The BIS Warns of Record-High Banking Stress in China

The Bank for International Settlements has recently released a quarterly report warning that China’s “credit to GDP gap” has reached a record 30.1%, indicating that the world’s second-largest economy faces mounting debt and credit pressures. According to the BIS, levels elevated beyond 10% signal high banking strain in an economy. In the United States, for instance, readings surpassed the 10% threshold in the lead-up to the financial recession.

The elevated credit to GDP gap suggests excessive credit growth in China and the possibility of a financial implosion. Should such an event occur, the repercussions would greatly damage the global economy. According to the Telegraph, “outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control.”

China’s total debt has reached 255% of GDP, having ballooned by 107% in the past eight years, and continues to grow, while corporate debt alone has hit 171% of GDP. Though China’s leadership has promised to limit debt growth, it has been hardpressed to follow through on its pledge given that debt has sustained the nation’s economic growth. Government spending on infrastructure and real estate has also proven to be less productive and failed to contribute meaningfully to GDP.

Some analysts have taken to prescribing bank recapitalization and reducing reflexive stimulus spending to artificially sustain growth on the part of the Chinese government. China’s central bank issued a statement earlier this year averring that investors would be able to maintain reasonably high levels of capital in the event of a serious banking shock. The fear, according to the Telegraph, is that a surge in capital outflows may force the central bank to sell off foreign currency to bolster the yuan, “automatically tightening monetary policy” and sparking a vicious cycle.

Significant doubts remain as to whether the government can extricate the nation from its precarious situation, though state control of the financial system may conversely prove to partly mitigate the risk of a banking crisis.

References:

http://www.mauldineconomics.com/outsidethebox/does-it-matter-if-china-cleans-up-its-banks

http://www.bloomberg.com/news/articles/2016-09-18/bis-warning-indicator-for-china-banking-stress-climbs-to-record

http://www.telegraph.co.uk/business/2016/09/18/bis-flashes-red-alert-for-a-banking-crisis-in-china/

http://www.businessinsider.com.au/this-early-warning-indicator-of-looming-financial-risks-is-flashing-red-for-china-2016-9

Apple’s $14.5 Billion EU Tax Fine Brings Corporate Tax Reform Back Into Spotlight

News of the $14.5 billion fine for back taxes that the European Commission has slapped Apple with in Ireland has brought the debate over corporate taxes back into the spotlight. The Cupertino-based company received news of the unwelcome multi-billion dollar surprise following the EU’s determination that Apple had dishonestly attributed billions in revenues to a shell office in order to pay tax rates lower than 1%.

Senator Elizabeth Warren published an op-ed in The New York Times arguing that “the door is now open for Congress to fix our own corporate tax code, which has allowed the biggest multinationals to shirk their obligations for decades.”

Warren proposes raising the proportion of government revenues originating from corporate taxes permanently, on the grounds that the tech giants currently running afoul of international tax authorities (such as Google, Facebook, and Apple) are beneficiaries of federal funding and federally commissioned scientific research. She also proposes closing tax loopholes that offer lower permanent tax rates for income generated abroad, arguing that such measures incentivize American multi-national companies to further invest and build businesses abroad.

Such policy views have been gaining traction in America, where the Treasury Department announced just today that it had tightened rules requiring American businesses to repatriate profits generated abroad if they seek to enjoy foreign tax credits. The move is seen, in part, as an attempt to limit the repercussions of the massive tax fine that the EU has just levied on Apple.

“Today, we are closing another tax loophole that contributes to the erosion of our tax base,” said Mark J. Mazur, assistant secretary for tax policy at Treasury, according to the Washington Post. The U.S. is atypical in that it taxes profits at a 35% rate regardless of where they were generated once the money returns, which has encouraged businesses to stash their gains offshore (to the tune of $2 trillion).

Apple, which holds $200 billion in profits offshore, has indicated that it will return the money to American shores once the corporate tax rate is lowered.

References:

https://www.washingtonpost.com/news/wonk/wp/2016/09/15/a-tax-loophole-for-u-s-companies-operating-overseas-just-got-tighter/

http://www.nytimes.com/2016/09/08/opinion/elizabeth-warren-what-apple-teaches-us-about-taxes.html

http://www.forbes.com/sites/timworstall/2016/09/15/seriously-folks-we-can-do-better-than-this-on-the-corporate-income-tax/#3dc461a87543

http://www.forbes.com/sites/beltway/2016/08/30/could-the-eus-apple-tax-reboot-corporate-tax-reform-in-the-us/#4ca3ea614baf

China’s Rapidly Aging Population Bodes Ill For Future Economic Growth

China’s rapidly aging population has been exerting pressure on the second-largest economy in the world, prompting the U.S. Federal Reserve to warn that China’s growth could decline sharply by 2030. As its population ages, China’s labor productivity has fallen driving a slowdown in economic growth. Furthermore, the growth rate of China’s working age population is worryingly forecasted to become negative by 2020. Instead, China is slated to become the world’s most aged population by 2030. By 2050, over 30% of its population will be comprised of senior citizens, aged 60 or older.

With the overwhelming majority of China’s current working age population already employed (~80%), economists believe that productivity growth, rather than employment growth holds the key to sustaining Chinese economic activity and health in the future. In response to these looming concerns about long-term economic growth, Chinese officials opted to overturn its longstanding one-child policy last year in order to alleviate China’s demographic woes.

“It’s a little too late, but it’s better now than later,” said Yanzhong Huang, senior fellow for global health at Council on Foreign Relations to the International Business Times. “If the policy is put in place immediately, it will only take effect 20 years from now, in terms of relieving the high-level of aging.”

Other possible measures to bolster aging labor forces are proposed in a 2010 working paper composed by Harvard’s Program on the Global Demography of Aging. Suggestions include raising the retirement age, encouraging higher savings, employing primary care providers for children, increasing employment of women, liberalizing immigration, and expanding education.

The Harvard researchers posit that the China’s best avenue for mitigating the effects of an aging labor force is to mobilize and leverage underutilized segments of its population, namely, the undereducated, underemployed, and women. The study’s authors argue that creating a large reserve labor force can “can lay to rest concerns that China will not have enough workers in the future to preserve the country’s impressive growth in GDP and in GDP per capita.”

References:

http://www.reuters.com/article/us-usa-fed-china-idUSBRE92P14T20130326

https://www.hsph.harvard.edu/program-on-the-global-demography-of-aging/WorkingPapers/2010/PGDA_WP_53.pdf

http://www.ibtimes.com/chinas-one-child-policy-change-will-take-decades-relieve-economic-pressures-aging-2161789

http://en.people.cn/90001/90776/90882/7137446.html

Chinese Economy Rebounds Following Stimulus

China has released its highly anticipated economic figures for the second quarter of 2016, which rose 6.7% compared to the year before, beating analysts’ expectations, albeit barely. The numbers suggest that the nation’s economy is slowing at a steady pace, even if Chinese economic data is notoriously unreliable.

The Chinese economy picked up steam last month, rebounding after a series of tumultuous months. Industrial output, for instance, accelerated to 6.3%. Government spending in on infrastructure also helped lift industrial activity, compensating for a steep decline in private investment, which once fueled the Chinese economy. According to the New York Times, private investment fell to 2.8% (down from 3.9% growth in the first five months) whereas government spending on fixed assets ballooned by 23.5% in the first half of the year.

Zhou Hao, a Commerzbank AG economist, tells the Wall Street Journal that the economic stability could dissuade the central bank from cutting interest rates and other drastic monetary easing measures.

On the other hand, the heavy role that government maneuvering and stimulus played in buoying growth figures has given other economists pause, raising misgivings about the long-term sustainability of the economy.

IHS Global Insight’s China economist Brian Jackson, for instance, posed questions about the veracity of the numbers as well as the implications of state-led economic growth.

“The first misgiving reflects concerns that the government is squeezing as much growth as plausible from relatively opaque sectors via accounting techniques. The second misgiving reflects concern that if the data is wholly accurate, then it implies a deepening shift towards state-led growth in both the secondary and tertiary sector, which raises major doubts about the long term productivity and thus sustainability of current economic activity,” Jackson added.

Also troubling is the question of whether state-backed infrastructure projects are generating economic value. A recent study by Oxford’s Said School of Business avers that low-quality infrastructure investments presents a sizeable risk to Chinese economic growth, going so far as to argue that over half of the infrastructure investments in China have destroyed rather than added value.

“Unless China shifts to fewer and higher-quality infrastructure investments the country is headed for an infrastructure-led national financial and economic crisis, which is likely to spread to the international economy,” comments Dr. Atif Ansar, one of the study’s authors.

References:

http://www.wsj.com/articles/chinas-economy-rebounds-with-help-from-government-spending-1473744662

http://www.nytimes.com/2016/07/15/business/international/china-gdp-economic-growth.html

http://www.cnbc.com/2016/07/14/china-q2-gdp-growth-slightly-beats-expectations-reuters.html

http://phys.org/news/2016-09-china-infrastructure-investments-threaten-economic.html

Oil Prices Surge Following Drawdown in U.S. Crude Stocks

Oil prices spiked by 4 percent on the back of news that American crude oil stocks had been drawn down significantly, in part due to delays in Gulf Coast import shipments caused by Tropical Storm Hermine.

Contrary to analysts’ expectations, U.S. inventory data showed that crude stocks had dipped by 14.5 million barrels last week to 511.6 million barrels. This constitutes the largest weekly drop in stockpiles in 17 years, according to the U.S. Energy Information Administration. U.S. Gulf Coast imports fell to 2.5 million barrels per day, the lowest recorded level ever.Brent crude prices, on the other hand, veered towards $50 per barrel, rising $1.98 (4.1%) to $49.95 a barrel. Gasoline futures also surged 5%.

In addition, Congress has been authorizing drawdowns of crude stocks from America’s Strategic Petroleum Reserves. Last year, the legislative body sanctioned the sale of $2 billion of crude oil from the reserve by the Energy Secretary.

Some have pointed to the news as an indication that the epic supply glut in oil, driven by increases in OPEC production and the U.S. shale revolution, is nearing an end. Given the role in adverse weather in the crude stock drawdown, other analysts believe the oil price surge is temporary.

“The drop in crude stocks was caused by the decline in imports after the storm delayed ships going into Louisiana and Texas,” said James Williams, president of energy consultant WTRG Economics in Arkansas, to Reuters. “Next week, crude stocks will likely rise dramatically as those ships offload this week.”

On the other hand, oil prices could be buoyed by further developments in the Russian-Saudi Arabian oil pact to stabilize the oil market. OPEC and other oil-producers such as Russia are slated to discuss the issue further later this month in Algeria. While both nations have floated the idea of output freezes, neither has committed to immediate action in that regard. In fact, OPEC oil output is already on the high side.

“Implementation remains highly questionable and current OPEC production already approaches levels we had not anticipated until 2018,” Macquarie Research analysts said according to CNBC.

References:

http://www.wsj.com/articles/u-s-s-aging-oil-reserve-infrastructure-an-update-1473256811

http://money.cnn.com/2016/09/08/investing/oil-prices-stockpiles-plunge-hurricane/

http://www.cnbc.com/2016/09/07/oil-extends-gains-after-data-shows-huge-stock-draw.html

http://www.reuters.com/article/us-global-oil-idUSKCN11E01R