Japan and China courting the Philippines

japHere’s a news report from forbes last January 14, 2017. I think both will win. Both will have greater access to the PH’s

(a) big, young population as consumers or needed migrant labor,

(b) SE Asia’s fastest growing big economy since about 2009,

(c) nice tropical tourism destination for their people,

(d) both have quarrel over a small island that’s obviously closer to Japan than China, so both have issues over international rule of law,

(e) both have ageing population, so both would need an infusion of young migrant labor from the PH, today or tomorrow.

While many support the state-sponsored population control (aka RH law to prevent “unwanted pregnancies” that become “unwanted babies” that become “unwanted workers” and entrepreneurs someday?), the Japs, Europeans, etc. envy the PH’s big, young population. https://www.bloomberg.com/…/japan-turns-to-asia-s

(f) Both have huge, big governments that are heavily indebted (220%+ of GDP for Japan, 40%+ for China but if the debt of their state corporations and banks, local governments, private corporations are included, about 240% of GDP). So both will need the money of middle class and rich Filipino tourists who can afford to travel to more countries around the world.

China belligerence to hide insecurity

* This is my article in BWEconomicForum last December 14, 2016.

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ON OCCASION, a fraternity gets big enough such that its members begin to establish cliques of their own, causing disunity in the organization. This, in turn, prompts the officers to initiate a “rumble” with another fraternity. As a result, cliques are set aside and the frat moves as one in protecting their brods or beating up members of the other fraternity. This same logic may apply to China.

One of my dormitory roommates, a member of a fraternity, told me that anecdote while we were both students at the University of the Philippines in Diliman. While fraternities would seldom or never admit publicly that they initiated a rumble, it nevertheless is common knowledge to some members.

The same strategy may have been practiced by China in its continuing belligerence, particularly over secessionist regions and territories that it presumes to claim. The government in Beijing is increasingly becoming insecure with its more informed, more assertive citizens who dislike central planning and government-led intimidation. Some irreverent or potentially secessionist regions keep asserting their aspirations so it acts belligerently and court regional or global fallout in the process.

During the BusinessWorld-PAL ASEAN Regional Forum held last Nov. 24, one of the sessions was “The South China Sea or West Philippine Sea: The Economics of Competing Territorial Claims.” Speakers were Bonji Ohara of Tokyo Foundation, Thanh Hai Do of Diplomatic Academy of Vietnam, and Dindo Manhit of Stratbase-Albert Del Rosario Institute in Manila.

The three speakers talked about non-military, non-confrontational schemes to resolve the territorial dispute. Rightly so. An insecure government like the China Communist Party (CCP) that bullies its own citizens will have no hesitance to bully other countries with smaller military capabilities.

What are the sources of insecurity by the CCP? First and foremost are the vocal and assertive potential secessionists.

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Insecurity driving China’s hostility in territorial rows, secessionist areas

The election of Ms. Tsai Ing-wen (DPP) in Taiwan last January has temporarily jolted the CCP and sounded another round of belligerence. Hong Kong pro-independence activists never went away, as shown by the Umbrella Revolution two years ago to the recent election of young legislators who are openly campaigning for HK independence from China.

The Uighur activists have figured in violent and fatal attacks in recent years. XUAR shares borders with five Muslim countries — Kazakhstan, Kyrgyzstan, Tajikistan, Afghanistan, and Pakistan. And there are other potential rebel areas too like Macau and Manchu.

Second, a debt-fueled economy propped up by cronyism and dictatorship. As of 2015, China’s debt (government household + corporate debt) has reached 280% of gross domestic product (GDP).

Two papers have made the following observations:

“Unsurprisingly, the lion’s share of the money has been funneled into China’s immense state-owned enterprises, which largely explains why they hold an outsize share of the country’s corporate debt,” John Minnich said in a piece entitled “China’s economic problems will come to a head in 2017,” published in Market Watch on Nov. 23. “(State-owned companies account for over 55% of that debt, despite contributing only 20% of GDP.) It also explains why, by comparison, China’s central government has an unusually low level of debt. (Beijing’s debt equaled only 22% of GDP in 2015.)”

Similarly, in a May 10 piece for Fortune Magazine entitled “China’s Government Says It’s Over Debt-Fuelled Growth,” Scott Cendrowski said that: “[C]redit ratings agency Moody’s noted that China’s total debt has climbed to 280% of gross domestic product, including China’s state-owned company liabilities that totaled 115% of GDP at the end of last year. For comparison, in Japan and South Korea, which also have large government-owned sectors, SOE (state-owned enterprises) liabilities were 31% and 29% of GDP in 2014.”

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Insecurity driving China’s hostility in territorial rows, secessionist areas

Third, rich and intelligent people are leaving China, with a potential to come back as new reformists or outright becoming members of the opposition.

There was one survey in 2015 showing that more millionaires leave China than any other country in the past 14 years.

Here is another observation from the Wall Street Journal, two years ago: “China’s culture of corruption and abuse of power is a major reason so many of the country’s rich want to leave. A Barclays survey released Monday found that 47% of Chinese with more than $1.5 million in assets are planning to emigrate, and this is consistent with past research. Developed-country programs that allow investors to essentially buy residency continue to attract waves of Chinese,” Hugo Restall said in a piece entitled “China’s Unhappy Rich” for the WSJ’s Sept. 17, 2014 edition. “Many of China’s brainiest young people also want out. According to the state-run Xinhua news agency, the annual number of students who go abroad for study and don’t return reached 70,000 in 2012….”

The CCP’s insecurity should rise through time because their own citizens inside and outside China hate heavy restrictions and dictatorship. To hide or temper this insecurity, China will try to be belligerent to hype up nationalist sentiments from its people.

China imploding someday, perhaps in one or two generations, will be a welcome news for the world. China may also break up into many new countries and governments. The main country may remain under the communist party, similar to what happened in the former USSR. But the newly formed countries will be more democratic.

President Duterte and ‘Pakyu’ EU

These are news reports from September 21 to 23, except the news on “Killings prompt ‘hesitation’ among European investors” which was published a month earlier, August 2016. I also include here the fb postings by a friend, famous commentator Bernard Ong. No further comments from me.

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From Bernard Ong, September 21, 2016:

“China supplies almost 100% of the shabu to the Philippines. Coddles the international drug lords & their syndicates. Takes over our seas & reefs. Chases Pinoy fishermen away from their traditional livelihoods. Corrupts our local officials to extract minerals in irresponsible manner.

Sounds 1000x more damaging than other countries urging the Philippines to respect universal human rights. Something we ought to be doing without anybody’s prodding.

If you must say Pakyu. Be brave, be smart. Point your Pakyus in the right direction.

Pity the die-hard followers who have to switch-on & switch-off their anti-US hatred and pro-China/Putin love.

Those who don’t suffer from mood swings due to drugs, bipolar & other conditions will find it hard keeping up with whom to bash & whom to praise. Last time I checked, the Mochas & Sassots & ThinkingPinoys that feed their confused minds are still on bashing the West (govt, media, human rights) mode. Those guys have not received the memo. Slow. Andanar is sleeping on his job.

My suggestion to die-hards is not to wait for clues from Idol’s speeches. Flip-flops do not provide useful guidance.

Just think for yourself. Think of what is best for the Philippines. Key word is think. Then you won’t bash the UN, US, EU, international media. Not that they are saints. But it is against Philippine interest to do so – we risk losing a lot (investment, aid, trade, tourism, jobs, defense) for the shallow pleasure of petting one man’s ego and venting anger. High cost, high risk, no benefit.

Ignore the leader’s mood swings. Better yet, correct him when he goes off course. Maybe he will listen to you.”

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“EU is the Philippines’ biggest foreign investor with an FDI stock of over 366 billion pesos.

EU investment is distributed among 600 companies, employing about 400,000 Filipinos, in relatively higher-paying jobs, in sectors like energy (e.g. Shell), manufacturing (e.g. Loreal, Unilever), finance (e.g. Deutsche Bank).

EU invests almost $400B overseas each year. Philippines gets only 0.1% of that. Could easily double or triple with our market potential – IF we don’t create the perception of risk by behaving like a rogue nation ruled by thugs instead of laws.

To make these numbers digestible: If the Philippines misses out on $3 billion investment in next 6 years, that means 60,000-120,000 fewer high-paying jobs, less income, less buying power, less taxes, less money for infrastructure. There are multiplier effects. Ignore at your own peril.

So “Pakyu EU”. Close the lights on your way out.”

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China’s debt, central planning and central crashes

* This is my article in BusinessWorld yesterday.

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“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — Friedrich Hayek.

One of the characteristics of centrally planned economies like China is that officials and planners centralize many resources, which creates centralized expectations from the people, and since planners’ egos cannot really plan and control all factors, this often results in centralized economic dislocation, disappointment, and anger.

Take the case of China’s debt.

Officially, China has a gross public debt/gross domestic product (GDP) ratio of only 41% in 2014, manageable and just slightly higher than the debt/GDP ratio of Taiwan and South Korea (38% and 36%, respectively). But China has more debt that what it will officially admit.

A report by McKinsey Global Institute (MGI) said that China total borrowings (individuals + companies + local and central governments + state enterprises) was 282% of GDP in 2014, higher than the debt ratio of the US, Germany, Canada, and other big economies. (See Graph 1)

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High debt, private and public, will always create financial turmoil, today or tomorrow. Especially in a dictatorship that abhors political competition and yet wants to mimic economies that allow market and political competition.

This was discussed in “The Chinese Financial Crises and their Impact on Asia,” one of the panel discussions during the recently-concluded “Asia Liberty Forum” in Kuala Lumpur, Malaysia from Feb. 18-20. The session was chaired by Prof. Christopher Lingle of the Universidad Francisco Marroquin in Guatemala. The speakers were Dr. Carmelo Ferlito, IDEAS Senior Fellow, Malaysia and Adjunct Faculty Member at INTI International College Subang, Malaysia, Andrew Shuen of Lion Rock Institute, Hong Kong, and Dr. Mao Shoulong, Renmin University, also of Unirule Institute, China. These three independent think tanks — IDEAS, Lion Rock, and Unirule are all members of the Economic Freedom Network (EFN) Asia. (See Graph 2)

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In his presentation, Carmelo Ferlito noted that from 2003-2008, China’s total debt was stable to declining at 170% of GDP, then by 2009, it exploded and kept rising. He further noted that “a lot of this debt is sitting in local governments or state-owned enterprises. There is assumption that government can let its “zombie” entities stumble on as debt-paying vehicles or maybe occasionally let a couple default without any systemic contagion.

But now the Chinese government again began buying stocks to prop up its plummeting stock market, that is unsustainable.”

LESSONS FOR SOUTHEAST ASIA

With the continuing financial turmoil in China that started last year, there are lessons to be explored for emerging economies in the region like the Philippines.

  1. Fiscal and household irresponsibility will snap. As public and private debts become bigger, economic uncertainty will also rise as those debts should be repaid. People will never know who can pay back and when, and who will default.
  1. Moral hazards. A central planning government tends to attract less-studied behavior by the public. As a result, people with low financial literacy may be encouraged to gamble their savings at the stock market, thinking that the government will bail out anyway.
  1. Central planning leads to central disappointment. Central planning cannot and will not cure and control everything, including stock prices, booms and busts, debt spirals, and inflation. Central planning can only postpone small busts until these become bigger and burst. Authoritarianism can never be compatible with free markets.

The great Nobel prize economist and political philosopher, Friedrich Hayek, has some words to say about central planners. It is important that economists and planners outside communist China should heed them.

“No man or group of men possesses the capacity to determine conclusively the potentialities of other human beings and that we should certainly never trust anyone invariably to exercise such a capacity.” — The Constitution of Liberty (1960), Chapter 6, “Equality, Value and Merit.”

Bienvenido S. Oplas, Jr. is the President of Minimal Government Thinkers, a member of the Economic Freedom Network (EFN) Asia, and a fellow of South East Asia Network for Development (SEANET).  minimalgovernment@gmail.com

On many rich Chinese leaving China

China implosion, it will happen because people and nature hate heavy restrictions and dictatorship. This event will have huge impact on the rest of the world especially in Asia. Not soon, but a few decades now.

china1On June 5, 2014, Fortune made this headline, Why China’s rich are leaving and showed this table.

The top 3 reasons why rich Chinese leave their country, based on the Hurum-Visa survey are: (1) better options for their children’s education; (2) distressed about growing pollution problems; and (3) concerned about food safety in the country.

Other news reports here.

(1) “China’s debt has soared to two and a half times its economy, Standard Chartered estimates…Total financial credit has surged to 251 percent of gross domestic product from 147 percent at the end of 2008, the bank said.”

July 21, 2014, http://www.cnbc.com/id/101854344

Not clear if the report refers to public debt or of the entire economy and including private corporate debt. But there is a rise, from 147% of GDP in 2008 to 251% in 2013.

(2) “China’s failure lies not in the structure of its dairy industry but in the structure of its economy…. That contamination incident happened partly because China’s safety regulatory apparatus remains weak and its unfree press can’t serve as a watchdog. Rule of law is too erratic—to put it kindly—to function as an effective check on bad behavior.”

— Joe Sternberg, July 16, 2014, http://online.wsj.com/…/joseph-sternberg-the-milk-of

(3) “He even called on cadres to allow for a little dissent if necessary.

 We should push ahead with reform and opening up without hesitation,

“Xi said cadres should have the political will to try new initiatives, and in remarks that signal that his massive anti-corruption campaign would continue, he said cadres should set aside their personal feelings and even hire people who had opposing views.”

August 20, 2014, http://www.scmp.com/…/xi-says-china-must-not-deteron

Interesting development. Foreign direct investments (FDI) to and from China was negative, meaning FDI inflows were lower than outflows. Chinese businessmen and state-owned enterprises are investing more abroad — mainly in the US, EU, Japan. This means what?

  1. Labor costs, taxes, bureaucracies, corruption, etc. are rising fast in China, investors would rather do business outside, or
  2. Strategic move to further internationalize China capitalism guided by socialist dictatorship. Or
  3. Generation of pacifist, trade- and business-oriented communist leaders are rising. The hawks and war-mongers in the Communist Party are shouting their last Hurrah via more militarism and provocation of their neighbors to say they are not losing in the party.

(4) Sept. 16, 2014, https://sg.news.yahoo.com/chinas-overseas-investment

(5) “According to a Barclays survey, which polled over 2,000 Chinese residents with a total net worth greater than $1.5 billion million, 47 percent of Chinese respondents said that they wanted to move abroad in the next five years, compared to a global average of 29 percent.”

Sept. 15, 2014, http://shanghaiist.com/…/study-nearly-half-of-wealthy

This news is consistent with the previous news report. Many rich Chinese want to experience more individual freedom, something that they cannot enjoy inside China, even if they are very close to the Communist party leaders.

(6) “Democracy is defined not only by people’s right to vote in an election but also the right to participate in political affairs on a daily basis,” Xinhua quoted Xi as saying. “Democracy is not a decoration … it’s for solving people’s problems.”

Sept. 22, 2014, http://www.scmp.com/…/democracy-not-decoration-xi

Really? the China Communist Party will allow public participation in government? Allow elections?

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(7) “About 30 Chinese officials, including managers of state-owned companies, are known to have committed suicide this year. Among them were several high-profile cadres under investigation for graft… entrepreneurs and private company managers are under greater stress as the economy slows. Last year more than 80 businessmen committed suicide in a six-month period in the city of Wenzhou alone.

“Entrepreneurs complain that making a fortune paints a bull’s-eye on your back. Hence the so-called “curse of the rich list.” Unlike in most countries, China’s most successful tycoons don’t want to be ranked among the country’s wealthiest individuals, since honorees tend to find themselves ruined or in handcuffs.

“China’s culture of corruption and abuse of power is a major reason so many of the country’s rich want to leave. A Barclays BARC.LN -1.07% survey released Monday found that 47% of Chinese with more than $1.5 million in assets are planning to emigrate, and this is consistent with past research. Developed-country programs that allow investors to essentially buy residency continue to attract waves of Chinese.

“Many of China’s brainiest young people also want out. According to the state-run Xinhua news agency, the annual number of students who go abroad for study and don’t return reached 70,000 in 2012….”
— Hugo Restall, Sept. 17, 2014,  http://www.wsj.com/articles/chinas-unhappy-rich-1410889484

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My hypothesis:

(1) Greying communist party officials of China have their kids studying in the US, Canada, UK, Australia, etc. When they come back and become CP leaders soon, they will be tolerant of democracy, tolerant of political pluralism. And China’s one-party system will implode and collapse.

(2) China internal dissent is larger than what we know or read in media. China’s external bullying is partly a diversionary tactic, to create “external enemies” and hope to consolidate internally, to rally nationalism. Such internal dissent started in Tiananmen 27 years ago, or even earlier. The stabbings, massacres, riots in some restive regions, they look “scattered” and uncoordinated, but they may be wide and deep.

(3) If China implode someday, it will break up into several countries and governments, the main country may remain under the communist party. Similar to what happened in the former USSR, it broke up into many new and smaller countries, but the bulk of the country remained as Russia.

China’s stock market and central planning

bw2* This is my article in BusinessWorld Weekender yesterday.

HIGH DEBT, private and public, will always create financial turmoil, today or tomorrow. The ongoing fiscal drama in heavily indebted Greece will continue for many months to come, whether it will stay using the Euro or not. And recently, it was China’s turn with the recent near-crash of its stock markets in Shanghai and Shenzen, and partially affecting the markets in Hong Kong.

Unlike the markets in the US, Japan, UK, Germany and other democratic countries, the case of China will always be internally conflicting. It is a dictatorship that abhors political competition and yet it wants to mimic economies that allow market competition.

HIGH PUBLIC DEBT

Officially, China has a gross public debt/GDP ratio of only 41% in 2014, manageable and just slightly higher than the debt/GDP ratio of Taiwan and South Korea (38% and 36%, respectively). But China has more debt than what it will officially admit.

A report by McKinsey Global Institute recently said that China’s total borrowings (individuals + companies + local and central governments + state enterprises) was 282% of GDP in 2014. This is very high for a non-industrialized economy like China.

There is high-margin lending (borrowed funds for stocks investment), reaching $323 billion last month alone, invested in the stock market by many novice, first-time stock investors numbering in tens of thousands.

STOCK MARKET BUBBLE

From 2010-2014, China’s stock market capitalization/GDP ratio averaged only about 45%. By June 12 this year, it rose to almost 100%, showing a huge asset price bubble in the first half of this year.

In comparison, this ratio is mildly increasing in the US (around 140% in 2014) and Japan (nearly 100% in 2014) from 2011 up to the present.

Figure 1 (from Bloomberg)

150716WeekEnder_GDP••

The bubble started last year when government media repeatedly announced that stocks were cheap, with the implicit understanding that the central planning authorities can control prices from falling. Millions of novice and first-time stock investors came in droves, China’s market capitalization tripled and reached $9.8 trillion, according to a Bloomberg report last June 30.

From 2011 to mid-2014, Shanghai’s price-to-earnings (P/E) ratio was only around 12. By late 2014-mid-2015, this rose to 26, more than double in less than one year.

BUBBLE CRASHED

Why did the bubble burst so suddenly? There are several explanations and hypotheses for this.

One is that China is experiencing a GDP growth slowdown of “only” 7% or less, compared to 9-12% per year for the last three decades or more. Two, some government stimulus programs to shield China from various global turmoil have to end. Three, finance also follows the law of gravity: the speed and height of price rise is somehow directly proportional to the speed and depth of price decline.

The magnitude of the stock price decline was $3.9 trillion, according to the Bloomberg China Market Cap index. That was equivalent to the GDP size of Germany, larger than the GDP sizes of UK or France or Brazil, and twice the GDP of Russia.

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The bulk of China stock investors are the more than 90 million individuals who make up about 80% of the market, according to a survey of households.

The stocks crash was worse than the US property crisis in 2008-09, although in terms of global interconnection and contagion, the US financial turmoil last decade had a larger impact. Significant deterioration in the public debt of Greece, Spain, Portugal, Ireland, Cyprus, Italy, etc. occurred in 2009 and 2010, obviously a result of contagion from the US.

Compared to the Greece debt problem, this is much larger. Greece’s GDP size in 2014 was only $238 billion, and its total public debt was about $320 billion.

CENTRAL PLANNING FIGHTS BACK

China’s government responded with several measures. One, the central bank cut interest rates, hoping that more savings from the banks will go to the stocks market. Two, some stock traders and speculators were investigated with threats of prosecution for stock rumor mongering. Three, a number of planned initial public offerings (IPOs) were suspended. Four, outright stop in trading.

From Bloomberg reports:

“At least 1,301 companies have halted trading on mainland Chinese exchanges, locking up $2.6 trillion of shares, or about 40 percent of China’s market capitalization. The China Financial Futures Exchange raised margin requirements for sell orders on CSI 500 index futures, while the central bank will provide “ample liquidity” to the stock market. China Securities Finance Corp. said it will buy more shares of small- and mid-cap companies.” (July 8)

“Official measures to support shares became more extreme during the week as declines deepened. They include a ban on stockholders and executives from selling stakes in listed companies for six months, an order for companies to buy equities and an investigation by the nation’s public security bureau into short-selling.” (July 10)

LESSONS FOR SOUTHEAST ASIA

Emerging economies in the region like the Philippines can draw lessons from this latest episode in regional and global economics.

1 Moral hazards. When a central planning government rallied the public to invest in the market, many investors with little or zero experience in the market came believing they couldn’t lose money since the government is big enough to guarantee returns or bail them out later.

2 Adverse selection. Millions of new novice investors have picked up the wrong timing, at a time when fiscal uncertainty hounds the EU and China was experiencing growth slowdown. Adverse selection often results in adverse results.

3 Debts and uncertainty. As public and private debts become bigger and bigger, the economic uncertainty also becomes bigger. People will never know who can pay back and when, and who will default.

4 Corporate fundamentals. Investors should do hard analyses of the fundamentals of companies whose stocks they are buying, and not just wait for cues and pronouncements from government. It can be a case where as government intervenes more, it creates more panic and price volatility.

5 Central planning and central disappointment. Central planning cannot and will not cure and control everything, including stock price ups and downs, boom and bust. Central planning works mainly to postpone small busts to become huge busts and bursts. Authoritarianism can never be compatible with free markets.

6 Role of government. The state and its various agencies, from local governments to different regulatory agencies to monetary authorities, should focus on ensuring fair market rules rather than guaranteeing outcomes.

Bienvenido S. Oplas, Jr. heads a free market think tank in Manila, Minimal Government Thinkers, Inc., and is also a fellow of South East Asia Network for Development (SEANET), a regional center based in Kuala Lumpur advocating economic freedom in the region.