Wednesday, July 24, 2013

Executing China's String of Pearls Strategy

Back in 2009, Chris Devonshire-Ellis wrote:
China’s “string of pearls” strategy appears to be taking another step forward as Beijing increases ties with the Sri Lankan government. The strategy, which was the subject of a 2005 U.S. China Commission report to Congress, is driven by China’s need to secure foreign oil and trade routes critical to its development. This has meant establishing an increased level of influence along sea routes through investment, port development and diplomacy.

To date, China’s investments extend from Hainan Island in the South China Sea, through the littorals of the Straits of Malacca, including port developments in Chittagong in Bangladesh; Sittwe, Coco, Hianggyi, Khaukphyu, Mergui and Zadetkyi Kyun in Myanmar; Laem Chabang in Thailand; and Sihanoukville in Cambodia. They extend across the Indian Ocean, Sri Lanka, the Maldives, Pakistan’s Gwadar Port, and in islands within the Arabian Sea and into the Persian Gulf.

Not surprisingly, both the U.S. and Indian governments are concerned, part of these developments include the upgrading of airstrips, many supported with military facilities, such as the facility on Woody Island, close to Vietnam. These developments mean that the balance of power within the Indian and Arabian Gulf has now shifted away from the traditional Indian government management, backed up with U.S. military strength, but to China, backed up with regional diplomatic ties that dispense with the need to engage with either power. (Devonshire-Ellis, 2009)

China's "String of Pearls" Strategy

Fast forward to 2013 (H/T ) :
Sri Lanka has finalized a $1.43 billion deal with China Communications Construction Co Ltd (601800.SS) to build a city on a 230 hectare site that will be reclaimed from the sea, the head of the state-run Ports Authority said on Wednesday.

The site is next to the island nation's main Colombo port and Colombo's historic Galle Face Green seafront. It is also close to where Shangri-La Hotels Lanka Ltd, a subsidiary of Hong Kong-listed Shangri-La Asia Ltd (0069.HK), is building a 500-room hotel.

"The Chinese firm will invest in reclaiming the land and infrastructure of the port city," Priyath Wickrama, chairman of Sri Lanka Ports Authority, told reporters. "It will be given around 50 hectare of reclaimed land on a 99-year lease for its investment."

The 39-month long construction project will start in September, Wickrama said, adding the city would include eco-parks, residential areas, offices and shopping malls.

Since the end of a nearly three-decade war in May 2009, the Indian Ocean island nation has been spending heavily on infrastructure, including ports to attract foreign investments to its $59 billion economy.

It has already created new land near the proposed port city as part of its expansion of the Colombo port to double its capacity by 2015.
India is too large a country to be encircled” said M.K. Narayanan, the incumbent West Bengal governor, in 2010 (Suryanarayana, 2010).
The opposite appears to be the case thus highlighting what international relations analysts have surmised for some time: India punches beneath its weight geopolitically. 
In retrospect, going as far back as 1992, we can see George K. Tanham's report, "Indian Strategic Thought: An Interpretive Essay" to reflect the shortcomings of the Indian system.

So is Asia headed towards Chinese hegemony? Extrapolating is dangerous; China's rise appears secure but not as simple as it sounds. Shinz┼Ź Abe's landslide victory provided him with the mandate he truly craves. No, it isn't about implementing Abenomics and its three arrows for economics has never been Abe's passion, it is about restoring Japan to its glory as a muscular and militarized nation.

Devonshire-Ellis, C. (2009, March 18). China’s string of pearls strategy. China Briefing, Retrieved from’s-string-of-pearls-strategy.html   Aneez, S., Sirlal, R., and Holmes, D.(ed.) (2013, July 24). Sri lanka teams up with chinese firm for $1.4 billion port city. Retrieved from  
Suryanarayana, P. S. (2010, September 26). ‘india should not punch below its weight'. The Hindu. Retrieved from
Tanham, G. K. (1992). Indian strategic thought: An interpretive essay. In Santa Monica, CA: RAND. Retrieved from

Monday, July 22, 2013

Bill Gross: One Big Idea – policy rates cannot normalize

Policy rates cannot normalize
10 months ago (September 2012):

We are in the age of inflation
See The Lending Lindy

Using a different framework, your humble blogger argued for No "rate normalization": a case for a secular trend of low rates in Canada in 2011.

The current policy of financial repression is too convenient for central banks to give up and expedient enough for national governments to embrace. As the idea of nominal GDP targeting gains traction amongst central banks, perhaps first with the Carney led Bank of England, as the the next great policy initiative, there will learn that creating inflation is less about managing "inflation expectations" and more about understanding the dynamics of income distribution and rises in real wages in a globalized world where off shoring and technology makes heretofore regular work uncompetitive. A world where advocacy for balanced budgets for every nation as preferred policy flies in reality's face where imbalances remain and there is no reconstruction of the monetary and financial systems on the horizon. Those managing bank balance sheets in the west worry relentlessly about interest rate risk. This is only sensible. But they should be just as concerned about long term spread compression as dynamics conspire against policy rate normalization.

Friday, July 19, 2013

Quantitative Easing: Monetary Policy as Reflation with the Confidence Fairy

Here is a video: "John Kay on the Mystery of QE" from

In the modern financial economy, the main effect of QE is to boost asset prices, as market gyrations of recent weeks have clearly illustrated. But is the pursuit of higher asset prices an effective or desirable means of promoting economic growth? The distributional impact of the policy demands attention; the one certain consequence of boosting asset prices is that those with assets benefit relative to those without. Many people own houses – but, although in the UK, for example, we need more houses, we do not need another housing boom. The public also holds financial assets indirectly, largely through pension funds. But here there has been a paradoxical effect: because of the way pension funds are valued, QE has generally increased pension funds’ liabilities more than their assets.
For the full commentary you can go to John Kay's website (click here)

The last sentence was a massive understatement from John Kay. See charts below for Canada and more so the United States which has embraced zero interest rate policy along with the Federal Reserve's own brand of quantitative easing. Growth in liabilities continues to outpace growth in assets leading to more DB (defined benefit) plans being underfunded. At the extreme, it may be the death knell for many if plan sponsors continue to cling to the belief that asset returns will mean revert to those seen during the bull market of the 1980s and 1990s along with a corresponding pop in nominal interest rates. As yours truly has asked many an investment consultant and actuary: "what about the Japan scenario? what then?"

Canadian Pension Funding: Cumulative Returns - Assets vs. Liabilities (2006 - 2013 YTD)
Source for Canadian Data: BlackRock

U.S. Pension Funding: Cumulative Returns - Assets vs. Liabilities (2000 - 2013 YTD)
Source for U.S. Data: Ryan ALM

U.S. Pension Funding: 12 Month Rolling Returns: Assets vs. Liabilities (2000 - 2013 YTD)
Kay concludes:
Why has so much attention been given to these monetary policies with no clear explanation of how they might be expected to work and little evidence of effectiveness? The very phrase “quantitative easing” seems designed to discourage non-technical discussion. But the real answer, I fear, is all too familiar: these policies may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.

By now it should be clear that the incarnations of QE as executed by the FED, BOE, and ECB have not been as helpful as originally advertised. There is the old yarn spun by economists about lags in policy being long and variable: this has never been more true than in the case of QE where the lag has been longer than expected with the consequence of asset reflation rather than capital investment to grow the productive capacity of an economy.

The line of thinking from establishment circles places great emphasis on managing expectations and decreasing policy uncertainty. This is a canard. All actors in an economy live by heuristics, sometimes less rationally than others, but always with an implicit understanding that --with a bit of luck and a lot of hard work-- there should be a light at the end of the tunnel. It is this hope that drives capitalism and running the rat race on a knife edge that keeps people going; the finely worded proclamations of Chairman Bernanke, Governor Carney, President Draghi which are so closely watched, read and parsed by financial market actors are completely lost on the common person trying to make ends meet.

If QE is to work as a useful policy tool that ideally it should have the explicit goal of expanding credit creation in the productive economy --not providing more mortgage financing for real estate speculation. The banking sector plays a massive role in this regard and whether concepts of narrower banking and more localized banking are realistic or not will be the decision of national policy makers and regulators. One thing is unequivocal: a return to the 4 C's of credit --character, capacity, capital, collateral-- with a nod to the fifth C (conditions) is necessary to fund the business sector in general and SMEs in particular. This entails a less profitable banking sector but, perversely, a more productive, more dynamic and healthier economy than we have now.

Kay, J. Financial Times, "Quantitative easing and the curious case of the leaky bucket." Last modified July 10, 2013. Accessed July 19, 2013.

Thursday, July 4, 2013

Matheus Grasselli in conversation with Marshall Auerback: How Advanced Mathematics Can Support New Economic Thinking

This video is about 16 minutes long and features mathematician Matheus Graselli in conversation with Marshall Auerback. Currently the DSGE paradigm is considered state of the state of the art in terms of forecasting tools for central banks. The IS-LM model of Sir John Hicks remains a pedagogical tool for intermediate macroeconomics while the heterodox models of Hyman Minsky and Wynne Godley are beginning to gain traction amongst quantitatively inclined forecasters interested in non orthodox (i.e. not 'neoclassical') approaches. Other fields -- engineering comes to mind immediately -- tend to see systems as not being inherently stable and consider robustness as a critical component to systems design. The economy, by contrast, while immeasurably more complex than say a process in a chemical plant, is assumed to mean reverts and go back towards an ostensibly stable equilibrium path. The recovery, or lack of it, post 2008 illustrates the vacuity of this approach. The Fields Institute in Toronto, along with George Soros' Institute for New Economic Thinking ("INET") is looking to  remedy this approach and it is critical that they succeed. Go here to see details on Mathematics for New Economic Thinking - An INET workshop to be held October 31 - November 2, 2013.


This will be a 3-day workshop with each day comprising of 5 to 6 invited talks followed by round table discussions on an emerging area in new economic thinking.
Topics include: financial instability, default contagion in the banking system, the role of shadow banking, macro-prudential regulation, credit and leverage cycles, liquidity, fiscal sustainability, debt and deficits, monetary policy implementation, central banks as lenders of last resort, sovereign default contagion, stock-flow consistent models, dynamical systems models in macroeconomics, agent-based economics, gauge theory and preferences, the consequences of the SMD theorems, money in modern economies, radical uncertainty, long-term growth and sustainability