Posts Tagged ‘International Monetary Fund’

IMF: World Headed Toward the Brink of a New Financial Crisis

October 7, 2015

Global economics: $3 trillion corporate credit crunch looms as debtors face day of reckoning, says IMF

A poisonous “triad” of global risks is pushing the world to the brink of a new financial crisis, says stark IMF report

Traders react in the Euro Dollar pit at the Chicago Mercantile Exchange to an announcement by the United States Federal Reserve on interest rates January 28, 2004. The U.S. Federal Reserve opted on Wednesday to hold interest rates at 1958 lows to keep the economic recovery rolling but changed its wording on the future of rates slightly to say it can 'be patient' before lifting borrowing costs. MRKET REUTERS/John Gress  JG/JDP - RTRBDZ4

“Risk premia could decompress in a disorderly way causing a vicious cycle of firesales, redemptions, and more volatility” say IMF
The Telegraph

Governments and central banks risk tipping the world into a fresh financial crisis, the International Monetary Fund has warned, as it called time on a corporate debt binge in the developing world.

Emerging market companies have “over-borrowed” by $3 trillion in the last decade, reflecting a quadrupling of private sector debt between 2004 and 2014, found the IMF’s Global Financial Stability Report.

This dangerous over-leveraging now threatens to unleash a wave of defaults that will imperil an already weak global economy, said stark findings from the IMF’s twice yearly report.

The Fund warned there was no margin for error for policymakers navigating these hazardous risks.

The slightest miscalculation, they said, could collapse into a “failed normalisation” of interest rates and market conditions, wiping 3pc from the world’s economic output over the next two years.

How debt levels compare in the emerging and developed world

But stretched corporate balance sheets were just one element of unprecedented “triad” of challenges facing the financial system, said the twice yearly report.

Seven years after the financial crisis, a combination of lingering debt burdens in advanced economies, and vanishing market liquidity could result in a new credit crunch when conditions tighten.

• Five charts that explain a miserable global economy right now

“Policy missteps and adverse shocks could result in prolonged global market turmoil that would ultimately stall the economic recovery,” said Jose Viñals, financial counsellor at the IMF.

The world’s major central banks should ensure policy remains “accommodative” for fear of setting off a new wave of instability that would see bond prices rise and asset prices collapse, said the IMF.

“Risk premia could decompress in a disorderly way causing a vicious cycle of firesales, redemptions, and more volatility,” said Mr Viñals.

The report called on the Federal Reserve to hold off on its first interest rate hike in nine years and for the authorities in the eurozone and Japan to continue with unprecedented stimulus measures.

“Managing any outbreaks in financial contagion will require nimble and judicious use of available policy buffers,” added the report.

The IMF painted a picture of a brittle financial system that was coming to the end of a period of cheap liquidity propped up by low rates.

These benign conditions are set to evaporate as the credit cycle tightens in emerging markets.

Flashing red: emerging markets are at the tail-end of the credit cycle

The summer’s stock market volatility and unprecedented outflows from emerging markets hint at the disruption that awaits markets, said the report.

“Some markets show clear signs that liquidity conditions have worsened and that accommodative monetary policy is masking underlying risks,” the report said.

“The challenge will be for abnormal market conditions to adjust smoothly to the new environment.”

China’s authorities will also have to put up with mass corporate bankruptcies and debt write-offs, said the IMF.

In the wake of its stock market collapse earlier this year, the report called on Beijing to embark on an “orderly deleveraging” by removing stabilisers artificially propping up its indebted companies.

“Moving decisively will ultimately prove less costly than trying to grow out of the problem.”

Although governments in the developing world had taken the right policy actions to strengthen their public finances and reduce external debt, leveraged banks and corporates could now drive them into the ground, said the report.

Sovereigns could then lose their investment grade status from ratings agencies, heaping more pressure on spiralling borrowing costs.

Last month, Latin America’s biggest economy, Brazil, was “junked” by Standard & Poor’s rating’s agency.

This cocktail of financial risks is compounded by an environment of anaemic growth. The IMF forecasts global output will fall to its lowest level in five years at just 3.1pc this year.

“Low nominal growth would put pressure on debt-laden sovereign and private balance sheets, raising credit risks,” said the report.

Accommodative monetary policy is masking underlying risks

“Corporate default rates would rise, particularly in China, raising financial system strains, with implications for growth.

“Some markets show clear signs that liquidity conditions have worsened and that accommodative monetary policy is masking underlying risks.”

In a bid to manage the transition, the IMF urged authorities to play closer attention to the asset management industry and beef up capital requirements for emerging market banks.

In Europe, EMU authorities should press ahead with their plans for a banking union to plug the architectural gaps that have undermined the future of the single currency.

“What we want to achieve is a successful normalization of financial conditions and monetary policies together with a sustained economic recovery”, said Mr Viñals.

“Three percent of global output is at stake”.

China Starts Dumping U.S. Government Debt — One Time Top Buyer — Pessimism About the World Economic Outlook

October 7, 2015

China and The U.S. — Shift in Treasury holdings is latest symptom of emerging-market slowdown hitting global economy

Pessimism about the world economic outlook

People’s Bank of China

By  Min Zeng and Lingling Wei
The wall Street Journal

Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.

Few analysts expect much higher yields in the Treasury market as a result. Foreign private purchases of U.S. debt have increased amid pessimism about the world economic outlook. U.S. firms and financial institutions continue to buy Treasuries, as do some foreign central banks.

Xi Jinping and Barack Obama at the White House

Still, many investors say the reversal in central-bank Treasury purchases stands to increase price swings. It could also pave the way for higher yields when the global economy is on firmer footing, they say.

Central-bank purchases over the past decade are widely perceived to have “helped depress the long-term Treasury bond yields,’’ said Stephen Jen, managing partner at SLJ Macro Partners LLP and a former economist at the International Monetary Fund. “Now, we have sort of a reverse situation.”


In the past decade

Foreign official net sales of U.S. Treasury debt maturing in at least a year hit $123 billion in the 12 months ended in July, according to Torsten Slok, chief international economist at Deutsche Bank Securities, the biggest decline since data started in 1978. A year earlier, foreign central banks purchased $27 billion of U.S. notes and bonds.

In the past decade, large trade surpluses or commodity revenues permitted many emerging-market countries to accumulate large foreign-exchange reserves. Many purchased U.S. debt because the Treasury market is the most liquid and the U.S. dollar is the world’s reserve currency.

Foreign official purchases rose as high as $230 billion in the year ended in January 2013, the Deutsche Bank data show.

But as global economic growth weakened, commodity prices slumped and the dollar rose in anticipation of expected Federal Reserve interest-rate increases, capital flowed out of emerging economies, forcing some central banks to raise cash to buy their local currencies.

In recent months, China’s central bank in particular has stepped up its selling of Treasurys.

The People’s Bank of China surprised investors by devaluing the yuan on Aug. 11. The heavy selloff that followed—triggered by concerns that Beijing would permit more weakening of the yuan to help spur growth—caught officials at the central bank somewhat off guard, according to the people.

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To contain the selloff, the PBOC has been buying yuan and selling dollars to prevent the yuan from weakening beyond around 6.40 per dollar.

Internal estimates at the PBOC show that it spent between $120 billion and $130 billion in August alone in bolstering the yuan’s value, according to people close to the central bank.

China isn’t alone. Russia’s holdings of all U.S. Treasury debt fell by $32.8 billion in the year ended in July, according to the latest data available from the U.S. Treasury. Taiwan’s holdings dropped by $6.8 billion. Norway, a developed nation hit by the oil-price decline, reduced its Treasury holdings by $18.3 billion.

Some other central banks increased holdings. India increased its Treasury debt holdings to $116.3 billion at the end of July 2015 from $79.7 billion a year ago. The Federal Reserve held $2.45 trillion of Treasury debt at the end of September and isn’t expected to sell U.S. debt soon.

Traders said China’s selling has been a factor in why 10-year Treasury yields have remained near 2% as stock and commodity markets tumbled in recent months. The yield fell as low as 1.6% before the so-called taper tantrum in mid-2013 as the Fed prepared to end monthly bond purchases.

The 10-year yield settled at 2.033% Tuesday, compared with 2.173% at the end of 2014 and 3.03% at the end of 2013. Yields fall as prices rise.

Some analysts have warned for years that persistent fiscal deficits made the U.S. Treasury market vulnerable to a reduction in foreign purchases. But many investors say they believe longtime holders such as China won’t sell bonds in a way that threatens to disrupt the market.

“I can’t rule out China being a big risk to the bond market but it’s not something that is keeping me awake at night,’’ said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages $95 billion. “While they may decide to sell more Treasury bonds, the transactions are likely to be done in a prudent way.”

Indeed, bond yields have remained persistently low for the past decade and have fallen sharply since the 2008 crisis, thanks in part to strong official and private demand for debt deemed safe.

In the 12 months to July, foreign private investors bought long-term Treasury debt at the fastest pace in more than three years.

U.S. bond mutual funds and exchange-traded funds targeting U.S. government debt have attracted $20.4 billion net cash this year through the end of September, poised for the biggest calendar-year inflow since 2009, according to fund tracker Lipper.

Sales by foreign central banks could accompany a further decline in bond yields, by underscoring the depth of economic problems hitting emerging regions. For over a decade before the recent slowdown, developing nations, led by China, were viewed as the engine for global economic growth.

“We have a problem of insufficient demand globally,’’ said Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing and the author of “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.”

Slack in the U.S. economy argues against a sharp rise in rates, said Prof. Pettis.

“U.S. bond yields are not going to rise significantly unless we have much stronger growth and higher inflation,” he said.

Write to Min Zeng at and Lingling Wei at


Chinese President Xi Jinping (L) holds a small-range talks with U.S. President Barack Obama at the White House in Washington D.C., the United States, Sept. 25, 2015. Xi arrived in Washington, the second stop of his state visit to the United States, on Thursday after a busy two-and-a-half-day stay in Seattle. (Photo and caption by Xinhua)

Xi Jinping meets Barack Obama: four key elements of US-China rivalry they won’t agree on

September 24, 2015


As Xi Jinping arrives in Washington for a “fence-mending” dinner with Barack Obama, disagreements over key elements pose huge challenges

Barack Obama and Xi Jinping meeting in Amsterdam last year

Barack Obama and Xi Jinping meeting in Amsterdam last year  Photo: AP

By Neil Connor, Beijing Correspondent
The Telegraph
September 24, 2015


Xi Jinping was due to arrive in Washington for a dinner with Barack Obama on Thursday night, in which he will aim to reassure the US president about a rising China.

The Chinese president said he favours a “new model of major country relationship” built on understanding, rather than suspicion.

But behind the pomp and circumstance of his first official state visit, disagreements over key elements have posed enormous challenges for what has been dubbed his “fence-mending expedition”.

Foreign Policy

Ahead of Xi Jinping’s visit, United States national security advisor Susan Rice said Washington takes “no position” on rival territorial claims in the South China Sea, but Beijing’s muscle flexing in the region is a major cause of concern for President Barack Obama’s administration.

Satellite photographs taken earlier this month show China is appearing to carry out preparatory work on a third airstrip on one of several artificial islands in the disputed waters.

China’s island building programme coincides with its increasingly aggressive posturing over the South China Sea, which it claims in almost its entirety, much to the anger of its Asian neighbours – and the US.

Beijing is also embroiled in a bitter territorial dispute with Japan over tiny islets in the East China Sea, where it has set up an Air Defence Identification Zone (ADIZ).

Despite Ms Rice’s comments, China’s willingness to confront its neighbours has caused concern in Washington, which has been carrying out a military and political ‘pivot’ to Asia in recent years.

Richard Bitzinger, a regional security expert at the S.Rajaratnam School of International Studies in Singapore, told The Telegraph the Xi is attempting to “alleviate US concerns” with his “fence-mending expedition”, but that does not mean he will give way.

“Xi is also not going to back down from his increasingly assertive, even aggressive, stances,” Mr Bitzinger said.

“He’s a nationalist, pure and simple, and he’s in the USA to convince Washington of that as well.”


China shut down a bilateral cyber security working group last year when the US charged five Chinese military officers with hacking American firms, underscoring the deep distrust that exists between the two sides over cyberspace.

Tensions mounted further earlier this summer after an attack on the US government’s Office of Personnel Management, which compromised the personal date of four million people.

“This isn’t a mild irritation,” Ms Rice said, speaking about concerns that Beijing is at the centre of large-scale cyber-theft. “It’s an economic and national security concern.”

The issue has been a major stumbling block between forging closer relations between the two nations, but Obama has stepped back from targeting Chinese firms and individuals with sanctions.

Hopes that a “minimal consensus on cybersecurity” might become a reality increased with Mr Xi’s decision to send senior official Meng Jianzhu to the US for talks ahead of the president’s visit, Jean-Pierre Cabestan, professor of government and international studies at Hong Kong Baptist University, said.

“His (Xi’s) interest is to tone down the bones of bones of contention, to show openness and to demonstrate a willingness to talk about anything and negotiate the burning issues,” Prof Cabestan told The Telegraph.

Chinese state media is also building up hopes of an agreement, but frustrations remain on the “double standards” from Washington on cybersecurity.

“It accuses other countries, especially China, of industrial espionage or other cyber attacks while the US monitors other countries’ senior officials or political figures almost constantly,” Wu Xinbo, director of the Centre for American Studies at Shanghai’s Fudan University, told the Global Times newspaper.

Trade and investment

“I think it is noteworthy that he visited the big Boeing plant in Seattle,” said Mr Bitzinger, referring to the early stage of Mr Xi’s visit on the American West Coast.

“China is Boeing’s biggest single customer which is worth billions in US exports, and he is not letting the USA forget that.”

Chinese firms signed $38billion (£25billion) worth of deals for 300 aircraft this week, the latest huge outlay highlighting the country’s economic importance to the US.

Boeing forecasted last month that China will need 6,330 new airplanes over the next 20 years, worth a massive $950 billion.

China-US trade reached $555.1billion last year, and Mr Xi may feel as if he is in the driving seat with regards to long-running negotiations over a bilateral investment treaty between the two countries.

China is hoping for more US investment – particularly in high-tech industries.

It also wants the US to shed some of its security reviews and other “burdens and obstacles” for potential Chinese investors, and to loosen import restrictions.

But there are major concerns about the strength of the Chinese economy, with both the Asian Development Bank and the International Monetary Fund lowering their forecasts for Chinese growth.

China is expected to struggle to meet its seven per cent target for this year, after it revised its 2014 growth figure to 7.3 per cent, the lowest in 24 years.

“In the long run the fundamentals of the Chinese economy are good,” Xi told a meeting of top executives from both countries in Seattle.

However, Prof Sonny Lo, from the Hong Kong Institute of Education, said: “The US strategic think tanks will doubt this, given the momentum and structural conditions of the Chinese economy.

Technology bosses meet Xi Jinping in AmericaTechnology bosses meet Xi Jinping in America  Photo: AP

China’s seat at the ‘top table’

British chancellor George Osborne said on his visit to China this week that the Asian giant deserves to “take its place at the top table”.

Mr Osborne, not for the first time during his trip, delighted his Chinese hosts by urging US Congress to back quota and governance reforms of the International Monetary Fund (IMF), which would see more power given to emerging economies like China.

Osborne also spoke of his pride in leading Britain into the Asian Infrastructure Investment Bank (AIIB) – the first major Western economy to join the China-led institution, which is expected to be launched next year.

The US views both the AIIB – which will have a capital of $100billion and has already attracted most of the major European economies as prospective members – and China’s demands for more influence with the IMF with suspicion.

“It worries that China’s rise may pose a threat to its dominance in the world,” Xu Winbo said.

Mr Xi said in an interview in the Wall Street Journal this week that he wants the US to help China “improve” the global system.

“This will not only leverage our respective strengths to enhance cooperation, but also enable our two countries to jointly respond to major challenges facing mankind,” he said.

Former US Federal Reserve chairman Ben Bernanke previously suggested that the US Congress’ decision to block reform of the IMF pushed China into creating the AIIB.

“I understand why other countries say, ‘well let’s take our marbles and go home,’” he said.

The Obama administration – which backs the IMF reforms – appeared outmaneuvered as it watched its global partners falling over themselves to sign up to the AIIB.

Which means that Obama may be forced to engage in some ‘fence-mending’ himself on this point, if he is to secure Chinese support on his own objectives.

Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve

September 18, 2015

China — Global economy continues slow expansion as governments stalled on policy overhauls

Reserve Bank of India Governor Raghuram Rajan, at left at the Fed’s Jackson Hole, Wyo., conference last month, says central banks alone can’t drive economic growth. 
Reserve Bank of India Governor Raghuram Rajan, at left at the Fed’s Jackson Hole, Wyo., conference last month, says central banks alone can’t drive economic growth. Photo: Reuters

Central bankers have injected roughly $8 trillion into the global economy since the financial crisis. In return, the world has remained in a low-growth rut.

The Federal Reserve cited market turmoil and a weak economic picture overseas in deciding Thursday not to back off from one of the most aggressive global monetary policies in decades. Whenever the Fed moves to raise interest rates, one lesson remains: Cheap money alone can’t solve the world’s economic ills.

The Fed noted positive developments at home, including increased household spending and business investment, but worried conditions overseas could restrain U.S. growth and put further downward pressure on near-term inflation.

“A lot of our focus has been on risks around China, but not just China—emerging markets more generally and how they may spill over to the U.S.,” said Fed Chairwoman Janet Yellen, noting “the significant economic and financial interconnections between the U.S. and the rest of the world.”

Federal Reserve Chairwoman Janet Yellen explains factors currently weighing on the inflation rate and when they are expected to lift, potentially moving inflation toward the Fed’s 2% target rate.
After looking at global economic stresses, Federal Reserve policy makers decided not to raise interest rates. WSJ Chief Economics Correspondent Jon Hilsenrath explains why they held off. Photo:AP

Her unease underscores in part the limits of loose monetary policy as a singular response to economic weakness. Instead of using the breathing room of low interest rates to revamp their economies, governments around the globe have failed to enact longer-lasting policy overhauls as they try to combat an array of demographic and other challenges.

“Finance, especially as motivated by central banks, is really only a lubricant to growth,” said Raghuram Rajan, head of the Reserve Bank of India, at a recent meeting of top global finance officials. “It can’t be the underlying driver of growth.”

Since the financial crisis began in 2007, the average key interest rate set by central banks has fallen by around 4 percentage points in advanced countries and 2 points in emerging markets. Central banks have also bought bonds and other assets equal to 10% of global output to stir growth in the postcrisis era.

Yet global growth has persistently fallen short of expectations. In April 2010, the International Monetary Fund projected the world economy would grow 4.5% per year from 2011 through 2014. In fact, it grew just 3.6% per year. The fund now projects growth of 3.3% this year, revised down from 3.8% a year ago.

Increasingly, the global problem isn’t just demand, but weaker capacity to supply goods and services with available capital and labor, what economists call “potential growth.” This is due to declining growth of labor-force populations and feeble growth in productivity, which is output per worker.

Weighed down by debt, eurozone nations have struggled to cut unemployment and revive investment and business lending. Japan has failed to fix the inefficiencies dragging down its economy. China, Brazil, Turkey and a host of other major emerging markets have reached the limits of their ability to expand without radical policy overhauls.

And across the world, declining growth of working-age populations is undermining potential growth rates—the ability of economies to expand based on the availability of workers, know-how and capital.

Many of the overhauls needed to make economies more competitive, innovative and productive—such as opening up protected sectors and deregulating labor markets—often face political opposition. Governments have also found it difficult to boost spending amid high debt levels or find the financing needed for infrastructure projects that, while improving growth prospects, have questionable rates of return over long time horizons.

The fact that the U.S. is preparing to raise interest rates even though the economy is expanding at a relatively tepid pace is one consequence of slower potential growth. The central bank is preparing to move in large part because the nation’s unemployment rate has fallen to almost pre-recession levels, not because there has been a strong rebound in overall economic output. On Thursday, the Fed lowered its forecast for the long-run growth outlook, saying the U.S. economy would grow annually from 1.8% to 2.2%, down from its June forecast of 2.0% to 2.3%.

The problem of falling potential growth is particularly acute for China and nations tied to the world’s second-largest economy. The Asian powerhouse’s slowdown is fueling worries among many outside economists that the country’s growth rate is actually several percentage points below the government’s official 7% target for 2015.

Citigroup’s research arm, for one, is now warning private-bank clients that China’s deceleration is increasingly at risk of pulling the global economy into a recession. Beijing says it is committed to moving its economy away from an export-led, credit-fueled model and toward more reliance on domestic consumption, an overhaul the IMF says is necessary to ensure healthy long-term expansion.

Fed Vice Chairman Stanley Fischer being interviewed during the Jackson Hole conference. Photo: Jonathan Crosby/Reuters
In aggregate, the IMF expects potential output in advanced economies will increase only by 0.3 percentage point over the next several years to 1.6%, well below the 2.2% recorded before the financial meltdown. The capacity of major emerging markets to grow is seen shrinking by 2 percentage points from pre-crisis levels to 5.2% over the same period.

The world is settling into a “new normal” of slower expansion, the fund says.

Yet a relatively firmer U.S. expansion gives the Fed some latitude to normalize policy. But the nation still faces many of the same growth challenges of other economies, including slowing population growth and cautious businesses. The American economy will be running at one of the slowest growth rates in which the Fed has started a rate increase cycle.

Even if the Fed moves rates up gradually, while other countries face dim or weakening growth prospects and more central-bank easing, economists are predicting a long period of turbulence in global markets.

“Until that transition is complete—and different emerging market countries will progress at different speeds—emerging market financial assets are likely to remain under pressure,” said Hung Tran, executive managing director at the Institute of International Finance, an industry group representing more than 500 of the world’s largest financial firms. “In particular, emerging market credit markets could be the next shoe to drop.”

Write to Ian Talley at

Worries Rise Over Global Trade Slump

September 14, 2015

Growth in exports and imports is lagging behind the pace during past expansions, threatening productivity and living standards

Cargo ships sit docked at the Port of Newark in Newark, N.J., in June. Trade has slowed this year around the world, troubling economists. 
Cargo ships sit docked at the Port of Newark in Newark, N.J., in June. Trade has slowed this year around the world, troubling economists. Photo: Aaron Showalter/Bloomberg News


By William Mauldin
The Wall Street Journal
Sept. 14, 2015 1:26 p.m. ET

A sharp drop in global trade growth this year is underscoring a disturbing legacy of the financial crisis: Exports and imports of goods are far lagging behind the pace during past expansions, threatening future productivity and living standards.

For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists. Before the recent slump, the last year trade underperformed during an economic expansion was 1983.

“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” said WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”

Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.

Economists blame the slowdown on many factors, from China’s shift away from certain kinds of manufacturing to a decline in international investment. They also point to a dearth of new big trade agreements and trade barriers erected after the 2008 downturn, as well as a newfound reluctance by companies to source products and components far from home.
Few see any signs that trade will soon regain its previous pace of growth, which was double the rate of economic expansion before 2008. In 2006, global trade volumes grew 8.5%, compared with a 4% expansion in global GDP.

This year the WTO is expected to cut its 2015 trade forecast a second time after a sudden contraction in the first half of the year—the first such decline since 2009.

Much of the slowdown comes from the sluggish performance of emerging economies, including China, compared with their brisk growth in prior decades. The shift has prompted economists to wonder whether the prolonged burst of trade-driven globalization is over.

“It’s fairly obvious that we reached peak trade in 2007,” said Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank.

World trade volumes may rebound a bit in the second half of the year, but grow just 1% for all of 2015, estimates Paul Veenendaal, an economist at the CPB Netherlands Bureau for Economic Policy Analysis, which closely follows world trade. That is well behind the expected level of global economic growth, forecast at 3.3% by the International Monetary Fund.

“What we saw in the first half of the year is that the fall was from a remarkable decline in trade in China,” Mr. Veenendaal said. “My guess is that it will pick up again this year, but I’m not sure.”

For the first seven months of the year, U.S. exports dropped 5.6% to $895.7 billion. The value of South Korean exports shrank 14.7% in August from a year earlier, the sharpest fall in six years, as shipments to China dropped. Chinese imports in August fell 13.8% in dollar terms from a year earlier, after an 8.1% decrease in July.

In the 1980s and 1990s, China’s manufacturing economy began its rapid ascent, and the collapse of the Soviet Union expanded trade in new market-based economies. Beijing joined the WTO in 2001, nudging down some tariffs and committing to observe many global rules of the road. Other emerging economies also took off, buoyed by cheap credit, and many companies sought to fatten profit margins by outsourcing production to countries with lower labor costs.

“When I started with Caterpillar in 1975, our major export markets were rich countries—Canada, Australia, Europe and oil-producing countries,” said Bill Lane, director of global government affairs at Caterpillar Inc. “Fast forward 40 years, and today our big customers are the developing countries—Latin America, Africa, the Middle East, Asia.”

Now, some of those developing countries are giving Caterpillar its biggest headaches. The company said sales of construction equipment in Asia fell 30% in the first quarter, led by declines in China and Japan.

During the 2008 crisis, trade collapsed sharply as credit dried up and economies contracted around the world. Trade later appeared to recover, although it never returned to its previous clip.

Part of the reason is companies have been worried about making big capital investments in plants, economists say. Another factor is Europe’s slow recovery, which has weighed on trade among the 28 countries of the European Union, as well as reducing the EU’s demand for Chinese goods including machinery and electronics, not to mention U.S. exports.

Meantime, disasters such as the tsunamis in Asia, disruptive flooding in Thailand and even the recent explosion at China’s port of Tianjin are leading corporate executives to rethink the wisdom of supply chains spanning the globe.

“There has been some shortening of the global value chain. There has been some re-shoring of production—or at least restructuring of value chains to move production closer for security,” said Douglas Lippoldt, senior trade economist at HSBC Holdings PLC.

Another drag is the failure of government officials to complete major trade agreements. The WTO’s Doha Round of negotiations that envisioned deep trade liberalization has stalled, although the Geneva-based trade body completed a deal on removing impediments that could boost trade in developing countries. Countries that trade over $1 trillion a year in high-tech goods agreed to eliminate tariffs on the products, but the time frame is unclear. Advanced economies, now more reliant on services and newer technologies than traditional manufacturing, would see some additional growth from new trade agreements like the Pacific deal President Barack Obama has been seeking to conclude for years, economists say.

Critics of globalization warn that bursts of trade can shift jobs and alter cultures around the world. Still, most experts see trade as a major engine for raising overall living standards because international shipments broaden the pool of customers for a given product and enhance competition and specialization, cutting prices for consumers.

Asian countries that have opened their borders have seen millions of people move from small farming to better-paying jobs at exporting factories. Today’s lackluster trade growth could slow efforts to alleviate poverty, economists say.

While China’s economic policies and inexpensive labor helped build a manufacturing powerhouse, Beijing is now engineering a giant shift toward consumption, services and technologically advanced manufacturing.

China has started building many of the products it used to import. In 2004, China’s exports of machinery and transportation equipment started to exceed its imports as domestic production surged. By 2013, those exports appeared to plateau at over $1 trillion.

Some multinational companies this year say they are finding it harder to get goods into—and out of—China.

Fiat Chrysler Automobiles NV said its Maserati shipments to China dropped 37% in the second quarter, partly the victim of an anticorruption campaign that discourages conspicuous consumption. Fiat Chrysler Chief Executive Sergio Marchionne said its imported Jeep models face similar challenges in a country that increasingly is buying domestically made goods.

“What I think is impacted is the ability to extract a significant margin for cars that are imported from the outside for a variety of reasons,” Mr. Marchionne told analysts in late July. “We have seen a drop both in volumes and the ability to generate margins. And I think that’s something that’s permanent.”

In times of crisis countries have devalued their currencies to spur exports and boost growth, but foreign-exchange moves have little chance of raising trade overall and may be unappealing given international pressure to avoid devaluation and its limited economic upside.

Japan’s recent quantitative easing weakened the yen but did little boost to net exports, according to a paper from the Brookings Institution this month. For China, letting the yuan weaken further would give exporters only a limited advantage, given their imported materials and foreign debt payments.

Write to William Mauldin at

No more bail-outs: Germany blocks Juncker’s eurozone reform drive

September 11, 2015

Eurozone: Berlin brands Juncker’s visions to deepen monetary union as ‘unacceptable’, rejecting taxpayer rescues for banks and sovereigns

Wolfang Schaeuble wants new rules preventing taxpayer money going to rescue indebted banks and governments
The Telegraph

Germany is set on a collision course with Brussels’ visions for deeper eurozone integration, by setting out its objections to greater financial risk-sharing in the single currency.

Berlin is determined to break the toxic link between distressed banks and indebted governments, and will insist on new “bail-in” procedures to impose losses on private sector creditors in the event of another financial crisis.

The eurozone has been thrown into turmoil since 2009, after the banking systems of Ireland, Spain, and Greece were rescued by taxpayer money, loading debt on to government balance sheets.

As Europe’s largest creditor nation, Germany wants senior bank bondholders and private sector depositors to take the hit when banking or government solvency is threatened.

The red lines have been laid out in a Germany finance ministry “non-paper” seen by the Financial Times. It will be presented by Wolfang Schaeuble at an informal gathering of eurozone finance ministers in Luxembourg today.

“The restructuring of banks without taxpayers’ money will function only if sufficient resources are available for a bail-in and if member states ensure that the bail-in is legally enforceable,” said the paper.

Germany’s priorities for the euro contrast with those of France and the European Commission, who are determined to shore up monetary union through increased risk-sharing among member states. This would begin with the introduction of a common bank deposit insurance fund and the creation of a eurozone treasury, both of which were championed by Jean-Claude Juncker earlier this week.

Berlin however will not support plans for risk-pooling before it receives cast-iron guarantees that taxpayers will not have to foot the bill to rescue indebted banking systems and imperilled governments.

This also puts Angela Merkel’s government at odds with the European Central Bank, which has insisted on no bail-in of creditors during talks over Greece’s €25bn bank recapitalisation.

“Without adequate facilities to limit bank risks effectively, taxpayers’ and depositors’ money would again be put at undue risk,” said the document.

“To now start a discussion on further mutualisation of bank risks through a common deposit insurance or a European deposit reinsurance scheme is unacceptable.”

Mr Schaeuble’s ministry is also pushing for a swifter procedure to carry out sovereign debt restructuring following five years of protracted talks over Greece’s perilous public finances.

The paper says losses for private bondholders have been imposed “too late” during previous crises, forcing struggling governments into “excessive fiscal adjustment” in a bid to keep paying back their creditors.

“This in turn creates unnecessary economic and social hardship and may compound a crisis.”

Greece underwent the biggest private sector debt restructuring in history in 2012, two years after it received its first international bail-out.

Eurozone finance ministers are due to discuss proposals for Greek debt relief on Saturday. The question of relieving Greece’s €330bn debt mountain, most of which is owed to its official sector creditors, has remained unresolved since an agreement over a new three-year rescue was thrashed out in July.

Debt relief must be secured if the International Monetary Fund is to haveany further involvement in the country’s bail-out, but write-offs have been resisted by the euro’s creditor nations, led by Germany.

Officials are also due to postpone Greece’s first bail-out review, pushing it back from October as the country is set to hold snap elections next weekend.

Modi tells billionaires ‘invest,’ says China’s pain is India’s gain

September 8, 2015


Prime Minister Narendra Modi and his top economic team on Tuesday assured a group of billionaires that India could withstand global turbulence and China’s economic slowdown, then asked them to open their wallets.

The meeting at Modi’s residence came as India’s rupee fell to two-year lows and a stock market sell-off wiped out most of the record gains made since he took office last year. Markets bounced back after the session.

India’s projected economic growth of 8 percent is still viewed by the IMF as a bright spot among major economies and has attracted foreign manufacturers, but indebted domestic firms are pushing for rate cuts and protection.

Modi sees a chance to attract more foreign cash as money flows out of China, but it will be tough. Investors and firms increasingly worry he has not moved fast enough since taking office. Annual growth slowed to 7 percent in the June quarter.

“Mr. Modi ran a successful state,” U.S. investor Jim Rogers told Reuters Trading India. “He campaigned for two years, saying he knew what to do. He has been there 15 months … yet little has happened.”

Rogers recently announced he had sold his India investments. Foreign investors have sold a net $756 million of Indian shares this month.

Apparently strong headline growth is undermined by doubt about the quality of economic data and a slow recovery, with job losses in construction and a summer drought hitting consumer demand.

“Domestic investment is sluggish because of lack of demand and high cost of capital,” Jyotsna Suri, president of industry group FICCI, said after the meeting.

Chief economic adviser Arvind Subramanian told the gathering, which included India’s richest man, Mukesh Ambani, that the economy was healthy and could withstand global market jitters and an expected hike in U.S. lending rates.

India’s drive to modernize its infrastructure was made easier by cheaper commodities as Chinese demand slows, he said, with investors seeking returns turning to India.

“Some of these investments are a little bit of a hedge against a Chinese slowdown,” Subramanian said, citing recent commitments from Taiwan’s Foxconn, Germany’s Siemens and China’s Xiaomi.

During the three-hour meeting also attended by central bank governor Raghuram Rajan, businessmen called for interest rates to be cut as much as 1.25 percentage points by next March.

After farmer protests forced Modi to drop a major land reform and opposition parties delayed a growth-boosting tax overhaul, expectations are growing for new measures to lure foreign investors.

India’s macroeconomic situation has improved since the “taper tantrum” of 2013, thanks largely to lower prices for its huge oil imports.

(Writing by Frank Jack Daniel; Editing by Douglas Busvine and Clarence Fernandez)



Modi asks billionaires if China’s pain can be India’s gain

September 8, 2015


NEW DELHI: Prime Minister Narendra Modi called bankers and billionaires to his residence on Tuesday to brainstorm on how India can manage global economic turbulence, including opportunities for Asia’s third-largest economy in China’s market and growth woes.

The morning meeting in New Delhi was attended by tycoons including India’s richest man, Mukesh Ambani, finance minister Arun Jaitley, central bank governor Raghuram Rajan, Raghuram Rajanand state and private bank chiefs.

At the gathering, industry chamber Assocham told Modi policy makers needed to act fast to “bullet proof” India from global jitters – calling for a deep cut in interest rates and new duties to stop dumping of Chinese products such as steel.

India’s macroeconomic situation has improved considerably since the “taper tantrum” of 2013, not least thanks to lower prices for the commodities it imports. Then, inflation, for example, was at double digits – it has since halved.

The International Monetary Fund considers India’s economy a rare bright spot among emerging markets and Modi sees a chance to attract more foreign investment as money flows out of China.

But it will not be easy to turn China’s pain into India’s gain. Investors and corporates increasingly worry that Modi has not moved fast enough since taking office. Annual growth slowed to 7 per cent in the June quarter.

“Modi ran a successful state. He campaigned for 2 years saying he knew what to do. He has been there 15 months with the largest majority since independence yet little has happened,” US investor Jim Rogers told Reuters Trading India on Tuesday.

Rogers recently announced he had sold his India investments.

After farmer protests forced the government to drop a major land reform and opposition parties delayed a growth-boosting tax overhaul, expectations are growing that Modi will soon unveil new measures to make it easier for foreign money to enter India.

The government predicts India’s economy will grow at 8 per cent or more in 2015-16, prodded by government spending. Yet private investment has been slow to pick up, with banks and businesses hobbled by bad debts and high lending rates.

In the real economy, there are few signs of an major economic recovery. In the construction and diamond polishing industries, for example, there have been large layoffs.

Assocham called on central bank chief Raghuram Rajan to slash interest rates by up to 1.25 per centage points by March to help revive investment and growth.

Saudi Arabia to cut spending, issue more bonds to shore up budget

September 6, 2015


Saudi Arabian Finance Minister Ibrahim Al-Assaf attends a 2013 investor conference in Riyadh

DUBAI (AFP) – Saudi Arabia will cut spending and issue more bonds as it faces a record budget shortfall due to falling oil prices, the finance minister said on Sunday.The kingdom — the biggest Arab economy and the world’s largest oil exporter — is facing an unprecedented budget crunch after crude prices dropped by more than half in a year to below $50 a barrel.

It has so far relied on its huge fiscal reserves to bridge the gap but Finance Minister Ibrahim al-Assaf said more measures would be necessary.

“We are working… to cut unnecessary expenditure,” Assaf told Dubai-based CNBC Arabia in Washington, where he is accompanying King Salman on a visit.

He provided no details on the scale of the cuts but insisted key spending in education and health and on infrastructure would not be affected.

“There are projects that were adopted several years ago and have not started yet. These can be delayed,” Assaf said.

He said the government would issue more conventional treasury bonds and Islamic sukuk bonds to “finance the budget deficit” — which is projected by the International Monetary Fund at a record $130 billion (117 billion euros) for this year.

The kingdom has so far issued bonds worth “less than 100 billion riyals ($27 billion/24 billion euros)” to help with the shortfall, he said, without providing an exact figure.

“We intend to issue more bonds and could issue sukuk for certain projects… before the end of 2015,” Assaf said.

Saudi Arabia has projected an official budget shortfall for this year of $39 billion, but the IMF and other institutions believe the actual deficit will be much higher.

The IMF forecast in July that the deficit will be 20 percent of Gross Domestic Product (GDP), while Saudi Arabia’s Jadwa Investment firm said on Wednesday it expects the shortfall to be around $109 billion.

In 2014, Saudi Arabia posted a budget deficit of $17.5 billion — only its second since 2002.

Jadwa said that by the end of July the government had withdrawn $82 billion from its reserves, reducing the assets to $650 billion.

The reserves are expected to drop to $629 billion by the end of the year, Jadwa said.

Economic growth is expected to slow from the 3.5 percent recorded last year, with the IMF forecasting in July that the Saudi economy would expand by 2.8 percent this year.

It is forecasting 2.4 percent growth for next year.

Citing official figures, Jadwa said Wednesday that the Saudi economy grew 3.8 percent in the second quarter, up from 2.4 percent in the previous period, due to a rise in oil production.

Saudi Arabia pumped a record 10.6 million barrels per day in June but this slowed to 10.4 million bpd in July, it said.

The budget shortfall is hitting as Saudi Arabia maintains a costly military intervention against Iran-backed Huthi rebels in neighbouring Yemen.

Eyes on China economic data see trouble ahead

September 5, 2015


China’s battered stock markets reopen on Monday after a two-day public holiday and before a monthly data dump that could reinforce fears of a hard landing, rattling the globaleconomy.

Key numbers next week include trade data on Tuesday — expected to show both exports and imports falling again in August — and inflation on Thursday. Signs of further weakness in the world’s second-largest economy would cement expectations of fresh stimulus measures from Beijing and keep markets on edge.

The International Monetary Fund warned Group of 20 finance ministers and central bankers this week that China’s slowdown and rising financial market volatility, some measures of which are close to levels seen during past crises, have boosted risks to global growth. Its staff cited a mix of potential dangers such as depreciating emerging market currencies and tumbling commodity prices.

The G20 is discussing those developments in Istanbul but its meeting, which ends on Saturday, is unlikely to result in specific measures to address the turmoil in Chinese markets or its impact elsewhere.

Japanese Finance Minister Taro Aso said this week that a “frank debate” was needed about what is happening in the Chinese economy, including structural problems such as rising bad debts, but Beijing is not likely to be singled out for criticism.

A draft communique seen by Reuters on Friday addressed last month’s surprise devaluation of China’s yuan currency only indirectly, committing members to move toward more market-determined exchange rate systems while refraining from competitive devaluations. It also avoided saying a U.S. rate rise would be a risk to growth, as some emerging market officials had wanted.

Beijing had denied the move is the start of a round of competitive currency devaluations by governments to help exporters although officials in Washington, which has long argued for a more market-determined yuan exchange rate, greeted the shift with some scepticism.

Euro zone finance ministers also meet informally in Luxembourg on Friday, while APEC finance ministers and central banks will gather in the Philippines.

The market turbulence has clouded expectations for a U.S. interest rate rise later this month, the first for nearly a decade, although a lower-than-expected monthly jobs reading on Friday was largely shrugged off by markets.

Nonfarm payrolls increased 173,000 last month, the smallest gain in employment in five months and well below a 220,000 forecast, but a fall in the unemployment rate and accelerating wage growth kept the prospect of a hike on the table.

Federal Reserve rate-setters meet on Sept. 16-17.

U.S. markets will be closed for Labor Day on Monday.

Next week the Bank of England will also consider a first rate rise from crisis-era lows. Other central banks taking interest rate decisions include South Korea and the commodity-driven economies of Canada, Russia, and New Zealand.

With no chance seen of a Bank of England hike on Thursday, the focus will be on the minutes of the meeting and how rate-setters who split 8-1 against a hike in August voted.

Although Governor Mark Carney has said the BoE could “look through” the temporary disinflationary impact of lower Chinese demand for commodities, soft UK data has prompted markets to move back the expected timing of a rate hike to April or May.

Industrial output and trade data will give an indication of how Europe’s big economies are coping with the slowdown in emerging markets, which European Central Bank chief Mario Draghi blamed on Thursday for cuts to the ECB’s growth and inflation forecasts.

Ominously, he also warned that the projections were based on data gathered before China’s stock market started to melt down.

Amid fears that central banks are running out of ammunition to deal with crises after years of near-zero interest rates and monetary stimulus, a downbeat Draghi also signaled that the ECB is likely to increase its already huge asset purchase program.

(Editing by Ruth Pitchford)


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