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The following post was published in The Opportune Time for its October 8 issue by Bloggerlytica contributor Ian Chan. We apologize for the lack of publishing due to unforeseen schedule changes.

While the unemployment rate dipped below 8%, the number of jobs created is still insufficient to put those who want work back to work. Photo Courtesy of US Daily Review

The unemployment rate in the United States (U.S.) fell to 7.8% in September, the lowest since January 2009. The economy added 114,000 jobs last month and revised up job gains in July and August. While forecasters expected the number of jobs created, the drop in the unemployment rate came as a surprise. Many expect the drop in the unemployment rate, though mainly symbolic in nature, will provide a boost to President Barack Obama’s re-election campaign.

From a rate of 8.1% in August, the lower rate in September may point to an improving economy as better job prospects and cheap consumer credit boost spending amid a global slowdown. However, many economists believe that the U.S. economy needs to create 150,000 jobs every month to keep up with population growth and bring down unemployment, meaning that the modest number of jobs created in September may not prove to be enough to keep the unemployment rate sustainably low.

As we discussed a few weeks ago (link to fiscal cliff article?), the looming specter of the “fiscal cliff” in the U.S. had prompted many analysts to predict that businesses would lay off more workers to hedge against policy uncertainty. The “fiscal cliff” refers to the $600 billion in automatic spending cuts if Congress fails to act on a number of policy expirations and sequestrations. However, the report on jobless claims offered little sign that companies were laying off workers on a wide scale.

Initial jobless claims climbed 4,000 last week to a seasonally adjusted 367,000, but that followed a drop of 22,000 and a 4-week average held steady at 375,000. The 4-week average offers a better glimpse of the trend in claims than the 1-week data. If employers were hedging against the fiscal cliff they would have laid off more workers until after the election or even until Congress acts in the lame-duck session. However, there seems to be no wide trend to act as such yet. While planned layoffs at U.S. firms rose 4.9% in September, they came in at a 15-year low for the month, according to Challenger, Gray & Christmas.

More encouragingly, in a report by the Labor Department, unemployment rates were lower in August than a year earlier in 325 of the 372 metropolitan areas, higher in 40 areas, and unchanged in 7 areas. Over the year, in 36 out of 37 metropolitan areas with annual average employment levels above 750,000 in 2011, non-farm employment rose.

While the employment numbers were encouraging, the Commerce Department showed new orders for manufactured goods tumbled 5.2 percent – the biggest drop since January 2009 when the economy was in the grip of a recession. Nevertheless, the decline was due to a collapse in demand for aircraft, as orders excluding transportation rose 0.7 percent. ISM national factory activity index released on Monday showed that manufacturing activity expanded in September for the first time in four months. In other words, manufacturing numbers paint a mixed picture of the U.S. economy.

Even though the automobile industry bailout by the Obama administration has been under intense scrutiny and debate for months, the industry appears to be rebounding, according to the latest data from Autodata. Overall industry sales increased 14.5% in the first 9 months of 2012, compared with the same period a year ago. A total of 1.19 automobiles were sold in the U.S. in September, a 13% increase from 2011. This brings the monthly sales rate to just fewer than 15 million vehicles on an annualized basis, and represents the highest seasonally adjusted rate since February 2008. Many believe that continued low interest rates and quantitative easing measures by the Federal Reserve have fueled consumer expenditure as cheap credit flows to households.

In addition to the automobile industry, the housing market seems to have turned a corner as well, with August home prices posting a 4.6% increase from a year earlier nationwide. The gains in August show the biggest year-on-year increase since June 2006 and represent the 6th consecutive month of prices have risen nationwide. Metropolitan areas that were hard hit by foreclosures and the financial crisis have been leading the way, with home prices in Phoenix, Arizona rising by 21.8% in August from a year earlier.

The automobile industry turns a corner. Photo Courtesy of Forbes

With one month to go till the U.S. Presidential Election, a string of economic data points to an economic recovery that, though still weak, is sustainable and on its way, bolstering President Obama’s claim that his policies have saved the U.S. economy from depression and needs more time to bear fruit. While the drop in the unemployment rate is not generally indicative of the overall strength of the labor market, the symbolism behind the rate decreasing to the lowest level since Obama took office will surely be used Democrats to strengthen their case as Election Day approaches. There will be one last jobs report on November 2, just four days before the election, which in the end may determine this election.

A Hawk’s Eye

© Fred Hazelhoff/ Foto Natura/Minden Pictures/Corbis 2004

Northern Goshawk
© Fred Hazelhoff/ Foto Natura/Minden Pictures/Corbis 2004

With Paul Ryan accepting the nomination to be the Republican Party’s Vice-Presidential candidate, Romney-Ryan has shifted into the centre stage of this past week’s election action. On domestic issues, Paul Ryan brings to the table substantial opinion and experience. The recent nominee is known particularly for his work as the Chair of budget committee and for his hotly debated budget proposal. On foreign policy, however, the young congressman seems to have less experience and insight than Romney might have needed. In mid-August, Slate actually suggested that “by choosing Paul Ryan as his running mate, Mitt Romney has sent out many messages, one of which is that foreign policy will not be a prominent element in his campaign.” Up until now, the former Mass. Governor’s foreign policy revolves around an anachronistically hawkish outlook with a series of unwarranted threats. Much of what the former governor has said regarding foreign policy has been complaints of inaction and weakness over the last four years and calls for a greater dose of neoconservatism.

For example, on Russia, the Presidential hopeful intends on playing hardball with Mr. Putin. Romney has frequently criticized Obama’s approach towards Russia as soft and labeled the Eurasian giant America’s greatest geopolitical foe in a CNN interview last March. His remarks while on his overseas trip to Poland in July further highlighted his intentions to stand by allies and go head to head against Russia.

Likewise, on the Middle East, Romney has heavily criticized President Obama’s policy towards the Middle East for being unclear and muddled in the wake of the Arab Spring. He considered Obama’s decision to wait on UN and NATO approval before intervening in Libya in March 2011 to be weak and delayed, and has thus promised a more proactive stance in the region. In particular he has pledged greater financial and diplomatic support for transitional bodies to promote democracy and state-building. Consider the US edges closer towards to fiscal cliff each day, it is a real wonder how the former governor will finance and justify these projects abroad. Moreover, given the unpopularity of the Bush administration’s state-building rhetoric and actions, it is doubtful that Romney wants to return to that era.

Similarly, Romney has been just as critical of Obama’s approach on China, calling the President weak for not having been more forceful in addressing issues of human rights, maritime defence and unlawful trade practices. While Romney claims to promote a US policy that will encourage further cooperation and economy opportunities between the two states, he also promised to directly counter China’s unfair practices in trade, intellectual property rights and currency valuation. I am personally intrigued to see how Romney will manage to improve relations and further business opportunities with China by labeling Beijing a currency manipulate on his first day in office.

Moreover, Romney has expressed multiple times that he does not believe there should be any cuts to defence, and even pledged at multiple times during his campaigning to increase defence spending. If he is also to deliver on his proposed tax cuts and also cut the deficit, the remaining pot of money in the federal budget will have to dwindle to almost nothing for other departments such as education, health, and housing. In the current fiscal environment, Romney is either having major problems with his math or being irresponsible with his rhetoric.

Despite the rapid rise of the emerging economies, US remains to be the leading economic and geopolitical leader of the world. With dwindling a fiscal budget, however, Mr. Romney ought to be wary that the US no longer holds the same superpower advantage it did 20 years ago. Perhaps the Presidential hopeful simply holds a naive view of the status of his nation, or perhaps all his talk on funding overseas democratic crusades and defying any and all competing states is simply irresponsible rhetoric made to mislead and woo constituents. The world should hope Romney does not act on his aggressive notions of foreign policy, if he is ever to step in the Oval office. Given his record of changing positions frequently, the world may yet see a realist President in office even if he is elected.

Egyptian President Mohammad Morsi made China his first overseas destination as President, in a trip that will also bring him to Iran. (Photo Courtesy of AlJazeera)

Fresh off his power struggle with the generals, Egyptian President Mohammad Morsi has embarked on his first overseas trip since the Egyptian people elected him to be their first democratically elected leader. Morsi’s three-day visit to China was aimed primarily to improve economic ties, and the destinations, his reception, and his speeches before the trip have underlined a shift in the foreign policy of the most populous country in the Middle East.

The United States have been strong supporters of Egypt’s regime since the post-Nasser days with former Presidents Anwar Sadat and Hosni Mubarak enjoying millions of aid each year from the U.S. government, with the sum mainly going to the military. President Jimmy Carter’s historic Camp David meeting bringing together Israel and Egypt formed the cornerstone of U.S. Middle East policy and Egypt’s security policy for decades, and the peace has been safeguarded by the Egyptian military.

After Mubarak’s fall last year, the Supreme Council of the Armed Forces (SCAF) took over responsibilities in keeping order and establishing democracy. However, although the military was originally popular with the people as it had stood with the protesters against Mubarak, its slow and often obstructive approach to bringing democracy to Egypt soon disillusioned the impatient protesters. However, the People’s Assembly was duly elected in the last two months of 2011 and legislative authority passed from the SCAF to the Assembly, with the Presidential Election scheduled for mid-June.

However, in the run-up to the Presidential Election, the generals took back legislative authority, ordered the Assembly dissolved, and severely limited the incoming President’s powers. The world watched as the hopes of a democratic revolution in Egypt seemed to slowly melt away, and a candidate representing the Muslim Brotherhood’s political wing, Mohammad Morsi, seemed poised to win the Presidency.

A little over a month since the election results came in and Morsi was declared the winner,  a surprising change of events has occurred. Morsi has ordered the Assembly to reconvene to finish drafting the constitution, and the Defense Minister Field Marshal Mohammad Tantawi, who was also the Chairman of the SCAF, was dismissed. Many believed that Morsi’s bold move in convening the Assembly, and then dismissing the generals, would have started a new round of power struggle between the civilian and military governments. However, with  a couple weeks passed and no significant action from the generals, who have been preoccupied with skirmishes in the Sinai Peninsula, and Morsi’s strong trip to China, it seems that a full transfer of power to civilian control has occurred.

The West has been put in an awkward position since the toppling of Mubarak as it has always been a supporter of the military regime. Many were concerned that the toppling of Mubarak, or the transition to an Islamist President may cause the peace with Israel to flail, but so far these fears have not been realized. The U.S. has in particular been slow to warm to Morsi, as he represents the Islamist Muslim Brotherhood, but so far Morsi has not embarked on any radical social policies, and has instead focused his efforts on solidifying civilian control and reviving the battered economy.

These efforts should be applauded, and celebrated as a successful result of the rocky Arab Spring. Egypt has always served as an important bellwether of the Middle East and remains an influential player. And while reestablishing civilian control is a relieving result, Morsi’s foreign policy is yet to be determined, but his speeches and current trip seem to be pointing somewhere that the U.S. would be wary about.

For example, Morsi made his first trip as President to China. China has been increasingly active in Africa and the Middle East in recent years, taking advantage of the massive amounts of natural resources available and pouring in investment and technology in return. China has also been instrumental, along with Russia, to halt any involvement by the United Nations Security Council in the crisis in Syria. Morsi has declared that the Assad regime needs to go and condemned his approaches, but has made no mention of this in his trip.

In a speech given before the overseas trip, Morsi emphasized the need for Egypt to not be aligned with any side and to have a balanced foreign policy, an echo of Nasser’s sentiments during the early years of the Cold War. And while Egypt became an American ally in the region following Nasser’s demise, with a civilian government now in place headed by Morsi, the U.S. no longer wields the same amount of influence. Knowing that the U.S. will be reluctant to support a Muslim Brotherhood-dominated government, Morsi has duly chosen to find new friends to help resuscitate the Egyptian economy that has been battered by over 18 months of protests and instability. While it is not right and premature to call this a new Cold War, as China’s economic and geopolitical clout grows and the U.S. continues to decline, nations such as Egypt will have to adapt to improve its status quo.

However, it will have to be Morsi’s last destination that would trouble the West the most–Iran. Morsi is scheduled to attend the summit of non-aligned nations held in Tehran, the first time a sitting Egyptian President had visited since the 1979 Revolution. Moreover, Egypt and Iran currently have no formal diplomatic ties, making the visit all the more notable. Morsi has said that he believes the solution to the Syrian crisis lies regionally, and has reached out to his neighbors and regional powers to find a common solution to the Assad problem. As Syria’s closest and more physical backer, Iran can have a huge role to play should it decide to let Assad go.

Along with newly elected Islamists in Tunisia and secularists in Libya, Morsi represents a new generation of Middle Eastern leaders who have emerged from the Arab Spring. They will find a dangerous world evolving with Israel mentioning preemptive strikes against Iran almost daily, Syrian refugees pouring out of the country in the thousands, and an increasingly assertive Turkey under Prime Minister Recep Erdogan. While the West will continue to try to influence the situation, with regimes elected by the people, and a declining U.S. military presence in the region, the Middle East, will continue to remain a spirited and volatile region of the world.

Disclaimer: Polling data and reports taken primarily in early August, new polls may have surfaced since then.

China’s man? A protester mocks Leung’s close ties with the mainland.

Leung Chun-ying (Leung) began his term as Hong Kong’s third Chief Executive on July 1, 2012, following an election campaign that was full of scandal, scam, and dispute. His election, or selection, as Chief Executive by the 1,200-member committee did not give him much legitimacy or popularity among the people and governance has proven difficult thus far.

Following his first audience with his predecessor, Donald Tsang Yam-kuen, where he spent 45 minutes, he was notably seen spending more than 90 minutes in the Central Government Liaison Office, the symbol of China’s influence and power in Hong Kong. The Liaison Office, which is based in Sai Wan, which is not the traditional places of government in Hong Kong, has led many to say that Hong Kong is now “Ruled by Sai Wan”, protesting the meddling and interference of China in Hong Kong’s promised and supposed autonomy. Leung proceeded to try to reassure the people of Hong Kong by adopting populist measures such as banning Chinese women from giving birth in Hong Kong and restarting public housing projects. However, he never experienced a honeymoon period after the election nor at the start of his term as his predecessors, partly due to his controversial selection and policy mishaps.

China’s President, Hu Jintao, presided over the inauguration of Leung on July 1st, emphasizing stability and harmony in his remarks, and imploring Leung to rule and govern well. For the first time since the handover in 1997, Hu was greeted by a military parade of the People’s Liberation Army, which maintains a usually discreet garrison in Hong Kong. The parade fanned fears that China’s rule was tightening and Leung’s full embrace of Beijing will endanger the civil liberties of Hong Kong’s citizens. More damningly, Leung delivered his inaugural address entirely in Mandarin, the official language of Beijing that is not spoken by the majority of Hong Kong’s Cantonese-speaking residents, reinforcing the image that Leung will be a strongman for Beijing in Hong Kong. 400,000 people showed up for the annual July 1st demonstration to mark Leung’s inauguration, the highest number since the infamous 2003 demonstration against then Chief Executive Tung Chee-hwa that forced Tung from power and tabled the controversial Article 23 legislation.

Before his inauguration, Leung had tried to get the Legislative Council (LegCo) to pass a political reform package that would have created two new deputy secretaries and two new bureaus. Although most of the package was not controversial, the proposal to create a Culture Bureau with the explicit directive to cultivate love for the motherland met strong resistance in the LegCo by pro-democratic parties and even some pro-establishment figures. LegCo is now out of session as it prepares for the elections in September; therefore the reform package will await the new legislature.

But much more alarming than the creation of the Culture bureau was Leung’s proposal to broadly introduce and implement a patriotic education curriculum (officially known as the Moral and National Education Curriculum Guide” in all public schools starting this fall. While the proposals to introduce such a curriculum started earlier in Tsang’s administration, it was Leung who made it a priority in his administration and pushed for its swift implementation. However, the curriculum has struck at the core of the identity of Hong Kong’s citizen and has led to an outcry against so-called “brainwashing”.

While earlier in the year only a handful of teachers and students activists demonstrated against the curriculum, on July 29th, 90,000 Hong Kong citizens, including many mothers pushing their babies in strollers and secondary school students, gathered in stifling heat to demonstrate against the curriculum. All the major newspapers ran commentaries criticizing the way the administration was handling the public outcry, and public opinion turned decisively against the implementation of the curriculum.

More anger surfaced after a booklet that specifically promoted “one-party rule” and criticized “foreign, multi-party systems” was allowed to distribute among schools unchecked by the Department of Education. Even the Secretary for Education was skeptical and mentioned that the material was inappropriate, but again, no action was taken against the booklet. Claims by the government that many other developed democracies have similar curriculums were rejected. For example, the administration seems to have failed to see the difference between civic education classes in France and citizenship classes for immigrants in the United States as equivalents of the proposed curriculum. Moreover, the press has been reporting that public schools have been organizing pilgrimage trips to Shaoshan, Hunan province, the birthplace of Mao Zedong, paid for by the taxpayer. These trips have troubled many parents and teachers, and reinforced the perception that Leung is trying to brainwash Hong Kong’s next generation.

After multiple publicly funded school organizations including the Catholic Church and many Protestant denominations came out to say that they will not teach the curriculum this fall, and amid continuous public outcry, the Leung administration has set up a committee that will offer advice regarding the implementation of the curriculum. This committee was supposed to draw upon diverse figures and stakeholders in Hong Kong’s society, but was boycotted by parents, teachers, and students, rendering it little more than a rubber-stamping group for the curriculum. Although the full implementation is not scheduled until 2015, many are now calling for the wholesale withdrawal of the curriculum.

Part of the reason there has been so much blowback for the curriculum is because it drives into the core identity of Hong Kong’s citizens. While economic interaction with the mainland has increased exponentially since 1997, Hong Kong’s citizens have always been keen to draw a distinction between Hong Kong’s civil society and China’s communist rule. China needs Hong Kong, as it has become China’s biggest source of foreign direct investment, increasing 600% from 1996 to 2012 to $204 billion annually. However, Hong Kong has also depended upon China for tourist spending, real estate investment, and trade. Despite this close interaction, a recent poll asking Hong Kong citizens whether or not they were “proud to be a Chinese citizen” dropped to 37%, the lowest since the turnover.

In addition to Leung’s perceived weakness in standing up to China and his insistence on following the will of Beijing, Leung’s administration and cabinet has been plagued with scandal. His cabinet was composed mainly of holdovers from the Tsang administration, with only six new faces as many of Leung’s first choices reportedly refused to serve. There was only one of the 3 secretaries and 12 bureau chiefs who was not a pro-establishment figure: Anthony Cheung Bing-keung (Cheung). Cheung serves in the new government as the Transportation and Housing Secretary, after previously serving as the Vice-Chair of the Democratic Party.

Another notable pick was David Sun, who was appointed as Director of Audit. Sun became the first non-civil servant to be appointed, in a post traditionally filled by apolitical appointees, as the office is responsible for auditing the government’s departments. Sun was a vocal supporter for the Leung candidacy and is a close ally of the Chief Executive. Moreover, the public were outraged to find out that the Chief Executive will be making $620,843 a year, thirty times the median wage in Hong Kong. Although the decision to raise the salary was probably not Leung’s, which was included in an overall review of civil servants’ salaries, the perception did not help Leung’s out-of-touch image.

However, the original buzz over Leung’s appointments was quickly taken over by the scandals that have plagued his appointees. First, Leung’s first appointee to be Development Secretary, Mak Chai-kwong, had to resign on July 12th over allegations that he abused civil service rent reimbursements while Mak was a civil servant. Only two weeks into his job, Mak became the shortest serving minister in Hong Kong’s history. Leung swiftly appointed real estate executive Chan Mo-po to the post, hoping to contain the damage by appointing someone that the public already expected to be in public office, as Chan had originally been tapped to be Deputy Finance Secretary, a post that has not been created as the governance reform package has not passed LegCo.

Unfortunately for Leung, Chan has proved to even worse pick for the job, as reports emerged that Chan acted as a “slum lord” while he was a real estate executive by renting out his apartments in an illegal fashion. In Hong Kong, residences are hard to come by as real estate prices are high and continuously grow higher. Part of the reason Leung was keen to announce his public housing projects was to keep home prices low. With the harsh conditions, many Hong Kong residents have traditionally turned to slum lords, who divide up single apartments into multiple outlets by the mere addition of a piece of cloth or bamboo board. These had been outlawed for years but continue to plague many of the poorer districts of Hong Kong.

It emerged that Chan and his wife owned multiple of such entities and for years and extracted huge profits from them. Chan even been quoted to boast about how good returns were as a landlord while he was in the private sector. Although Chan remained silence when reports first emerged, he later admitted to knowing about the apartments, but claimed they were legitimate apartments and has not resigned yet. The scandal is particularly damaging because the Development Secretary is tasked to root out these slums and Chan will now be the one in charge.

Hong Kong’s fourth election for the LegCo will be held on September 9th, with a record number of party lists and candidates running for the reformed legislature, now with 70 instead of 60 seats since the passage of the political reform package in 2011. 5 new geographical constituencies and 5 new “super-District Council” seats are up for grabs, and so is control of the legislature. Recent polling, less than one month before the actual elections, estimates that most of the new gains will go to the pro-establishment parties, with the pro-democracy parties struggling to hold onto one-third of the seats that will be necessary to veto major legislation.

On Hong Kong Island geographic constituency, the Civic Party, which finds its base of supporters among professionals and independents, has been losing support since the retirement of Audrey Eu, their appealing former party leader. Current legislator Tanya Chan, the young and charismatic barrister who is the second ranking candidate on the Civic Party list, is likely to lose her seat. Panic calls from the Civic Party have not been taken up by the other pro-democratic parties as many remarked that even if Chan pools in more votes, she may not receive enough to beat out the pro-establishment figures due to Hong Kong’s proportional representation system, and will instead steal votes from other pro-democracy candidates who otherwise may have triumphed.

Tanya Chan’s troubles are symbolic of the pro-democrats broader issues in this current campaign. Having lost the initial push in registration and disunited as always, the pro-democrats have been outgunned by the better organized and more united pro-establishment parties, who are also better at “persuading” their own members not to run against each other or start new parties. In contrast, there are many more single-issue and extreme political parties on the pro-democracy wing that draw votes away from the mainstream parties. The pro-democrats are now fighting to hold onto 24 seats, the crucial number in the new legislature that will allow them to block measures by the government that they oppose.

Year HK Island Kowloon East Kowloon West New Territories East New Territories West Total
2008 4:2 2:2 3:2 5:2 5:3 19:11
2012 3:4 2:3 3:2 5:4 5:4 18:17

The above table shows a breakdown of the geographical constituencies in the 2008 elections and the projected seats in the 2012 election. If current polling data holds, the pro-democrats will go from 19 seats to 18, and the pro-establishment parties will gain 6 seats from 11 to 17. Again, that would mean almost all of the 5 new directly elected seats will go to pro-establishment parties, with the super-District Council seats most likely ending with a 2-3 split. The pro-establishment parties are riding on a successful District Council election in 2011, due mainly to its ability to conduct extensive local work and outreach. However, many analysts believe that the 19 seats gained by the pro-democrats in 2008 was partially due to luck, and that 17 was a much more likely number given polling trends, meaning a gain of 18 this round should not be considered as a crippling blow.

In the functional constituencies, 14 will be elected automatically due to a lack of opposition, a drop from all previous elections. Pro-democrats hope to hang on to the four seats in the law, welfare, education, and health care sectors, and hope to pick up seats in the accounting and technology sectors. If the pro-democrats hold onto 18 geographical seats, 6 functional seats, and 2 super District Council seats, that will give them 26 seats, two above the crucial number of 24, but that scenario is the rosiest of scenarios.

However, with likely voters hitting an all time high and anti-Leung sentiment strengthening with the Chan incident and opposition to the patriotic education curriculum, the pro-democrats are hoping to tap into strong voter frustration and Hong Kong citizens’ crisis mode to bolster their ranks and reverse the trend from 2011.

In conclusion, Leung’s first five weeks have been turbulent with administrative scandal and political blunders. His perception as Beijing’s strongman has been reinforced by his actions and policy announcements, and his ability to govern effectively may be permanently weakened, only a few weeks into his administration. However, the legislative campaign is showing signs of favoring the pro-establishment figures, and if the pro-democrats lose the crucial 24 seats, Leung may not need a strong mandate to pass all the policies that he wants.

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Warnings about China’s economic collapse have been reported almost ever since the world’s second largest economy grew at breakneck pace for the last three decades. After the financial crisis in 2008, the government pumped billions of RMB, or Yuan, into the economy to prop up lending and economic activity, and the Chinese economy has barely slowed since the crisis. However, recent signs are now pointing to a consensus among economists and market watchers that China’s economic slowdown may finally have come, albeit slowly, softly, and in most senses carefully orchestrated by the central government.

 

As the Chinese Communist Party meets this fall to execute an opaque, unpredictable, and once-a-generation leadership transition, China’s departing leaders are anxious to leave a strong legacy behind and the incoming leaders want to hit the ground running. Unlike the economic brinksmanship that affects certain liberal democracies across the world, China’s one-party rule, obsession with stability and harmony, and reliance on economic success to justify legitimacy will keep policymakers and technocrats busy and anxious about China’s slowdown.

 

Across the political spectrum, China’s leaders now increasingly recognize that breakneck, double-digit growth in the coming decade is both impossible and undesirable. The export-driven, construction and investment heavy economic boom has come to an end as Chinese consumers become wealthier and the developed world slumps further. While the export lobby and other interest groups will push the central planners to maintain the status quo, China’s leaders generally acknowledge that changes are needed, the only question remains is how quickly they act and where they act first.

 

One of the primary area China has been keen to manage the slowdown is in the property market. China’s shallow and undeveloped financial system and banking sector had driven most of its savings and investment into property speculation and stock trading, with resulting volatile property prices and strong upward pressures on home values. While steady increases in property prices are generally good, the volatile and exponential rises have shut many middle class and young households out of the property market, and created not only an asset bubble but a chorus of discord, as home ownership is considered a social status much as it is in the United States.

 

Even as the government installs price controls in many cities and bans speculations in others altogether, property developers have been suffering, especially many small/medium and local developers. Reports of suicides and bankruptcies are rampant, especially in areas where construction was huge. Many of these developers and construction companies ran on tight shifts, rapid developments, and short-term loans. The government has even banned property developers from borrowing from trust funds, which used to be a critical part of their funding. Now with credit drying up, property developments stalling, and saturating demand, these developers and companies have few options but to shutter, leaving half-finished projects and thousands jobless. No doubt the central government would need to find a way to pacify these workers or face unrest. Already, conflicted signals are coming from the government, as there seems to be no consensus on how far to let prices drop or how hard to squeeze developers. The average price of housing in 100 major cities rose very slightly from June to July, the second straight month a meager increase has been recorded, showing a bottoming out, or just volatile prices. Further price hikes would damage the credibility of the government, as keeping prices steady, and even falling, has been a priority all the way from the top. An inability to control prices or influence market trends would weaken the CCP’s legitimacy as the economic steward the people need to depend on.

 

The housing problem continues to bother the central government. Even as property prices cool, many who desire housing have already been shut out of the market and are not able to move into proper housing. Migrant workers who have poured into the coastal cities in the last decade are finding it increasingly hard to buy affordable housing, with many forced to live in communal apartments, slums, and outskirts with little to no household maintenance. According to a research firm, GK Dragonomics Research, an estimated one third of China’s 225 million urban households are without kitchens and plumbing, a startling figure for a country with so much economic growth. No wonder government officials are reluctant to relax the restrictions and allow developers to resume construction. Even though many developers are now working through inventories and prices have stabilized, there is still little relief for those who live in horrid conditions and need affordable housing. In that regard, the government has so far been silent. In contrast, the semi-autonomous city of Hong Kong’s newly installed leader, CY Leung, has made rebuilding public housing one of his first priorities. It will be interesting to see whether or not China will follow suit, or if property prices will be allowed to rise in response to broad economic slowdown.

 

In other indicators in a country where accurate and complete economic data is hard to come by, China’s official Purchasing Managers Index (PMI) slipped to 50.1 in July from 50.2 in June. This is a third straight month of decline and is the lowest since November 2011. The HSBC PMI, which is not run by the government, showed an increase from 48.2 in June to 49.3 in July. A reading above 50 represents expansion, whereas a reading below 50 represents contraction, therefore while the official numbers show decline, they still point to expansion, whereas the HSBC reading shows continued contraction. The PMI measures the health of the manufacturing sector, and therefore a barely expanding, or even contracting manufacturing shows acute weakness in the Chinese economy that has been rare in the last two decades. Sustained weakening may point to expansionary monetary policy in the third quarter though, which should boost China’s economic performance and reboot its economy in time for the party conference.

 

Moreover, consumer and producer prices seemed to have dropped in the second quarter, meaning that the specter of deflation is on the horizon. In a tour of interior China, Premier Wen Jiabao, China’s top economic official, warned of “downward pressure” and hinted at many policies to mitigate the downturn. Interest rate cuts in June will most likely be replicated in the third quarter, and the government has freed banks to lend a larger share of deposits, subsidized energy-saving home appliances, and approved more investment projects. The government will likely do more as the data on retail sales, investment, and electricity consumption all showed signs of weakness.

 

In conclusion, China’s economic slowdown is real, and it will continue, but it is not the collapse that many economist and observers have warned against. As Europe and America continue to falter, China’s domestic policymakers will introduce policies to stimulate growth and jumpstart the economy, while maintaining price stability, especially in the property markets, and slowly orient the economy away from a reliance on exports. As the 18th National Congress of the CCP approaches this fall, China’s policymakers will increasingly try to fine tune economic growth, trumpet the positive signs, and make sure that China’s fifth generation of political leaders have a stable and harmonious society in which to govern from. 

 

ECB to the Rescue?

Can the Euro survive the latest onslaught from the markets, or will the ECB save the day?

Europe’s perilous journey to save itself continued to hit many speed bumps this week with Moody’s downgrading of Germany’s, the Netherlands’, and Luxemburg’s AAA credit rating, Spain’s spiraling costs, and Greece’s precarious situation. However, a silver lining has opened up as the European Central Bank (ECB) has hinted at new moves and mandates to support the monetary union.

Moody’s downgrading of the three countries on Tuesday signaled a nasty turn of events in Europe as the “safe haven” nations come under attack by the markets even as the weaker nations struggle to stay afloat. With the outlook of these countries downgraded to “negative” by Moody’s, Finland now remains as the only AAA country in the Eurozone with a stable outlook, further complicating efforts by robust creditor nations to bail out the weaker debtor nations such as Spain and Greece.

The announcement by Moody’s was forcefully pushed back by the German finance ministry, but bond markets were unconvinced. German 10-year bond yields rose many basis points immediately after the statement, with Dutch yields rising similar amounts. More troubling is the continued spiraling costs of Spanish bond yields, which rose to 7.69 percent at one point following the announcement, and remains way above the 7 percent mark beyond which economists generally believe to be unsustainable. The concern for many is that with the downgrading, opposition for further action to sustain the Euro and strengthen the weaker periphery states may grow as calls to defend sovereign credit status multiply.

On Friday Chancellor Angela Merkel issued a joint statement with French President Francois Hollande stating they were “deeply committed to the integrity of the Euro-zone,” which may mean that political will is still strong to defend the single currency. However, whether or not such pledges and statements can be fulfilled are starting to raise doubts, especially as Merkel’s own coalitions partners and party leaders start speaking of the Greek exit as imminent. The Free Democrats, which have faced a huge slump in the polls since entering office but still wields sizeable influence in the parliament due to its voting bloc of 93 votes in the 620-seat assembly, are now speaking of a Greek exit as not only imminent but beneficial for the Greeks and Germans. As the “troika” of creditors arrive in Athens to make their assessments on Greece’s proposed austerity measures and current situation, it will be interesting to observe how domestic opinion changes in Germany. If the Free Democrats have their way, Greece’s exit and the contagion that will follow in the Euro-zone is horrifying, but the specter of the breakup seems to hover ever so strongly above European heads.

Despite all the bad news, it seems that the ECB is now signaling it may do more to sustain the Euro and defend the single currency more than they used to. ECB President Mario Draghi said on Thursday that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” which markets interpreted as a signal that the ECB would intervene in Spanish and Italian bond markets should that be necessary, a move the ECB had vowed not to take so far since its first bond-buying program failed to change situations dramatically. However, since the rigid Draghi and the ECB are now making comments about how intervention would fall under the ECB’s mandate, it is plausible to believe that Draghi would intervene when needed. Bond yields instantly sank in response to Draghi’s remarks, with the Spanish yields dropping below the 7 percent mark.

Along with the comments made by ECB council member Ewald Nowotny, Austria’s central bank chief, that there are arguments in favor of giving the European Stability Mechanism (ESM) a banking license to boost its firepower, the ECB’s public announcements have held the markets together and prevented a full-scale collapse across the board. However, if the ECB decides not to act in the next couple of meetings, its credibility will be harmed without successfully defending the single currency. Many economists have said that granting the ESM, Europe’s permanent bailout fund, access to ECB lending will ease concerns over its viability and legitimacy. Granting the ESM a banking license would make sure that its 500 billion Euros of firepower would be enough if Spain or Italy needed it.

Given that a recent bank lending survey shows that demand for private loans has softened the second quarter in a row, Draghi’s comments were not surprising or shocking, but carried a weight that temporarily beat back the market waves. In a report published on Wednesday, 11 percent of banks that took part made it harder for companies to borrow in the second quarter. If the ECB steps in, it will be facing a yawning gap between demand and supply that it will, and should fight back forcefully.

In the end, words can only mean that much. The Germans and French need to keep their heads together and craft sustainable options given the current situation. All eyes are now on the Germans and the ECB. If their governments come together with a long-term plan not only for Greece but for Spain and Italy as well, the markets may reward the sovereign bond markets. If sovereign nations fail, the ECB under Draghi will need to reevaluate the situation and intervene as necessary.

DISCLAIMER:

One of Bloggerlytica’s contributors, Ian Chan, will be focusing more on international financial markets and macroeconomic conditions in the coming months. Moreover, Bloggerlytica will be featuring articles from The Opportune Time, a weekly financial newsletter, of which Ian Chan is also a regular contributor.

San Bernardino County, the new epicenter of California’s municipal crisis.

Dated 7/21/12

San Bernardino, California, became the third city in California to declare bankruptcy this year when its City Council voted last week to seek bankruptcy protection, in a move that underscores the economic hardship in the U.S. amid a weak job market, continual house foreclosures, and stagnant government revenue growth. However, San Bernardino is only one of many local government entities across the United States going through all sorts of legal procedures in this troubled time, with Nebraska leading the country in number of government entities bankrupt, and the states of California, Texas, and Alabama following right behind.

The city, which is in San Bernardino County and is one of the biggest counties in the U.S., had the third-highest foreclosure rate when put together with neighboring Riverside County. The foreclosure rate, along with 11.8% unemployment, 3.6% higher than the national average, has produced a $45 million budget shortfall and the city has $243 million of debt. Local municipalities all around the US are running out of options, as ratings agencies downgrade the credit rating of muni bonds, revenue sources dry up, and obligations mushroom. On July 12, S&P lowered San Bernardino’s lease revenue bonds to “junk” status, further complicating the city’s ability to raise money to cover its bills.

For the last four years, San Bernardino had been fighting hard to stay afloat, reducing the size of its workforce by 40%, negotiating concessions from employees, and declaring fiscal emergencies, but its obligations just proved overwhelming, with no real means of raising revenue. And while attention in the media has mainly focused on the federal budget deficit and debt ceiling battles, the local county-by-county struggles are equally concerning.

Nebraska’s situation stands out as its high number of bankruptcies comes not from towns, cities, or counties, but from special tax districts that are mostly owned by residential subdivision developers who used property-tax revenue to pay for local maintenance. These tax districts, and other municipalities across the country use file Chapter 9 bankruptcy procedures, a section for local governments and the entities they create. Chapter 9 differs substantially from Chapter 11, the section for private companies and non-profit groups, which gives governments more leverage and flexibility. Since 1981, more than 20,000 companies have gone through Chapter 11 to restructure and return to profitability, most recently made notable by the government-mandated restructuring of the U.S. automobile industry.

In contrast, only 220 cases have been filed under Chapter 9, mostly concentrated in the three states and Nebraska’s tax districts. These tax districts become vulnerable when housing sales slow, and the U.S. housing market has been hard hit since 2007, with the situation only recently turning the corner. Nebraska gives these tax districts unobstructed access to bankruptcy courts, whereas nationwide only half the states allow full, or conditional, access to bankruptcy court.

California, with has received the most headlines with its three municipal bankruptcies recently, along with Alabama and Texas, share similar traits that make Chapter 9 filings more common. All three impose few restrictions or conditions for municipalities to file bankruptcy. California requires mediation with creditors, but a declaration of emergency can shorten, or even eliminate, the talks. Alabama’s state supreme court recently handed down a ruling that made it a lot easier for municipalities in that state to meet Chapter 9 eligibility. On top of relaxed conditions on filing, these states restrict the power of local officials to impose new taxes or raise existing ones. In Texas, cities with more than 5,000 residents face restrictions from the state constitution on how much in property taxes it can collect.

Part of the reason why municipalities do not seek bankruptcy protection as often as private companies is the political stigma attached to it. Moreover, most cities and counties require a vote by popularly elected officials in order to file proceedings, a move that is often politically unpalatable to many officials. However, many analysts have argued recently that the high-profile coverage of California’s string of bankruptcies, and the dim fiscal situation for most states in the years to come, will make the bankruptcy option more attractive in the months and years ahead.

Whereas in countries such as China the federal government comes in to bail out municipalities and forces creditors to write off obligations arbitrarily, cities in the U.S. do not have that option, especially as states are forced to pass draconian measures in order to balance budgets and the federal government is under heavy pressure to adopt austerity measures. We expect municipal bankruptcies to increase in the short and medium term, a situation that will likely push up the rates of municipal bonds as the risk of default or write-downs increases.

Election Round-up

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As we hit the middle of global ‘election year’, it seems only fitting to look at the major elections that dominated world news this month.

Most recently, Egyptians voted in Muslim Brotherhood Candidate, Mohamed Morsi as their new President. While the ascension of a popular presidential candidate to office is an exciting milestone continuing the developments from the Arab Spring which deposed Mubarak nearly 18 months ago, the country’s political future is still far from stable. Thursday before the presidential elections, High court justices that had been appointed under former president, Hosni Mubarak, ordered to dissolve parliament. They asserted that there had been a misapplication of rules for independent candidates and thus sought to overturn the newly elected parliament. The next day, the military leaders executed the ruling order and shut down the Parliament, locking out lawmakers and seizing the right to issue laws.

Morsi was sworn in this morning as Egypt’s first democratically elected President but even the inauguration was rife with tension. Against his wishes, the new President took the oath before the Court that had earlier this month ordered the shut down of Parliament. When inviting the new president to take the oath, the Judge highlighted the authority of the interim Constitution issued by the June 17 military decree, which transferred most of the powers of the president’s office to the ruling generals.  Thus, while the election and inauguration of the new president signifies substantial progress, much more work will need to be done to manage the country’s political faction and transition from the remnants of Mubarak’s rule to a functional democracy.

In French legislature elections, President Hollande’s Socialist Party secured a solid majority in Parliament. This is the first time the Socialist have had majority control of government since the end of World War II. With control of parliament Hollande should have a free hand at passing his campaign pledges including taking more growth-boost measures, increasing tax for the rich, and pursuing more investment in state education among other areas.

With the June 17th elections, Greece has formed its first coalition government in modern times, with conservative New Democracy, winning majority seats. The Anti-bailout Syriza Party came out second and the Socialist party, third. Antonis Samaras, the New Democracy leader pledged to bring stability and hope to Greeks as the recover from the country’s deep recession. He has promised to increase social spending to alleviate the pains of the recession. To do so he will need immense help, support and approval for payment and cutback delays from his European counterparts. While the election results has receded fears of the “Grexit”, negotiations with will remain a challenge. Vis-à-vis the Euro zone, Germany remains reluctant to offer Greece more help until it is able to demonstrate greater stability and financial responsibility. Domestically, the new collation government will needs to put aside its differences and nationalist rhetoric, and instead figure how to best alleviate the situation, unlock more official funding and entice private capital flows to reinvigorate the economy.

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The U.S. Presidential election in November 2012 provides American voters and the world stark contrast not only in candidate styles, but most importantly, rivaling economic plans that will have grave consequences for the global economy. The decisions regarding fiscal and tax policies by the winner and the Congress will have important ramifications for growth in the U.S. economy.

President Obama and Democratic lawmakers in Congress favor raising tax rates on the highest brackets and capital gains as well as preserve many stimulatory fiscal measures. On the other hand, the now official Republican presidential candidate, former Massachusetts Governor Mitt Romney, favors lowering the tax rates and a more stringent deficit reduction plan. On the current trajectory, a combination of automatic budget cuts agreed upon last summer, the expiration of the Bush tax cuts and other various stimulatory measures taken after the financial crisis may automatically take $650 billion out of the U.S. economy and may cause the economy to contract 1.3 percentage points, according to the non-partisan Congressional Budget Office, possibly leading to a double dip recession in the world’s largest economy.

However, a recent survey of economists showed that most academics expected Congress to make some last minute deal to avoid a double dip recession. If history is any guide, even if the deal is less than ideal, the lawmakers will come up with something to avoid the blame of making the economy worse. Recent polls have shown that economic growth and jobs are more important issues than the deficit among voters.

The focus on growth and jobs is why Romney has focused his campaign message on cutting taxes and creating jobs, instead of cutting government spending. When offered $10 of spending cuts for every $1 taxes raised, candidate Romney had rejected such an offer, saying that he would not raise any taxes, and instead lower all tax rates in order to stimulate investment and create jobs. On the other hand, President Obama has made raising the capital gains rate and ending the Bush tax cuts for the highest income earners a matter of fairness and fiscal responsibility, claiming that lowering the taxes at a time of war and deficit would increase the debt and widen the deficit.

The proposals will change the landscape for investors and financial firms greatly. Romney proposes to keep the capital gains rate at 15 percent for the highest earners and 0 percent for every one else. In contrast Obama’s proposal would raise the rate to 23.8 percent in 2013, to help plug the gap created by different stimulatory measures and decreased tax receipts.

In 1987, both the individual tax rate and the capital tax rate were equalized to 28%, and the U.S. economy grew by 3.2, 4.1, and 3.6 percentage points, an expansion rate that many policymakers can only hope for now. The growth rates were higher than most years after 2003, when the capital gains tax was lowered multiple times. Moreover, looking at the economic evidence in the U.S., there is scant correlation between lower tax rates and investment or growth. Furthermore, this is the first time in the U.S. history that tax rates have been lowered or kept low during wartime.

In my opinion, I agree with the majority of economists who predict lawmakers will come together at the last minute to make a deal to avoid the fiscal cliff. However, the deal will most likely kick the can down the road further, likely making one to two years extensions to various pet projects and tax rates, instead of creating a credible fiscal plan that emphasizes growth in the short term and a deficit reduction plan in the medium to long term that addresses unsustainable entitlements and debt.

However, whatever the plan that Congress comes up with or whoever is elected President, what may be most important for investors and firms alike are expectations. The uncertainty of the health care law and its implementation, the differing tax plans, and stopgap budgets are creating an environment where businesses find it hard to make long-term decisions about hiring and investment. Many commentators, business leaders, and economists advocate that whatever the differing political viewpoints, credible economic and budget plans, and a stable investment environment are what will spur growth more than adhering to specific ideologies.

If the U.S. economy falters due to political ineptness, as the Eurozone has already, the rest of the world may be pulled back into a double dip global recession. With most governments unable to unleash expansionary fiscal and monetary policies as deficits and debt build up, the consequences are almost too horrifying to imagine. All hope now lies on the shoulders of U.S. politicians, and if history is any guide, as evident by the debt-ceiling negotiations and tax cut extensions of the past years, they will avoid an imminent crisis, kick the can down the road, and continue to blame each other. 

Following Bo Xilai’s high profile removal from power as the Community Party chief of the city of Chongqing in April, the world has followed closely the political scandal and corruption surrounding Mr. Bo, as well as his economic and social policies at the helm of Chongqing, western China’s biggest manufacturing hub.

The incident that sparked Bo’s downfall was the defection of his former aide, Wang Liqun, who drove to the American Embassy in Chengdu, Sichuan province. Now with investors unsure about Chongqing’s future and looking for new cities for growth, the ancient city of Chengdu has been gaining more attention, recently from a number
of Hong Kong’s property developers. After the earthquake that killed 4,000 people around Chengdu and badly damaged the city, the central government in China has been accelerating its investment in the city, which is also rated the fourth most livable city in China.

In the 1980s when China first embarked on economic reforms, there was a heavy emphasis on first developing the coastal regions into manufacturing powerhouses. The Special Economic Zones set up in the southern province of Guangdong provided a model for the rest of the country on how to liberalize and embrace global trade. The taking off of the export industry has created millions of jobs and drawn millions of workers from the inland regions to migrate East. This historic internal migration led to the rapid development of the real estate industry as construction of housing and office space never ceased. 

However, with the housing prices in major cities such as Beijing and Shanghai shooting up in recent years and many citizens clamoring for action, and the wealth gap between the coastal regions and the inland regions growing, the central government has for the last decade increased its investments into western China and also recently clamped down on the housing market to prevent a bubble. This “Go West” policy has created a lot of new jobs, and was the base for Bo’s Chongqing model of economic development. With economic growth tapering off in the coastal regions and the housing market saturated, the natural move for the property developers would be to move inland. 

With the likes of Swire Properties Ltd. aiming to open a $1 billion retail and office project for 2014, Sun Hung Kai Properties Ltd., Henderson Land Development Co., and Wharf Holdings Ltd. and others are laying the groundwork to build malls, offices, and residences for the city of 11 million. This move reflects the trend that property developers are finding growth prospects away from Hong Kong, where housing prices have risen almost 80% since 2009 have led to a strong clamp down from the government and proposals to restart public housing programs.

Hong Kong’s property developers have increasingly taken advantage of the Chinese market and broadened their bases, first with Beijing and Shanghai, where entire districts and shopping strips have been developed very similarly to downtown Hong Kong. With the central government putting more emphasis on developing the interior with its “Go West” policy launched more than a decade ago, this move makes sense for developers that are facing a saturated market in the main coastal cities.

With Chengdu growing at 15.2% annually, as compared to an average of 11.9% among comparable cities, and retail sales growing at 18% in 2011, the prospects for growth are almost limitless. Many luxury brands are looking for well run and professional malls to relocate to and with the double dip recession gripping the Euro-zone and the sluggish recovery in the United States, these brands have redoubled their efforts to expand in developing economies, with China’s fledging middle class as the prime target. The move by the Hong Kong developers reflects a general shift in China to a more balanced economic growth model geographically, and with more than half of the Chinese population now urbanized, the future growth of the housing market would determine China’s sustainable growth path.