Monday, January 16, 2017

Two richest Canadians own more than bottom 30% of population, report finds

OTTAWA — The Globe and Mail

Published Sunday, Jan. 15, 2017 7:50PM EST

Last updated Monday, Jan. 16, 2017 10:47AM EST

As world leaders, business tycoons and celebrities descend on a ritzy Swiss ski resort for the World Economic Forum this week, a new Oxfam report says that eight men own the same wealth as the poorest half of the world’s population.

Oxfam is also sounding the alarm in Canada, where 33 individuals – all men – now own a total of $112-billion. The two richest Canadian billionaires own $33-billion between them, which is more wealth than the bottom 30 per cent of the Canadian population.

“The inequality crisis is bigger than we feared,” said Lauren Ravon, director of policy and campaigns for Oxfam Canada.

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“We’re seeing a trend where Canada is unfortunately catching up with this inequality momentum that’s building in other countries … There’s no reason why this needs to be in a country where we do have governance, where we have taxation systems in place, where we have public policies that support public-care services.”

The report identified David Thomson and Galen Weston Sr. as the richest in the country, basing its figures on the Forbes billionaires rankings, which in turn lists Mr. Thomson with the combined assets of his family. (Mr. Thomson controls The Globe and Mail through a private company.)

The annual report, timed to coincide with the World Economic Forum, also uses data from the Credit Suisse Global Wealth Report . It examines how big businesses and the world’s superrich are fuelling the inequality crisis by driving down wages, using their power to influence politics and dodging taxes.

It found that between 1988 and 2011, the incomes of the world’s poorest 10 per cent increased by just $65, while the incomes of the richest 1 per cent grew by $11,800. Over the same time period in Canada, the increase of incomes for the bottom 10 per cent represented only 3 per cent of total income growth, while the increase of incomes of the top 10 per cent accounted for 29 per cent.

According to Oxfam, the world could see its first trillionaire in 25 years if the superrich continue to benefit from the “highly secretive industry of wealth management.”

The report calls for a more “human economy” that works for all people, and not just the fortunate few. In order to achieve this, Oxfam recommends that governments put a stop to tax dodging, level the playing field by increasing taxes on corporations and high incomes, and set aside funds to invest in public services, education and job creation. The anti-poverty charity also says governments must ensure workers are paid a living wage, put an end to the gender wage gap and remove barriers to women’s economic progress, such as unpaid care work.

Prime Minister Justin Trudeau will not attend the World Economic Forum in Davos, Switzerland, this week. He cancelled his planned trip to the invite-only event after facing criticism for unethical fundraisers where attendees paid $1,500 to spend time with him in private homes of wealthy donors. His press secretary, Cameron Ahmad, has insisted the decision to skip the forum had nothing to do with the possible negative reaction from Canadians about seeing him rub elbows with the world’s elite.

Rather, Mr. Trudeau is taking a cross-country trip where he is holding town halls and meetings with Canadians. He kicked off the tour last week with stops across Ontario.

As the Prime Minister continues his tour next week, Oxfam is calling on him to uphold his government’s commitment to shared economic prosperity for all. Mr. Trudeau campaigned in the 2015 federal election on a promise to strengthen the middle class and promote inclusive growth.

“As Trudeau meets with Canadians in communities across the country over the next week, we urge him to keep issues of gender inequality and poverty top of mind. Women make up a huge proportion of people living in poverty, both here in Canada and around the world. They contribute significantly to the economy but are getting shortchanged by economic growth,” Ms. Ravon said.

The Oxfam report estimated it will take 170 years for women globally to be paid the same as men. In Canada, women are paid less than men in 90 per cent of jobs tracked by Statistics Canada.

Ms. Ravon said the government can take a first step to close the inequality gap by making its upcoming federal budget – expected in late February or March – work for women.

“A feminist federal budget would prioritize progressive taxation, increase the proportion of total government spending on public services and social protection to lift people out of poverty, encourage living wages, close the gender pay gap, and increase the international aid budget to make our global commitments to women’s rights a reality.”

With files from Robert Fife

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Saturday, January 14, 2017

One of the most brilliant China minds in the world has a warning for the 2nd half of 2017

Linette Lopez

Jan. 10, 2017, 5:49 AM
181,559

Reuters

It's the beginning of the year, and as such, top analysts all over the world are making predictions about what the world will bring.

But not all of them merit as much attention as Autonomous Research's Charlene Chu, one of the most brilliant minds on China and its debt issues.

Chu has laid out her predictions for the year ahead in a note titled "The war on outflows," and two things really jumped out at us.

China's war on money leaving the country (outflows) is being fought with the country's foreign-exchange reserves and capital controls — that can't last forever.
China's future hinges on one wild card — the US and the dollar.

Chu said (emphasis ours): "China's authorities have chosen to pursue harsher measures against capital outflows over a large change in the exchange rate to address the country's outflow problem, at least for now. This could work for a few quarters, but we think closing the gates is not feasible over the long run for the largest trading nation in the world with a USD33trn banking sector. We expect growth to begin decelerating in 2Q17, as a weaker credit impulse passes through, but this is of secondary importance to outflows and the currency."

Protect your house

In December, China experienced $82 billion worth of outflows, the continuation of a troubling trend that has been pushing the value of the yuan, the country's currency, down.

To stem these outflows, the government has instituted capital controls for individuals and corporates. The problem with that, Chu said, is that those measures will eventually start to hurt the Chinese economy, dampening business sentiment. Foreign direct investment, for example, Chu said, "has already weakened considerably from less inbound investment and more outbound M&A by Chinese companies."

And, of course, there's the fact that the country is draining its $3 trillion in foreign-exchange reserves to prop up the yuan. Chu estimates that the People's Bank of China blew through $800 billion in foreign-exchange reserves in 2016, which was a year of accelerating gross-domestic-product growth and another Chinese property boom. She believes keeping up with outflows could eat up half of China's foreign-exchange reserves over the next few years.

Autonomous Research

What's more, it seems capital controls are making Chinese households more nervous:

"Until recently, the majority of outflows have occurred through corporate channels. It has only been in the last 3-4 months — since the reinstatement of housing purchase restrictions — that we have noticed average urban Chinese citizens becoming more interested in moving their money offshore. If China lost USD800bn last year with limited contribution from households, then the pressure in 2017 ought to be worse."

This means ultimately Chinese authorities will have to make a choice: Let go of their control of the yuan and interest rates, or end the free flow of capital in and out of the country.

We should also note that Chu sees the People's Bank of China hiking rates over the year to keep money in and/or attract investor money to the country, and that will be tough for banks and heavily indebted corporates.

The Trump card

Chu is an agreement with analysts all over Wall Street on our second salient point, which is that China's relationship with the US will be especially important during this delicate period. A trade war could set of "market jitters" that increase outflows, for example.

"It is this vulnerability to a heightening of market jitters and an intensification of outflow and currency pressure that is our most salient concern with regard to forthcoming policy changes out of the US, not what size hit there may be to GDP," she wrote.

China has already come up with a few things it can do to strike back at US companies should a Trump administration decide to start a trade war. They include levying more taxes and onerous investigations.

Some analysts believe that would only come back to bite China.

"When you have a country with a large trade deficit that retaliates against a country with a large trade surplus with it, it's the country with the trade deficit that wins," Michael Every, the head of financial markets research at Rabobank Group in Hong Kong, told Bloomberg. "The country with the surplus loses, every time."

If Chu is right, China isn't in the position to take that kind of loss — and may not be for a while.

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Thursday, January 12, 2017

China's economy is at the mercy of a force completely beyond its control

Linette Lopez

4h
5,191

Reuters

The strength of the US dollar is forcing China down a path it has been trying to avoid for years, pushing it to slow the money machine that has propelled its economy since 2008.

The course of this path could mean strange and terrible things are in store for economies around the world. A slower, weaker Chinese economy — and the resulting weakness of the yuan — will create competition for other developing-market exporters in a race to the bottom.

This is a moment many China watchers have been waiting for — it just didn't come how, when, or why they thought it would.

The money machine is China's state-run banking sector. Through loans, the banks pumped cash into the economy at an unprecedented rate — as the rest of the world watched and worried. The International Monetary Fund harped on China's debt for years, and across Wall Street, money managers have often gotten slaughtered betting on China's demise (in one way or another) as debt climbed to 280% of GDP.

China's leadership seemed to not hear these concerns until recently, when officials did something very strange: Party leaders got together to tell apparatchiks down the chain that they needn't worry about hitting growth targets.

This means that a country infamous for its obsession with hitting the numbers is setting them aside in the face of mounting debt.

You can see where this change comes from: At the end of 2016, the US dollar started rising, the yuan started weakening, and people started to quickly take money out of the country to keep their savings from losing value.

Now "we are in uncharted territory," Charlene Chu, a famed China analyst at Autonomous Research, wrote in a recent note titled "The war on outflows."

We are now seeing that as the US gradually ends its postcrisis monetary easing program, China will be forced, in some measure, to do so as well. In many ways, though, the country is not ready.

Business Insider

A series of unfortunate events

To understand how it's ever so slowly falling apart, we have to understand how the Chinese economy held together in the first place.

After 2008, the Chinese government kicked off its own program to avoid the global financial crisis. It did not do it the way the US did, though. Instead of having its central bank buy bonds, the Chinese government instructed its banks to lend. And they did, adding 30% or more credit to the economy every year, according to Chu.

Now there is 165 trillion more yuan ($23.8 trillion) in circulation than there was eight years ago. At the same time, the value of the yuan has remained virtually the same — an unnatural state in economics, to be sure.

The result has been an increase in purchasing power for Chinese people — a promise the Chinese Communist Party made and kept.

But it also created an imbalance between the increasing amount of yuan in circulation and the steadiness of the currency's value that "will only continue to grow if the CNY does not weaken materially and China's financial sector continues to expand at double-digit rates," Chu wrote (emphasis ours).

Now, keep in mind that a double-digit expansion of the banking sector is something of a jog considering what China's used to.

"Total banking sector assets in China will increase [by 30 trillion yuan] to [228 trillion yuan] in 2016 alone, and another [100 trillion yuan] will be added to this by 2020 if the banking sector grows at 10% per annum, which, we would note, would be the lowest growth rate on record," Chu wrote.

Last month, $82 billion left China, as the government was forced to fix its currency lower and lower against the dollar and people worried about the value of their assets.

And despite the fact that China's leaders have tried to tell the world that the yuan is now fixed against a basket of currencies, not just the dollar, it doesn't matter. We still live in a dollar world.

Consequences

Now instead of growth, the Chinese government's main concern is keeping capital in the country. To do so, it has instituted several capital controls for individuals and corporations, but, of course, there are always ways to get around things like that.

Plus, holding the yuan steady comes at a cost. The Chinese government is spending its foreign-exchange reserves to prop up the currency. Right now it's holding about $3 trillion, but Chu sees this working for only the next two quarters. A more permanent solution must be found.

So the government also has to think about attracting money to the country, and that's where the gears of this great money-making machine start to ever so slowly grind down.

One way China can attract money is by raising interest rates, which would have consequences for all the borrowers who have taken on unprecedented levels of debt.

The flow of yuan around the country would tighten, cooling the property market. This is important. Property-market growth is part of what turned 2016's rocky start into a net positive year for China.

Autonomous Research

"Liquidity and market risk vulnerabilities in the financial sector will be more on display," Chu wrote. In other words, some of the hands that distributed yuan around China would be impaired, taking a toll on the country's heavily indebted corporations.

Autonomous Research

This is why the Chinese government is being forced to prepare its people, and the world, for a slowdown. For the world, this ultimately means deflation — a force it has been fighting since the start of the financial crisis — as the yuan declines and other countries try to keep up (or down). All China can do in the meantime is what it's doing right now: fixing the yuan higher, no matter what the dollar does.

Regardless, as the economy slows the currency will glide down. It will have to. Chu estimates that if the government continues to support the yuan against market pressure, it could blow through its foreign-exchange reserves in a couple of years.

Some caveats, of course

Two things to keep in mind here. First, the dollar could weaken.

"I do think that it's likely to be supported by the Fed raising rates again, but I really doubt that the dollar [index] is going to make it above 120," Jeff "Bond King" Gundlach of DoubleLine Capital predicted in his most recent monthly investment outlook presentation.

That, of course, would take pressure off the yuan and help with outflows. But this wouldn't stop this process; it would only slow it. No matter what happens, the Chinese economy is building up dangerous debt levels that must be dealt with, and China has acknowledged that the economy's growth will slow. The imbalance between the yuan in circulation and its value remains, and that in and of itself will push the yuan's value down.

"One thing that is increasingly clear to us is that the world's largest source of monetary easing since 2008 won't be passing through in the way it has been, whether that is from a closing of the gates on outflows or a fall in the purchasing power of Chinese companies and individuals through a weakening of the exchange rate," Chu wrote.

Second, this will happen incredibly slowly. The catastrophic credit event that Wall Street's wildest minds have wondered about is unlikely to happen. The Chinese government has control over too much of its economy and can pull and push levers such as interest rates and manipulate the money supply however it likes.

Increasingly, economists think China will look like a poorer Japan, declining into drudgery in unexpected ways to ease its transition into a painfully slow-growing economy.

Either way, it isn't entirely a mystery where we'll go. What's more unprecedented is how we'll get there.

China has shown its hand. We now know what a dollar can do — and how little China can do to stop it.

The opinions expressed in this article are those of the author.

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Monday, January 16, 2017