Emerging and Frontier Markets: Economic and Geopolitical Analysis

[SvenSvensonov]

Even though the rapid decline of the Russian ruble is well-known by now, I'd like to post this Economist infographic and a companion FT piece here, because this is starting to look a little scary, and the implications for other emerging markets may be more dire if the problems of the ruble create a contagion problem. 1997 redux?
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Daily chart: Russia crushed | The Economist

Russia crushed
Dec 16th 2014, 13:45 BY THE DATA TEAM

IN THE world of central banking, slow and steady is the aim. So when a central bank raises interest rates by a massive 6.5 percentage points, and imposes the hike at midnight—as Russia's did on December 15th—it is a sign that something is going very wrong.

Pressure has been building for a while. The Russian economy is highly dependent on hydrocarbons: oil prices have fallen from $110 to below $60 in the past six months. Sanctions imposed by the West as a result of adventurism in Ukraine have made it hard for Russian companies to raise finance abroad. The rouble has been losing value against the dollar for months. On December 15th things got much worse. The rouble lost 10% of its value against the dollar, the worst drop since it was knocked off its exchange-rate peg in 1998. The Central Bank of Russia, led by Elvira Nabiullina, is thought to have intervened, using a few hundred million dollars in reserves to buy roubles. When that proved ineffective, Ms Nabiullina jacked up interest rates.

That brought only temporary relief. The rouble has been tumbling again today, and the panic has spread beyond currency markets, and beyond Russia. Ten-year rouble-denominated government-bond yields spiked to 15% on December 16th; the yield on dollar-denominated Russian ten-year bonds has hit 8%. The Moscow Exchange MICEX-RTS lost ground, as did shares in companies—including Austrian banks—that are exposed to Russia.

The woes of investors pale next to those of ordinary Russians. Before this week’s turmoil inflation was already running at about 9%, far above the 5% target Ms Nabiullina is supposed to hit. A normal depreciation tends to feed through to higher prices quite slowly, as imports, including inputs used by domestic firms, get more expensive. But in Moscow shopkeepers have started to reprice goods daily, in effect handing Russian workers a massive pay cut. The risk now is that Russians will lose confidence in using their own currency altogether.

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http://blogs.ft.com/beyond-brics/2014/12/16/em-safe-havens-where-oh-where-are-they/

EM safe havens: where oh where are they?
Jonathan Wheatley

In the long-running battle between contagion and differentiation in emerging markets, contagion currently has the upper hand. That’s hardly surprising when you look at the size of the shock coming out of Russia and the failure of Monday night’s 650 basis point interest rate rise to deal with it. Nothing on this scale has been seen since 1998.


Rouble per US dollar, year to date. Source: Thomson Reuters

But contagion is not absolute and some EM currencies are bucking this month’s sharp falls, at least for now. Below, we present charts that show how the big EM currencies are faring in these times of extreme stress.

No other currency is suffering as the rouble but some are coming close. Below is the Turkish lira. Unlike Russia, Turkey benefits from cheap oil. Its current account deficit, a perennial concern for investors, narrows by more than $400m with every $10 fall in the oil price. But Turkey has been caught up in EM risk aversion, helped along by a political crisis that President Recep Tayyip Erdogan has done nothing to dissipate.


Turkish lira per US dollar, year to date. Source: Thomson Reuters

It’s a different story in Brazil, where you would expect the real to be doing badly given Brazil’s status as a commodity exporter. It is not yet, however, the significant net oil exporter it is destined to become (assuming Petrobras ever emerges from scandal). Rather than oil, Brazil is suffering from contagion, as one of the most liquid EM foreign exchange markets there is, and by the failure of its new economics team to reassure markets about the seriousness of their orthodox intentions.


Brazilian real per US dollar, year to date. Source: Thomson Reuters

Also tanking is the Nigerian naira, another oil exporter in the eye of the cheap oil storm. Attempts by the central bank to assert itself as the naira went into free fall may, however, be paying off.


Nigerian naira per US dollar, year to date. Source: Thomson Reuters

There is no chart showing what has happened to the Venezuelan bolívar this year: it is unchanged, at the official rate, at 6.28 to the dollar. The unofficial rate, however, has reportedly gone into the stratosphere, hitting 183.7 to the dollar on Tuesday according to dolartoday.com, from 64 at the start of the year and 159 on December 1.

But for an indication of what investors think of Venezuela’s prospects as the oil price plunges, here is its 5-year credit default swap:


Venezuela 5-yr CDS, year to date. Source: Thomson Reuters

All of the above might be expected to be doing badly in current circumstances. Not so the Indian rupee. India is a beneficiary of cheap oil and its government has been doing pretty much what investors could wish for – not least, taking the opportunity to cut fuel subsidies. But India, too, is a liquid market and investors have taken the exit door.


Indian rupee per US dollar, year to date. Source: Thomson Reuters

It is a similar story with the Indonesian rupiah: it, too, could be expected to gain from cheap oil and from an investor-friendly government. But the EM tide is still sweeping against it.


Indonesian rupiah per US dollar, year to date. Source: Thomson Reuters

Nor has the South African rand done much better. It held up fairly well during the early stages of falling oil, as would be expected. But this month it, too, has been swept away.


South African rand per US dollar, year to date. Source: Thomson Reuters

The Polish zloty is another currency that is suffering more than might be expected, given its solid reputation as an EM safe haven. It has, indeed, weathered the recent extreme storm very well, though only after losing about 12 per cent of its value against the dollar this year to the end of November.


Polish zloty per US dollar, year to date. Source: Thomson Reuters

That leaves just the Korean won moving against the tide. It has strengthened sharply this month, perhaps buoyed up by its current account surplus. But its exports are threatened by Japan’s expansionary Abenomics and the falling yen. The won may be one of the few safe havens around but it may not be one for long.

http://blogs.ft.com/beyond-brics/files/2014/12/krw-dec-16.png
Korean won per US dollar, year to date. Source: Thomson Reuters

We spend a lot of time on the problems Russia has faced. From a lack of diversity in their economy, to a willingness to annoy the global community, but we haven't spent a lot of time on how they fix their issues (unless we have and I've missed that thread). What are your thoughts on how Russia finds growth or at least economic stability instead of ruin? How do they fix their mess?

The Russians have a lot of pride, their government more so, but the most simple, and yet most unlikely of solutions is for them to simply approach the West and Ukraine, apologize for their actions, even if they don't return Crimea and I don't think anyone in the West expects them too either, and help find a solution instead of being a problem. The US and Europe, mostly Europe who suffers along with Russia, want an excuse to remove the sanctions on Russia, even if they remain militarily and politically distant, and solving the Ukrainian problem, rather than fostering it would see Russia at least be welcomed back into the economic fold of the West. However, even if this occurs, I don't see Western businesses clamoring for an opportunity to invest in Russia as they know the next flair up will once again see them targeted.

With capital outflows, brain-drain and a lack of a business friendly investment climate, Russia sees issues that go far beyond Ukraine and see its position and future prospect dampened severally. For all the talk of turning Russia away from natural resources and towards high-tech or manufacturing, I don't see this as a possibility given their current situation.

*Also, I like your idea of returning to "lurker" status. I've been contemplating a disengagement from this site too, especially as I'm set to get married in April of next year. I prefer to read, rather then discuss (as I often state in regards to political discussions) and thus my contributions remain limited and often contrary to what I desire. We may be seeing each other less and less.

 

[LeveragedBuyout]

We spend a lot of time on the problems Russia has faced. From a lack of diversity in their economy, to a willingness to annoy the global community, but we haven't spent a lot of time on how they fix their issues (unless we have an I've missed that thread). What are your thoughts on how Russia finds growth or at least economic stability instead of ruin? How do they fix their mess?

The Russians have a lot of pride, their government more so, but the most simple, and yet most unlikely of solutions is for them to simply approach the West and Ukraine, apologize for their actions, even if they don't return Crimea and I don't think anyone in the West expects them too either, and help find a solution instead of being a problem. The US and Europe, mostly Europe who suffers along with Russia, want an excuse to remove the sanctions on Russia, even if they remain militarily and politically distant, and solving the Ukrainian problem, rather than fostering it would see Russia at least be welcomed back into the economic fold of the West. However, even if this occurs, I don't see Western businesses clamoring for an opportunity to invest in Russia as they know the next flair up will once again see them targeted.

With capital outflows, brain-drain and a lack of a business friendly investment climate, Russia sees issues that go far beyond Ukraine and see its position and future prospect dampened severally. For all the talk of turning Russia away from natural resources and towards high-tech or manufacturing, I don't see this as a possibility given their current situation.

That's a difficult question, to which there are probably no satisfying answers. The rise of oil during Putin's term in office masked a lot of long-term structural problems, and in truth, Russia's economy was already heading towards recession before Crimea and the oil collapse. I'm certain that the best minds in Russia are studying solutions to revive the Russian economy, but it's not a simple matter. Perhaps I will return to this issue after I have studied it a bit more in depth and given it the time it deserves. For the sake of argument, though, I'd like to return to a post earlier in the thread that explored how various economies achieved high growth:

Emerging and Frontier Markets: Economic and Geopolitical Analysis

You can read the cited post for the full picture, but focusing on just one critical bottleneck, I would identify the upper left bubble as the culprit for Russia's ills. Rule of law is essentially non-existent, and I think the case of Yukos is a neat microcosm for the problems Russia's economy faces: the assets were acquired in a rather shady and perhaps illegal way, but the management was professional and efficient. Just as Yukos was starting to produce some serious profits, though, Putin intervened, confiscated the assets, sold them off cheaply as a gift to a crony, and threw the Yukos management in jail.

How can any business prosper in such an environment? And that's industry, and we're talking about a well-run company. What happens if management is corrupt and inefficient, does corporate governance efficiently solve the problem? No, shareholders are treated like garbage in Russia. The treatment of Hermitage Capital surely indicates that there are no checks on incompetence and inefficiency.

In my view, the main difference between Russia and China is that Russian corruption worked against business (cannibalizing resources), while Chinese corruption worked hand-in-hand with business (graft).

I think if the apparatchiks would get out of the way, Russia might actually pull itself up by its bootstraps; it certainly has the necessary human capital to do so. It has a large enough population, enough natural resources, and willing trade partners in Europe and China for its products, but the kleptocrats and oligarchs just can't help themselves.

To conclude, revisiting my point in your excellent Superpower thread, culture matters. Americans value transparency, clean government, checks and balances, and optimism. Unfortunately for Russians, Putin's Russia possesses none of those characteristics, and business will continue to fail so long as those conditions hold.

*Also, I like your idea of returning to "lurker" status, I've been contemplating a disengagement from this site too. I prefer to read, rather then discuss (as I often state in regards to political discussions) and thus my contributions remain limited and often contrary to what I desire. We may be seeing each other less and less.

Welcome to the dark side, brother. Except for a handful of contributors, the quality has been too low to sustain an intellectually-stimulating discussion for long. Perhaps time will solve that, perhaps not. It's always a pleasure reading your contributions, and I will be sorry to see their reduced frequency. If this is PDF-specific, and you participate somewhere else, I would be very interested to haunt such a site--please let me know.

 

[anonymus]

@LeveragedBuyout

I am having difficulty in understanding the current slide in Indian Rupee value vis-a-vis dollar.

Superficially, Conditions in India seem primed for appreciation rather than depreciation.

Due to fall in Oil prices, government has been able to do away with Oil subsidy completely. Initially plan was to increase prices of Oil by 5% per month until they equalize with international prices but with fall in prices, immediate removal of subsidy has been possible.

With a conservative government in power, Fiscal deficit this year is expected to be 3% of GDP, a sharp decrease from 6% during last government.

Inflation in India has fallen to 0% this week. This may sound bad for a economy where this is accompanied by low interest rates, but in India repo rates is 8%. Rates were high to bring inflation which was hovering close to 8% under control. A rate cut is imminent.

Only bad situation in India is on CAD front, where CAD has increased because government lifted curbs on Gold import.

Overall the situation did not justifies currency depreciation.

UPDATE 2-Indian rupee, bonds slump; policy makers say not worried| Reuters

Welcome to the dark side, brother. Except for a handful of contributors, the quality has been too low to sustain an intellectually-stimulating discussion for long. Perhaps time will solve that, perhaps not. It's always a pleasure reading your contributions, and I will be sorry to see their reduced frequency. If this is PDF-specific, and you participate somewhere else, I would be very interested to haunt such a site--please let me know.

Don't count on that. Quality of this site is decreasing overtime, not increasing. It was much better in 2011-12 period.

 

[LeveragedBuyout]

@LeveragedBuyout

I am having difficulty in understanding the current slide in Indian Rupee value vis-a-vis dollar.

As the saying goes, when the market is in crisis, correlation goes to 1. I don't think this is an India-specific scenario, it's just a general flight-to-quality that is hitting emerging markets across the board. Everyone hides in the warm embrace of the reserve currencies (USD, JPY, EUR) in difficult times, but if Russia doesn't have a 1998-style default, I would expect to see a recovery in EM currencies at some point.

 

[Indos]

There are still dumb entrepreneurs in Indonesia who dont understand Rupiah future that is likely to depreciate against USD in a long period and keep borrowing money from western banks even though their majority revenues comes in Rupiah not USD, like Lion Air. Our government need to educate entrepreneurs who dont have macroeconomics understanding or not having Chief Economist position at their company. They have to be careful on their expansion plan for at least 4-5 years to come, and look into our current and long run prediction of our trade account and USD supply and demand before borrowing money from western banks.

The previous and current fall of Rupiah is not always due to fundamental cause though, but since our financial market is too liberal and many foreigners has big stake there, so the possibility of falling Rupiah is still quite big because of profit taking or psychological reason.

Despite that, we have to admit that Todays we still have fragile fundamental strength in our currency that makes sharp depreciation still become a possibility because of speculation reason in our liberal financial market. What is happening in USA should not affect our currency in a massive way just like the last several days if we have strong fundamental position.

This fact should make future USD borrower get cautious first before making any decision to borrow, but personally I like them to hold their ambition for a while in getting cheap USD from abroad for their expansion, waiting for better fundamental strength in our own currency first.

But Today I just want to inform you all here that there is big development that can strengthen Rupiah fundamentally in a long run which is our Government plan to increase our state own company (PT Pertamina) oil refinery capacity in a massive way so we dont have to import it from Singapore anymore which can only increase our USD demand. Not to mention that in 2017 our biggest oil field (Mahakam Block) will be in the hand of Pertamina (State Own) so it means more oil to feed our (new added capacity) refinery that will reduce imported oil greatly.

This new development is matter a lot since we import too many oil that needs huge USD, and since our refinery is not large enough to process all of our oil ( we are also a net oil importer in huge scale, current production is not enough to feed our domestic demand), so we still have to export our crude oil and in return import oil products from Singapore Refinery, a very unnecessary action and a waste of value added opportunity. We have more clean government now, it is so clear by seeing latest development in how they manage our economy.

Good Thread @LeveragedBuyout

 

[Chinese-Dragon]

Rouble per US dollar, year to date. Source: Thomson Reuters

But contagion is not absolute and some EM currencies are bucking this month’s sharp falls, at least for now. Below, we present charts that show how the big EM currencies are faring in these times of extreme stress.

No other currency is suffering as the rouble but some are coming close. Below is the Turkish lira. Unlike Russia, Turkey benefits from cheap oil. Its current account deficit, a perennial concern for investors, narrows by more than $400m with every $10 fall in the oil price. But Turkey has been caught up in EM risk aversion, helped along by a political crisis that President Recep Tayyip Erdogan has done nothing to dissipate.


Turkish lira per US dollar, year to date. Source: Thomson Reuters

It’s a different story in Brazil, where you would expect the real to be doing badly given Brazil’s status as a commodity exporter. It is not yet, however, the significant net oil exporter it is destined to become (assuming Petrobras ever emerges from scandal). Rather than oil, Brazil is suffering from contagion, as one of the most liquid EM foreign exchange markets there is, and by the failure of its new economics team to reassure markets about the seriousness of their orthodox intentions.


Brazilian real per US dollar, year to date. Source: Thomson Reuters

Also tanking is the Nigerian naira, another oil exporter in the eye of the cheap oil storm. Attempts by the central bank to assert itself as the naira went into free fall may, however, be paying off.


Nigerian naira per US dollar, year to date. Source: Thomson Reuters

There is no chart showing what has happened to the Venezuelan bolívar this year: it is unchanged, at the official rate, at 6.28 to the dollar. The unofficial rate, however, has reportedly gone into the stratosphere, hitting 183.7 to the dollar on Tuesday according to dolartoday.com, from 64 at the start of the year and 159 on December 1.

But for an indication of what investors think of Venezuela’s prospects as the oil price plunges, here is its 5-year credit default swap:


Venezuela 5-yr CDS, year to date. Source: Thomson Reuters

All of the above might be expected to be doing badly in current circumstances. Not so the Indian rupee. India is a beneficiary of cheap oil and its government has been doing pretty much what investors could wish for – not least, taking the opportunity to cut fuel subsidies. But India, too, is a liquid market and investors have taken the exit door.


Indian rupee per US dollar, year to date. Source: Thomson Reuters

It is a similar story with the Indonesian rupiah: it, too, could be expected to gain from cheap oil and from an investor-friendly government. But the EM tide is still sweeping against it.


Indonesian rupiah per US dollar, year to date. Source: Thomson Reuters

Nor has the South African rand done much better. It held up fairly well during the early stages of falling oil, as would be expected. But this month it, too, has been swept away.


South African rand per US dollar, year to date. Source: Thomson Reuters

The Polish zloty is another currency that is suffering more than might be expected, given its solid reputation as an EM safe haven. It has, indeed, weathered the recent extreme storm very well, though only after losing about 12 per cent of its value against the dollar this year to the end of November.


Polish zloty per US dollar, year to date. Source: Thomson Reuters

That leaves just the Korean won moving against the tide. It has strengthened sharply this month, perhaps buoyed up by its current account surplus. But its exports are threatened by Japan’s expansionary Abenomics and the falling yen. The won may be one of the few safe havens around but it may not be one for long.

http://blogs.ft.com/beyond-brics/files/2014/12/krw-dec-16.png
Korean won per US dollar, year to date. Source: Thomson Reuters

Look at all these developing world currencies collapsing due to capital flight.

And China is trying to move towards Capital account liberalization in our upcoming reforms.

 

[Viet]

Look at all these developing world currencies collapsing due to capital flight.

And China is trying to move towards Capital account liberalization in our upcoming reforms.

indeed china is doing well. respect.

There are still dumb entrepreneurs in Indonesia who dont understand Rupiah future that is likely to depreciate against USD in a long period and keep borrowing money from western banks even though their majority revenues comes in Rupiah not USD, like Lion Air. Our government need to educate entrepreneurs who dont have macroeconomics understanding or not having Chief Economist position at their company. They have to be careful on their expansion plan for at least 4-5 years to come, and look into our current and long run prediction of our trade account and USD supply and demand before borrowing money from western banks.

The previous and current fall of Rupiah is not always due to fundamental cause though, but since our financial market is too liberal and many foreigners has big stake there, so the possibility of falling Rupiah is still quite big because of profit taking or psychological reason.

Despite that, we have to admit that Todays we still have fragile fundamental strength in our currency that makes sharp depreciation still become a possibility because of speculation reason in our liberal financial market. What is happening in USA should not affect our currency in a massive way just like the last several days if we have strong fundamental position.

This fact should make future USD borrower get cautious first before making any decision to borrow, but personally I like them to hold their ambition for a while in getting cheap USD from abroad for their expansion, waiting for better fundamental strength in our own currency first.

But Today I just want to inform you all here that there is big development that can strengthen Rupiah fundamentally in a long run which is our Government plan to increase our state own company (PT Pertamina) oil refinery capacity in a massive way so we dont have to import it from Singapore anymore which can only increase our USD demand. Not to mention that in 2017 our biggest oil field (Mahakam Block) will be in the hand of Pertamina (State Own) so it means more oil to feed our (new added capacity) refinery that will reduce imported oil greatly.

This new development is matter a lot since we import too many oil that needs huge USD, and since our refinery is not large enough to process all of our oil ( we are also a net oil importer in huge scale, current production is not enough to feed our domestic demand), so we still have to export our crude oil and in return import oil products from Singapore Refinery, a very unnecessary action and a waste of value added opportunity. We have more clean government now, it is so clear by seeing latest development in how they manage our economy.

Good Thread @LeveragedBuyout

your current account deficit is the MAIN cause for the weakness of your currency.

 

[DarkElf]

There are still dumb entrepreneurs in Indonesia who dont understand Rupiah future that is likely to depreciate against USD in a long period and keep borrowing money from western banks even though their majority revenues comes in Rupiah not USD, like Lion Air. Our government need to educate entrepreneurs who dont have macroeconomics understanding or not having Chief Economist position at their company. They have to be careful on their expansion plan for at least 4-5 years to come, and look into our current and long run prediction of our trade account and USD supply and demand before borrowing money from western banks.

The previous and current fall of Rupiah is not always due to fundamental cause though, but since our financial market is too liberal and many foreigners has big stake there, so the possibility of falling Rupiah is still quite big because of profit taking or psychological reason.

Despite that, we have to admit that Todays we still have fragile fundamental strength in our currency that makes sharp depreciation still become a possibility because of speculation reason in our liberal financial market. What is happening in USA should not affect our currency in a massive way just like the last several days if we have strong fundamental position.

This fact should make future USD borrower get cautious first before making any decision to borrow, but personally I like them to hold their ambition for a while in getting cheap USD from abroad for their expansion, waiting for better fundamental strength in our own currency first.

But Today I just want to inform you all here that there is big development that can strengthen Rupiah fundamentally in a long run which is our Government plan to increase our state own company (PT Pertamina) oil refinery capacity in a massive way so we dont have to import it from Singapore anymore which can only increase our USD demand. Not to mention that in 2017 our biggest oil field (Mahakam Block) will be in the hand of Pertamina (State Own) so it means more oil to feed our (new added capacity) refinery that will reduce imported oil greatly.

This new development is matter a lot since we import too many oil that needs huge USD, and since our refinery is not large enough to process all of our oil ( we are also a net oil importer in huge scale, current production is not enough to feed our domestic demand), so we still have to export our crude oil and in return import oil products from Singapore Refinery, a very unnecessary action and a waste of value added opportunity. We have more clean government now, it is so clear by seeing latest development in how they manage our economy.

Good Thread @LeveragedBuyout

The problem is deeper than that. The labor law is too rigid and too biased on the worker side. At the same time no government or political party dared to side with the businessman afraid that it's going to cost them votes. So more often than not it's much easier and simpler to import from China/Vietnam except for things that related to natural resource or something that because of law/regulation/tax must be made in Indonesia.

 

[Indos]

The problem is deeper than that. The labor law is too rigid and too biased on the worker side. At the same time no government or political party dared to side with the businessman afraid that it's going to cost them votes. So more often than not it's much easier and simpler to import from China/Vietnam except for things that related to natural resource or something that because of law/regulation/tax must be made in Indonesia.

Recent cut on oil subsidy is actually a witness that we have more rational administration Today. I like entrepreneur to be our President like Jokowi, he understand entrepreneur problem quite well. On the other hand, Ahok (Jakarta Governor) want to increase his "PNS" (local government employee) salary into 14 million per month. It can cause many worker nationally get jealous and seek more hike in their salary and thus create more problem in Businessman side. It can also suck best talent from university from production function (as entrepreneur or worker) and rather seek administrative jobs instead as local government employee. Such a lost in our economic strength.

Dont forget inflation effect as well for this very unnecessary salary increase if the effect become nationally, since worker salary increase create product and services increase as well, and the unlucky people who have no job will get the highest burdent. Our competitiveness will also get worse, and in the same time ASEAN free trade comes into effect next year.

 

[DarkElf]

Recent cut on oil subsidy is actually a witness that we have more rational administration Today. I like entrepreneur to be our President like Jokowi, he understand entrepreneur problem quite well. On the other hand, Ahok (Jakarta Governor) want to increase his "PNS" salary into 14 million per month. It can cause many worker nationally get jealous and seek more hike in their salary and thus create more problem in Businessman side.

The salary hike is only one of the small problem. Businessman just need some predictability/stability, for example tied it to inflation so no more protest every year and stop the union from forcing the worker to join the demonstration, also no sudden hike just because the mayor wants to curry favor.

The biggest headache is in the detail of the regulation, for example you can't even fired worker who miss work for 5 days or more, if you don't give them writing call (panggilan tertulis) with copy to RT/RW 3 times. Also if he at the days 5 work again, all your previous writing calls is useless and he can miss work for 3-5 days again without any consequence.

Severance pay is another problem, after 3 month of work, worker can get 1 month pay, they can get almost a year of pay after 5 years of work and so on. All of this is, on top of Jamsostek, BPJS ketenagakerjaan, and who know what the government will add again in the future.

Also a 'smart' worker who wants to make a quick money, can apply to work, keep his attitude for 3 month when he is still in probation time (masa percobaan), after that he will make a big trouble so the businessman has no recourse beside firing him and give him big severance pay. He/she can net 4-5 month pay for 3 months of work.

 

[LeveragedBuyout]

Look at all these developing world currencies collapsing due to capital flight.

And China is trying to move towards Capital account liberalization in our upcoming reforms.

RMB will be a reserve currency, so the danger for China is that the RMB will strengthen (like the other reserve currencies do) in times of crisis.

 

[Chinese-Dragon]

*Also, I like your idea of returning to "lurker" status. I've been contemplating a disengagement from this site too, especially as I'm set to get married in April of next year. I prefer to read, rather then discuss (as I often state in regards to political discussions) and thus my contributions remain limited and often contrary to what I desire. We may be seeing each other less and less.

Welcome to the dark side, brother. Except for a handful of contributors, the quality has been too low to sustain an intellectually-stimulating discussion for long. Perhaps time will solve that, perhaps not. It's always a pleasure reading your contributions, and I will be sorry to see their reduced frequency. If this is PDF-specific, and you participate somewhere else, I would be very interested to haunt such a site--please let me know.

That's because you guys are sane.

To a normal/sane person, the constant 24/7 flame wars and trolling on this forum, would feel both unpleasant and unhealthy. That's why most of the best members end up leaving after a while.

It's only the crazies like me that stick around, maybe I am just too used to it by now.

 

[LeveragedBuyout]

That's because you guys are sane.

To a normal/sane person, the constant 24/7 flame wars and trolling on this forum, would feel both unpleasant and unhealthy. That's why most of the best members end up leaving after a while.

It's only the crazies like me that stick around, maybe I am just too used to it by now.

It's really a question of time for me. Between work and family, I have a limited amount of time to learn, and I read voraciously. PDF, for me, was equivalent to a curated RSS feed, and I was able to read some interesting articles and analysis posted by users here. But my ignore list has grown so large that threads are largely unintelligible, and with a handful of exceptions, most of the information I see here can be easily found elsewhere.

If I am specifically asked about something, I will probably respond, but otherwise, it's too hard to initiate conversations at this point. I will extend the same request to you that I did to Sven: if you participate anywhere else that has a higher level of quality, please let me know.

 

[TaiShang]

Investing in Citizens

The people will become a new impetus for China's economic growth to adapt to the 'new normal'
By Wang Jun

HELP WANTED: A job fair in Nanjing, Jiangsu Province, attracts college graduates. A well-educated and skillful work force is needed to improve the human capital of China (AN XIN)

Amidst an aging population and a changing growth model, China is looking to human capital rather than labor to fuel its economic growth.

This year's Central Economic Work Conference held from December 9 to 11 decided that "economic growth should rely more on human capital and technological progress." Experts think this indicates that the Chinese Government will invest more time and resources into improving the quality of the country's human capital, particularly in the education sector and the labor market.

As discussed at the conference, China's biggest comparative advantage used to be a cheap labor force, which made it easy for advanced foreign technologies and management experience to transform into productivity soon after being introduced into China. Now, with an aging population, China has a smaller surplus rural labor force, so it makes sense that the country should shift its growth model, emphasizing human capital and technological progress, as well as turning innovation into a new engine that drives the country's development.

Disappearing dividend

According to a report of Economic Information Daily, studies of experts in demography and labor economics indicate the aging population and the disappearance of that demographic dividend are the inevitable outcome of economic and social development. Demographic changes in China have happened in three stages: The fertility rate falls, the working-age population's growth rate drops to zero and the existing population ages.

The accumulation and vast reserves of China's human resources have been crucial to high-speed growth in the past 30 years. The country, nicknamed "workshop of the world," has long been backed by long-term abundant labor supplies. However, in the face of a demographic dividend, the country is also likely to lose such an advantage in the next few years.

"In China, a labor shortage was first detected in 2004, and the working-age population decreased for the first time in 2012. The interval between these two turning points is very short. In the future, China's aging population track will be similar to those in developed countries, but it will progress much more quickly," said Cai Fang, Vice President of the Chinese Academy of Social Sciences (CASS), adding that although this factor will not cause economic stagnation, it is still likely to slow down the economic growth.

As its vast supplies of labor no longer exist, China's labor cost keeps increasing, making it unlikely that the labor-extensive and industrial-driven economic growth model continue. According to the Economic Operation and Forecast Early Warning System for China Light Industry, the average monthly wages of workers in southeast China's coastal areas equal about $500, while those in Indonesia and Viet Nam are only $300 and $250 respectively. China's low-end manufacturing industries are becoming less competitive in the international market.

In the meantime, the structure of the working population reflects the deficiency of China's human capital. Yin Xingmin, a professor at the School of Economics of Fudan University, said the ratio of research and development (R&D) personnel among 1 million people can indicate the contribution of human capital to the innovation. A high ratio and its rapid growth can reflect a growing human capital density in a country. For instance, Finland is a country with a population of only 5 million, but among every million people in this country, 7,700 are engaged in R&D, the highest in the world. In China, only 1,071 out of a million are engaged in R&D, indicating that China has far from enough input in human resources for innovation.

Hu Chi, a researcher with the Research Center of State-owned Assets Supervision and Administration Commission of the State Council, said a strong solution for China involves strengthening human capital.

"The core of our economic transition involves transforming the economic growth model and changing the labor-driven economic growth to a human capital-driven one," said Hu when interviewed by Economic Information Daily.

According to Hu, in the adjustment to the industrial structure, the country must change the focus from labor-intensive low-end manufacturing industries to high-end industries mainly driven by high technologies, and from the traditional model based on production to a modern one that stresses both production and services.

"This means that the economic growth must rely on human capital instead of labor," Hu said. "Only when China's economic growth completes the transformation from being labor-driven to human capital-driven can the country regain the internal driving force for the economic growth and realize economic take-off again."

Investments wanted

Currently, in China, the number of laborers is decreasing while human capital keeps growing, in contrast to previous trends, in which both increased rapidly. Experts think China should emphasize human capital investment in the future to accelerate upgrading of industrial structure.

"Why is the proportion of R&D investment against the total GDP rising sharply? It is not input by the government, but the companies themselves, because they have to improve their productivity, and the importance of human capital is hence recognized. From the brisk training market you can see such importance," said Cao Yuanzheng, chief economist of Bank of China, who believes the most important thing for China to do to improve productivity is to make full use of human capital, which he sees as the core of invention.

According to the China Human Capital Report 2014 compiled by the China Center for Human Capital and Labor Market Research (CHLR) under the Central University of Finance and Economics, the ratio of GDP against the total volume of human capital keeps rising in China, indicating the average productivity of human capital is rising. Li Haizheng, Director of CHLR, said the growth of human capital in China during recent years is not brought on by the increasing population, but promoted by education and other factors.

China's total volume of human capital had reached 812.1 trillion yuan ($132.7 trillion) in 2010, among the top of the world, but its per-capita human capital is still low, ranking 43rd among all the 122 economies on the list.

Since China's per-capita human capital is still low, it is particularly important for the government to invest more in human capital, especially in two aspects: educating more people to raise the labor force participation rate, and improving the labor market for better allocation of labor resources.

In the education sector, experts suggest extending compulsory education and continuing college enrollment expansion. Chen Yuyu, Director of the Institute of Economic Policy Research of Peking University, said China will grow to become a country that supplies well-educated and skillful laborers from one with just abundant supplies of poorly educated and less skillful laborers. Chen thinks to adapt to such a change, China must fundamentally reform its labor market.

"In China, the rate of college graduates aged 25-34 among the total population is lower than those of other countries, which requires the government to continue expanding investment in human capital, including extending basic education," Chen said. "And the college enrollment expansion should not be slowed down just because of temporary difficulties and nearsightedness."

Cai thinks that the essence of current employment policy must be changed. Under the present conditions, the most pressing problem is no longer the creation of more job opportunities but that skills of laborers cannot adapt to the changes of industrial structures.

According to Cai, since China's working-age population has peaked and is now decreasing, the government has to raise the labor force participation rate—a ratio between the labor force and the overall size of their cohort. Growing a larger, more educated population requires further expansion of college enrollment, because higher education can improve the quality of laborers and stimulate high school education.

In the labor market, Cao suggests the government to improve the efficiency of labor resources allocation through various supporting policies. Cao said that urbanization is in essence the urbanization of people and that capital is no longer reflected in monetary capital but rather in human capital.

"Urbanization does not mean merely building houses or subways, while the improvement of human capital is the core of urbanization. To improve human capital, a country needs a complete set of systems, and soft infrastructure such as education, healthcare and culture will become more important," said Cao.

In other words, boosting China's economic value requires a simple change in investment—an investment in its citizens and well-being, a win-win situation.

"Under new conditions, we must guide the change of investment into sectors conducive to accumulate human capital," said Li Yang, Vice President of the CASS. "Investment meeting such a requirement should obviously be made in education, healthcare, social security and other sectors of social infrastructure."

Beijing Review

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It's really a question of time for me. Between work and family, I have a limited amount of time to learn, and I read voraciously. PDF, for me, was equivalent to a curated RSS feed, and I was able to read some interesting articles and analysis posted by users here. But my ignore list has grown so large that threads are largely unintelligible, and with a handful of exceptions, most of the information I see here can be easily found elsewhere.

If I am specifically asked about something, I will probably respond, but otherwise, it's too hard to initiate conversations at this point. I will extend the same request to you that I did to Sven: if you participate anywhere else that has a higher level of quality, please let me know.

Same here. I also plan to reduce my presence here, which was already mainly limited to sharing stuff rather than engaging in personal debates. Those are just insustainable. But your analyses will always be a priority for me to read, so long as they appear. Also, this site worth taking a look at every now and then as you may find a pool of interesting analyses/shares.

 

[LeveragedBuyout]

Same here. I also plan to reduce my presence here, which was already mainly limited to sharing stuff rather than engaging in personal debates. Those are just insustainable. But your analyses will always be a priority for me to read, so long as they appear. Also, this site worth taking a look at every now and then as you may find a pool of interesting analyses/shares.

While we didn't always agree on issues, I have always appreciated your professional temperament and your constant introduction of new and interesting articles that presented a perspective I hadn't considered before, or from sources that I don't read myself. Your contribution above about China's demographics is a great example of that.

Good luck to you wherever you land, and perhaps we will cross paths again.