Chinese PSU management and lessons for India

Kyle Chan has a very good blog post where he discusses the landscape of Chinese state-owned enterprises (SOEs) and their incentive system. This post will discuss the relevance of such models and structures in the Indian context. 

Contrary to perceptions of lumbering and inefficient giants, thanks to several rounds of mergers, restructurings, and rationalisations, the larger central government SOEs are today highly profitable. Further, instead of profit maximisation, the priority of these enterprises is to serve as instruments of industrial policy and national economic priorities. 

Chan points to two conflicting goals that the government faces in the management of these SOEs - harnessing the power of market competition to drive productivity and innovation as well as meet public interest goals, while also avoiding “excessive or vicious competition” that’s damaging to the industry and is unsustainable. He describes this delicate balancing as a system of “managed competition where SOEs compete for business but operate in a co-ordinated industry landscape”.

He gives the examples of two massive infrastructure construction companies, China Railway Group Limited (CREC) and China Railway Construction Corporation (CRCC), which undertake railway, highway, bridges, tunnels and other construction projects within and outside the country. These are large conglomerates made up of over a dozen regionally-based subsidiaries each with similar size and capabilities.

The subsidiaries have a certain degree of autonomy and compete for construction contracts, like building a segment of a high-speed rail line in China. They bid directly on projects across the country and even around the world. Meanwhile, the two parent companies play a coordinating role, moving around resources, technology, equipment, and managerial personnel across the subsidiaries to ensure a relatively balanced set of competitors. This has been a key part of China’s success with building large-scale infrastructure. Multiple competent, well-resourced construction firms compete for contracts. If there are any issues, contractors can be swapped out relatively easily. And the parent SOEs help to maintain this balanced set of competitors, making sure that no single subsidiary gets too weak or too dominant. 

The bizarre structure of these SOEs and even their oddly generic, number-based names come from their legacy as administrative units within the former Ministry of Railways bureaucracy. In the pre-reform era, these SOEs were actually regional subdivisions of the Ministry of Railways’ construction arm. Before that, they were part of the Railway Corps of the People’s Liberation Army, which is partly why they retained a closed-off industry culture for many decades. Over time through a series of reforms, they were spun out of the Ministry of Railways and turned into these two groups of infrastructure SOEs.

The power and accountability structure of these SOEs mirrors that of China’s tiered political system. The parent SOEs do not micromanage the work of the subsidiaries but instead monitor their progress on certain metrics and intervene selectively to keep the competition fairly balanced. The parent SOEs manage the promotion and career trajectories of managers in the subsidiaries. This is similar to the way that Beijing manages the promotions and transfers of provincial and local political leaders using metrics such as economic growth. CREC and CRCC themselves answer to their own “parent company,” which is the State-owned Assets Supervision and Administration Commission (SASAC). SASAC is a Chinese central government body that oversees 97 of China’s most powerful and strategically important SOEs (full list here in English). SASAC itself acts like the ultimate parent company, playing a key role in appointing executives and allocating resources across the SOEs under its remit.

The Chinese experience with the consolidation of SOEs assumes significance in the context of discussions in India about merging Public Sector Units (PSUs) and creating a holding company for managing them.

The key to success here is the “managed competition” - managing the coordination among the subsidiaries within each SOE and also the competing SOEs, managing the movements of resources and personnel across the subsidiaries, managing the appointments of the executives and their promotions, managing the allocation of resources within and across the SOEs etc. Doing it in a manner that ensures productivity improvement, innovation, and competition requires considerable administrative capabilities and discipline at both the SOE and SASAC leadership levels. Besides, some such as swapping contractors and moving resources across companies can be done only in highly controlled environments. 

I’m not sure about its replicability in other contexts. In countries like India where state capability and political economy discipline are scarce and with institutional restraints like the judiciary, such calibrated management of PSUs can be very difficult, even impossible. 

In fact, in such contexts, there’s a strong case for dispersing power and control. For example, consider a SASAC equivalent holding company that administers all the PSUs. It would then yoke the performance of all these entities to the commitment and capabilities of SASAC. This is a high degree of risk concentration in a context where state capability is deficient, political discipline is weak, and political economy is far more complex than in China. Prudent risk diversification in turn demands disaggregation and decentralisation of control. Each PSU is perhaps best left to itself. 

This example has close parallels with the ongoing problems with the two national entrance examinations conducted by the newly established National Testing Agency (NTA). While paper leakages are not uncommon, the reported manner of egregiously bad design and management of the examinations was rare even in the earlier dispersed system of medical entrance examinations. 

In many ways, it can perhaps be argued that the centralisation of the conduct of the medical entrance examinations through NTA has pulled the entire system down to the NTA’s level of competence. The earlier system would have allowed for the flourishing of at least some entrance examinations with high standards and credibility. 

This is also a teachable example of the perils of a centralised administrative system. It concentrates risks and pulls the entire system down to the level of competence of the central unit. Ideas like centralised procurements and centralised recruitments in general in a large and diverse country like India are not only likely to struggle but are also likely to leave the systems worse off. 

Weekend reading links

1. On privatisation and R&D expenditures

In the 1990s, Italy initiated the largest privatisation programme in continental Europe, dismantling much of its industrial backbone instead of fostering innovation. For example, while the telecommunications conglomerate STET allocated 2 per cent of its revenues to research and development (R&D) between 1994 and 1996, our calculations show that its privatised successor, Telecom Italia, spent roughly 0.4 per cent on R&D between 2000 and 2002.

2. Interesting stats on the US equity market exceptionalism

The question may provoke laughter, given that since 2011 US stocks (the S&P 500) have outperformed EM stocks (the MSCI EM index) by more than 400 percentage points. But it was not always so: between 1999 and 2007, emerging markets outperformed the US by almost 200 percentage points.

3. Startling graphic of caste-based wealth concentration in India.

More than 85 per cent of total billionaire wealth in the country belongs to those of upper caste communities. People of the scheduled castes (SC) comprised 2.6 per cent of such wealth in 2022 compared to 88.4 per cent by the upper castes, according to additional data shared with Business Standard by researchers of the World Inequality Lab following the publication of their May 2024 study, ‘Towards Tax Justice and Wealth Redistribution in India: Proposals based on latest inequality estimates’, by authors Nitin Kumar Bharti of New York University; Lucas Chancel of Harvard Kennedy School; and Thomas Piketty and Anmol Somanchi of the Paris School of Economics. The other backward class (OBC) share was 9 per cent and there were no billionaires of the scheduled tribes (ST). The researchers used publicly available billionaire lists and applied manual coding and an algorithm ‘Outkast’ to determine caste.

4. The accounting industry is already struggling with conflicts of interest and poor quality of accounting. In this context comes a story in FT of a creeping takeover of accounting firms by PE firms. 

Ten of the 30 largest US accounting firms could soon be in private equity hands, according to people familiar with negotiations, as at least four groups hold deal talks following this year’s sales of Grant Thornton and Baker Tilly. The acquisitions by financial buyers of those two top-10 firms by revenue opened the floodgates to other deals, the people said, positioning private equity to increase its influence over the US accounting profession dramatically. One top-30 firm, Atlanta-based Aprio, was planning a deal to sell a majority stake to the private equity firm Charlesbank Capital, according to people familiar with the situation. Two more — New York’s PKF O’Connor Davies and Carr, Riggs & Ingram of Alabama — had engaged bankers to run sale processes, they said. California-based Armanino, the country’s 19th largest accounting firm, according to Accounting Today, was in talks with a private capital provider about selling a minority stake, the people said. Armanino hit the headlines as the auditor of the US operations of crypto exchange FTX, which collapsed in 2022. The deal wave sweeping the profession means that one in three of the top 30 firms has taken, or is close to taking, private equity investment.

It's hard to think how beneficial this trend could be on the accounting industry.

5. The EU has announced tariffs of upto 50% on Chinese car imports. 

Brussels will impose tariffs of up to almost 50 per cent on Chinese electric vehicles... The European Commission notified carmakers on Wednesday that it would provisionally apply additional duties of between 17 and 38 per cent on imported Chinese EVs from next month. The duties will be applied on top of existing 10 per cent tariffs on all Chinese EVs, depending on the extent to which they complied with an EU anti-subsidy investigation into electric carmakers that was announced last September. Major exporters including BYD, the world’s largest electric-vehicle manufacturer, and Geely will be hit with additional individual tariffs of between 17 and 20 per cent. European brands such as Mercedes and Renault exporting EVs made in China will pay 21 per cent while Tesla “may receive an individually calculated duty rate”, the commission said. Companies considered not to have co-operated with the probe, including Shanghai’s state-owned group SAIC, will be subject to the 38 per cent rate. SAIC has dominated the lower end of the European EV market through its MG brand.

The Kiel Institute, an economic think-tank, has estimated an extra 20 per cent tariff on Chinese electric cars would reduce imports by a quarter. It calculated that this corresponded to an estimated 125,000 units worth almost $4bn... the market share of EVs imported from China increased from 4 per cent in 2020 to 25 per cent in September 2023.

The tariff measures are championed by France, but opposed by Germany, Hungary and Sweden who fear retaliation by the Chinese. 

More details of the tariffs here.

6. From the RBI's 2017-18 annual report, the findings of a model that evaluated the impact of MSP on prices.

They show that MSP has a positive and statistically significant effect on retail prices of all crops, although it varies significantly across crops. In general, it has a stronger effect for those crops where procurement is substantial, such as paddy and wheat.

There's a very strong correlation (see table 2). A 1% increase in MSP of wheat is associated with a 0.91% increase in retail price; a 1% increase in MSP of rice is associated with a 1.27% increase in retail price of rice. The correlation is far lower for other crops. Further, other variables like international prices, production etc have negligible impacts.

7. Fascinating story of how the Chinese fell in love with the Durian fruit and have created a large and rapidly growing export market from out of nothing for East Asian countries!

The fruit, durian, has long been a cherished part of local cultures in Southeast Asia, where it is grown in abundance. A single durian is typically the size of a rugby ball and can emit an odor so powerful that it is banned from most hotels. When Mr. Chan began his start-up in his native Malaysia, durians were cheap and often sold from the back of trucks. Then, China acquired a taste for durian in a very big way. Last year, the value of durian exports from Southeast Asia to China was $6.7 billion, a twelvefold increase from $550 million in 2017. China buys virtually all of the world’s exported durians, according to United Nations data. The biggest exporting country by far is Thailand; Malaysia and Vietnam are the other top sellers. Today, businesses are expanding rapidly — one Thai company is planning an initial public offering this year — and some durian farmers have become millionaires...

Farmers in Southeast Asian durian orchards say they can’t recall anything like the China craze. The surge in durian exports is a measure of the power of Chinese consumers in the global economy, even though, by other measures, the mainland economy is struggling. When an increasingly wealthy country of 1.4 billion people gets a taste for something, entire regions of Asia are reshaped to meet the demand. In Vietnam, state news media reported last month that farmers were cutting down coffee plants to make room for durian. The acreage of durian orchards in Thailand has doubled over the past decade. In Malaysia, jungles in the hills outside Raub are being razed and terraced to make way for plantations that will cater to China’s lust for the fruit... China is not only a buyer. Chinese investment has flowed into Thailand’s durian packing and logistics business. Already, Chinese interests control around 70 percent of the durian wholesale and logistics business...

Durian is to fruit what truffles are to mushrooms: Pound for pound, the fruit has become one of the most expensive on the planet. Depending on the variety, a single durian can sell for anywhere between $10 to hundreds of dollars. But Chinese demand, which has pushed up prices fifteenfold over the past decade, has frustrated Southeast Asian consumers, who see durians morphing from a plentiful fruit growing in the wild and in village orchards to a luxury commodity earmarked for export. Countries are exporting a fruit that is an integral part of their identities and cultures, especially in Malaysia, where it is a unifying national icon among its many ethnic groups.

8. India is emerging as a top destination for data centre construction by the US Big Tech firms.

Wonder how much of this is being driven by India's mandatory policy on data localisation by technology firms? If that's the case, it's one more win for industrial policy.

9. Interesting line of reasoning about inflation in India

Despite weak rural demand, inflation in villages is 5.3%, whereas in cities it’s close to the central bank’s 4% target. Even inflation expectations are higher in villages. The puzzle may be partly explained by the missing train journeys — 100 million fewer every month than before the pandemic. Something is broken with the regular rural-to-urban migration pattern.

10.  TSMC facts of the day

Its share of the global contract chip manufacturing market surpassed 60 per cent in the first quarter... advanced chips that use 7 nanometre and below technology accounting for two-thirds of TSMC’s total sales. Its high-performance computing business in particular, which includes chips for AI applications, makes up nearly half its total... Despite building out more plants overseas, 80-90 per cent of TSMC’s production capacity remains concentrated in Taiwan... Gross margins have long surpassed 50 per cent. Free cash flow more than quadrupled in the past year to $7.9bn, which means ample cash to invest in building capacity for the next generation 2nm chips which would widen the gap with rivals yet further.

11. It's surprising that many western media and commentators wail that being large net importers, they have little leverage over China. Consider this.

China has hit the EU’s soft underbelly in its fight over electric vehicle imports: pork. Poultry and beef could be next — especially chicken feet and other bits that Europeans do not tend to eat, but depend on selling... Food and drink are these days among the few products that China buys more of than it sells to the bloc, and they have been the first in the line of fire as Beijing retaliates over antisubsidy tariffs of up to 38 per cent on electric cars... Its trade surplus with Europe has ballooned in advanced equipment such as batteries, solar panels and cell phones. The EU, meanwhile, still sells lots of cars and aircraft. But increasingly its strength is serving China’s 1.4bn consumers with more traditional consumer fare: cheese, wine and handbags...

“When a European leader goes to Beijing to get the market reopened for steak they have to give a gift in return,” Clarke said. “We sell them the port of Piraeus [in Greece], they buy feta cheese and yoghurt.” The problem for Brussels is that there is not much the EU could block in return. It is almost totally reliant on Chinese solar panels and does not want to increase the cost of going green. It also needs Chinese-made batteries for its own electric vehicles. Under US pressure, the Netherlands has ended exports of advanced chipmaking machines, but cutting supplies of Hermès scarves is unlikely to bring the Chinese economy to its knees.

The report overlooks that an importer too can have leverage on the exporter.  

12. FT has an article on Chinese millionaires fleeing their country in record numbers. It highlights the "mirror transfer" system through which they take out their wealth

So many would-be migrants are left with little choice but to turn to “underground banks” to help spirit their wealth abroad. These shadowy institutions deploy numerous sleights of hand to transfer money across borders without law enforcement agencies noticing. One method is known as the “mirror transfer”, under which a sum of money is deposited in one underground bank in China. The same amount is then withdrawn from a reciprocal underground bank in another country. The money never actually moves, leaving little trail for detectives to follow.

13. The number of industrial policy interventions worldwide have ballooned from 228 in 2027 to 1568 in 2022, with most concentrated in the developed countries.

14. Some questions on Nvidia's stratospheric rise, evoking comparisons with Cisco (instead of Microsoft and Apple), from a very good article on the company.

The Nvidia economy looks very different to the one surrounding Apple. In many ways, the popularity of a single app — ChatGPT — is responsible for much of the investment that has driven Nvidia’s stock price upwards in the past few months. The chipmaker says it has 40,000 companies in its software ecosystem and 3,700 “GPU-accelerated applications”. Instead of selling hundreds of millions of affordable electronic devices to the masses every year, Nvidia has become the world’s most valuable company by selling a relatively small number of expensive AI chips for data centres, primarily to just a handful of companies. Large cloud computing providers such as Microsoft, Amazon and Google accounted for almost half of Nvidia’s data centre revenues, the company said last month. According to chip analyst group TechInsights, Nvidia sold 3.76mn of its graphics processing unit chips for data centres last year. That was still enough to give it a 72 per cent share of that specialist market, leaving rivals such as Intel and AMD far behind...

Demand for Nvidia’s products has been fuelled by tech companies that are seeking to overcome questions about AI’s capabilities by throwing chips at the problem. In pursuit of the next leap forward in machine intelligence, companies such as OpenAI, Microsoft, Meta and Elon Musk’s new start-up xAI are racing to construct data centres connecting as many as 100,000 AI chips together into supercomputers — three times as large as today’s biggest clusters. Each of these server farms costs $4bn in hardware alone, according to chip consultancy SemiAnalysis.

The biggest risk for Nvidia lies on factors beyond its control - whether the AI investments made by Big Tech will translate into proportionate benefits. 

That scale of investment will only continue if Nvidia’s customers figure out how to make money from AI themselves. And at just the moment the company reached the top of the stock market, more people in Silicon Valley are starting to question whether AI can live up to the hype... Big Tech companies will collectively need to generate hundreds of billions of dollars more a year in new revenues to recoup their investment in AI infrastructure at its current accelerating pace. For the likes of Microsoft, Amazon Web Services and OpenAI, incremental sales from generative AI are generally projected to run in the single-digit billions this year... The period when tech executives could make grand promises about AI’s capabilities is “coming to an end”, says Euro Beinat, global head of AI and data science at Prosus Group, one of the world’s largest tech investors.

But Nvidia is not staying still. 

Analysts say if it is to continue to thrive it must emulate the iPhone maker and build out a software platform that will bind its corporate customers to its hardware... It provides all the ingredients to build “an entire supercomputer”, Jenson Huang has said. That includes chips, networking equipment and its Cuda software, which lets AI applications “talk” to its chips and is seen by many as Nvidia’s secret weapon. In March, Huang unveiled Nvidia Inference Microservices, or NIM: a set of ready-made software tools for businesses to more easily apply AI to specific industries or domains. Huang said these tools could be understood as the “operating system” for running large language models like the ones that underpin ChatGPT... The problem for Nvidia is that many of its biggest customers also want to “own” that relationship with developers and build their own AI platform... Nvidia is cultivating potential future rivals to its Big Tech customers, in a bid to diversify its ecosystem. It has funnelled its chips to the likes of Lambda Labs and CoreWeave, cloud computing start-ups that are focused on AI services and rent out access to Nvidia GPUs, as well as directing its chips to local players such as France-based Scaleway, over the multinational giants. Those moves form part of a broader acceleration of Nvidia’s investment activities across the booming AI tech ecosystem. In the past two months alone it has participated in funding rounds for Scale AI, a data labelling company that raised $1bn, and Mistral, a Paris-based OpenAI rival that raised €600mn. PitchBook data shows Nvidia has struck 116 such deals over the past five years. As well as potential financial returns, taking stakes in start-ups gives Nvidia an early look at what the next generation of AI might look like, helping to inform its own product road map.

NaBFID and infrastructure financing

Tamal Bandopadhyay has an op-ed about the new infrastructure financing entity, the National Bank for Financing Infrastructure and Development (NaBFID).

NaBFID closed the financial year 2024 with Rs 1 trillion worth of sanctions. Disbursements till March amounted to Rs 36,000 crore. By the end of May, disbursements crossed Rs 45,000 crore. Around 50 per cent of this is long-term loans for 15-25 years. Rai expects sanctions to cross Rs 2 trillion in the current financial year and Rs 93,000 crore in disbursements. Renewable and traditional power generation projects account for a little over half of its portfolio, followed by roads (a little over one-fourth) and railways. It has also ventured into telecom, city gas distribution, and power transmission and distribution as well in a small way so far. Set up with Rs 1 trillion in authorised share capital, NaBFID’s mandate includes financing infrastructure through loans and equity investments and developing long-term bond and derivatives markets… To support fresh disbursements, NaBFID has lined up a Rs 20,000 crore credit line from multiple banks.

I’m not sure that the role of NaBFID that emerges from the above is what was intended. Two things are of concern. One, NaBFID appears to be playing the role of a regular commercial bank, albeit focusing on infrastructure loans. Two, it appears to be largely focused on the de-risked infrastructure sectors - power generation and transportation - that’ll anyways attract lenders.

This goes to the point about clarity on the role of NaBFID. Is it just a bank that focuses on infrastructure loans? Or is it a development finance institution (DFI) that serves as a market maker for infrastructure asset creation? In other words, what’s the additionality offered by NaBFID? How’s it different from the regular commercial financial institution? I have raised this question earlier in the context of NIIF here. 

From the article, it appears that NaBFID is yet another bank, competing with and lending to the regular de-risked sectors. 

The role of a DFI is different. It should serve as a market-making financial intermediary to serve the unmet needs in infrastructure financing. Specifically, it should de-risk and provide patient capital to infrastructure projects and sectors struggling to attract commercial lenders. 

Power generation (and transmission), roads, railways, ports and airports, telecommunications, city gas distribution etc., are among the most de-risked of infrastructure sectors. Apart from projects in remote or difficult areas, these sectors will attract commercial lenders. Yet they constitute almost the entire portfolio of NaBFID.

In contrast, sectors like water and sewerage, solid waste management, urban mass transit, electricity distribution, fishing harbours, irrigation, urban regeneration, schools/colleges, hospitals, affordable housing etc., struggle to attract equity investments and debt. These projects require lower-cost financing, guarantees, and risk-tolerant and patient capital. This can help crowd in commercial investments, set demonstration examples, and de-risk the segments/sectors. This is the role that a DFI has to play. It has to become an infrastructure financing investment bank. 

In addition to itself directly lending to specific infrastructure projects, NaBFID has an opportunity to work with regular banks and other financial institutions on the supply side of finance to standardise and de-risk financing sources. For example, as Tamal writes, the insurance companies and pension and provident funds have around Rs 75 trillion and Rs 45 trillion respectively of funds available. NaBFID could take the lead to help institutionalise capital mobilisation from insurance and pension/provident funds. 

They could strive to create demonstration examples and derisk for insurance and pension funds to invest an increasing share of their finances directly in infrastructure funds. I would go as far as to suggest that NaBFID should be mandated to raise a pre-defined and rising share of its capital from these investors. It could be considered to even have some regulatory mandate to push these funds to invest a minimum percentage of their capital directly in infrastructure funds. 

For this, NaBFID could launch infrastructure funds (including sector-focused funds) that mobilise capital from these kinds of institutional investors with long-term capital. It would help create the domestic market for infrastructure funds (currently this market is dominated by mostly foreign infrastructure funds who also raise the major share of their capital abroad). To derisk the instrument and catalyse the market, NaBFID could partner with Indian fund houses in launching infrastructure funds. 

It could also lead on the creation of the various policy and regulatory enablers that allow for such financing to flourish. It should support the Government of India with research and technical assistance on issues like the ongoing debate on the increased risk weights associated with infrastructure lending. 

Other examples on the financing side would be the demonstration of success with the creation of guarantee funds, takeout financing consortiums, subordinate lending arrangements etc. Guarantees are the cheapest way to de-risk infrastructure financing. How about a guarantee fund that brings together a coalition of lenders to support projects in specific as-yet not derisked sectors?

Such market-making requires strong infrastructure finance knowledge and skills. In this context, I’m not sure whether two retired bankers from regular commercial banks, however reputed they are, can lead on the achievement of the mandate of NaBFID becoming an infrastructure DFI. One of the common gripes among experts and commentators is that banks do not have the expertise to undertake due diligence on infrastructure projects. So I'm not sure whether retired commercial bankers are best placed to lead institutions that are supposed to undertake due diligence and lend long to infrastructure projects. 

Markets, rent control, and public policy

It’s all good in theory to oppose market regulation in the form of rent controls, capital controls, trade restrictions and so on and argue that markets should be allowed to operate unhindered. In practice though these theories bite the dust when faced with real-world constraints. 

Consider the case of Berlin, which has a housing affordability problem that’s felt in both the rental and own housing markets. This is despite massive inflows of private equity investments over the last decade-and-half. The PE investments in housing have not led to the expected supply boost that might have created downward pressure on housing prices. At least not till now. 

Gillian Tett has an article in FT about Berlin’s housing problem.

Since 2007, a dozen real estate investment groups — such as Deutsche Wohnen, Vonovia, Covivio and Adler — have spent more than €42bn to buy properties there. City planners hoped this would expand the housing supply. But rents exploded, tripling in neighbourhoods such as Friedrichshain-Kreuzberg and Neukölln, and doubling in outlying regions such as Marzahn-Hellersdorf. And since Berlin is a city where four-fifths of residents rent, this sparked popular anger — particularly among the young who were being squeezed out. This is not, of course, unique to Germany: as a recent FT series shows, similar stresses exist across the western world. Indeed, on average across the EU some 42 per cent of 25- to 29-year-olds live with their parents due to these pressures, says Eurostat. 

But Berlin’s situation is extreme. So is the political response: in 2021 activists organised a non-binding referendum on whether the government should expropriate 240,000 dwellings in the city owned by big investment groups (those with more than 3,000 properties)… When the referendum occurred, it passed with the support of 59 per cent of voters… the activists are now planning a second — binding — referendum. If that also passes, the Berlin government may end up having to spend billions of euros it currently doesn’t have to buy apartment blocks back from property giants and bring them into public ownership… 

It shows what can happen when popular anger erupts about rising prices — and corporate power… Berlin is not alone in having politicians who mutter about the need for rent controls. Similar themesare heard in the state of Washington in the US (where median rents jumped 34 per cent between 2001 and 2019) and in the Labour party in the UK (where rents jumped 8.9 per cent in the year to April). So the lesson that moderate politicians (and anxious real estate investors) need to learn from Berlin is that if they hate the idea of rent controls and/or expropriations, they urgently need to find other ways to counter the rental squeeze, most notably by expanding the housing stock.

Here are some observations:

1. Econ 101 informs us that markets will deliver the best outcomes if allowed to play themselves out. This is good in theory but struggles in practice across markets. There are at least two compelling arguments against any blind faith in markets.

One, markets can end up in multiple equilibriums depending on the starting and prevailing conditions, some very damaging. In this case, with the arrival of private equity investors, the Berlin rental housing market appears to have moved to a worse equilibrium. Second, as Keynes said, we may be dead by the time markets play themselves out and attain the desired equilibrium. 

2. There’s a fundamental incentive incompatibility issue with PE investments in markets like healthcare, housing, education, old-age homes, etc. There are two features to the revenue streams from investments in these segments - stable and reasonable returns. Being essential services and serving the mass market, price reasonableness is essential in all these segments. 

However, the value proposition of PE investments is to maximise profits. This pursuit of higher returns invariably drives up prices all across the housing market. Being the classic rent-seeker, the PE firm has no interest whatsoever in increasing supply at the cost of its rents. This raises fundamental questions about the suitability of PE investments in these markets. In these markets, unlike the supply of pure private goods, unrestrained pursuit of profit maximisation and corporate interests cannot be the primary driving forces.

3. This example illustrates the major faultline in the dominant American-version capitalism, of which PE is an important marker. The incentives of this capitalism and capitalists are often at odds with the overall public interest (and this happens when the balance between profit maximisation and public interest is unsettled). Further, in this version of capitalism, markets have come to be dominated by large corporates and financial market interests. 

This must change. As the Berlin case illustrates, the large buyout of rental properties by PE firms has made them a lightning rod for those aggrieved by rising rental costs in a city where the vast majority are renters. With their aggressive market expansion and profit-maximising actions, the PE firms have none but themselves to blame for this discontent and its attendant consequences. It’s a case of saving capitalism from the capitalists! 

4. Econ 101 informs us that market regulations like rent controls are bad. That may be so in theory. But in practice, when faced with ballooning rents arising from a combination of the market power of large PE landlords and the limited marginal supply, market regulation might be required. 

Politicians facing fast-rising rents will face strong pressures to do something. Experts will tell him to ease zoning regulations and lower the cost of housing construction. They are essential for ensuring longer-term supply, but will not have any impact in the immediate or short-term. Rent control turns out to be the only lever available that will generate immediate impact. 

As Jean Claude Juncker famously said, “Everyone knows what to do, but the problem is to win elections after doing it”!

5. Price controls in the housing market should be seen alongside other interventions like capital flow management, monetary policy interventions, trade restrictions, agriculture market interventions etc. In each case, the interventions are necessitated by the market failures engendered by the operations of the less restricted (or more free) markets. Such failures are inevitable given the nature and realities of these markets. 

Supporters of free-market capitalism are being pig-headed in refusing to acknowledge these market failures. Instead of sticking their head in the sand, they ought to acknowledge the reality and offer technically correct but practical solutions. This will anchor the public debates on practical responses, thereby avoiding wholly bad responses and instead generating second-best solutions. Theory should not become the enemy of the practical. This might be a case of saving capitalism from the ideologues of free-market capitalism!

6. Finally, it can be argued that such market failures happen because markets have not been allowed to play themselves out. But this logic runs into the fact that markets operate in the real world where fetters and restraints against their full play are unavoidable. 

The problem with this line of reasoning is its slippery slope for politicians and bureaucrats. When should governments intervene? With what instrument? How to calibrate the intervention? How to exit the intervention?

There are no easy answers to complex political economy problems. Market-driven solutions are at least no less problematic than government interventions in these kinds of markets. It can end up aggrandising a few at the cost of immiseration of the many. Against this backdrop, interventions are inevitable. 

Experts and commentators should wake up to the reality of a world where market interventions are inevitable. Public debates should be anchored around those second-best interventions that generate the least distortions and inefficiencies. Public policy discussions should be conducted in this constrained space. 

If rent controls have become inevitable, how best to do it? Or what alternatives can generate an impact in the short term on the housing affordability problem in the rental market?

Weekend reading links

1. More on China's EV market stranglehold. This dominance extends to the vehicles sales itself. 

The International Energy Agency forecasts that this year 10.1mn EVs will be sold in China, 3.4mn in Europe, 1.7mn in the US. Fewer than 1.5mn EVs will be sold everywhere else in the world. Yet the agency has forecast that the global EV fleet will grow eight-fold to about 240mn in 2030. This implies annual global EV sales of 20mn cars in 2025 and 40mn in 2030, or 30 per cent of all car sales. Moreover, an increasingly large share of that expansion is likely to come from new markets.

Most of China's new FDI in EVs is in battery production.

In some important developing economies, Chinese companies are investing in both production and processing raw materials. Nowhere is this more striking than China’s involvement in the EV ecosystem in Indonesia, home to the world’s largest reserves of nickel, a key component of EV batteries. Last year alone companies domiciled in China and Hong Kong invested $13.9bn in Indonesia, most of which is believed to have been in the metals and mining industry. Chinese companies account for more than 90 per cent of the nickel smelters in the country. Chinese banks have also been keen to provide financing for nickel plants when others have been hesitant, says Alexander Barus, chief executive of the Indonesia Morowali Industrial Park — the country’s largest nickel processing site, which was built by Tsingshan, a Chinese nickel producer, and a local partner... Having secured access to Indonesia’s key resources, Chinese companies have also been the first movers in setting up EV manufacturing plants, even as Indonesia — and President Joko Widodo personally — have courted other big names such as Tesla to set up EV manufacturing. BYD said early this year that it would invest $1.3bn in an EV factory in Indonesia. The story is similar in Brazil where BYD and compatriot group Great Wall Motor are about to commence local manufacturing that could also serve for exports to the wider region. Great Wall is investing about $1.9bn in Latin America’s largest economy with production expected to start this year at a former Mercedes-Benz factory in Iracemápolis, São Paulo state. As well as its investment in auto production at Camaçari, BYD is also on the lookout for lithium mining assets in Brazil, which is ramping up extraction of the key metal for EV batteries.

2. China's trade surplus touches a record $82.6 bn in May, up 25.6% from a year earlier, largest ever for May, and one of the highest for any month (except during the pandemic).

China is rapidly building new factories and expanding existing ones as part of a national strategy. But spending is weak by Chinese households, because of a long and increasingly steep slide in prices for their apartments. Much of the extra factory production is being exported. With fewer Chinese families buying new apartments, fewer household appliances are sold domestically, for example. The government said that the value of exports of appliances climbed 18.3 percent in May compared with the same month a year earlier. And because demand is so weak in China, appliance prices have tumbled. The actual number of appliances exported last month rose 27.8 percent...

China’s trade surplus has tended to be fairly low in May and much higher later in the year, when its exporters supply goods for the Christmas season. The quantity of many exports, not just household appliances, has been rising faster than their value. So many containers full of goods are leaving China, as fewer come back with imports, that shipping lines have been running short of containers in China... Increased tariffs do not appear to have done much harm yet to China’s exports, and might even help in the short term. Some Chinese companies have rushed to send goods to emerging markets in Latin America and elsewhere before tariffs can take effect. In the past year, China has stepped up exports to Vietnam and Mexico, where goods can be reprocessed and then shipped on to the United States or Europe with low or no tariffs. These more complicated trade routes, coupled with weakness in China’s currency exchange rate, may reduce tariffs’ effectiveness, said Capital Economics, a research firm.

3. Interesting snippet on the contrast between India and China on social welfare spending.

China’s development strategy has always prized jobs and infrastructure investment over handouts and social spending, especially when its poverty rate was over 10%. Its rural poverty plan in 2011 included “self-reliance and hard work” as one of its basic principles... Until 2013 its explicit anti-poverty policies were aimed predominantly at poor places, not people. Its plan in 1994 focused on 592 counties, many of them in the mountains. It then drilled down to about 148,000 villages after 2001. It did introduce dibao cash payments for the urban poor in 1997 and their counterparts in the countryside in 2007. But coverage was limited. One study found that it missed over 80% of the rural poor in 2013. Adding together cash transfers, in-kind transfers and fee waivers, China spent just 0.76% of its gdp on social-safety nets in 2014, according to a World Bank study. 

How does that compare with India’s welfare programmes? The same study reckons India spent over 1.5% of its gdp on them at that time, including public-works projects and school feeding schemes, as well as transfers and waivers. A more recent estimate puts India’s welfare spending at 1.8% of gdp, including direct cash payments to farmers and others, facilitated by the spread of no-frills bank accounts under one of Mr Modi’s signature schemes.

4. Janan Ganesh has an excellent article where he argues that a spell in power has the likelihood of both taming the populists and also reducing their credibility before the electorate. 

The last best hope against populism in Europe is to expose it to government. The pressure of office might force anti-establishment parties to moderate, as Giorgia Meloni has done somewhat in Italy. Or it might reveal their incompetence and turpitude, as happened to Boris Johnson in Britain. Sometimes, of course, it will do neither: power will neither tame nor shame. (See Viktor Orbán.)... Time spent in government is time spent alienating voters with tangible decisions. Right now, in much of Europe, populists have a goldilocks level of success: enough to foul the atmosphere, to spread the idea that simple answers to big problems exist if governments would but enact them, but not enough to have to prove this in office. The establishment has a record, and all records are flawed. Its enemies get to travel lighter. The contest between the two sides is, in Pentagon argot, asymmetric. 

Note how many of the hard right’s relative underperformers in the European parliament elections are incumbents at home (Orbán’s Fidesz) or proppers-up of governments (the Sweden Democrats). This is the gravitational force that drags mainstream politicians down. Government brings round-the-clock attention, not just the curated broadcast rounds at which Nigel Farage excels. Above all, it brings the burden of making decisions that cost voters money. I could cite tax rises here, to fund lavish promises. Or higher interest rates from overborrowing. But few things would harm the populist cause more than having to manage immigration. Their plausible-sounding alternative to foreign labour in low-wage sectors — pay domestic workers more — would be tested against the public’s price-sensitivity. Even if voters don’t balk at higher social care or retail costs, the trade-off would become apparent at last. Never having to be tested, populist ideas have a spurious credibility. Only a spell in government would change that...

A notion dear to the west is that progress is made, and the truth arrived at, through argument. (Socrates has a lot to answer for.) This underestimates the role of practical demonstration. The west didn’t experience a human lifetime of moderate politics after 1945 because it was talked into it. What counted was the folk memory, now almost extinct, of what happened when nations last voted for parties that defined themselves against the system. There might be no safe way of giving voters a controlled dose. But the status quo, in which populists are on television, on stage, but not on the hook for much, isn’t tenable.

5. EV industry job losses fact of the day

In Europe, a 2021 study for a supplier trade body by PwC estimated that a switch to EV production only in the region by 2035 would lead to the loss of some 500,000 jobs in power-train production for cars with internal combustion engines. This would be offset by 226,000 new jobs related to EV power-train production but there still would be less employment.

6. Some disturbing evidence about sample surveys globally

In a recent article published in the Journal of Development Economics, Dahyeon Jeong and co-authors found that in a long survey of consumption expenditure, there is a reduction in item nonresponse by 10 to 64 per cent. However, they also found that “an extra hour of survey time lowers (reported) food expenditures by 25 per cent”... In a paper published in the journal Review of Income and Wealth, Espen Beer Prydz and co-authors compiled a dataset of 2,095 household survey means from 166 countries, which they then matched with the means from national accounts aggregates. They found that across countries, the estimate of average per consumption from household surveys is 20 per cent lower than that in national accounts. The gross domestic product per capita was higher by 50 per cent.

7. The rise of the far-right in the elections to the European Parliament was also accompanied by losses to the Greens. It's a sobering reminder about the challenges with the Green Transition, especially when its costs start to become evident and when it competes with other social concerns. 

Five years after the euphoria the Greens experienced in 2019, when they increased their seats from 52 to 74, they slipped back to 53... The Greens’ performance in 2019 may prove a high-water mark. In the more benign, pre-pandemic and prewar economic environment, mass rallies inspired by green groups and activists such as Greta Thunberg helped to make climate concerns a central electoral issue... Unfortunately, voters began to feel the impact of green policies on their wallets and lifestyles just as post-pandemic inflation and the energy shock from the Ukraine war kicked in... Hard-right parties elsewhere made political capital out of promises to slow the transition, and centre-right parties adopted watered-down versions of the same rhetoric... green parties performed worst in France and Germany, where the far right did best. Greens fared better in Sweden, where the far right did not surge, and advanced in Denmark — while the Labour/Green alliance in the Netherlands narrowly overtook Geert Wilders’ far-right party. Where hard-right parties did well, polling suggests concern about migration — or its effects on, say, housing costs — was a bigger factor than the “greenlash”... Policymakers committed to the green transition need to learn lessons. They must be finely attuned to the impact on consumers, and ensure policies are well designed and communicated, with help for those most heavily affected. More targeted tax incentives to reduce the upfront costs of, say, installing solar panels or switching to electric vehicles could accelerate adoption by businesses and households alike.

The importance of good judgment in public policy

This post will discuss a framework for thinking about knowledge acquisition and information processing in the context of public policy. 

I blogged here pointing to two kinds of knowledge (even information) - learnt and experiential. The former is acquired through structured settings like classrooms, readings, and listening. In any domain, such knowledge contains concepts, theories, techniques and toolkits. The latter is accumulated over the lived life and lived career of an individual. It’s a huge series of experiential data points. The former is largely theoretical and objective, whereas the latter is purely personal and therefore subjective. 

Similarly, we can think of two pathways of information processing - logical and judgmental. In the former, an individual uses some logical framework and in the latter his or her instincts to process the information and make an inference or decision. Again, as earlier, the former is objective, whereas the latter is necessarily subjective (and therefore personal). Experiential knowledge is accumulated by living and doing. Instincts are a function of one’s values, preferences, and experiences. 

The table above captures the framework with some illustrative examples. The examples are only indicative representations of the category of people illustrated. As can be seen, each category of people has its unique comparative advantage. But while learnt knowledge can be acquired through some structured process, experiential knowledge accumulation depends on one’s professional role and the experience gathered. 

This means that, for example, outsiders to the public policy practice like an academic researcher or a technical expert will generally be constrained by their deficient experiential knowledge. On similar lines, though bureaucrats have rich experience, they struggle with their technical expertise and analytical frameworks.

The ultimate objective is to exercise good judgment. Good judgment is nothing but wisdom (in that domain). A person who can exercise good judgment can be considered wise. 

Good judgment can be exercised when both knowledge and knowledge processing pathways are combined. This person uses logical frameworks to process his or her learnt and experiential knowledge and then applies the filter of experience to make judgments about the issue, idea, event, or situation. 

In other words, a person can improve judgment about something by reading/listening/travelling more and through more personal experiences, and bringing all of them together in a thoughtful manner (this can also help depersonalise the experiential aspect, though only to some extent). The volume and diversity (understanding of different perspectives and opinions) of experiential data points used to make the judgment are important to make good judgments. It’s therefore often said that people with rich practical experience are able to exercise good judgment. 

There’s a limit to how much learnt knowledge and smart reasoning can help improve judgment at the margins. Instead, conditional on a broadly similar understanding of learnt knowledge, the quality of judgment is a function of experience. 

All this is important since the formation of opinions on most public policy issues, where there's no one single correct answer, is a matter of judgment. It’s easy to conflate logic and judgment, and wrongly believe that what are purely personal judgments are instead logical (and therefore universal) answers. Just as expert opinion is skewed towards concepts and theories and is unfiltered by experience, bureaucratic opinion generally tends to be blinkered by experience alone. 

The point about judgment is very important, especially on wicked problems of the kind that public policy throws up. High-stakes and high-level public policy decision-making are invariably about exercising judgment. They are done best when some institutional structures and incentives bring together several strands of thinking and inputs from multiple sources that combine technical expertise and experience.

Unfortunately, as Albert Hirschman has so eloquently articulated, it’s hard to exercise good judgment. It’s therefore the binding constraint in development. 

Weekend reading links

1. The bull case for Japanese stocks as the country's economy breaks free of the deflationary grip.

There is background excitement around the introduction, in January, of an expanded tax-protected investment scheme (structured much like a UK Isa and known as Nisa) and its capacity to draw into the Tokyo stock market some of the $7tn that Japanese households currently hold in cash. The so-called “Mrs Watanabes” — a moniker given to stereotypical keepers of the family purse strings — are generally conservative, but deflation has made them more so... That hoard of cash and deposits represents more than half of the households’ total financial assets, and is a far higher ratio than their peers in the US, UK and Europe, and than the worldwide average of 28.6 per cent. For a country that has accumulated such vast household financial assets — ¥2.1 quadrillion at the end of June 2023 — it is remarkable how little has flowed into the stock market...

Inflation is back... wage increases in 2024 have been the largest in 33 years and the prospect of them rising even higher are guaranteed by the fact that every single industrial sector in Japan is now short of labour... Japanese investment trusts, pension funds and insurance companies, said Smith, hold respectively 26.9 per cent, 9.1 per cent and 6.1 per cent of their portfolios in equity. That compares with 61 per cent, 28.1 per cent and 11.1 per cent by their US equivalents. Over the past decades, the 12-month forward earnings per share of Topix stocks have (in local currency) outperformed peers in the US, Germany, China and the MSCI Emerging Market index. The profits of corporate Japan, Smith showed, are overwhelmingly correlated with global industrial production and world trade, rather than with US 10-year Treasury yields, the dollar-yen exchange rate or Japanese industrial production, as many imagine.

2. Germany and Canada are the only two triple A rated economies among G-7.

3. Infrastructure assets long gestation period fact of the day.

Eurostar launched with just two core routes linking London to Paris and Brussels. It took 15 years to become consistently profitable, and 24 years for direct services between London and Amsterdam to launch. But industry executives believe several factors have combined to make starting new services more viable.

Interesting fact that Eurostar has enjoyed monopoly over the trains linking UK and Europe since its first service started in 1994. Now five companies have evinced interest in offering competing service. 

4. FT Alphaville has some stunning factoids about the private equity industry.

Private capital firms have taken more money from investors than they’ve distributed back to them in gains for six straight years, for a total gap of $1.56tn over that period. And this isn’t just about the recent glut of capital raised, lagged returns and private equity exit blockages either. Even if you include the big returns of 2013-2017, private capital funds have now called $821bn more than they’ve returned over the 14 years that Preqin’s data series stretches over.

But this has not stopped PE executive compensation from hitting the roof

Alphaville has a telling conclusion.

The fact that private equity alone is sitting on a record backlog of 28,000 companies worth an estimated $3tn at a time when most equity markets are at or near record highs doesn’t fill one with confidence. There’s a reason why PE and VC fund stakes are being sold at often steep discounts. There just seems to be too big a mismatch between what private equity and venture capital have paid for a lot of assets, the returns their investors expect, and what public markets or other potential buyers are willing to pay.

5. UAE is outcompeting China to emerge as the largest foreign investor, atleast in terms of intentions to invest, in Africa.

In 2022 and 2023, the UAE pledged $97bn in new African investments across renewable energy, ports, mining, real estate, communications, agriculture and manufacturing — three times more than China, according to fDi Markets, an FT-owned company tracking cross-border greenfield projects... A UAE official tells the FT that its total investments into Africa amount to $110bn... While many of these investments will not materialise... the Emirates has consistently been a top-four investor on the continent over the past decade. Companies from the UAE have embraced projects in Africa that more risk-averse investors have avoided... This wall of money is allowing the UAE to help shape not only their countries’ economic destinies, but in some cases the political fortunes of some African leaders... African companies are choosing to base themselves in Dubai to trade with the rest of the world... The number of African companies registered in Dubai has increased dramatically in the past decade, reaching 26,420 by 2022, according to the Dubai Chamber of Commerce. “Dubai is New York for Africans now,” says Ricardo Soares de Oliveira, a professor of international politics at Oxford university who has studied Africa-UAE links... UAE’s engagement in places like Sudan is partly motivated by its desire to counter Islamist extremism. But, he says, it has also seized the chance to diversify its economy with investments in food security, critical minerals and renewable energy... some see the UAE’s inroads into Africa as part of a larger vision to wield more power on the world stage... Dubai has become an attractive jurisdiction for Africans to trade, do business and park offshore money.

Like the Chinese, the UAE's investments have generally been in the old-economy industries.

Over the past decade, Masdar, Abu Dhabi’s renewable energy investor, has built infrastructure including five wind farms in South Africa, a battery energy storage system in Senegal and solar power facilities in Mauritania. Masdar is leading UAE plans to invest $10bn to increase sub-Saharan Africa’s electricity-generation capacity by 10GW. But UAE companies are also investing in fossil fuels. In May, the Abu Dhabi National Oil Company bought a 10 per cent stake in Mozambique’s Rovuma gas basin, acquiring it from Portuguese energy company Galp for around $650mn. In real estate, Dubai Investments, a listed conglomerate whose biggest shareholder is Dubai’s sovereign wealth fund, this year announced it would start work on a 2,000-hectare property development in Angola. The Abu Dhabi-based telecoms company formerly know as Etisalat... operates in 12 countries across Africa. UAE companies have begun to make a splash in mining too. International Resources Holding, a unit of International Holding Company, the $240bn Abu Dhabi conglomerate chaired by UAE national security adviser Sheikh Tahnoon bin Zayed al-Nahyan, last year paid $1.1bn for a majority stake in Mopani, a Zambian copper mine previously owned by Glencore. IHR has also expressed interest in investing in mines in Angola, Kenya and Tanzania. Last year, Primera, an Abu Dhabi-based gold trader, was granted a 25-year monopoly by the government of the Democratic Republic of Congo for all small-scale “artisanal” gold supplies in the country. Much African gold, both legal and smuggled, passes through Dubai, according to experts and African government officials... DP World is present in nearly a dozen African countries after pouring some $3bn into the continent. It now operates ports from Mozambique on the Indian Ocean in the south to Algeria on the Mediterranean in the north and Angola on the Atlantic, virtually encircling the continent.

The UAE's rising role in these industries is welcomed by Washington which sees it as a diversification away from the excessive role that China has been playing in these strategic industries in Africa for several years. And this is an interesting political economy consequence of the emergence of Dubai

Many of the 26,000-plus African companies registered in Dubai are “letterbox companies”, says Soares de Oliveira. “That allows Africans to keep dollars away from African economies. You pay suppliers in Dubai and the money never comes back.” Wealthy Africans, including politically exposed persons, also find a safe harbour in Dubai where they can buy property and enjoy a world-class lifestyle. Other high-profile residents include Isabel dos Santos, the billionaire daughter of Angola’s former president, who moved to the city in 2020 days after the new Angolan government froze her assets.

6. Fascinating portrait of Elvira Nabuillina, the head of the Russian Central Bank for the last 11 years, and widely respected in the markets and credited with steering the Russian Rouble and war economy during the difficult times. This is interesting.

Nabuillina’s friends say she is one of the few advisers granted leeway to speak candidly to Putin, which he appreciates... Today the bank has a degree of autonomy few other Russian institutions enjoy, with a mandate both to set interest rates and to regulate banks... After taking over the central bank in 2013 Nabiullina set about turning it into a workplace capable of attracting the best economists. She assembled a young, highly qualified team; many – such as her deputy, Ksenia Yudaeva, who helped introduce modern practices for data collection and analysis – were trained in the West. A lot of “smart, talented people” at the bank came to feel strong personal loyalty towards Nabiullina, said Alexandra Prokopenko, a colleague who left the bank shortly after the start of the Ukraine war.

A feature of Nabuillina's tenure has been her willingness to embrace orthodoxy on currency management. 

Previous governors of the bank of Russia had protected the rouble, keeping its exchange-rate value artificially high: Nabiullina announced plans to let it float. She resisted pressure from the oligarchs to keep cheap credit flowing, instead maintaining high interest rates. She also closed 300 banks in four years, many for “questionable transactions” – in other words, money-laundering. It was an ambitious agenda, guaranteed to upset people along the way, especially in the banking sector. But Putin was happy with the macroeconomic stability she was giving him. “Her enemies know he has her back,” said one observer... In 2014, the year Nabiullina had planned to fully float the rouble, Putin annexed Crimea. Europe and America imposed sanctions that made it harder for Russia’s major banking, energy and defence firms to get credit. On top of that, world oil prices dropped, and the rouble began to weaken; Russians saw their savings losing value fast. It would have been easy for Nabiullina to spend the bank’s reserves to shore up the rouble and impose capital controls to stop Russians from buying hard currency. But that would have shaken confidence in the kind of economy she was trying to develop. She stuck to her plan and allowed the rouble to float. Predictably, it sank. Establishment economists called her foolhardy. Right-wing nationalists denounced the bank’s “us State Department” staff. But her calculated gamble paid off, and by the autumn of 2016 the rouble had regained value. Inflation, meanwhile, was falling towards her target of 4%.

And break from orthodoxy when required.

In the days following the invasion, the eu froze Russian central bank assets worth over €200bn ($217bn) and Western nations slapped wide-reaching sanctions on Moscow’s banking, energy and defence sectors. On the morning of Monday February 28th, Russians queued to withdraw savings as the rouble lost nearly 30% against the dollar. Nabiullina had to impose extraordinary measures to calm the situation, far from her slick 2014 playbook. First she raised interest rates to 20% – such a bold move that one employee recalls her personal security detail being increased afterwards. Then she and Putin set capital controls, one of her personal red lines, obliging big energy firms to buy roubles with their dollars and banning most transfers out of Russia. She even froze Russian deposit-holders’ access to their funds for a while... Most of these measures were eventually reversed, and a kind of stability was achieved.

7. Exiting a stock market position is hard.

Last year Mr Imas and colleagues published a paper on the buying and selling choices of 783 institutional portfolios with an average value of $573m. Their managers were good at buying: the average purchase, a year later, had beaten the broader market by 1.2 percentage points. But they would have been better off throwing darts at the wall to select which positions to exit. After a year, sales led to an average of 0.8 percentage points of forgone profit compared with a counterfactual in which the fund selected a random asset to sell instead.

8. The Economist has a good survey on cross-border capital flows. This about the trends in FDI flows and their realignments in recent years. 

All types fell after the financial crisis of 2007-09, and have not recovered since. But the drop in FDI became more pronounced after the onset of America’s trade war with China during Donald Trump’s presidency. A study by economists at the IMF published in April 2023 found that, as a share of global GDP, gross global FDI had fallen from an average of 3.3% in the 2000s to just 1.3% between 2018 and 2022... To assess whether FDI has also been redirected over time, the IMF researchers analysed data on 300,000 new (or “greenfield”) cross-border investments carried out between 2003 and 2022. They found a rapid drop in flows to China after trade tensions ratcheted up in 2018. Between then and the end of 2022, China-bound FDI in sectors which policymakers deemed “strategic” fell by more than 50%. Strategic FDI flows to Europe and the rest of Asia fell, too, but by much less; those to America stayed relatively stable. FDI for China’s chip sector plunged by a factor of four, even as FDI for chip firms rose sharply in the rest of Asia and America.

The IMF researchers then compared investments in different regions completed between 2015 and 2020 with those completed between 2020 and 2022. From one time period to the next, average FDI flows declined by 20%. But the decline was extremely uneven across different regions. America and countries in Europe, especially its emerging economies, came out as relative winners. FDI to China and the rest of Asia fell by much more than the aggregate decline. The roster of relative winners—rich America and its closest allies—suggests that geopolitical alignment has played a part in diverting capital flows. Sure enough, it has become more important than ever. Measuring such alignment through UN voting patterns, the IMF researchers calculated the share of FDI flowing between pairs of countries that are geopolitically close. They found that this share has risen significantly over the past decade, and that geopolitical proximity is more important than the geographical sort. The same correlation with geopolitical alignment is present for cross-border bank lending and portfolio flows, though to a lesser extent.

This is on the cross-border capital flows and its impact on the economies. 

Yet in spite of the vast scale of financial globalisation over the past three decades, with gross cross-border positions rising from 115% of world GDP in 1990 to 374% in 2022, gains have proved elusive to measure. That does not mean there have been no gains. But at the same time there is clear evidence that sudden inflows of foreign capital can cause financial crises. A paper published in 2016 by Atish Ghosh, Jonathan Ostry and Mahvash Qureshi, then all of the IMF, identified 152 “surge” episodes of unusually large capital inflows across 53 emerging-market countries between 1980 and 2014. Around 20% ended in banking crises within two years of the surge ending, including 6% that resulted in twin banking-currency crises (far higher than baseline). Crashes tended to be synchronised, clustered around global financial convulsions. But the link between sudden floods of foreign capital and subsequent credit growth, currency overvaluation and economic overheating is hard to dismiss.

This is a good summary of the latest restrictions on capital flows of all kinds that have come into being following the rise of US-China tensions. While the article unsurprisingly bemoans these restrictions, I'm inclined to feel that they might be just about the right corrective to a trend on easing cross-border capital flows that might have gone too far. 

9. On China's renewables industrial policy 

In 2022, Beijing accounted for 85 percent of all clean-energy manufacturing investment in the world, according to the International Energy Agency. Now the United States, Europe and other wealthy nations are trying frantically to catch up... Last year, the energy agency said, China’s share of new clean-energy factory investment fell to 75 percent. The problem for the West, though, is that China’s industrial dominance is underpinned by decades of experience using the power of a one-party state to pull all the levers of government and banking, while encouraging frenetic competition among private companies.

China’s unrivaled production of solar panels and electric vehicles is built on an earlier cultivation of the chemical, steel, battery and electronics industries, as well as large investments in rail lines, ports and highways. From 2017 to 2019, it spent an extraordinary 1.7 percent of its gross domestic product on industrial support, more than twice the percentage of any other country, according to an analysis from the Center for Strategic and International Studies. That spending included low-cost loans from state-controlled banks and cheap land from provincial governments, with little expectation that the companies they were aiding would turn immediate profits... It all combined to help put China in the position today to flood rival countries with low-cost electric cars, solar cells and lithium batteries, as consumers across the wealthy world are increasingly turning to green tech. China now controls over 80 percent of worldwide production of every step of solar panel manufacturing, for example.

The difference between the industrial policies of China and the US is that the former was focused on sending low-cost (now clean tech) exports to global markets and preventing foreign firms from dominating China's domestic markets, whereas the latter is now intent on keeping out Chinese imports and denying it access to critical advanced technologies in strategically important sectors. 

10. From a Sanford Bernstein report (via Ken), the graphic below shows the sprawling empire of Reliance Industries' retail presence.

Of the over 18,000 stores Reliance Retail operated as of March 2022, roughly 8,500 were stores selling Jio SIM cards, handsets, and accessories. But there were 5,500 lifestyle outlets and 3,500 grocery stores too. That’s the kind of scale no one will have in the near future. In grocery, the only other player of note is Dmart, and its footprint is one-tenth of Reliance’s. Reliance is the largest in fashion and electronics too. The Tata Group is a worthy competitor in both (Westside and Zudio in fashion and Croma in electronics) but not one that Reliance would lose sleep over.

11. Facts about widening inequality even among the top echelons of the US society.

Not only have the biggest American companies grown spectacularly relative to the rest, they are also growing more entrenched, as are their owners. Wealth is rising fastest not for the 1 per cent but for the top tycoons, all of whom are — not coincidentally — in Big Tech... By last year, political economist Blair Fix has shown, the wealth of the richest American was 50 times the median for the top 400 billionaires, up from 10 times in 1983. And even among billionaires, inequality begets immobility: top-50 billionaires are now roughly 40 per cent more likely to hold their place on the Forbes list from one year to the next than they were in the 1980s.