Weekend reading links

1. The story that Africa, with its burgeoning middle-class and a new dawn of democracy, would be the new East Asia was always questionable. Now "over-exuberance has given way to uber-pessimism",

In its semi-annual report, the World Bank forecast growth in Sub-Saharan Africa of just 3.3 per cent this year, less than half the average of 6.8 per cent recorded between 2003 and 2008. Because of their growing populations, most African states need nearly 3 per cent growth just to stand still in per capita terms.

The biggest challenge for the African economies is their lack or slow pace of productive structural transformation, a problem not amenable to easy solutions,

Perhaps the biggest flaw in the middle class story is that, with a few exceptions, Africa hardly makes anything. For too many countries, the economic model continues to be to dig stuff out of the ground and sell it to foreign companies... Unless governments can build sustainable growth models less dependent on commodities and based more on adding value domestically, the ‘Africa Rising’ story will be just that: a story.

2. This snapshot of the reversal of commodity prices since January 2014 says it all,

3. Gavyn Davies points to the relative exchange rate movements since 2010, which marks out renminbi as being the biggest loser, in terms of currency appreciation.

The scale of renminbi's appreciation makes it a ripe candidate for an one-way bet, something which Beijing would go out of the way to dispel.

4. FT points to China's spectacular debt accumulation, rising from 148% at end-2007 to $25 trillion (163 trillion RMB) or 237% at March 2016., far higher than the emerging markets debt to GDP ratio of 175 at the end of Q3 2015. New borrowing rose by 6.2 trillion RMB in Q1 2016, the biggest three-month surge on record. As the graphic below shows, the country today has the largest corporate debt ratio among all major economies.

However, the article's reference to the concern of Michael Pettis and others about a Japan-style balance sheet recession in China may be overblown. For a start, there is a compelling argument that demographics has been the driving force behind the Japanese problems. More importantly, in terms of the space for responding, unlike Japan, the government and households in China are among the least indebted. The big worry with China would be the impact of large-scale corporate defaults and its impact on a largely public banking system, which gets amplified as the government struggles to increase consumption spending by consumers.

5. Bloomberg reports that $7.8 trillion of sovereign bonds are currently yielding negative rates, as against just $3 trillion yielding more than 2%!

To put the distortions in perspective,

Ireland’s 100 million euros ($113 million) of bonds due in 2116 were issued to yield 2.35 percent -- similar to yields that benchmark 10-year German bunds offered as recently as 2011.

And FT has country-wise break-up of negative yield debt,

6. Snippet from the automation and job-losses story,

Half a century ago, harvesting California’s 2.2 million tons of tomatoes for ketchup required as many as 45,000 workers... by the year 2000, only 5,000 harvest workers were employed in California to pick and sort what was by then a 12-million-ton crop of tomatoes.

7. FT has a longform on China's robot revolution, which will make it the largest operator of industrial robots in the world by the end of the year. Even as it is automating its factories with robots, its entrepreneurs have been moving very rapidly up the robot production chain. Backed by government support, Chinese robot manufacturers have been rising fast. In 2014, President Xi Jinping called for a 'robot revolution' to address labor shortages and improve Chinese manufacturing quality, and exhorted,

Our country will be the biggest market for robots, but can our technology and manufacturing capacity cope with the competition? Not only do we need to upgrade our robots, we also need to capture markets in many places.

Driving the rapid adoption of robots in China is its economics - the payback period of robots fell from 5.3 years to 1.7 years in the 2010-15 period and is expected to fall to 1.3 years by 2017. 

8. Corporates in the US may be flush with cash surpluses. But the market expectations of long-term corporate health may have rarely been as bleak as now,

Three decades ago, the club of triple A-rated American corporate borrowers was a busy place. About 60 big companies, ranging from Pfizer to General Motors, were deemed so “safe” that they held this coveted tag from the credit rating agencies. No longer. Standard & Poor’s has just stripped the mighty ExxonMobil of its triple-A rank because of understandable concerns about falling oil prices and mounting energy sector debt... This leaves just two — yes, two — American companies still in that triple-A club: the unlikely duo of Microsoft and healthcare giant Johnson & Johnson.

This further shrinks the global space of "safe assets", thereby amplifying the flight in "search of yield". In this context, Gillian Tett also points out the parched global landscape for "safe assets",

Ricardo Caballero and Emmanuel Farhi calculate, using data from Barclays, that between 2007 and 2011, the value of safe assets fell from $20.5tn to $12.2tn, equivalent to a drop from 36.9 per cent of global gross domestic product to a mere 18.1 per cent... Prof Caballero and Prof Farhi argue the imbalance is so severe that the problem confronting the world today is not a “liquidity” trap but a “safety trap”: the shortage is creating a self-reinforcing, panicky cycle that is contributing to stagnant growth.

More stringent post-GFC financial market regulatory provisioning norms, QE purchases by central banks, growing global sovereign indebtedness, and now the shrinking space of AAA rated corporate debt, have all contributed to the scarcity of "safe assets".