Weekend reading links

1. Interesting difference between what the Chinese and Indian students, the two largest category of foreign students in the US, choose to study,

Chinese students tend to choose undergraduate courses focused on business, while Indians opt for short graduate programs in more technical subjects like science and maths... The most Indian students were studying engineering–36%, followed by math or computer science–34.9%.

2.  Fascinating graphic in the Economist which captures the Brexit-Trump moments in the rich world. It shows that positive views of globalisation are today largely confined to the developing countries.

3. The Economist points to a new paper which calculates the challenge facing defined contribution (DC) savers as they grapple with the ultra-low interest rates in developed economies,

In recent history a fairly common savings rate of 8% each year over one’s career together with other common industry assumptions, would have allowed DC savers to reach a target retirement income replacement ratio (RR) of 75%. Unfortunately, current market yields indicate that both stocks and bonds may deliver lower returns in the coming years. This may impact savers significantly: we quantify that roughly 2% lower expected returns could potentially double the required savings rate over one’s working career in order to achieve this same 75% replacement ratio.

The historical real return of 7.5% from equities is expected to decline to 5%, and that from bonds from 2.5% to 1%, thereby generating a two percentage points lower annual return of 3.5% on a standard asset allocation of 60% US equities and 40% Treasury Bonds. This means that the worker now has to save 15% a year, not the current 9%, to reach the RR of 75%. On a 2.5% real return assumption, the contributions would have to rise to 19% overall!

This and the massive unfunded liabilities of defined benefits plans makes pensions a silent crisis lurking at the edge.

4. The distortions in the Chinese corporate debt market are scary. The system of dual rating of state owned enterprises (SOEs), a stand-alone rating based on the company's balance sheet and a state-backed rating that factors in government support, confounds the problems. Consider these,

Take, for instance, Beijing Infrastructure Investment Co Ltd, which operates the city’s urban rail system. With a hefty debt load, its initial credit rating would be BB-, a risky junk bond, according to S&P. But thanks to government support, S&P gives it a final rating of A+, eight notches higher, a solid investment-grade bond... In the onshore Chinese bond market, if the stand-alone ratings applied, SOEs would face annual interest rates of more than 10% instead of the roughly 5% they are used to. Even in the Hong Kong bond market, average annual borrowing rates for SOEs should be 3.5%, based on their stand-alone profiles; that, however, falls to roughly 2% after state support is included. That amounts to a two-fifths discount on interest costs—quite the subsidy.

This is all fine as long as the government can play along and provide the implicit guarantee. But a recent willingness to let a few fail shows that the possibility of massive turbulence cannot be ruled out.

5. India demonetisation snippet of the week,

Within a day of Mr Modi’s announcement, first-class tickets on India’s longest train route, between Dibrugarh and Kanyakumari, were sold out for the next four months: they could still be bought with old money, then later refunded for new.Within a day of Mr Modi’s announcement, first-class tickets on India’s longest train route, between Dibrugarh and Kanyakumari, were sold out for the next four months: they could still be bought with old money, then later refunded for new.

6. Livemint has a four part series on corporate debt in India. Given the scale of indebtedness, the process of deleveraging is slow, thereby prolonging the pain and postponing any revival of the investment cycle. An analysis of a sample of 305 companies shows that the smallest companies are the most leveraged. 

Compounding the problems, their ability to meet interest costs has dipped to the lowest in a decade.

In fact, even though India has one of the lowest corporate debt to GDP ratios, its corporate indebtedness is worsened by one of the lowest interest coverage ratios. This is caused by slower revenue growth and higher interest rates in India. 

As expected, the indebtedness has taken its toll on compensation, though executive compensation rose faster than those of regular employees. The counter-party in this are the banks, whose balance sheets have been bruised as the debt piles gradually turn sour. 

7. Livemint has a graphic of the share prices of 75 politically connected firms maintained by Ambit Research, compared to those of BSE 500.

This may well be the biggest achievement of this government in Delhi, controlling corruption and crony capitalism. The contrast with the previous government's tenure is stark.

8. Finally, fascinating article on what makes the All Blacks rugby union team tick. "Clean breaks" or slipping through defensive lines, was found to be the most robust predictor of scoring points, and New Zealand towers over everyone else.