Posts Tagged ‘currency’

Donald Trump’s year in numbers — Trump presidency an economic “game-changer” — And much better than expected

November 8, 2017

A year has passed since Donald Trump shocked the world by winning last year’s US presidential election. The news provoked a dramatic sell-off in Asian markets, and then a far more dramatic rebound. US stocks rallied, while emerging markets tumbled. The immediate belief was that a Trump presidency was a “game-changer” for the world economy and capital markets, and many feared it would be negative.

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The Nobel laureate economist Paul Krugman made an instant prediction that markets would “never recover”, for which he has since apologised. The results have been a little different.

First, after the initial reaction that the election meant “America First” and that other countries — especially emerging markets — would be harmed by the advent of Trump, the rest of the world, led by emerging markets, has gone on to outperform, even though the S&P 500 has set a series of all-time highs. Growth in the eurozone and China reassured doubters.

US stocks’ underperformance was largely driven by the dollar, which strengthened after the election but then began a significant weakening, driven in large part by surprisingly strong European growth which helped the euro

Perhaps ironically, the Russian rouble has gained the most of any major currency against the dollar since the election. Turkey’s lira has been by far the weakest.

Greater attention was turned to Mexico, which is uniquely exposed to the US economy and stood to be harmed by Mr Trump’s policies on migration trade. After an initial collapse, the peso put on a strong recovery, but it has wobbled again in recent weeks amid talk that the Nafta trade accord could be endangered after all.

Despite the anger and turbulence that surrounded Mr Trump all year, the US stock market has enjoyed what might be its calmest year ever. In terms of average daily moves of the S&P 500, 2017 may beat 1964 (another turbulent political year) as the calmest year ever for US stocks. As for the popular Vix index of market volatility, which was set up in 1990, it hit an all-time low in September. The practice of “selling volatility” — or short selling the Vix — became highly popular and highly profitable. Anyone who bought the main short Vix index on election day would by now have trebled their money.

If the markets stayed calm, then consumers seemed even happier. Gallup’s regular measure of economic confidence leapt to its highest level in more than a decade immediately after the election, and has since stayed at levels not previously seen since the crisis. Fury among liberal opponents of Mr Trump is still more than counter-balanced by the enthusiasm of his supporters.

The same goes for businesses. The regular ISM indices of purchasing managers, highly influential in markets, had signalled a possible recession early in 2016, before it grew clear that China was adopting an expansive economic policy again. During 2017, ISM numbers in both manufacturing and services sectors hit their highest levels in more than a decade, since well before the crisis; again the recovery of confidence is palpable.

On the core issues of the economy, however, the effects of Mr Trump are less apparent. The unemployment rate continued a steady fall that started during President Barack Obama’s first term. Meanwhile, inflation initially rose, suggesting that growth was about to resurge, before declining again during the summer. Inflation is picking up again now, but the mystery of how unemployment can stay so low without provoking higher inflation remains. The clear trend of the Obama years remains intact and uninterrupted.

Meanwhile, the greatest economic disappointment for the Trump administration is the continuing anaemic performance of wages. After stagnating post-crisis, they appeared to have at last hit a rising trend in the last year of the Obama presidency. But despite the tightening labour market, wage growth has slackened off again under Mr Trump so far. This remains the critical economic issue for his administration, and for the new leadership at the Federal Reserve.

On the president’s signature issues, the market is sending mixed signals. On tax, many banks now track the performance of the stocks which pay the highest effective tax rate, and should logically benefit the most from a tax cut. The chart uses Goldman Sachs data, and makes clear that such stocks are lagging; the market remains unconvinced that significant tax cuts are coming.

On the issue of Mexican immigration, however, there is evidence that Mr Trump’s rhetoric is already changing behaviour. Arrests at the border have fallen very sharply (although they have started to rise a little in recent months). This implies that far fewer people are attempting to enter the country. Meanwhile remittances to Mexico rose sharply. In the past this has been driven by Mexican migrant workers’ fear that they would lose their jobs, and implies that many may be planning to leave.

As for the highly controversial Trump positions on coal and climate change, coal stocks have risen since the election — although still not as much as the market. Meanwhile, the decision to withdraw from the Paris climate accord has not stopped clean energy stocks from rising much faster.


European Central Bank’s decision to reduce asset purchases not a true indicator of bloc’s economic health

October 24, 2017

By  Neal Kimberley

South China Morning Post

Tuesday, 24 October, 2017, 12:07pm

European Central Bank (ECB) is set to announce on Thursday a timetable for reducing the size of its monthly asset purchases amid signs the euro zone economy could expand in 2017 at its fastest pace for a decade. But investors should be wary. Economic, political and social fault lines remain beneath the surface of the economic bloc.

Economists polled by Reuters expect that, from January, the ECB will announce it is to trim its monthly asset purchases to 40 billion from the current 60 billion, with the programme to continue for another six to nine months. However, that does not mean an early end to very low or negative benchmark rates in the euro zone.

Reining in the pace of asset purchases is likely to be accompanied by a commitment to keep euro zone benchmark interest rates lower for longer. The ECB will be mindful that euro zone inflation, presently at 1.5 per cent, remains substantially beneath its target of close to but below 2 per cent.

It may be that the ECB asset purchase taper is a case of making a virtue out of a necessity.

Having acquired more than 2 trillion of paper already, mainly in the form of euro zone government bonds, as part of its asset purchase programme, the ECB, which is operating within self-imposed accumulation limits, might anyway soon find that its ability to add further purchases of some nations’ debt is constrained.

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As for the time frame, there is an argument that “the longer the ECB takes to pare back its net asset purchases to zero, the further into the distance the subsequent steps in the normalisation process become”, as Ken Wattret, the managing director of global macro at investment research company TS Lombard, wrote this month.

The longer euro zone benchmark interest rates remain lower – and with the ECB’s current deposit rate still at minus 0.4 per cent – arguably the more potential there is for anomalous situations to build up as investors pursue yield in euro-denominated bonds.

For example, based on data from the economic research website of the St Louis Federal Reserve, the yield on Bank of America Merrill Lynch’s Euro High Yield Index, where the corporate debt components are all below investment grade, was 2.17 per cent last week. Yet on Friday, the yield on the benchmark 10-year US treasury hit 2.39 per cent.

Junk was paying less for money than Uncle Sam.

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It is a topsy-turvy world but investors might wonder how long such anomalies can continue as asset purchases are pared back, even if the ECB still remains a long way off from raising its own benchmark interest rates.

Setting aside the still subdued level of euro zone inflation, the ECB may also be making the calculation that lower for longer interest rates will temper any further rise in the value of the euro on foreign exchanges, a rise which would undesirably bear down on imported inflation but also negatively affect the competitive position of euro zone exporters in global markets.

If such a calculation betrays an underlying but unvoiced concern that the euro zone economy is essentially still too frail to afford a materially stronger currency, it might nevertheless still be a stance that is well-grounded.

The data might show an improvement in the euro zone economy but the rising tide is not raising all boats equally. Intra-bloc economic and social divergences remain.

 As Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, said last week, those divergences “undermine the promise of shared prosperity, which was central to the creation of the euro in the first place. And they fuel populism in regions where inequalities have been felt more strongly”.

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Given that elimination of such divergences would have to involve fiscal transfers from richer to poorer countries within the euro zone, it is highly questionable if the political will exists in wealthier countries, such as Germany, for such redistribution.

It is hard to see how the next German government, which will almost certainly include the Free Democratic Party (FDP), could back such moves. FDP leader Christian Lindner has already dismissed France’s President Emmanuel Macron’s idea for a European Monetary Fund as “a pumping station for financial transfers”.

Meanwhile in Spain, the pressure for independence in Catalonia is at least partly driven by a belief that Catalans pay more into the coffers of the Spanish state than the region gets back.

All in all, the ECB’s incremental withdrawal of monetary accommodation makes perfect sense but the central bank’s approach reflects the euro zone’s continuing economic frailty. The fault lines in the currency bloc remain.

China’s Xi Approaches a New Term With a Souring Taste for Markets

October 17, 2017

As a Communist Party congress opens, the pro-market talk from Xi’s first term has faded as China’s priorities turn to economic intervention and supporting state companies.

Chinese President Xi Jinping, at a forum in September.Photo: Fred Dufour/Press Pool/Reuters


BEIJING—As a new president, Xi Jinping promised to give markets more room in China’s economy. He even considered scrapping a hulking ministry supervising state-owned companies.

Today, Mr. Xi has set aside such notions. In today’s China, state intervention attempts to engineer economic outcomes, ranging from raw-materials prices to the value of stocks and the currency.

State-owned corporate giants are bulking up, with private capital funneled into them for support. The agency Mr. Xi toyed with dismantling is back in the driver’s seat.

Going into his second term, Mr. Xi finds relying on markets too risky and state capitalism a better model. When the Chinese leadership talks of reform today it doesn’t mean economic liberalization as it did in, say, the era of Deng Xiaoping. It means fine-tuning a government-led model.

The Communist Party congress that starts Wednesday will hand the reins to Mr. Xi for another five years. Having purged many rivals, Mr. Xi is expected to gain an even freer hand to pursue state control across society, from schools to the economy. Based on interviews with officials, government advisers, economists and business executives, it is clear market principles Beijing once saw as tools to invigorate state behemoths and the capital markets are now something to be deeply wary of—potential agents of chaos.

“Risks are everywhere in the society, and now more than ever, the government should play a bigger role” in guiding the economy, said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, a government think tank.

Delegates to the 2012 Communist Party Congress at which Mr. Xi moved into the leadership.Photo: GOH CHAI HIN/Agence France-Presse/Getty Images

One consequence of China’s renewed emphasis on central control is that more credit is flowing into state businesses that are less productive than private ones. China’s state capitalism is rife with inefficiencies. It steers investment into unneeded building projects and industries such as steel that already overproduce.

This leaves China to tackle major, festering problems the country faces, such as soaring debt levels and overbuilding, with little benefit of the market discipline free enterprise might supply.

Heavier state intervention ultimately threatens to squeeze out private enterprise, sap innovation from the economy and slow China’s rise into rich-country ranks, according to economists and analysts. Badly handled, China’s economy could end up mired in years of low growth, delaying the expected date sometime next decade of passing the U.S. economy in size.

Despite its economic drawbacks, the centralized approach works in favor of the Communist Party’s hold on power. The loser is the private sector, including Western multinationals operating in China.

The Chinese government has maintained it can manage the country’s debt problems, and its investments in infrastructure and innovation can help China maintain growth.

China’s Communist leaders have never been entirely comfortable with capitalist dynamics. Mr. Xi seemed something of an exception, showing determination to shake up the bloated state sector as he took office in 2012.

Some in the party attributed that mind-set to his experience running Zhejiang province, where lower barriers for entrepreneurs led to enormous wealth creation and the emergence of tycoons such as Alibaba’s Jack Ma.

In Zhejiang, Mr. Xi embraced policies to nurture private enterprise. A government adviser described him as someone who knew firsthand how private businesses could generate prosperity.

Before he was anointed China’s leader, in the fall of 2012, Mr. Xi mysteriously vanished for two weeks. The absence was never fully explained. People with knowledge of it say he spent some of that time in Zhejiang, huddling with a few close advisers in the city of Zhuji in the Yangtze River delta, to brood over his vision for China.

His first policy blueprint a year later said market forces would play a “decisive” role in China’s economy.

That sent a jolt of anxiety through the corridors of a powerful agency called the State-owned Assets Supervision and Administration Commission, or Sasac, which holds the government’s equity in the largest state companies and supervises them closely, including appointing top managers.

According to officials familiar with planning at the time, Mr. Xi considered a bold proposal for the state sector based on the “Temasek model,” named for Singapore’s sovereign-wealth fund. In that model, investment companies funded by the Finance Ministry would take over the ownership in state companies from Sasac but leave running them to professional managers. That would essentially eliminate Sasac.

To test the plan, the officials say, Mr. Xi sent Vice Premier Ma Kai to provinces, including Zhejiang and its neighbors Jiangsu and Jiangxi, to meet with state companies.

Sasac recognized it was in a fight for its survival. Senior Sasac officials in Beijing called ahead to tell colleagues in those provinces they must convince the vice premier of Sasac’s importance to the state sector’s future.

“It was all hands on deck,” recalled a local Sasac official.

Officials of the agency latched onto a core political objective of Mr. Xi, strengthening the Communist Party, by arguing this was best achieved by increasing, not reducing, state companies’ footprint and Beijing’s control of them.

This question—whether the party was helped or hurt by market forces—came to a head in 2015.

China was in the middle of an epic stock rally, partly the result of a push to encourage stock investing and turn equities markets into a funding vehicle for businesses. Many individual investors had borrowed to buy into what became known as “the Uncle Xi bull market.”

In June of that year, the tide turned. Chinese stocks began a tumble—triggered by concerns the market was too frothy and exacerbated when investors rushed to unwind trades made with borrowed money—that reverberated around the world and embarrassed Beijing.

Investors in Beijing watched a falling stock market in July 2015.Photo: FRED DUFOUR/Agence France-Presse

Then in August, global investors seized on a brief Chinese experiment with a freer currency to pummel the yuan.

The turmoil posed one of Mr. Xi’s biggest challenges, and he expressed deep displeasure with regulators who seemed unable to prevent investment wagers against China’s stocks and its currency.

Over a few months, China’s commitment to market forces crumbled. A national team of state companies stepped in with supportive stock buying. The government cracked down on investors who had bet on stocks to fall. And the central bank set aside all other priorities to prop up the yuan, whose weakness was driving huge amounts of capital out of the country.

The conclusion of the Chinese leadership since then, say officials and government advisers, has been that the up-and-down cycles of the markets, something they can’t control, make outcomes too uncertain.

In May of this year, China’s c entral bank added to its formula for setting the yuan’s official rate a “countercyclical” factor—a tool to defy pressures exerted by currency markets. The move, reflecting a mistrust of markets, came after senior officials complained the yuan seemed unable to go up even when China’s economy improved, according to people close to the central bank.

China’s foreign-exchange regulator, Pan Gongsheng, explained the rationale at a closed-door event in July attended by European business executives, according to people who attended. Currency speculators would have kept driving down the yuan, he said, posing intolerable risks to China’s economy. “If you let the market determine its equilibrium level, where is the equilibrium level?“ he asked.

Chinese officials still publicly tout the markets and greater participation in the economy by private and foreign capital. But the enthusiasm for markets from the early days of Mr. Xi’s presidency is gone, say officials and government advisers.

Some China watchers theorize Mr. Xi will revive an agenda of pro-market economic overhauls after this month’s party congress as his power is consolidated. Among the many signs pointing the other way are that under Mr. Xi, Sasac’s influence has grown, not shrunk. As state companies have gotten larger, total assets the powerful agency oversees have almost doubled, to roughly $7.6 trillion.

“Nobody talks about the Temasek model anymore,” said a Sasac official. “It has been determined that model isn’t applicable to China.”

In the past few years, Sasac has spearheaded a wave of industrial mergers. The consolidation hasn’t led to improved efficiency or profitability, economists and analysts say. Instead, Sasac often has relied on big state companies to take on loss-making smaller ones just to keep them going.

A scene at Wuhan Iron & Steel.Photo: Wang He/Getty Images

Baoshan Iron and Steel acquired a debt-laden rival, Wuhan Iron and Steel, last year in a deal that formed the world’s No. 2 steelmaker by capacity, after ArcelorMittal SA . In 2015, China National Machinery Industry Corp., a giant industrial conglomerate known as Sinomach, ensured the survival of an equipment maker teetering on default by taking it over.

With a larger economy and a better social safety net, China is in theory better able to weather a state-sector shake-up than two decades ago, when then-Premier Zhu Rongji engineered one. Mr. Zhu closed money-losing factories and broke up some state conglomerates in an effort to spur efficiency through competition.

Beijing now is turning back the clock. Among Sasac’s endeavors, according to people familiar with the matter, is the re-establishment of a state aluminum giant broken up by Mr. Zhu.

The current head of Sasac, Xiao Yaqing, rose to prominence in that earlier upheaval. He was in charge of the smaller and nimbler Aluminum Corp. of China , or Chinalco, created out of Premier Zhu’s actions.

In 2008, Chinalco took a stake in the Anglo-Australian miner Rio Tinto PLC to thwart BHP Billiton Ltd.’s hostile bid for it, which Beijing feared would drive up iron-ore prices. The gambit worked, showing how state companies could be useful agents of the Chinese state—and paving the way for Mr. Xiao’s political ascent.

Shortly after he took the reins of Sasac last year, he said China would favor consolidation over bankruptcies in restructuring the state sector. At a news conference last month, Mr. Xiao said, “Strengthening party building is the key to state-sector reform and making state companies stronger and more competitive.”

Sasac now is reconstituting a mammoth Chinalco by putting weaker metal mills under its wings, say the people with knowledge of the matter. A Shanghai-listed subsidiary of Chinalco said the company is working on a plan to sell shares and then use the proceeds to acquire assets.

Xiao Yaqing of Sasac, an agency supervising China’s state-owned companies that once was threatened but now is in a strong position.Photo: Xinhua/ZUMA PRESS

“China seems to be returning to an earlier era, one in which big is beautiful and national interest trumps enterprise profitability,” said Michael Komesaroff, the principal of consultancy Urandaline Investments in Melbourne, Australia.

To keep growth from slowing too much, Beijing has kept the credit tap open. More of the lending has gone to state companies than to private ones, even though state companies use capital less efficiently. The resurgence of the state economy is “potentially far more adverse for China’s long-term growth and financial stability,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.

Government efforts to cut industrial overcapacity have forced many private coal miners and steel mills out of business. State companies have generally been left intact, and some have seen improved profits as private competition shriveled.

Beijing’s plans to cut coal output inspired expectations the least-competitive coal mines, mostly small and high-polluting ones, would be forced to close. Instead, China ordered all coal mines to shut production a certain number of days of the year.

The centralized approach didn’t make the coal industry leaner, but in a roundabout way it worked in Beijing’s favor. When state power generators complained of higher coal prices as a result of the production cuts, the government allowed more production days and asked state companies to sell coal below market prices. The result of relying on markets to sort it out would have been much less predictable, officials say.

In August, Beijing combined under one roof Shenhua Group, the country’s top coal miner, and China Guodian Group, one of its largest power generators, a move that created one of the world’s largest power companies and made it easier to control prices of both coal and electricity.

Today, private investment is growing much more slowly than state investment in China. Authorities have brought to heel the global ambitions of private Chinese conglomerates that had made inroads in Hollywood and bought trophy hotels in the West. Instead, they are favoring government-condoned projects overseas.

At times, China’s top-down approach, with bureaucrats rather than competition deciding winners and losers, also helps China’s private sector. An example is industrial policies to foster Chinese domination across sectors, such as electric cars, at the expense of foreign rivals.

More often, the state courts China’s private companies for their cash.

This fall, China Unicom, the weakest of China’s three state-owned telecom carriers, sold $11.7 billion in shares of its Shanghai-listed subsidiary to a group of private investors including internet giants Tencent, Alibaba and Baidu. Officials hailed the deal as a triumph of “mixed-ownership” reform.

In fact, the state’s overall holdings in China Unicom declined only a little, to about 58% from 63%, according to an analysis by research firm Gavekal Dragonomics.

“The essence of such reforms is to make state companies like China Unicom bigger and stronger,” an official involved in the process said.

Mr. Xi’s increasing emphasis on ideological purity leaves little room for Western-style capitalism.

A term Mr. Deng and his acolytes used in the 1980s and ’90s for China’s economy was “socialism with Chinese characteristics.” The emphasis was clear: addressing a state economy’s problems by applying market solutions.

Used today, given Mr. Xi’s increasing emphasis on ideological purity, the term conveys a different message—that there is little room for Western-style capitalism. In a July address commemorating the party’s 95th birthday, Mr. Xi said: “What we’re building is socialism with Chinese characteristics, not some other –ism.”

Turkey urges U.S. to review visa suspension as lira, stocks tumble

October 9, 2017

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FILE photo

ANKARA (Reuters) – Turkey urged the United States on Monday to review its suspension of visa services after the arrest of a U.S. consulate employee sharply escalated tensions between the two NATO allies and drove Turkey’s currency and stocks lower.

Relations between Ankara and Washington have long been plagued by disputes over U.S. support for Kurdish fighters in Syria, Turkey’s calls for the extradition of a U.S.-based cleric and the indictment of a Turkish former minister in a U.S. court.

But last week’s arrest of a Turkish employee of the U.S. consulate in Istanbul marked a fresh low. Turkey said the employee had links to U.S.-based Muslim cleric Fethullah Gulen, blamed by Ankara for a failed military coup in July 2016.

The U.S. embassy in Ankara condemned those charges as baseless and announced on Sunday night it was halting all non-immigrant visa services in Turkey while it reassessed Turkey’s commitment to the security of its missions and staff.

Within hours Turkey announced it was taking the same measures against U.S. citizens.

On Monday the Turkish foreign ministry summoned a U.S. diplomat to urge the United States to lift the visa suspension, saying it was causing “unnecessary tensions”.

Justice Minister Abdulhamit Gul said that if Washington had serious security concerns about its missions in Turkey, steps would be taken to address them.

“But if it’s an issue regarding the arrest of the consulate employee, then this is a decision the Turkish judiciary has made,” Gul told A Haber television. “Trying a Turkish citizen for a crime committed in Turkey is our right.”

Turkish media reported that authorities had issued a detention warrant for a second U.S. consulate worker. Reuters could not immediately confirm the reports, which also said the employee’s wife and child were being questioned by police.


The diplomatic spat spooked investors. The lira dropped 2.4 percent and stood at 3.7030 against the dollar after being quoted overnight as touching a level of 3.9223.

A woman waits in front of the visa application office entrance of the U.S. Embassy in Ankara, Turkey, October 9, 2017. REUTERS/Umit Bektas

The main BIST 100 stock index fell as much as 4.7 percent and was down 3.21 percent at 100,800 points at 1137 GMT.

Airline shares were particularly hard hit, with flag carrier Turkish Airlines falling 8 percent.

The central bank said it was following developments closely.

A woman walks past the U.S. Embassy in Ankara, Turkey, October 9, 2017. REUTERS/Umit Bektas

“This looks like a really serious situation,” said Blue Bay Asset Management strategist Timothy Ash, adding that the central bank would need to move quickly to calm market nerves and possibly hike interest rates – something President Tayyip Erdogan has resisted.

Turkey’s leading business association, TUSIAD, warned that the dispute would harm bilateral economic, social and cultural ties, and called for disagreements to be settled calmly.

The dispute with the United States coincides with deep strains in Turkey’s relations with Germany, another key ally, and with Turkish military activity at the Syrian and Iraqi borders, though their market impact has so far been limited.

U.S.-Turkish tensions have risen in recent months over U.S. military support for Kurdish YPG fighters in Syria, considered by Ankara to be an extension of the banned PKK which has waged an insurgency for three decades in southeast Turkey.

Turkey has also pressed, so far in vain, for the United States to extradite Muslim cleric Fethullah Gulen, viewed in Ankara as the mastermind behind the failed coup in which more than 240 people were killed. Gulen denies any involvement.

Friction with the United States has also arisen from the indictment last month by a U.S. court of Turkey’s former economy minister Zafer Caglayan, charged with conspiring to violate U.S. sanctions on Iran.

Sinan Ulgen, an analyst and former Turkish diplomat, said those underlying disputes had created a “crisis of confidence” which made this latest fallout particularly bitter.

“This harshness is a result of a build-up,” he said. “We should not consider this as solely a reaction to the detentions of consulate employees”.

Additional reporting by Can Sezer in Istanbul and Gulsen Solaker in Ankara; Writing by Dominic Evans; Editing by Daren Butler and Gareth Jones


Turkish Lira Tumbles in Asia Witching Hour as Tensions Escalate

October 9, 2017


By Michael Wilson and  Netty Idayu Ismail

  • Lack of volume was behind Monday’s price decline: Saxo Capital
  • Currency heads for its longest losing streak since May 2016

Traders scrambled Monday morning as Turkey’s lira plunged, turning off live platform pricing and restricting quotes amid volatility caused by rising tensions between the U.S. and its NATO ally.

As politics pushed the lira to a record low against a basket of currencies including the euro and the dollar, requests for quotes on “show side only” basis were flashing, according to traders familiar with the transaction who asked not to be identified because they aren’t authorized to speak publicly.

 Image result for Turkish lira, photos

The currency market has faced bouts of extreme volatility during early Asian trading hours, including the pound’s flash crash a year ago as well as the South African rand’s plunge in January 2016. While the lira is a volatile developing-nation currency with thinner trading, Monday’s decline is a reminder of the underlying fragility of the $5.1 trillion-a-day foreign exchange market.

“Almost certainly the liquidity is a significant issue in the price action,” said Andrew Bresler, deputy head of sales trading for Asia Pacific at Saxo Capital Markets Ltd. in Singapore. “This is always the problem with negative news events in early Asia trading timezone. Fewer market participants will exacerbate the move.”

Read More: What has happened in Asia’s witching hours

The trigger on Monday was the U.S. and Turkey each suspending visa services for citizens looking to visit the other country. Both sides said “recent events” had forced them to “reassess the commitment” of the other to the security of mission facilities and personnel. The moves followed the arrest of a Turkish national who works at the U.S. consulate in Istanbul for alleged involvement in the July 2016 coup attempt against President Recep Tayyip Erdogan.

The lira was at 3.7175 per dollar as of 11:47 a.m. in Singapore, down more than 2.5 percent from Friday’s close, and touched as low as 3.8533. The currency is heading for a seventh day of declines, the longest stretch since May 2016.

As news broke that the spat between Turkey and the U.S. had intensified, the bid/offer spread in prices offered by interbank market makers blew out to 60 times the average, highlighting the costs of doing business in emerging-market FX.

Read More: How liquidity gap drove cost of lira trades up 60 times

The latest escalation of tensions also coincides with the headwind that emerging-market assets have been facing amid prospects of tighter monetary policy by the Federal Reserve.

Emerging-market currency volatility has climbed since reaching an almost three-year low in August, and exceeded expected fluctuations in developed-nation peers last week for the first time since July, JPMorgan Chase & Co. indexes show.

“Politically, Turkey’s case is an isolated case so it’s unlikely that there will be a durable contagion into the rest of EM,” said Nader Naeimi, who heads a dynamic investment fund at AMP Capital Investors Ltd. in Sydney and holds a short position in developing-nation currencies including the lira. “However, the short-term impact to sentiment across EM FX is a strong possibility at a time where foreign currency markets will continue to be forced to adjust their expectations of U.S. rate hikes.”

— With assistance by Lilian Karunungan, Garfield Clinton Reynolds, and Benjamin Robertson


India’s economy in ‘downward spiral.’

October 5, 2017


CNN Money
October 4, 2017: 12:47 PM ET

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India’s economy, once hailed as a global bright spot, is down in the dumps.

Growth in the South Asian nation fell during the first six months of 2017 from 7% to 5.7%, its slowest pace in three years, and analysts say the road to recovery is steep.

“We’re on a downward spiral,” said Mohan Guruswamy, head of the Center for Policy Alternatives in Delhi, and a former official at India’s finance ministry.

Prime Minister Narendra Modi swept into power in 2014, promising to take India’s economy to new heights. But many reforms have yet to materialize and some changes that have been enacted are hurting growth.

Modi defended his performance in a speech Wednesday, claiming his government had helped several industries.

“It is true that there has been a reduction in growth, but it is also true that the government is fully committed to reversing this trend,” he said. “Our fundamentals are strong.”

A double whammy

India is still reeling from two shocks within 12 months — Modi’s sudden ban last November of 86% of the country’s cash, and a sweeping overhaul of the tax system aimed at turning the country’s 29 states into a single market.

The cash ban “was a massive blow, just when the economy looked at a point of inflection last year and the decline had started leveling off,” Guruswamy said.

Modi’s signature reform — a national goods and services tax implemented in July — has been widely hailed as a positive step because it should simplify business in the long run. But the implementation caused major disruption.

“My fear was that if people didn’t understand how to do the tax system, then they would stop doing business with one another,” said Shailesh Kumar, South Asia analyst at the Eurasia Group. “You did see some of that…as companies didn’t really know what to do.”

The government has said it expected a growth slowdown, but appears to have been blindsided by the sharp drop.

Top financial institutions are worried that the economy will struggle to regain its momentum in the near term. The central bank has just slashed its growth forecast for the current fiscal year to 6.7% from 7.3%.

“The implementation of the [tax reform] appears to have rendered short-term prospects uncertain,” Reserve Bank of India Governor Urjit Patel told reporters.

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Reserve Bank of India Governor Urjit Patel

The State Bank of India, which is owned by the government, was more blunt. The slowdown, it said in a report last month, is “not short term in nature or even transient.”

Modi’s not delivering

Analysts, business leaders and even members of Modi’s own party are now questioning his stewardship of the economy, not just because of the upheaval his changes have caused but also over reforms that aren’t happening.

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Prime Minister Narendra Modi

“High on the list of priorities is pushing through measures to ease land acquisition laws and liberalize the labor market,” analysts at Capital Economics wrote in a recent note. “But there is no clear indication yet that Prime Minister Modi actually has the conviction to push ahead with necessary but unpopular reforms.”

There have also been calls for an overhaul of the banking system. About 12% of total loans have gone bad, according to official data.

Yashwant Sinha, a former finance minister and senior member of Modi’s party, wrote an opinion article slamming the “mess” that the Indian economy is in. “A hard landing appears inevitable,” Sinha said.

Beef and beer bans

Rising Hindu nationalism, stoked by Modi’s right-wing party, is also hurting some parts of the economy.

In May, the government banned the sale of cows — an animal considered sacred by the country’s Hindu majority — for slaughter, sending the meat industry into a frenzy.

While the ban was suspended by India’s Supreme Court in July, the policy confusion has had a chilling effect. India exports vast quantities of buffalo meat. Those exports have declined this year, according to local media.

Cattle that once provided a vital source of additional income for millions of India’s rural poor have now become liabilities because farmers fear they will be unable to sell them to the meat and leather industry, Guruswamy said.

Hindu nationalists have “completely unleashed a reign of terror as far as cattle are concerned,” he added.

India’s Supreme Court dealt the economy another blow in April, banning the sale of alcohol within 500 meters (546 yards) of national highways. Some estimates put the hospitality industry’s potential losses at $10 billion.

The court eased the restrictions in August, but many within the industry said they had already lost millions. Diageo (DEO), the company behind brands like Johnnie Walker and Smirnoff, said the India ban would dent sales growth.

Some of India’s top trading partners are taking note.

“The space for civil society in India continues to shrink as Hindu nationalism rises,” Sen. Bob Corker, chairman of the U.S. Senate Committee on Foreign Relations, said on Tuesday.

Corker, who was speaking during a hearing to nominate a new U.S. ambassador to India, also expressed disappointment at the state of the economy.

“In particular, I remain frustrated by the slow pace of Indian reforms in the economic sphere,” he said.

Millions of new jobs needed

Modi faces an uphill struggle to steady the ship. The most pressing challenge, experts say, is to create the jobs he promised India’s large young population.

Around 12 million Indians enter the workforce every year, but struggle to find employment.

“Poor quality data makes it difficult to put a number on the job woes, but the available data is grim and news stories about jobs losses abound,” Ruchir Sharma, chief global strategist at Morgan Stanley, wrote in the Times of India newspaper on Wednesday.

Over 1.5 million Indians lost their jobs in the first half of 2017, according to a study by the Centre for Monitoring Indian Economy, and unemployment is on the rise.

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Macron’s eurozone plans put eastern EU members on the spot

September 28, 2017

French President Emmanuel Macron is impatient to reinvigorate the eurozone. But this puts the EU’s eastern members in a dilemma: stay out and risk losing clout in Brussels or join and risk losing economic sovereignty?

USA Präsident Macron vor der UN-Vollversammlung (Reuters/S. Stapleton)

Macron reiterated his view this week that a multi-speed Europe led by a core of ‘avant-garde’ countries could be the price worth paying for pushing the eurozone — and the European project more widely — forward in the aftermath of the Brexit vote.

“We should imagine a Europe of several formats — going further with those who want to advance, while not being held back by states which want to progress slower or not as far,” Macron said.

“It appears that Macron would like a tighter, more centralized eurozone with France and Germany at its heart,” Liam Carson of Capital Economics told DW. “However, he remained fairly vague on euro-zone specifics, probably because of the worse than expected outcome for [German Chancellor Angela] Merkel in the German election.”

But Macron’s words have fallen on some deaf ears in Central and Eastern Europe, a region struggling with political uncertainty and growing Euroskepticism, despite continued strong growth.

Of the nine new member states that joined the EU in 2004-2009, the Baltic countries, Slovakia, Slovenia, Cyprus and Malta have adopted the euro, while Poland, the Czech Republic, Hungary, Romania, Bulgaria and Croatia have not yet done so.

Critics argue that speeding up the process of monetary — as a precursor to fiscal — integration might fuel the overheating that was seen in Southern Europe after the 2007-8 financial crisis and subsequent recession.

But, “if the eurozone can generate growth throughout the 19 nations and not just the center, then any new institutions may prompt the non-euro members to want to join. If not, then the divisions would surely widen,” Linda Yueh, a professor of Economics at London Business School, told DW.

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‘It’s now or never’

Will Hutton, a British economist, told DW that while a two-speed Europe is a risk, “the time has come for this. Macron’s plans are the biggest boost to Europe since the early 1990s, the era of Jacques Delors.”

“Sure, Macron is using Merkel’s weakness, but Europe is on the cusp of an economic run and while some eastern European economies might not be able to stand the pace, Europe can’t go on at the speed of the slowest for much longer,” Hutton said, adding that the UK might even be knocking back on the EU’s door in the next five to ten years.

All non-euro EU member states except Denmark and the UK are already legally obligated to work toward adopting the euro, by satisfying various “convergence criteria,” namely:

Inflation — Member states should have an average rate of inflation that doesn’t exceed that of the three best-performing member states by over 1.5 percent for a period of one year before being assessed.

Government budgets — Member states’ ratio of planned or actual government deficit to GDP should be no more than three percent. Their ratio of government debt to GDP should be no more than 60 percent.

Exchange Rates — Member states should have respected the normal fluctuation margins of the exchange rate mechanism (ERM) and should not have devalued their currency against any other member state’s currency for at least the two years before being assessed.

Interest rates — Member states should have had an average interest rate over a period of one year before being assessed that does not exceed by more than two percentage points that of the three best-performing member states.

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Central & Eastern Europe: weary and ​​​​​wary 

“It seems unlikely that any of the major economies in Central and Eastern Europe will adopt the euro any time soon,” Carson says.

“With respect to the criteria, as things stand, Poland, Romania and the Czech Republic all meet the debt, interest rate and inflation criteria for joining,” although he added that there is a good chance that loose fiscal policy in Poland and Romania will cause budget deficits to widen beyond the 3 percent of GDP threshold by next year.

“Hungary’s deficit could also widen beyond 3 percent of GDP and with public debt still well above 60 percent of GDP, it also fails the debt criteria.”

“More importantly, political appetite for joining the euro is generally waning. Accession to the eurozone in Poland and Hungary is unlikely to happen under the ruling PiS (Law and Justice) and Fidesz governments, which have both become increasingly hostile towards EU oversight of domestic policy,” Carson says.

“Poland’s opposition is based on ideological grounds, but also public support is not sufficient. In the Czech Republic the main obstacle is public support. Most of the parties would have been open to introducing the euro, but public opinion has prevented that so far. In Hungary there is strong public support and a governmental decision ahead of the 2018 elections might be a popular step,” Daniel BarthaExecutive Director of the Center for Euro-Atlantic Integration and Democracy (CEID)  in Budapest, told DW.

The Palace of Culture and Science in WarsawPoliticians in Warsaw have warned that the creation of a multi-speed Europe could “break apart” the EU.


“Brexit is not a risk for the EU … A bigger threat is if the EU starts to break apart into a multi-speed union, into blocs where some are stronger and can decide about others,” President Andrzej Duda said this month. “The result could be a divided EU that’s not politically or economically viable, which may break apart the bloc,” he added.

The bedrock of common understanding that Merkel and ex-Polish PM Donald Tusk shared is now long gone. And ties between Warsaw and Paris have been strained since August after Macron’s speech criticizing what he called Warsaw’s attack on democracy and a French plan to tighten rules on EU posted workers, such as Polish truck drivers.

The Law and Justice (PiS) government has also taken aim at Germany, demanding war reparations, attacking plans to build a second Nord Stream gas pipeline to Russia that bypasses Poland and being highly critical of its western neighbor’s policies towards refugees.

Nonetheless, Poland will start to debate whether to join the eurozone when the bloc becomes a stable and transparent entity, Konrad Szymanski, the Polish deputy foreign minister in charge of European affairs, has said.

About 80 percent of Polish international trade is accountable in euros, so entering the eurozone will significantly decrease currency risk and simplify transactions with foreign companies. Despite this, over two-thirds of Poles oppose joining the euro area.

Prague, the Czech capitalA general election to be held October 20-21, will show whether the Czechs will seek to join the EU hard core.

Czech Republic

The Czech Prime Minister Bohuslav Sobotka wants his country to set a date for the adoption of the euro and has “the ambition to belong among the most advanced European countries.”

The Czech Republic has been cautious about joining the euro, on both the left and the right. No firm date has been set and in recent years governments have shied away from making predictions.

The country has a long reputation for running a credible monetary policy and traditionally has had interest rates below those in the eurozone.

“In the Czech Republic, Andrej Babis, who is the heavy favourite to become Prime Minister following next month’s elections, has continued to strongly reiterate that the Czech Republic shouldn’t adopt the currency,” according to Carson.


Hungarian economic policy cannot abandon its long-term intention of joining the eurozone, “but there is no rush,” the economy minister, Mihaly Varga, said in June. Vargo said a currency system where monetary policy is unified but fiscal policy is not is also a viable route.

But a senior Hungarian politician said in early August that Hungary could only consider adopting the euro when its level of economic development is closer to that of the eurozone countries.

“That is, if there is genuine convergence,” Andras Tallai, state secretary at the economy ministry, said.

Hungarian parliament bulilding is seen as ice floes float on the Danube river in Budapest In 2013, Hungarian Prime Minister Viktor Orbán proclaimed euro adoption would not happen until the country’s purchasing power parity weighted GDP per capita had reached 90 percent of the eurozone average.

“Otherwise, Hungary could be the loser of accession similar to some Mediterranean countries,” he went on, adding that Hungary won’t yet enter the Exchange Rate Mechanism (ERM) — a kind of ante-chamber for eurozone aspirants — but already meets all of the Maastricht criteria for adopting the euro, with the exception of the forint not being pegged to the euro.

Hungary has to enter to the ERM2 (the exchange rate mechanism) and meet the criteria for 2 years constantly. Hungary meets all other criteria: inflation was 0.1 percent, the deficit 2.4 percent and interest rates are also around 1 percent, and although the debt level is beyond the 60 percent limit, as it is constantly reducing, Hungary also meet that criterion.


Romanian Prime Minister Sorin Grindeanu has said Romania will adopt the euro only after wages in the country come close to those in other EU member states.

Romania has second lowest minimum monthly wage out of 20 EU member states, of 1,450 lei ($341/321 euro), after Bulgaria, according to a study by KPMG.

A study conducted last November by the European Institute of Romania showed that the country could join the Eurozone 13 years from now – if it sustains the average growth rate of the last 15 years.

Currently, Romania is below 60 percent of the European Union average in terms of GDP per capita.

“The story is slightly different in Romania. The foreign minister, Teodor Melescanu, recently announced that Romania will adopt the euro. However, he stated that this won’t happen until 2022. And given that previous plans to adopt the euro have been shelved, this date could easily be delayed. In short, Romania won’t become a member of the euro-zone any time soon,” Carson says.

Frankreich PK Migrationsgipfel in Paris (Reuters/C. Platiau)Angela Merkel is supporting Macron’s call for a new powerful eurozone finance minister post to oversee economic policy across the bloc. She said the new role could provide “greater coherence” to economic policy.

Merkel holds the key

German Chancellor Angela Merkel also backed a plan for a European Monetary Fund (EMF) that would redistribute money within the bloc to where it was needed.

Macron believes that the monetary union suffers from too little centralization and needs its own budget, while Merkel views the bloc’s problem as over-centralization and too little national responsibility.

Merkel has backed her Finance Minister Wolfgang Schäuble‘s proposal to turn the European Stability Mechanism, the eurozone’s bailout fund, into the EMF, but she does not see the official possessing “expansive powers.”

Merkel has said she wants a budget of “small contributions” rather than “hundreds of billions of euros.”

France will implement these deep structural reforms on the proviso that Germany agrees to modest steps towards fiscal federalism in the eurozone. But many in Germany — and far beyond as well — appear skeptical about Macron’s ability to achieve his domestic goals.

Still, observers say, Merkel will want to help Macron politically as it is in Germany’s interests to see that he is not replaced at the next presidential election in France by Marine Le Pen of the National Front.

Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero

September 19, 2017
Behind every bubble is a good idea bursting to get out, and Bitcoin kind of looks like a good idea, at least if you squint a bit.
Image result for Chinese yuan, photos

By James Mackintosh
The Wall Street Journal
Updated Sept. 18, 2017 3:08 p.m. ET

Behind every bubble is a good idea bursting to get out, and bitcoin kind of looks like a good idea, at least if you squint a bit. A digital currency without borders that governments can’t control and that allows secret online transactions? I’m in. Bitcoin itself? Not so much.

So is a single bitcoin worth $500,000, $5,000, $500 or $0? I’m inclined to say $0, especially if bitcoin’s value depends on it being adopted as a global digital currency to replace dollars. There is no chance whatsoever that bitcoin can displace the dollar, for the simple reason that it is badly designed. Bitcoin can handle a pathetically small number of transactions, and uses an inordinate amount of electricity to do so, making it entirely unsuitable to replace ordinary money.

Image result for Bitcoin, photos

Even if bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum that bad money drives out good. Given the choice of spending inflationary government-issued money or something which holds its value, everyone would spend the bad paper stuff and hoard the bitcoin. You wouldn’t want to be the person who spent 10,000 bitcoins on two pizzas in 2010, when a bitcoin was worth a fraction of a cent. Those bitcoins are now worth $40 million. But if no one spends bitcoin, it will never get established as a currency.

Digital Gold Or The Real Inert Lump Of Metal? / Bitcoin’s surged while gold’s done little in recent yearsSource: Thomson Reuters (gold); Coindesk (bitcoin)

There are two somewhat less ambitious claims for bitcoin that could give it value. The first is that it is a limited form of money because of its usefulness for dealing illegal drugs and dodging capital controls. The second is that it is a form of digital gold: an insurance that will keep its value even if governments confiscate or inflate away the buying power of the currencies they issue.

Let us unpack the idea of bitcoin being based on illegal transactions. Dan Davies, a bank analyst at Frontline Analysts in London, came up with a value thanks to bitcoin’s built-in limit of 21 million in circulation.

In any currency, the money supply multiplied by how often it circulates equals the price level times the number of transactions. For bitcoin we can estimate three of the four variables, Mr. Davies says. He observed that even criminals don’t set prices in bitcoin, but rather in dollars, and then immediately convert. Assume that all drug dealing moves online, that bitcoins circulate as rapidly as ordinary currencies and estimate a $120 billion-a-year market for illegal drugs, and the formula spits out an ultimate value of $571 for a single bitcoin. The more drugs traded, the higher the value, and the more bitcoin hoarded rather than spent, the higher the value.


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Drug dealers might be willing to put up with the limitations of bitcoin, notably the uncertain time taken to complete a purchase and the high transaction costs. Laundering dollars is more expensive.

But studies cited by the United Nations Office on Drugs and Crime suggest that cryptocurrency-based online drug dealing remains relatively small, and focused on retail, meaning fewer and smaller transactions than Mr. Davies’s limiting assumption, so justifying a much lower bitcoin price.

On this basis the recent price of $3,950 is mostly speculation, and J.P. Morgan Chase & Co. Chief Executive James Dimon’s comparison to the 17th-century Dutch tulip mania is apt. Bitcoin is “being driven all over the place by speculative portfolio flows,” says Mr. Davies.

Digital gold might be more appealing for bitcoin’s true believers, who would surely prefer to avoid basing a currency on illegal activity.

Gold is hopeless if you want to pay the mortgage or buy bread, but is useful insurance because we can be confident that if a government currency collapses the shiny metal will roughly hold its value.

It helps that history holds plenty of examples of currencies losing all their value to hyperinflation while gold could still be bartered for food and shelter.

Gold has a value far above what is justified by its uses in electronics and jewelry only because (almost) everyone agrees that it has value. That “network effect” is what bitcoin needs to establish itself, and the more attention it garners, the more likely it is to become established. Yet gold has had thousands of years and a history of being used to back money to support its position.

Bitcoin pioneered the cryptocurrency movement, but after eight years, the virtual currency is still struggling to find mainstream acceptance. Author and WSJ Moneybeat reporter Paul Vigna joins Lunch Break’s Tanya Rivero to discuss why many people talk about bitcoin, but most don’t use it. Photo: Bloomberg (Originally published April 21, 2017)

Technological disruption may be overturning many societal norms, but securing society-wide recognition as a safe asset takes more than the backing of tech evangelists and a bunch of get-rich-quick stock promoters.

Still, the potential to replace gold gives us some figures to work with. Thomson Reuters GFMS estimates there were 2,155 metric tons of gold held in exchange-traded funds. Switch all of that into bitcoin and it would justify a price of about $5,500 for the 17 million bitcoins currently outstanding.

We could be more optimistic and think bitcoin might replace gold coins and bars. Leave aside that the gold is better than bitcoin because gold doesn’t depend on having an electricity supply, and the 24,000 metric tons GFMS estimates have been bought for investment in the past half-century would justify a price of $61,000 for every bitcoin.

If we assume that bitcoin will either succeed completely in displacing gold or fail and be worth zero, it helps explain why the digital token has been so incredibly volatile, with a 40% loss in two weeks, and a 33% rebound since Friday’s low. Based on the simple choice between total success and failure, we can very roughly say that bitcoin at 70% of the gold ETF-derived price suggests a 70% chance of displacing so-called paper gold as society’s chosen emergency store of value, and a 6% chance of displacing physical gold.

Even digital dreamers should accept that is far too high.

Write to James Mackintosh at


China confident of maintaining strong growth, Premier Li Keqiang tells heads of six global agencies

September 12, 2017

Nation’s economy was becoming healthier and more sustainable, Li tells IMF, World Bank, WTO chiefs

By Catherine Wong
South China Morning Post

PUBLISHED : Tuesday, 12 September, 2017, 3:43pm
UPDATED : Tuesday, 12 September, 2017, 3:43pm

Chinese Premier Li Keqiang said on Tuesday he was confident China would maintain the strong economic growth it achieved in the first half of the year.

Speaking at a press briefing after a round-table meeting with the heads of six global agencies, including the World Bank, International Monetary Fund and the World Trade Organisation, Li said China’s economy was becoming healthier and more sustainable.

“Judging from the trend of China’s economy over the past few months, it will continue to maintain the momentum of the first half of this year,” he said.

“There will not be any big changes to the trend of China’s economic development.”

The “1+6” dialogue was established in July 2016 when Beijing was working hard to persuade the world that neither its economy nor its currency was on the brink of crashing.

Since then, the situation is has changed significantly. China’s GDP expanded 6.9 per cent in the first half of this year, compared with 6.7 per cent for the whole of 2016, while the yuan has gained almost 6 per cent against the US dollar since January.

Besides the improvements in the headline figures, Li said China’s economy was becoming healthier and more sustainable.

“China has shifted from excessive reliance on investments and exports to a coordinated development of consumption, investment and exports,” Li said.

The progress achieved in shutting down obsolete industrial facilities had “exceeded our expectation”, he added.

Li said also that China’s debt situation, which has been a source of concern regarding the stability of its economy, was “under control”. He did not mention the yuan’s exchange rate.

Speaking at the press briefing, which was attended by all six of the visiting dignitaries, Jim Yong Kim, president of the World Bank, noted China’s continued “leadership in promoting open trade” and said its “Belt and Road Initiative” was expected to help infrastructure spending around the world.

The way in which Li had “embraced” multilateral trade was “critical in what has become a very challenging time”, he said.

Christine Lagarde managing director of the International Monetary Fund, said the IMF was seeing the “progress of reform across a wide range of areas” in China. The agency would continue to offer its “strong support” to China’s reform efforts in terms of boosting consumption, increasing the role of market forces and focusing on the quality rather than quantity of growth, she said.

“Your leadership is as clear as the blue sky in Beijing today,” Lagarde said.

The four other leaders at the talks were Roberto Azevedo, director general of the World Trade Organisation; Guy Ryder, director general of the International Labour Organisation; Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development; and Mark Carney, chairman of the Financial Stability Board.