Sunday, January 24, 2016

Weekend reading links

1. The latest Oxfam report on global wealth distribution points to worsening inequality. Just 62 people own the same wealth as 3.6 billion people in the poorer half of world population, down dramatically from 388 five years ago. The report also finds that their wealth rose 44% since 2010 to $1.76 trillion, whereas that of the bottom half fell by 41% in the same period! In fact, since the turn of the century, while they received just 1% of the total increase in global wealth, the top 1% of population, whose wealth now exceeds the rest of the world, received half the increase!
This is part of a secular decline in the share of labor income across the world.
2. Livemint points to Ambit Capital's Keqiang index of real economic indicators (auto sales, cargo volume, capital goods imports, and power demand), which exhibits a striking correlation (81% positive correlation) with the old GDP series and a very weak (35%) correlation with the new series. As per this index, which has consistently declined over the past year, the September quarter GDP estimate would be 6% against 7.4% in the new series.
3. More signatures of corporate distress come from the rising proportion of shares pledged by India's business owners. Promoter share pledging rose 14% in the last quarter to reach Rs 2.03 trillion, or 46.35% of promoter holdings. There were 25 companies where promoters had pledged 100% of their holdings, 79 with more than 90%, and 208 with more than 50%.
Unsurprisingly, infrastructure firms dominate the list of those who have pledged their shares.

4. Livemint points to a WEF report on labor market disruption based on survey of executives across 15 countries which points to a loss of 7.1 million jobs due to redundancy, automation, or disintermediation, especially in white-collar office and administrative roles.
5. Solar power tariffs continue their sharp downward trend, with the latest round of reverse bidding under the National Solar Mission resulting in Rs 4.34 per unit. Finnish firms Fortum Energy bid that rate for 70 MW, with US firm Rising Sun Energy quoting Rs 4.35 per unit for two projects of 140 MW, and French Solairedirect bidding Rs 4.36 for the same capacity. NTPC had bid out a total of 420 MW in its solar parks across Rajasthan in this round.
Softbank, along with its joint venture partner SBG Cleantech had quoted Rs 4.63 for 350 MW in Andhra Pradesh earlier. Under the NSM, the Government of India provides viability gap funding of Rs 1 Cr per MW as well as land and transmission corridor. 

6. Arvind Panagariya has flagged off a debate on the merits of having a two per cent inflation lower bound for India arguing that none of the developing countries have had 2-3 percent inflation rate on a sustained basis. 

7. The financial market problem facing the Chinese economy is a teachable moment in foreign exchange management policy. In recent months, even as the dollar has strengthened against other currencies, the renminbi's dollar peg has had the effect of keeping the Chinese currency over-valued, and making it appear as an one-way bet. The Chinese government's recent apparent tolerance of depreciation, if only motivated by considerations of external trade competitiveness, by way of widening the renminbi's trading band may have lend further credence to this perception. This has had the effect of encouraging domestic capital flight from China in anticipation of weakening renminbi, circumventing tight capital controls. In 2015, there was $676 bn in net capital outflows from China. 
The outflows put pressure on foreign exchange reserves which fell by $512.7 bn last year, the highest ever. The Chinese government's clumsy response to equity market volatility, rising public and private non-financial debt, and uncertainties about economic growth numbers have naturally spooked the markets and fuelled a belief that things may be far worse. As the graphic below shows, capital outflows by domestic investors have been the driving force behind the reversal of capital flow trends.
In such situations, market reactions are far from rational and are easily swayed by perceptions and more often than not over-shoot its repsonse. In this context, a gradual easing of capital controls and transitioning to a floating exchange rate may have the effect of triggering an irrational run on the currency. Given the recent precedents, its response from the Chinese government is more likely to exacerbate the concerns and deepen the devalution spiral. 

In the circumstances, where markets have taken control, for good or bad, the best that Chinese government can do is to reassure the markets and gradually depreciate. Some form of capital controls, despite the difficulty of its enforcement, during this transition may be useful. 

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