks.  Basically, mum and dad investors in China have been borrowing big time to buy stocks and that led to the steep selloff in recent weeks where the market imploded.

China’s stock market has experienced a sharp sell-off since mid-June and the turmoil continued into July despite an aggressive government rescue program. Share prices in Shanghai were down 14 per cent in July, the worst monthly performance since August 2009, according to its benchmark index.

So, how much money did Beijing actually spend trying to support the markets? Economist and Peking University professor Christopher Balding has calculated the money poured into the market by China’s pension funds, the People’s Bank of China,  China’s major securities brokers, China Securities Finance Corp and of course the Chines government and he has arrived at a mind-boggling figure —$1.6 trillion.

That’s more than six times the $247 billion the US government initially spent on the Troubled Asset Relief Program, or TARP, that was used to support financial institutions after the 2008 financial crisis. It’s easily the biggest bailout in history.

Will it help? Probably not. As the Financial Times points out, the amount of money borrowed by government-backed entities to calm the stock market in July alone has already surpassed any increase in capital raised from equity.

Put another way,  China’s stock market is now competing with other borrowers plunging the nation even further into debt.

That makes China a ticking time bomb for the global economy.

Why Tony Abbott is wrong about Adani

August 7, 2015

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Australian Prime Minister Tony Abbott has come out attacking environmentalists and the courts after a Federal Court set aside the environmental authority of the Carmichael mine in Queensland. The operation, which will be Australia’s biggest mine, is owned by Indian energy company Adani.  The Federal court found that Environment Minister Hunt had not properly considered advice about two threatened species — the yakka skink and the ornamental snake in the Galilee basin.

Abbott came out swinging today saying the courts and environmentalists had sabotaged the project and were robbing Indians of badly needed power.

“Let them go ahead for the workers of Australia and for the people of countries like India who right at the moment have no electricity. Imagine what it’s like to live in the modern world with no electricity,” the prime minister said.

But EAS Sarma, former secretary of India’s ministry of power, says Abbott doesn’t know anything about India and has no idea why it has power shortages.

He points out that India’s population of 1.24 billion comprises 247 million households, 68 per cent of whom live in rural villages. According to the 2011 census, 45 per cent of these rural households – 75 million – have no electricity. In the rural areas, many remote villages are beyond the reach of the electricity grid. There are also many families in electrified villages who cannot pay for expensive electricity.  Coal would make no difference to these people.

Another reason for the shortages is because of corruption, which is part of India’s political fabric.   The Herald Net  reports that “transmission and distribution losses in some states are as much as 50 per cent because of theft and corruption by employees in the power industry.”

No amount of Australian coal will solve that.

Then again, the Adani mine is unlikely to get up because of its flawed business model. As reported here, Adani’s business modelling is built around a thermal coal price of between US$80-100. It currently sits at US$60. It can’t get up if the price stays that low, and no one is expecting it to rise.

Greece heading for permanent depression

August 5, 2015

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So Greece’s stock market has crashed after reopening this week. It’s been dragged down by bank shares. Clearly people there are not confident that the banks there are safe.

What makes it worse is the report from the National Institute of Economic and Social Research showing that Greece needs a debt write-down of almost €100 billion  if the country is to stand a chance of clawing its way out of a “prolonged and severe depression” By the end of 2016, the economy is forecast to be 30pc smaller than at its peak in 2007 and 7 per cent smaller than before it joined the euro in 2001.The means it will stay in recession until at least the second half of 2016. More likely, it means the place is heading for permanent depression

What that means is that Greece is likely to leave the Eurozone.

Given the way it’s panning out now, things are bound to end badly.

Macroeconomic forecasts show that Greece’s debt-to-GDP ratio will keep heading north. This was known two years ago, but now for the first time the geniuses at IMF publicly acknowledge so.

In the medium term fiscal surpluses will be achieved at the cost of lower growth.

The program imposes “quasi-automatic spending cuts” if the fiscal surpluses fall below ambitious targets.

Assuming Greece puts itself through the wringer for three years, we’re likely to see 2018 debt climbing north of 200 per cent of GDP.

And therein lies the problem. Greece will still be unable to borrow in the market, and a fourth bailout will be needed.

And by then, Greeks might stop caring for the euro.