Tuesday, July 10, 2012

530 World's most profitable bank is ICBC, a state-owned Chinese bank

World's most profitable bank is ICBC, a state-owned Chinese bank

(1) Rise of China's banks recalls 1988, when 9 of 10 biggest banks were
(2) 1988 Basle Accord had protectionist, rather than prudential motives
- David Grover
(3) Western bankers imposed 1988 Basle Accord as a protectionist
measure, causing Japan's crash
(4) Geoffrey Gardiner (retired Banker) on how the Basle Accord of 1988
affected Japan's banks
(5) World's most profitable bank is ICBC, a state-owned Chinese bank
(6) Industrial and Commercial Bank of China is largest bank in the world
by profit and market capitalization
(7) ICBC given approval to take over a US bank
(8) US files WTO complaint over China's tariff on imported cars
(9) To get out of its economic crisis, Europe needs to learn from
China's state-led investment - John Ross
(10) China has a bubble too - Michael Pettis
(11) Dambisa Moyo: China unleashing a war for resources

(1) Rise of China's banks recalls 1988, when 9 of 10 biggest banks were
Japanese - Peter Myers, July 6, 2012

China's banks have displaced Western banks at the top of the pyramid
(items 5 & 6).

This recalls the late 1980s, when 9 of the 10 biggest banks in the world
were Japanese. As a protective measure, British and American banks
imposed The Basel Accord, which brought Japan's banks down and initiated
its financial crisis: http://mailstar.net/basle.html

The IMF recently did "a review of China's compliance with the Basel Core
Principles" (item 7). Looking for an excuse to impose another Basel
Accord, perhaps. But they found no pretext on which to intervene.

Dambisa Moyo warns of China's buying spree (of foreign assets) (item 8).
Richard A. Werner analysed Japan's similar buying spree in the
1980s-90s: http://mailstar.net/basle.html

The news that the world's most profitable bank is a state-owned Chinese
bank, ICBC, is shocking for Americans brought up on the ideology that
Socialism doesn't work. Clearly, it does - only too well. It is
Capitalism which does not work - which induces Depressions such as we
are in now.

(2) 1988 Basle Accord had protectionist, rather than prudential motives
- David Grover

If Japan's financial power peaked in the late 1980s, why was its
negotiating position in the Basle Capital Adequacy accord so weak?

by David Grover

[...] For all the talk of level playing fields, the Basle Accord had
protectionist, rather than prudential motives. Further pressure to pass
the Basle Accord, for example, came from American and British bankers
who claimed 'under-capitalized' Japanese banks were pinching their
business unfairly.

(3) Western bankers imposed 1988 Basle Accord as a protectionist
measure, causing Japan's crash

Patrick S. J. Cormack and Bill Still write, in their book The Money
Masters: How International Bankers Gained Control of America (Royalty
Production Company, 1998, pp. 73-4):

{p. 73} Regulations put into effect in 1988 by the BIS {the Bank of
International Settlements}, called the Basle Capital Adequacy Accord,
required the world's bankers to raise their capital and reserves to 8%
of liabilities by 1992. ... those nations with the lowest bank reserves
in their systems have already felt the terrible effects of this credit
contraction as

{p. 74} their banks scrambled to raise money to increase their reserves
to 8%. To raise the money, they had to sell stocks which depressed
their stock markets and began the depression first in their countries.
Japan, which in 1988 had among the lowest capital and reserve
requirements, and thus was the most effected by the regulation - has
experienced a financial crash which began almost immediately, in 1989,
which has wiped out a staggering 50% of the value of its stock market
since 1990, and 60% of the value of its commercial real estate. The
Bank of Japan has lowered its interest rates to one-half of a percent -
practically giving money away to resurrect the economy, but still the
depression worsens.

{endquote} more at http://mailstar.net/basle.html

(4) Geoffrey Gardiner (retired Banker) on how the Basle Accord of 1988
affected Japan's banks

Subject: Re: capital adequacy ratio Date: Wed, 17 Apr 2002 10:34:07
+0100 From: Geoffrey Gardiner <geoffrey.gardiner@btopenworld.com>

020417 Gardiner to Myers

{April 17, 2002}

... The Basel Accord of 1988 was an agreement by the twelve countries
who comprise the Bank for International Settlements (BIS) at Basel that
the minumum capital adequacy ratio should be 8 per cent of weighted
loans, of which not less than 4 per cent should be provided by
shareholders funds. Shareholders' funds are referred to as tier one
capital and subordinated loans as tier two.

The weightings are a means of recognising that some loans are safer than
others. For instance mortgages on houses can be weighted 50 per cent,
which means that house loans need to be backed by only a 4 per cent
capital adequacy ratio. Some loans to governments may be given a rating
between nil and 10 per cent.

Full details of the Accord are on the website of BIS - bis.org
Individual governments are given some discretion with regard to the
setting of weightings. How individual central banks implement the
agreement is usually secret.

At the time the agreement was made the Japanese banks were grossly under
capitalised. Because their capital bases had been less than others they
were able to lend at a lower rate of interest for as their shareholders
funds were smaller they needed less profit to achieve the same earnings
per share as a better captialised bank. (See Prof David Llewellyn in
Jan 1992 edition of "Bankers' World.") They had cornered the market in
good industrial lending as a result.

The agreement was fully implemented in Jan 1993. The Japanese banks had
been faced with the choice of raising more capital or of cutting back
on lending. Not being particularly profitable at the time, a
requirement for a successful capital issue, I believe they chose the
latter course, cutting back on overseas lending first, and then at
home. Of course the cut back produced a recession, helped along by the
fact that British banks, led by Barclays, had expanded their capitall
bases to increase their business and had made many bad lendings. In
1988 Barclays raised £920 million of new capital. It lost the lot
according to a handwritten letter I have from the later Chief Executive
who put things right..

When the Japanese banks cut back lending in Japan, it was lending on
real estate which was hit particularly badly. Property prices fell,
eventually by 60 per cent, and many loans went bad as the security for
them faded away. The Japanese bankers had tried to be clever. They had
invested their shareholders' funds not in loans but in the common
shares of the companies to which they were lending, on the basis that
if the companies used the loans wisely, the bank's shareholders would
benefit. When lending was reduced, the shares they held went down, and
that automatically cut the lending capacity of the banks. A downward
spiral followed, ending with the total bankruptcy of the banks. They
were kept in business by huge support from the government. In effect the
banking system was nationalised, but it was not called that, probably
in order to avoid irritating American sentiment.


(5) World's most profitable bank is ICBC, a state-owned Chinese bank


China banks now account for third of global profit

July 2, 2012

Chinese lenders accounted for almost a third of global bank profit last
year, up from 4 per cent in 2007, as they grabbed market share given up
by struggling European peers, according to The Banker magazine's annual

Three Chinese banks topped the profit table, led by Industrial and
Commercial Bank of China (ICBC) for the second successive year, with
pretax earnings of $US43.2 billion ($42 billion), according to The Banker.

ICBC was followed by China Construction Bank, which delivered a $US34.8
billion profit, and Bank of China , with earnings of $US26.8 billion.

JPMorgan was fourth with a profit of $US26.7 billion, while HSBC was the
most profitable European bank, with earnings of $US21.9 billion.

Bank of America topped the magazine's Top 1,000 list for the second
year, which uses Tier 1 capital as a measure of a bank's ability to lend
on a large scale and endure shocks.

JPMorgan was second in that table, with four Chinese banks in the top 10
for the first time -- ICBC ranked third, CCB was sixth, Bank of China
ninth and Agricultural Bank of China 10th.

National Bank of Greece reported the biggest loss last year - $US17.4
billion, followed by Belgian group Dexia .

Eurozone banks accounted for 6 per cent of global profit last year,
compared to 46 per cent five years ago and their 45 per cent share of
global assets, the Banker estimated.

In contrast, Chinese banks accounted for 29.3 per cent of global profit
last year, the magazine said.

It said the Tier 1 capital of Bank of America was $US159 billion at the
end of 2011, slightly down from a year before but $US9 billion more than

Bank of America also topped The Banker's first Top 1,000 list 42 years
ago, when it was based on assets rather than capital.


(6) Industrial and Commercial Bank of China is largest bank in the world
by profit and market capitalization


Industrial and Commercial Bank of China

Industrial and Commercial Bank of China Ltd. (ICBC) is the largest bank
in the world by profit and market capitalization[3]. It is one China's
'Big Four' state-owned commercial banks (the other three being the Bank
of China, Agricultural Bank of China, and China Construction Bank). It
was founded as a limited company on January 1, 1984. As of March 2010,
it had assets of RMB 12.55 trillion (US$1.9 trillion), with over 18,000
outlets including 106 overseas branches and agents globally.[4] In 2011,
it ranked number 7[5] on Forbes Global 2000 list of worlds biggest
public companies[6]. ...

This page was last modified on 1 July 2012 at 22:31.

(7) ICBC given approval to take over a US bank


10 May 2012 Last updated at 01:55 GMT

ICBC gets approval to take over US bank

Industrial and Commercial Bank of China (ICBC) has been given the nod to
take over a US bank, the first such US approval for a Chinese firm.

The US Federal Reserve approved state-owned ICBC's plans to acquire the
US subsidiary of Bank of East Asia.

This comes just days after high-level economic talks between the US and
China in Beijing.

The Fed also gave permission to two other Chinese banks to increase
their presence in the US.

"It is a pretty significant step. There has been a lot of backlash about
Chinese state-run companies acquiring overseas assets," Stephen Joske of
Australia Super, an institutional investor in Beijing, told the BBC.

"The permission [given] to ICBC is a clear message that things may be
returning to normal and that fears about Chinese state-run firms may be

“There is no evidence that Chinese accounting methods or practices at
the large Chinese banks, such as ICBC, are unreliable”

US Federal Reserve

China's state-owned banks have played a key role in the country's growth
in recent years as they lent record sums of money after the global
financial crisis.

While that saw profits at Chinese banks soar, it has also led to
concerns about the health of the Chinese banking sector amid concerns
over bad debt levels.

At the same time, some critics in the US have also raised concerns about
accounting practices used by Chinese firms.

However, the Federal Reserve said that it was satisfied with the
operations of ICBC and also with the overall regulations in the Chinese
banking sector.

"China's largest banks, such as ICBC, use the 'big four' accounting
firms," the Fed said in a statement.

"There is no evidence that Chinese accounting methods or practices at
the large Chinese banks, such as ICBC, are unreliable."

The US central bank added that the International Monetary Fund had
concluded a financial system stability assessment (FSSA) of China ,
including a review of China's compliance with the Basel Core Principles.

It said the FSSA found that the rules set by the Chinese banking
regulator "establish a benchmark of prudential standards that is of high
quality and was drawn extensively from international standards and the
[Basel Core Principles] themselves".

(8) US files WTO complaint over China's tariff on imported cars


U.S. to file WTO complaint against China on auto duties

Posted 2012/07/05 at 7:06 am EDT

WASHINGTON, July 5, 2012 (Reuters) — The United States will file a
complaint against China on Thursday with the World Trade Organization
for imposing duties on more than $3 billion worth of U.S.-made autos, a
senior U.S. official said.

The complaint comes as President Barack Obama campaigns in Ohio, where
auto plants have been affected by the duties. The president will discuss
the issue during his remarks.

"The key principle at stake is that China must play by the rules of the
global trading system. When it does not, the Obama Administration will
take action to ensure that American businesses and workers are competing
on a level playing field," a senior administration official said in an

The duties cover more than 80 percent of U.S. auto exports to China.

"The duties disproportionately fall on General Motors and Chrysler
products precisely because of the actions that President Obama took to
support the U.S. auto industry during the financial crisis," the
official said.

Obama will highlight his bailout of the auto industry during a two-day
campaign bus tour of Ohio and Pennsylvania. The WTO complaint is meant
to reinforce that message and counteract criticism from Republican
presidential candidate Mitt Romney that Obama has not been strict enough
when dealing with China.

(Reporting by Jeff Mason; Editing by Vicki Allen)

(9) To get out of its economic crisis, Europe needs to learn from
China's state-led investment - John Ross

John Ross

10 June 2012


Four years into the international financial crisis, it is clear that the
economic policies followed in Europe to deal with it have failed to do
so. ...

China's stimulus, in terms of proportion of GDP, is equivalent to a
program of US$2 trillion in the EU today. An investment program on that
scale would be substantially too large in the EU at present – the
situation is not as critical as in 2008. Nevertheless it is only
necessary to compare this number to the $13 billion discussed by EU
commissioners today, to see how inadequate is the scale of the proposed
EU response to the present situation. ...

Unless Europe is prepared to grasp the nettle of a large "China style"
program, one based on state-led investment, Europe is likely to face, at
best, years of economic stagnation.

China's authorities have always rightly clarified that it is not arguing
for its economy to be a model for others. It rightly insists every
country is specific and therefore no country can or should mechanically
copy another. But nevertheless China learned many things from other
countries. For its own sake, Europe should start to learn from China *
* *

This is an edited version of an article which originally appeared at

(10) China has a bubble too - Michael Pettis

China is not different

Posted by Houses and Holes in China Economyon July 5, 2012 | 23 comments

Exclusively from Michael Pettis’ newsletter.

{start of Pettis article}
We are beginning to see an increasing reluctance to respond to evidence
of bubble-like behavior in China with explanations of how these things
don’t mean the same thing in China as they do in other countries. Our
normal understanding of economics doesn’t apply to China, we are
earnestly told by the China bulls, because either:

1) China has a different set of economic rules under which it operates,
and so the economic processes that have adverse consequences in other
countries are unlikely to have the same consequences in China (how many
times, for example, have we heard someone say that China cannot have a
real estate bubble because, unlike in the US, surging real estate prices
have not been fueled by a deregulated mortgage bubble?), or

2) China’s very wise policymakers have invented a new and brilliant
form of economics that isn’t understood in the “West”, although
strangely enough it seems well-understood by the many Westerners who
regularly proffer up this explanation. (For an especially hard-hitting
counterargument to this kind of claim, much beloved of China bulls,
check out this article by Minxin Pei.)

We still hear the China’s-economy-is-different nonsense from
non-economists, but among the many academic economists and research
analysts who used to trot out these arguments regularly even two or
three years ago, there is a growing awareness, I think, that they are
starting to wear thin. There is no such thing as a different kind of
economics, and even a very cursory glance at Chinese economic history
should have made clear that if China really does exist in a different
economic universe, with its own set of rules, then this has been a
fairly new phenomenon. For most of its history the same old set of rules
seemed to apply to China that applied everywhere else.

The massive credit expansion in China, with its associated problems of
overinvestment and asset price bubbles, is no different than any other
credit bubble. I mention this because until recently it was not just
China that was supposedly following a new set of economic rules, and I
was reminded of this after reading an article in the Financial Times
about the Spanish bank Bankia.

{June 21, 2012 7:50 pm
The bank that broke Spain
By Victor Mallet and Miles Johnson
Bankia has imperilled Madrid’s finances and driven it to seek a bailout

According to the article:

During Spain’s housing boom, mortgage lending at Caja Madrid, the
largest of the savings banks that formed Bankia, started to grow so
quickly that, by 2007, some executives were trying to slow things down.
After its mortgage book expanded by 25 per cent in 2006, Carlos
Stilianopoulos, Caja Madrid’s then head of capital markets and later
Bankia’s chief financial officer, said: “We don’t want to grow this
fast. We are a savings bank so we don’t have to keep shareholders happy.
We prefer to have a solid institution.”

At the same time, warnings from abroad about the overheating of Spain’s
property market were dismissed. “Perhaps in other countries this pace of
growth would be seen as a bubble,” he told Euromoney. “But not in Spain.”

“Perhaps in other countries…but not in Spain.” This statement alone
should have been a warning signal. We know why it is impossible for
property prices ever to become unsustainable in China – actually I don’t
know, but I have been told that it is because of the immutable
urbanization process, of which more later – but why is that the case in

This, it turns out, I can explain. I remember in 2003 my mother had a
New Year’s Eve party at our family home in Málaga, in southern Spain, at
which over 80 people sat for dinner, including most of my old friends
still around from high school days. That night I had one of those
epiphanies (as you often do on New Year’s Eve, I guess) about the real
estate market when I suddenly realized that nearly every one at the
party was involved in one way or the other in real estate. Most of the
people there (including my Persian sister-in-law) were real estate
developers, real estate agents, real estate lawyers, architects, or
owners of building and construction companies. All of them lived off
(and had prospered mightily from) the real estate boom in southern Spain.

But this cannot be, I thought in my naiveté. If the only industry around
is real estate, then we must be living through a real estate bubble of
enormous proportions.

Later that night I spoke to one of my old high-school friends, Andy, who
was at the time a prosperous real estate agent with houses in Marbella
(purchased on borrowed money, naturally), a Mercedes, and all the
trappings that accrue to an immensely charming and self-confident real
estate agent during a real estate boom. In our conversations, and ones
that took place subsequently over the next few years, I warned him that
the property market in the south of Spain looked out of control, and it
would be a good idea from him to diversify his savings out of real estate.

Same old same old

Of course Andy didn’t. He explained to me that what we were seeing in
southern Spain was not a bubble because there were very strong reasons
to believe that real estate prices were undervalued and were going to
rise a lot more. Europe, he told me, is aging rapidly, and old people,
as everyone knows, like nothing better than to retire in some warm and
sunny place, preferably on the beach. With an infinite supply of
European old people and limited European beachfront property, mostly in
Spain, Italy, and Greece, where in addition you had great food,
warm-hearted people, and plenty of immigrants to keep the prices of
services (and servants) down, it was certain, Andy explained, that real
estate prices would not decline. The demand was insatiable at almost any

This seemed like a perfectly reasonable argument on the face of it, and
it was widely proposed to justify ever-soaring Spanish real estate
prices for many years, not just on the Spanish coast but also, perhaps a
little bizarrely, in every nook and cranny of the country, including
some pretty gray and inaccessible building projects outside cold,
northern industrial cities.

The weakness in the argument, of course, was that although there might
have been near-infinite demand, this could not justify near-infinite
increases in prices, especially since the demand itself was likely to be
highly pro-cyclical because the Spanish economy had itself become
dependent on real estate development. As long as the economies of the
cold northern European countries were booming, in other words, the
demand from retirees for beach houses would stay high, but any slowdown
in the economy would reduce demand in Spain at the worst possible time.

And as Spanish real estate slowed, the impact would be exacerbated by a
much sharper slowdown in the Spanish economy caused by the slowdown in
real estate, which had become a major driver of the economy. If a
substantial portion of the Spanish workforce depends on a booming real
estate market – and not just those directly dependent, but also those
indirectly dependent, like bankers, restaurateurs, retailers, travel
agents, and so on – then any slowdown in the real estate sector is
itself seriously self-reinforcing.

We have now seen how this works in Spain, but in China we are still
using a similar argument to explain why real estate prices cannot drop
significantly. Our Chinese version of the
old-people-love-to-live-on-the-beach argument is the urbanization
argument. As long as Chinese workers continue to move from the country
to the cities – and urbanization has been one of the most dramatic
consequences of Chinese growth in the past three decades – then there is
likely to be a near infinite demand for city property, and so prices can
only go up. And because prices can only go up, speculative demand for
real estate is not speculative, it is precautionary.

This claim seems at least as plausible as the Spanish argument
justifying infinite price increases, and was probably true a decade ago,
but it runs into the same problem that the Spanish story ran into (and
indeed that nearly every previous case in history of a real estate
bubble, which has always started with a plausible story). First, no
matter how much demand we can project into the future, rising prices can
nonetheless outpace rising demand because rising prices can themselves
stimulate further demand, in which case rising prices are unsustainable.
This should be obvious, but the point is often lost in the giddiness
that accompanies rapidly rising prices.

Second, and this is key, the rising demand is itself pro-cyclical. This
is the most dangerous part of the process and perhaps the least well
understood. Rising demand driven by the urbanization process is itself
subject to underlying growth in the economy, since it is growth in turn
that drives the urbanization process.

What’s more, when we reach the point as we did in Spain several years
ago, and have reached in China too, in which a substantial part of the
growth that drives the urbanization process is itself created by real
estate development, then any slowdown in underlying growth is likely to
be seriously exacerbated by a corresponding slowdown in real estate
development. This is because the economy is caught in the reverse side
of the feedback loop that helped drive prices on the way up – slowing
growth leads to slower demand for urban real estate, which leads to
slower real estate development, which itself leads to slower growth.

This is part of the reason why declining real estate prices and slowing
sales, which Beijing has insisted for years it wanted to see, is causing
so much worry. It is both a consequence and cause of economic slowing,
and these kinds of self-reinforcing relationships always lead to
unexpectedly sharp outcomes, both on the way up and on the way down.

Minsky on balance sheets

Without wanting to sound obsessive I want to re-emphasize this idea. In
trying to judge the probability of a crisis we need to think not just
about the probability and impact of positive or negative events in and
of themselves. It is extremely important that we also understand the
balance sheet mechanics that force the system into self-reinforcing
behavior. The structure of the balance sheet itself, in other words, is
as important in determining the impact of adverse events as the direct
impact of those events on the asset side of the balance sheet.

This is, of course, one of Hyman Minsky’s key insights, and in that
light I thought I would pass on part of a lecture by James Galbraith on
Keynes which Galbraith gave at the 5th annual “Dijon” conference on Post
Keynesian economics, delivered in Copenhagen in May last year. In the
lecture Galbraith made a brief detour on the subject of Minsky in which
he said:


James K. Galbraith: The Final Death (and Next Life) of Maynard Keynes
By: selise
Monday August 1, 2011 4:26 am}

Hyman Minsky developed an economics of financial instability, of
instability bred by stability itself…Minsky’s approach, very different
from Godley’s, is conceptual rather than statistical. A key virtue is
that it puts finance at the center of economic analysis, analytically
inseparable from what is sometimes called real economic activity, for
the simple reason that capitalistic economies are run by banks. And, of
course, his second great insight is into the dynamics of phase
transitions: the famous movement from the hedge position to the
speculative position to the intrinsically unsustainable, doomed to
collapse ponzi position which arises from within the system and is
subject actually to formalization in the endogenous instabilities of
non-linear dynamical models.

To grasp what Minsky is about, it seems to me, is to go immediately
beyond the coarse notion of the “Minsky moment,” a concept which implies
falsely that there are also non-Minsky moments. It is to recognize that
the financial system is both necessary and dangerous, that strict
financial regulation is both indispensable and imperfect.

Any attempt to predict the likelihood and extent of a breakdown in an
economic system – country, region, or company – that starts only from
the asset/operational side of the economic entity (what Galbraith refers
to above as real economic activity), without taking into account the
feedback mechanisms inherent in the relationship between the asset and
liability sides, is pretty useless.

What’s more, the recent history of disturbances in that economic entity
tells us nothing about the future impact of similar disturbances – as
long as the balance sheet structure is changing, and as Galbraith
reminds us, the lack of instability during previous disturbances will
itself change the structure of the balance sheet. Stability is itself
destabilizing, as Minsky warned us, because it changes the nature of the
relationship between the two sides of the balance sheet.

Commodities and growth

Volatility, in other words, is a function not just of volatility in real
economic factors, but also, and perhaps even more so, of the structure
of the balance sheet. The structure of the balance sheet can either
smooth out normal economic fluctuations or it can turn them into highly
destabilizing events.

One example of a destabilizing feedback mechanism worth pondering is the
relationship between commodity prices and Chinese growth. Here is a very
interesting article from last week’s Financial Times:

China: Dug in too deep
By Henny Sender
June 24, 2012 9:15 pm
Overspending and project delays reveal many mining groups are
ill-prepared for global expansion}

Chang Zhenming, chairman of Citic Pacific, is unambiguous about the
significance of his company’s Sino Iron mine in the desolate, red-soiled
Pilbara region of Western Australia. “The whole of China is watching
this project,” he says.

More to the point, China is watching with some trepidation as his Hong
Kong-listed company faces increasing cost overruns and delays. The
stakes are high. Mr Chang says Sino Iron is four times bigger than any
iron ore project at home.

While outside observers often fear Chinese companies are unstoppable
juggernauts in their ravenous pursuit of the world’s minerals, much of
this perception is inaccurate. China’s int-ernational resource expansion
is not running smoothly. The world’s second-biggest economy had hoped it
would more easily control its economic destiny by taking huge mineral
stakes, robbing companies such as BHP Billiton, Vale and Rio Tinto of
the ability to dictate commodity prices.

But the Sino Iron project, far from being a showcase for China’s might,
has become instead a cautionary tale of the difficulties Chinese
enterprises face as they seek to expand abroad. When it was first
conceived in 2006, the total cost was estimated at under $2bn. By now,
it has already cost Citic Pacific $7.1bn. Analysts at Citigroup
calculate the bill could swell to a possible $9.3bn, while others say
they expect the ultimate bill will be closer to $10bn. The mine is at
least two years behind schedule.

“This is no longer about commercial goals,” says a senior executive at
one leading Asian trading company with extensive sourcing operations in
Australia. “It is about Chinese machismo. They have plonked down too
much money to pull out now.”

Leaving aside that rather interesting and even surprising last
paragraph, one obvious comment on this article is that vastly
overspending on a project of this nature is not at all surprising in a
system in which privileged operators have near infinite access to cheap
funding, little accountability, and no budget constraints for any
project that can be proposed as being of national importance (and it is
astonishing how many projects fit under that category). But the lesson I
want to draw is a very different one – a balance sheet lesson.

In projects like this, and in the extent of commodity stockpiling we
have seen more generally, China has taken a huge long position. Some
analysts argue that China, by buying far more in the way of commodities
and commodity producing companies than it requires for its immediate
needs, is hedging its future demand.

Others make an even stronger case. Dambisa Moyo, a former investment
banker turned economic writer, has argued in her book Winner Take All
that the world is facing a crisis in the form of a commodity shortage.
According to a recent review in the Guardian:


Dambisa Moyo: 'The world will be drawn into a war for resources'
The controversial writer and economist on why she believes the economic
rise of China, combined with the west's complacency, leaves us facing a
future of terrifying global instability
Decca Aitkenhead
The Guardian, Sun 24 Jun 2012 20.00 BST}

If Moyo’s calculations are correct, we are in big trouble – which makes
the central premise of her book, Winner Takes All, all the more
arresting. Governments across the world, she writes, have singularly
failed to grasp what’s coming – with one sensational exception. “Simply
put, the Chinese are on a global shopping spree.” State-sponsored
Chinese corporations are busy buying up commodities across Africa, North
America, the Middle East, South America – anywhere they can – in a
concerted strategy to seize control of resources before the rest of the
world wakes up to the looming crisis.

They’re striking deals with what she calls the “axis of the unloved” –
developing countries rich in commodities but poor in political and
economic capital – in return for much needed investment, employment and
infrastructure. Extravagant shoppers, the Chinese are happy to pay over
the odds, treating their trading partners not as poverty-ridden charity
cases nor political pariahs but valued commercial equals.

But when the resources begin to run dry, the consequences will be
catastrophic. Already, since 1990 at least 18 violent conflicts
worldwide have been triggered by competition for resources. If nothing
is done now, warns Moyo, commodity wars on a terrifying scale are all
but inevitable.

Inverted balance sheets

Perhaps it is my natural skepticism, but we have heard warnings like
these many times before, and they have usually proven to be
spectacularly wrong largely because they are based on projections of
recent trends that are clearly unsustainable. In my opinion the next few
years are not going to see soaring commodity prices but rather
collapsing commodity prices, in large part because it has been China’s
unsustainable investment boom that has both driven demand up ferociously
(accounting for only 10% of global GDP China nonetheless absorbs roughly
40% of global copper production and nearly 60% of global iron ore and
cement production) and driven up investment in extractive industries.

Once China brings down its infrastructure investment rate, the
combination of declining demand (in fact China has stockpiled so much
that it will soon turn from importing copper, iron ore, and other
commodities to exporting them) and expanding supply is likely to have a
very deleterious effect on prices. In my opinion China is paying overly
high prices in a market in which prices are likely to drop sharply.

But reasonable people can differ on whether or not commodity prices are
going to rise substantially. What reasonable can never do is place too
much confidence in their predictions. Dambisa Moyo may be right that
commodity prices will soar, and remain permanently high. I doubt it, but
the real reason I think China is making a mistake in stockpiling
commodities is not because I think prices will inevitably decline, but
rather because it is a risky balance sheet strategy for China. It
exacerbates the volatility impact of commodity prices, which are already
very volatile, and this brings us back full circle to Hyman Minsky.

Why is stockpiling a bad strategy for China? It is risky because of the
inverted relationship between Chinese growth and commodity prices. It is
widely agreed in the commodity industry that the biggest cause of rising
commodity prices in the past decade has been the ferocious growth in
Chinese demand, and this growth has been primarily a consequence of
Chinese investment growth. If China keeps growing rapidly, of course, we
may very well see higher commodity prices in the future, but – and this
is the problem – if China slows significantly, the price of commodities
is likely to decline, at least in the next few years.

So China has effectively made a big bet on commodity prices, and it
“wins” the bet if it continues to grow quickly. It “loses” the bet,
however, if its growth rate slows sharply. This is what I referred to as
an “inverted” capital structure in my 2002 book, The Volatility Machine.
An inverted structure is the opposite of a hedged structure – when the
asset/operational side of your balance sheet does well, your liability
side also does well, but when the asset/operational side does badly, the
liability side does too.

Inverted balance sheets exacerbate volatility – good times are
automatically better than they otherwise would have been and bad times
are automatically worse. Countries (or companies) with inverted balance
sheets are more volatile than countries with hedged balance sheets, and
unless you can get all your speculative bets right, this higher
volatility lowers growth over the long term. Inverted balance sheets, I
argued in my book, are one of the key differences between countries that
are able to recover successfully from crisis and countries that aren’t,
and I would propose that this may be one of the differences between
countries that can escape the middle income trap and countries that can’t.

Of course a country’s balance sheet is affected by a lot more than just
commodity stockpiling. There are many other aspects of China’s balance
sheet that matter, but I would argue that good liability management
consists of eliminating sources of volatility in the balance sheet by
structuring it in ways that cause the performance of the liability side
and the asset side (or, to put it another way, the structure of expenses
and the structure of revenues) to move in opposite ways, not in the same

This isn’t happening – in at least one aspect of the national balance
sheet, commodity stockpiling. To take another example, hot money flows
are automatically volatility enhancers – when the economy is growing
quickly, money pours into the country and causes even more growth, but
when the economy gets into any trouble, money flees and so causes even
more contraction.

China in principle has capital controls, which should prevent this from
happening, but in practice Chinese capital controls are extremely
porous, and as Chinese prospects have gotten worse in the past two
years, we have seen what is clearly a surge in capital flight. If China
is serious about internationalizing the renminbi and relaxing capital
controls it will only increase the balance sheet inversion (which is why
I think we are going to see a reversal of RMB internationalization in
the next few years).

Or to take two more obvious examples, first, asset based lending – for
example against real estate – is also a source of balance sheet
inversion. When asset prices rise, the value of debt collateralizing the
assets also rises, but when asset prices drop the debt becomes less
credible and its implicit cost to the economy rises. Second, borrowing
short term, or borrowing in a foreign currency, has the same risk
profile. When the country is doing well, the real cost of short-term or
foreign currency debt declines, only to surge when the economy gets into

Sometimes inverted capital structures are inevitable, but liability
management consists, in my opinion, of identifying ways of eliminating
inversion when you can and embedding as much hedged liability structures
as you can, so as to make the overall economy less, not more, volatile.
In the case of China, stockpiling commodities is exactly the wrong thing
to do – but of course it is hard to convince anyone that this is the
case when we are in the “good” part of the volatility cycle.

{end of Pettis article}

(11) Dambisa Moyo: China unleashing a war for resources


Dambisa Moyo: 'The world will be drawn into a war for resources'

The controversial writer and economist on why she believes the economic
rise of China, combined with the west's complacency, leaves us facing a
future of terrifying global instability

Decca Aitkenhead

The Guardian, Sun 24 Jun 2012 20.00 BST

Massive geopolitical shifts seldom announce themselves with a bang. They
tend instead to creep up slowly, until it's hard to be sure exactly when
they began. I remember going to buy some steel about six years ago, and
being staggered by the price. "Ah," the man in the hardware store
explained, "it's the Chinese, you see. They're buying up so much steel,
the price has gone through the roof." The last time I visited my
brother, all the lead had been stripped from his garden shed – the
second theft in two months – thanks to rocketing lead prices. And it
must have been around the time of the Iraq war that I recall first
hearing someone say the next big war would be fought over water. At the
time the prediction had sounded far-fetched; these days, it's a commonplace.

These sort of random, disconnected events look neither random nor
disconnected once you read Dambisa Moyo's account of what's happening to
the world's commodities. In 1950 the world's population stood at 2.5
billion; by last year it had reached 7 billion, and is projected to hit
10 billion by 2050. With almost all the population growth occurring in
the emerging economies, by 2030 some 2 billion people will have joined
the global middle classes. "Put another way," Moyo writes, "in less than
20 years we will witness the creation of a middle class of roughly the
same size as the current total population of Africa, North America and
Europe." Naturally, they will want mobile phones, fridges, cars and
washing machines; 2,000 new cars already join Beijing's streets every
day. In 2010 China had 40 cities with populations of more than a
million; by 2020 it plans to have added another 225. The implications
for the world's commodity resources are stark and sobering: global
demand for food and water is expected to increase by 50% and 30%
respectively by 2030, the pressure on copper, lead, zinc and corn is
already becoming unsustainable, and no one has a clue where the energy
we'll need is going to come from.

If Moyo's calculations are correct, we are in big trouble – which makes
the central premise of her book, Winner Takes All, all the more
arresting. Governments across the world, she writes, have singularly
failed to grasp what's coming – with one sensational exception. "Simply
put, the Chinese are on a global shopping spree." State-sponsored
Chinese corporations are busy buying up commodities across Africa, North
America, the Middle East, South America – anywhere they can – in a
concerted strategy to seize control of resources before the rest of the
world wakes up to the looming crisis. They're striking deals with what
she calls the "axis of the unloved" – developing countries rich in
commodities but poor in political and economic capital – in return for
much needed investment, employment and infrastructure. Extravagant
shoppers, the Chinese are happy to pay over the odds, treating their
trading partners not as poverty-ridden charity cases nor political
pariahs but valued commercial equals. But when the resources begin to
run dry, the consequences will be catastrophic. Already, since 1990 at
least 18 violent conflicts worldwide have been triggered by competition
for resources. If nothing is done now, warns Moyo, commodity wars on a
terrifying scale are all but inevitable.

To western eyes, Winner Take All makes for scary reading. Viewed through
Chinese eyes, on the other hand, it's an altogether different story. For
all its premonitions of armageddon, the book's tone feels more
congratulatory than cautionary – reflecting the particular perspective
of its author.

Moyo stepped off a transatlantic flight only hours before we meet, but
arrives looking like a supermodel, shrugging off jet lag with the
indifference of someone who, when asked where she lives, replies: "Oh,
on a plane." Born in Zambia in 1969, she spent her first eight years in
the US before returning with her parents, both economists, to the
capital, Lusaka. At 19 she left again for good, acquiring a masters from
Harvard and a doctorate from Oxford, and working for the World Bank and
Goldman Sachs, before publishing her first book, Dead Aid, in 2009.

A turbocharged attack on aid, it caused quite a sensation – here was an
African denouncing western aid as patronising and counterproductive –
earning Moyo the nickname "the anti-Bono" and securing her reputation as
a box-office star of the global high-finance circuit. Her second book,
How The West Was Lost, was a devastating obituary of America's
supremacy, the cause of death diagnosed as a fatal overdose of greed and
laziness. With blue-chip western academic credentials, yet a distinctly
non-western way of looking at the world, she was named one of the
world's 100 most influential people by Time magazine. Yet her latest
work, she says, was inspired by her own ignorance.

"I'm pretty savvy; I kind of understand what's going on in the world. So
I was quite surprised to learn how little I knew about commodity
scarcity. I was very shocked by my own ignorance. It just seemed to me
surprising that the only country that seemed to be doing something in a
very systematic and deliberate way was China."

Winner Take All is presented as a warning to the west – it's subtitled
China's Race For Resources, and What It Means For Us – but the book
reads more like a hymn of praise to China. When I ask if she regards its
story as scary or thrilling, she doesn't hesitate. "Oh, I think it's
fantastic. I think it's fundamentally fantastic – and also in the
literal sense of the word. You know, it's fantastic – it's a good thing
– but also 'fantastic' as in something really tremendous. They bought a
mountain in Peru – half the height of Mount Everest – they bought the
mineral rights. I flew in from Canada this morning, where they've done a
laptops-for-pork deal. They're importing beef from Brazil, and in return
they'll build roads and railways. It's just an amazing display of
discipline, and a systematic approach – it's unparalleled. I don't know
any other country that does it in this way."

If anything, the chief inspiration for Winner Take All seems to have
been Moyo's irritation with western attitudes to Chinese growth. "There
is this obsession with China being a culprit," she agrees. "Even now,
people will still say: 'Oh, the reason why the United States' economy is
not doing well is because the Chinese are manipulating the exchange
rate,' or, 'The Chinese have human-rights issues,' and, 'The Chinese
don't do democracy, and the Chinese cheat.' You know, it's always about
the Chinese, and no one actually takes a step back and thinks: 'Gosh,
actually, it's our fault that productivity is declining. It's got
nothing to do with the Chinese.'"

The hypocrisy of western criticism is, she says, quite breathtaking. We
accuse the Chinese government of meddling in free-market capitalism,
clean forgetting that US farm subsidy programmes and Europe's Common
Agricultural Policy have condemned Africa's farmers to poverty. The US
is perfectly happy to take China's money – more than $1tn worth of
government bonds – yet expects the emerging markets to say: "No, we
don't want Chinese money because there's an issue of human rights." We
complain that the Chinese are paying too much for commodities, instead
of wondering whether China might in fact have grasped their true value.
And we have the nerve, she marvels, to accuse China of neocolonialism,
failing to understand that "the rest of the world actually thinks what
China is doing is pretty damn clever". It was the west which got rich by
invading and plundering the rest of the world, whereas China is engaging
with it on respectful, peaceful, generous terms.

"What the Chinese are trying to do – move a billion people out of
poverty – is just an unheard-of thing in history. The fact that they
have moved 300 million in 30 years is unheard of. It took Britain 156
years to double its per capita income. It took America 57 years, Germany
65 years. It's taken the Chinese 12-and-a-half years."

Moyo stresses more than once: "I'm an economist, not a political
scientist," and her writing is full of the maddeningly opaque jargon of
commodity trading. Yet the book's fundamental message seems to be as
much about the contrasting politics of Washington and Beijing as
commodity prices. She is always described as a passionate free-market
capitalist, so I ask how that fits with her admiration of China.

"I have to tell you, this is my favourite thing about being raised in
Africa; we don't do labels very well, we don't do this, 'Oh, you're a
Democrat; oh, you're a Republican.' Because we live in the real world.
There's not a single country that actually approaches economics in a
pure, free market, capitalist way. I like the free market – but it very
much exists only in textbooks. If I had a choice, and we could live in a
very pure world, I would be a supporter of the free markets. But because
we don't live in that world, I do really admire what the Chinese have
done. Having the good fortune of being born in Africa – I absolutely
love the fact that I was raised and born in Africa – I love people who
deliver results."

Moyo's critics say her predictions of a commodity crisis are alarmist,
failing to account for future technological solutions to shortages.
People have been worrying about unsustainable population growth ever
since Thomas Malthus in 1798, goes this critique, and yet the world
always somehow manages to muddle through.

"Right, but the people who are saying: 'We'll muddle through,' are
people sitting in the west who get clean water when they turn the tap
on. If you're in India, and the Brahmaputra river is being rerouted by
the Chinese, you're not muddling through; lives are being lost. Wars are
being fought right now. 'Oh, we'll muddle through,' is a very western
view, because you're not killing each other yet, and oil prices haven't
risen to $1,000 a barrel. If you live in a poor country, where you have
to walk miles for water, or you have to fight for water or resources, it
is already happening." She invests her money in technology and
innovation, she adds. "And my sense is that we're not close to any big
discovery in any of the categories – land, water, energy and minerals –
that has made me not nervous about the coming headwinds."

Other critics dismiss her predictions of scarcity as miscalculations
based upon a flawed assumption that China and other emerging markets
will continue to grow at their recent prodigious rate – when in fact,
their economies are starting to slow, and have probably already peaked.
"People do not understand," she says, with a hint of weary incredulity,
"that the Chinese government will and can do pretty much anything to
make sure they don't have a recession. They're not going to sit there
and do nothing while an economy slows down to 5% growth a year. They
will have a political problem; they will have Tiananmen Square, they
will have people on the streets. So what do they do? They'll turn the
taps on." The notion that African aspirations could now be switched off
strikes Moyo as equally laughable. "I go to Africa all the time. You
talk to a young person and tell them they can't have Facebook?
Seriously? You try telling them that."

It's not hard to see why Moyo is such a hit as a public intellectual.
But when we come to the logical conclusion of her thesis, her position
seems to become somewhat illogical. She calls for the creation of a
global body focused exclusively on commodity issues – but when I ask
what it would look like, her only clear stipulation is a central role
within it for China. If China is winning the commodity race, its
interest in any such body strikes me as doubtful, but Moyo thinks
self-interest will ensure their support for a strategy to prevent
resource depletion and consequent conflict. "I think the world will be
drawn into a war for resources," she says firmly. "I think we'll see
more wars."

Yet if all her predictions are correct, at that point surely the Chinese
will flex their considerable military might in order to protect the
worldwide interests they've paid for. It would be perverse of them not
to, wouldn't it? Moyo flatly refuses to see it.

"They have been very deliberate in their speeches that this is about the
peaceful rise of China. And by the way, what kind of campaign would they
launch? They would go to all those countries and be fighting in all
those different countries at the same time? I don't know how they would
be able to do it. I can't play that scenario out." Perhaps my scepticism
is simply evidence of the sort of suspicious western mindset Moyo
scorns, but I wonder if her determination to champion China might not be
in danger of tipping over into blind faith.

Moyo is clearly well aware that her critics dismiss her as more of a
showy controversialist than a sober-minded thinker. When I ask about the
factual errors that have been seized upon in all three books – in Winner
Take All, for example, she says Opec stands for Oil Producing Exporting
Countries – she bristles defensively. "Well, I wish I had been more
perfect. But my book hit the New York Times bestseller list last week,
and people seem interested in what I have to say." She considers it
"rather cheap" to indict a book because of a few inaccuracies, and
suspects critics make so much of her mistakes because they cannot
forgive the heresy of Dead Aid. "They think I'm speaking out of my
place." As for "the anti-Bono" nickname, "I absolutely despise it. When
people make those type of cheap headlines, it takes away from
fundamental points."

There certainly seems to be more than a hint of subtle prejudice in some
of the comments she has attracted – both positive and negative. Nigel
Lawson called her "confused" and "muddled" in a BBC radio debate, while
his son Dominic has praised her as "a very serious lady indeed", and I
can't imagine him describing a white male equivalent as a "very serious
gentleman indeed".

She has homes in New York and London, but is anxious to point out: "That
sounds all very glamorous, but it's just where I throw my stuff," and
insists: "My core, core, core: I'm an African." I ask to what extent she
suspects her work is viewed through the prism of her identity as an
African woman. "Woman? Zero. African? 100." Given her own emphasis on
the influence of African origins on her work, I can't work out if she
considers this unfair or not.

"I think," she reflects with an elegant shrug, "I'm kind of a hard bird
to figure out."

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