1. Deflation and currency depreciation may be another reason for the surge in Chinese exports.
China’s real effective exchange rate, which adjusts for differences in inflation between China and its major trading partners, is back to where it was in 2014, unraveling a decade of steady appreciation... the currency’s inflation-adjusted slide means goods made in China are even cheaper than before, a trend reflected in weak import prices. That makes Chinese products keenly attractive for Americans, blunting U.S. officials’ goal of reducing reliance on Beijing... Compared with a basket of the currencies of its major trading partners, China’s yuan has fallen 6% from a recent peak in March 2022, according to data from the Bank for International Settlements, an international group of central banks...
China’s real effective exchange rate—which adjusts not just for whom China trades with, but also for differences in their inflation—has tumbled 14% in the same period. China is flirting with deflation, which most economists see as a bad thing because it weighs on spending and makes debts harder to bear. But it has a hidden benefit by making Chinese exports even more competitive on world markets, especially when inflation is high in the U.S. and elsewhere. The gap between China’s nominal and real exchange rates is the widest since the BIS data begin in 1994. The U.S.’s corresponding real exchange rate has risen 6% since early 2022... Chinese export volumes in February were around 10% higher than in March 2022. World export volumes were up only 1.4% in the same period, according to data from the CPB Netherlands Bureau for Economic Policy Analysis... Emerging Asian export volumes have fallen almost 2% over the two years that China’s have risen 10%, CPB data show.
2. Michael Pettis on China's steel production that's swamping global markets
China’s steel industry has become a stand-in for the overall economy, with growing supply facing declining domestic demand. According to the World Steel Association, China produces roughly 55% of all the steel produced in the world. It produces nearly 80% more than the next nine biggest producers, which are, in order, India, Japan, the US, Russia, South Korea, Turkey, Germany, Brazil and Iran... to achieve a dynamic balance between supply and demand... will require some combination of a decline in production, which is bad for growth and unemployment in China, and an expansion in exports, which won't be easy for other steel producers and exporters... So far exports have taken up much of the slack... an Oxford Economics report which measures China’s combined export volumes of iron and steel to be 80 per cent above pre-pandemic levels... Fitch says that China’s steel exports climbed by 36.2% in 2023, to 90.26 million metric tonnes, and by 30.7% in the first quarter of 2024, to 25.8 million metric tonnes. This accounted for only 5% of China's total output, suggesting it could grow a lot more.
3. Sri Lanka and its creditors agree to restructure its $13 bn debt which it defaulted in 2022 by issuing macro-linked bonds where bond payouts are linked to GDP growth rates.
In return for taking a roughly one-third haircut on their original debt, creditors have proposed a new $9bn bond with payments adjusted higher or lower in 2028 depending on the average US dollar GDP that Sri Lanka achieves. The country has put forward other ways of setting GDP-linked payments and is also assessing a creditor proposal for a separate governance-linked bond. This would cut coupon payments if the country raises tax revenue collection as a share of GDP and passes anti-corruption reforms.As they emerge from defaults, countries such as Ukraine and Uruguay have handed out equity-like warrants, which promise extra money based on factors like movements in the price of commodities that the country produces or GDP, as a way of getting creditors to swallow debt losses. But these instruments, which can be difficult to price and trade, have often ended up on the market scrapheap. Sri Lanka’s proposed bond could break new ground because “it is not a warrant — it is an adjustment to an existing bond that would take effect from 2028. That is the difference with earlier versions,” according to Thilina Panduwawala, senior macroeconomist at Frontier Research, a Sri Lankan advisory firm... Earlier this year, Argentina had to deposit hundreds of millions of dollars with a London court in order to appeal against a ruling that it must pay creditors €1.3bn for using the wrong GDP data for warrants it issued after its chaotic 2001 default.
4. Nice profile of Keir Starmer, the UK Labour Party leader and potential PM-in-waiting. Starmer is portrayed as an outsider who would roll-up his sleeves and focus on the execution of stuff.
The article has this reference from an autobiography of Rory Stewart.
In his recent memoir Politics on the Edge, Stewart writes that “it was at the operational level that so many of the worst problems in British government lay. Not in the ‘what’ but the ‘how’.”
5. John Burn-Murdoch shows data on economic and social outcomes of migrants and points out that Anglosphere does better than Europe in attracting and integrating migrants. This graph is striking.
6. Steven Glinert points to an important blindspot in the US CHIPS Act, its focus on smaller size chips and neglect of the larger sized chips (mature nodes) that are commonly used across industries including military and where the Chinese are gradually establishing a stranglehold that has the potential to choke economies opposed to it. The majority of chips used in modern technologies are higher nodes.
China's semiconductor strategy is driven by two main goals: the primary one being domestic self-sufficiency, viewing semiconductors as a critical national asset akin to strategic reserves of oil or food. The secondary goal is to establish a strategic leverage point in the global supply chain through mastery of mature node chips, effectively creating a potential chokepoint that enhances their geopolitical leverage... These chips are fundamental components of critical everyday objects including medical instruments, cars, planes, and most importantly, military hardware...
The loss of control over higher node chips will not only compromise our consumer goods supply chain but poses a far more severe threat to our military supply chain. We already suffer from insufficient control over chip provenance within military applications, and the situation is worsening. A military Humvee, for example, requires thousands of chips, from GPS to sensors to CPUs. The most advanced processor in a military device might use 14nm technology—equivalent to what an iPhone used in 2015—with most being far less sophisticated. Losing control over our supply chain for these less advanced chips means losing control over our capability to produce essential military hardware.
He points to how commercial interests and considerations may have captured the CHIPS Act.
We are funding companies that are investing heavily in profitable chips, yet our vulnerability concerning lower-tech, yet equally critical chips, persists... The most cutting edge machinery is designed for the most cutting edge, low node size, processes. Fabs always want to be ahead of the ball, so they devote resources to those cutting edge processes, while machines for older processes depreciates in value. TSMC is at such scale that they can keep depreciated equipment and facilities and continue using them, as they have some clever ways to squeeze cash out of these fully depreciated facilities. However, for companies like Intel and GlobalFoundries, mature nodes generally do not fit into the margin structures. For the most part, American companies sell their old facilities and old equipment (sometimes to the Chinese). One can see why. The economics of operating a modern fab are staggering. A reasonably sized fab might cost around $5 billion in capital expenditures, which requires generating $50-$70 in revenue per second to achieve a 20% return at the outset. Even after it depreciates, it still has to generate $30-$40. Producing a chip at 65nm might cost $5 per chip, necessitating the output of a large wafer every 30 to 60 seconds—a formidable challenge.
This is a good article about TSMC's struggles with labour supply and management culture clashes in establishing its chip facility in Arizona.
7. The contrast between manufacturing and services in India is stark in several dimensions. One is the presence of foreign companies. While manufacturing is largely dominated by foreign companies and their brands, in finance Indian companies and brands have vanquished foreign brands.
8. One area where Vietnam may be following in India's path, decision paralysis among bureaucrats induced by an anti-corruption campaign.
Vietnam’s anti-corruption drive, which the ruling Communist Party chief Nguyen Phu Trong likened to a “blazing furnace," is running hot. This year alone, two of the four pillars of power, including the chairman of the parliament and the country’s president, left their posts amid graft allegations. Last month, Truong My Lan, a real estate tycoon and Vietnam’s richest woman, was sentenced to death for her role in a $12 billion fraud case that involved Saigon Commercial Bank, one of its largest lenders. Eighty-five others were sentenced on charges ranging from bribery to abuse of power...At issue in Vietnam is infrastructure, which smartphone and electric vehicle manufacturers need for their mega factories. Vietnam, shaped as a long and curvy letter S, still relies on roads that can be narrow, congested and bumpy for most freight traffic... Trong’s anti-graft campaign has an unfortunate side effect—public procurements for infrastructure projects have stalled. Officials are too scared to make any decisions for fear of inciting scandal and punishment. In the first four months of this year, the government disbursed only 15% of what it had planned for public investments. To foreigners, the most glaring and disappointing example is Ho Chi Minh City’s much-anticipated first metro line, which began construction in 2012 and was originally scheduled for completion in 2018. It is still not open yet... With all the foreign manufacturers pouring in, power demand has been soaring. But almost no decisions on energy infrastructure have been taken since the anti-corruption campaign started in 2017, noted Gavekal Research.
10. It's reported that Blackstone is in the process of buying Omega Healthcare, an outsourcing services provider to the healthcare services sector globally and with 27,000 employees on its roll. The estimated valuation is $1.7 billion. Its current owners, Goldman Sachs Asset Management and Everstone Capital, are exiting.
In India, Blackstone, with investments of $50 bn in India, has prioritised healthcare, technology, real estate and infrastructure. Globally, it focuses on health care, logistics, data centres, and hotels, apart from value-added exporters and consumer-centric businesses.
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