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China’s vanished current-account surplus will change the world economy

Thu, 05/17/2018 - 14:51

NOT long ago China was a leading culprit in global economic imbalances. Whether blame was ascribed to its undervalued yuan or its frugal people, the problem seemed clear. China was selling a lot abroad and buying too little back. One data-point summed this up: its currentaccount surplus reached 10% of GDP in 2007, well above the level that is generally seen as reasonable. Far less attention has been paid to its steady decline since then. In the first quarter of 2018 China ran a current-account deficit, its first since joining the World Trade Organisation in 2001. Just as its massive surpluses of yore had big consequences for the global economy, so does this swing in the opposite direction.

China still exports many more goods than it imports, to the tune of nearly $500bn annually. But its share of global exports appears to have peaked. At the same time its trade deficit in services is getting bigger, largely thanks to all its tourists venturing abroad (see chart).

At bottom, a current-...

A WTO ruling on aircraft subsidies raises the risk of a tariff war

Thu, 05/17/2018 - 14:51

THE manufacture of airliners may be the world’s most globalised industry. Only two firms make big civil jets: Boeing of America and Airbus of Europe. Most of their revenues—55% for Boeing and 70% for Airbus—are earned outside their home territory. Both source parts from dozens of countries. But a ruling by the World Trade Organisation (WTO) on subsidies in the industry could deal another blow to the beleaguered international trading system.

On May 15th the WTO’s final appeals body upheld parts of a previous ruling, finding that the European Union wrongly provided subsidies to Airbus to develop new aircraft. That, it concluded, had hit sales of Boeing’s jets. As soon as the WTO gives the go-ahead America will have the right to impose retaliatory tariffs on EU imports. Trade experts warn they could be the highest in the WTO’s history.

Boeing crowed that the ruling showed that the EU had given $22bn in “illegal subsidies” to Airbus. But Tom Enders, Airbus’s chief executive,...

NAFTA negotiators are struggling to meet a congressional deadline

Thu, 05/17/2018 - 14:51

AS FAR back as the campaign trail, President Donald Trump had promised to renegotiate or rip up the North American Free Trade Agreement (NAFTA). But Paul Ryan, the Speaker of the House of Representatives, has said that if this Congress is to have time to approve a new version, it needs word that a deal is going ahead by May 17th. As The Economist went to press, that deadline seemed unlikely to be met.

Negotiations seemed to stall on May 11th over rules relating to carmaking. After a brief meeting between ministers, and despite reports that momentum has been building in recent weeks, wide differences remained. Representatives of the Mexican car industry had planned to return to Washington on May 14th to resume talks, but were told by their government not to bother.

The impasse is over “rules of origin”, which must be satisfied if a car is to qualify for tariff-free export within the trade bloc. Such rules normally set minimum requirements for...

How Turkey fell from investment darling to junk-rated emerging market

Thu, 05/17/2018 - 14:51

MANY of the most famous hedge-fund trades have been bets that things were about to go wrong. Think of Enron’s bankruptcy or the souring of subprime mortgage bonds in America. The best trade made by “the Professor” was very different. It was a bet that something was starting to go right.

A visit almost 20 years ago convinced him that Turkey was serious about fixing its economy. The yield on its one-year Treasury bills was then above 100%. “It was a serious mispricing,” he tells Steven Drobny in “The Invisible Hands”, a book of interviews with pseudonymous hedge-fund managers. The IMF gave its approval to Turkey’s reforms soon afterwards. The price of T-bills surged. The one-year interest rate fell to 40%.

The wheel has since turned almost full circle for Turkey, which now seems to attract more sellers than buyers. The lira is sinking. S&P has cut the country’s credit rating from junk to junkier, partly because of concerns about its reliance on foreign capital. The deficit on...

World economic growth is slowing. Don’t worry—yet

Thu, 05/17/2018 - 14:51

IN 2017 the global economy broke out of a rut. It grew by 3.8%, the fastest pace since 2011. Surging animal spirits accompanied a rebound in business investment across the rich world. Global trade growth rose to 4.9%, also the fastest rate since 2011. Emerging-market currencies appreciated against the dollar, keeping inflation low and debts affordable. Financial markets wobbled in February, but only after reaching all-time highs. In April the IMF said that the global economic upswing had become “broader and stronger”.

Since then that healthy glow has begun to fade. First, economic surveys in Europe took a turn for the worse (...

Pension bonds are an ingenious idea for providing retirement income

Thu, 05/17/2018 - 14:51

WHEN people stop working, they need a retirement income. Some are lucky enough to have an employer-provided pension linked to their salary. Everyone else faces a difficult choice.

Some keep their pension pot in cash and watch as it is eroded by inflation. Others use savings products with high fees and risk being hurt by a stockmarket downturn. A third option is an annuity, which guarantees a lifelong income but vanishes at death, even if that is a week after retirement.

Lionel Martellini of EDHEC, a French business school, and Robert Merton of the Massachusetts Institute of Technology (a Nobel laureate in economics) have come up with an alternative. Workers would buy government-issued bonds while in employment; these would pay no interest until retirement. Over the next 20 years (the typical life expectancy on retirement) bondholders would receive payments comprising interest plus the return of the capital. These would be linked to inflation, or another measure such...

The long arm of the dollar

Thu, 05/17/2018 - 08:18

FEW banks can match the quaint serenity of Banco Delta Asia’s headquarters in Macau. Housed in a pastel-yellow colonial building opposite a 16th-century church, its entrance is flanked by tall vases, depicting sampan gliding between karst hills. In the tiled square outside, men laze under a banyan tree and an elderly woman peels a boiled egg for lunch.

But in 2005 this backwater bank incurred the wrath and might of the world’s financial hegemon. America’s Treasury accused it of laundering money for North Korea, prompting depositors to panic, other banks to keep their distance and the Macau government to step in. The Treasury subsequently barred American financial institutions from holding a correspondent account for the bank, excluding it from the American financial system.

Macau is over 8,000 miles from Washington, DC. But it is hard to escape the long arm of the dollar. Its dominance reflects what economists call network externalities: the more people use it, the more useful it...

Argentina’s economic woes

Thu, 05/10/2018 - 14:54

ON MAY 8th, as the peso continued to tumble, Mauricio Macri, Argentina’s president, addressed his nation on television. His government had opened negotiations with the IMF for a credit line in order to “avoid a crisis like those we have faced before in our history”. That steadied the peso. But it also brought back painful memories for Argentines, highlighted doubts about Mr Macri’s approach to mending Argentina’s economy and cast a shadow over the reformist president’s future.

Argentines have bitter memories of the last time their government sought the IMF’s help. Many blame the fund for imposing austerity in return for loans and then pulling the plug in 2001, tipping their country into a devastating $82bn sovereign default. It was followed by widespread unemployment, a sharp rise in poverty and the corralito, in which the government froze bank accounts for a year to halt a run. Argentina’s economy had been battered by the lunatic policies of a succession of populist...

Sluggish exports leave India needing to curry favour with investors

Thu, 05/10/2018 - 14:54

More like these, please

IN THE spring of 1991, Indian officials desperate to fend off a balance-of-payments crunch secretly airlifted 20 tonnes of gold confiscated from smugglers into the vaults of UBS, a Swiss bank. That crisis prompted liberalising reforms that helped integrate India into the global economy. By 2013 India’s exports as a percentage of GDP had nearly quadrupled, to over 25%, not far from the global average. But an exporting funk since then has pushed the figure to its lowest level in 14 years. Paired with a rise in imports, the trend has revived questions about the competitiveness of Indian firms—if not the government’s ability to finance a growing current-account deficit.

A repeat of the 1991 drama is not in the offing. India’s economy today is growing at a world-beating pace. Its central bank holds enough foreign reserves to pay for nearly a year’s worth of imports. Foreign investors are on hand to finance both government and corporate borrowing....

China tries to lure its tech firms into listing at home

Thu, 05/10/2018 - 14:54

FOR a country that is hugely proud of its high-flying tech firms, China has a funny way of showing it. None of its internet giants—not Alibaba, nor Tencent, nor Baidu—is listed on the domestic stockmarket. Rules that were supposed to help investors have had the perverse effect of forcing firms to go public abroad, mostly in America. The result is that most people in China cannot buy stocks in the country’s biggest, most innovative companies. But change is finally at hand. In the coming weeks China is expected to start letting these firms list some of their shares at home. If handled well—a big if—it would be a boon for the young stockmarket.

China’s tech darlings initially went abroad because it was their only real option. Chinese regulations forbid dual-class shares, a structure favoured by tech entrepreneurs because it means they can raise capital while retaining control. Companies must also have three years of profits before going public. This is a stumbling block for tech...

Barriers to entry

Thu, 05/10/2018 - 14:54

SCIENCE is supposed to be the ultimate meritocracy. People might sneer at a thinker’s background or training, but there can be no arguing with a powerful new idea which explains the world better than its rivals do. In reality, academia is cluttered with odd cultures and practices which serve as barriers to entry—and, at times, as cover for discrimination. In economics, men receive tenure at a rate 12 percentage points higher than women do, after controlling for family circumstances and publication records. Women who clear that hurdle are about half as likely as men to be named full professor within seven years. Just 4% of doctoral degrees in economics were awarded to African-Americans in 2011 (compared with about 8% across all academic fields). Something is broken within the market for economists, and the profession has moved only belatedly and partially to address it. A lack of inclusivity is not simply a problem in itself but a contributor to other troubles within the field.

Though women in...

Big investors are giving university digs an upgrade

Thu, 05/10/2018 - 14:54

The way we were

THE words “Unite Students” are emblazoned on Aston University’s residence halls and on signs all over campus. They are the name of a firm that builds, buys and manages student accommodation across Britain. Last year Unite Students bought all 3,000 of Aston’s on-campus bedrooms for £227m ($313m) in partnership with the Government of Singapore Investment Corporation, a sovereign-wealth fund. It was thought to be the largest ever one-off purchase of student housing.

Many readers will no doubt recall dingy halls of residence owned by universities, or squalid private digs owned by individual landlords. But student accommodation has got an upgrade. Private halls have sprung up as cash-strapped universities have outsourced to companies such as Unite. Some have grown into publicly traded brands offering thousands of beds across the globe. American Campus Communities owns more than 134,000 beds across America. Dubai’s GSA has student housing in...

Lessons to a columnist’s previous self

Thu, 05/10/2018 - 14:54

IN A British television show, “Doctor Who”, the titular character is able to travel anywhere in time and space in his Tardis police box. Given access to that technology, what useful message would this columnist impart to his previous self, nearly 12 years and 550 columns ago?

The first lesson would be to avoid confusing the economy with the financial markets. If you looked at share prices alone, you might assume the intervening period had been calm; the S&P 500 index is around double its level when this column began in September 2006. But though the markets have long since recovered their sangfroid after the crisis of 2008-09, the trend growth rate of developed economies has never regained its strength. That is a bitter irony given that the crisis originated within the financial sector, bringing to mind a teenager who crashes their parents’ car and leaves them with the bill.

In part, the market’s resilience was owing to the remarkable strength of corporate profits, something else that would not have been obvious 12 years ago. Back then American profits were only just reaching a post-war high, relative to GDP. When they plunged in 2009, it looked like a return to normal. But the pre-crisis levels were rapidly regained and, indeed, surpassed. Explanations for the strength of profits include less competition in some...

Europe must agree a common position to avoid Donald Trump’s tariffs

Thu, 05/10/2018 - 14:54

DIPLOMATS are racking up the air miles, but the prospect of trade war has not receded. Negotiations between American and Chinese representatives in Beijing ended on May 4th without agreement. Indeed, the two sides’ starting positions are so different that a mutually agreeable deal is hard to imagine. Talks will resume next week when Liu He, China’s vice-premier, travels to Washington. Negotiators will need to work quickly. From May 23rd America can impose its first set of tariffs against China, on around $50bn of goods. The Chinese would soon retaliate.

America is edging towards trade conflict not just with an avowed rival but with its closest friends. In March, when President Donald Trump announced plans for tariffs on steel and aluminium, America’s allies were granted temporary exemptions to allow time to negotiate deals. Those exemptions are due to run out on June 1st.

Many countries are already off the hook, having agreed to restrict shipments to America. South...

The world’s biggest Muslim country wants to boost sharia finance

Thu, 05/10/2018 - 14:54

Still pretty interesting

THE Indonesia Stock Exchange greeted its latest listing on May 9th: that of BRIsyariah, the Islamic arm of state-controlled Bank Rakyat Indonesia, the country’s biggest bank by assets. The initial public offering (IPO) of 27% of BRIsyariah’s equity raised around 1.3trn rupiah ($92m). Islam outlaws the payment of interest, the basis of conventional banking. Yet despite being home to an eighth of the world’s Muslims—225m, in a population of 260m—Indonesia’s Islamic banks are tiny. They account for just 5.8% of all banks’ assets. In neighbouring Malaysia, which has been promoting Islamic finance for many years, Islamic banks’ share exceeds 25%.

But Indonesia’s are growing fast. According to the Financial Services Authority (OJK), the industry’s supervisor, last year their assets rose by 19%, against 9.8% for conventional banks. BRIsyariah’s IPO will help tackle what the OJK says is the biggest obstacle to their development: a want of...


Thu, 05/10/2018 - 14:54

The Economist invites applications for the 2018 Marjorie Deane internship. Paid for by the Marjorie Deane Financial Journalism Foundation, the award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at The Economist writing about finance and economics. Applicants are asked to write a covering letter and an original article of no more than 500 words suitable for publication in the Finance and economics section. Applications should be sent to by June 2nd. For more information, see

A Canadian startup applies machine-learning to corporate bond issuance

Thu, 05/10/2018 - 14:54

WITH the exception of a few governments big enough to run their own auctions, anyone wishing to issue bonds must seek bankers’ help. A hefty fee will buy assistance in calibrating the size, structure and timing of a bond issue, as well as connections to lots of buyers. And once a bank has agreed to underwrite an issue, it bears the risk of failing to get a good price for the bonds. But the process is old-fashioned and inefficient (the head of bond origination at one American bank jokes that “not a lot has changed since 1933”), and the accuracy of the advice is hard to gauge. Overbond, a financial-technology startup in Toronto, wants to change all that.

Investment bankers responsible for bond issuance still operate largely by feel, calling up asset managers to get a sense of demand, rather than by crunching numbers. Rules against insider trading mean they cannot talk directly with their trader colleagues. Data on existing bonds are more abundant. In America, for instance, information on the price,...

Make Bank of America great again

Thu, 05/03/2018 - 14:49

IN THE skyscraper that is Bank of America’s New York headquarters, the chief executive, Brian Moynihan, looks relaxed. The bank has just announced record first-quarter earnings. Its return on equity is comfortably in double digits. Its share price has been on a roll. The revival of America’s second-largest bank, he avers, was inevitable. Any dark moments? None, except perhaps when America’s sovereign debt was downgraded in 2011 and all the country’s banks suffered. Early hints at the current prosperity? On his first day in the job, in 2010, he says. Vast losses from bad debt and litigation merely obscured billions of dollars in operating profits. “We just had to get rid of what was dragging us down.”

In fact, this renaissance was anything but predictable. Over little more than half a century Mr Moynihan’s two predecessors, Hugh McColl and Ken Lewis, had transformed the tiny North Carolina National Bank into an institution that could claim a business relationship with half of all American...

Even though more people are doing it, studying is still worthwhile

Thu, 05/03/2018 - 14:49

WHICH has provided a better return in recent decades: America’s stockmarket or education? The latter, according to a research review by George Psacharopoulos and Harry Patrinos for the World Bank. The two economists looked at 1,120 studies, across 139 countries, and came up with an annual average “rate of return”—actually a pay premium, the increase in hourly earnings from an extra year of schooling—of 8.8%. The analogy is inexact, but for comparison America’s stockmarket returned an annual 5.6% over the past 50 years.

Their figure excludes social gains, such as lower mortality rates associated with greater education. The premium is higher for girls and for primary education. It is also higher in poor countries, presumably because the smaller the share of educated people, the higher the pay they can command. The same reasoning suggests that the return should have dwindled as educational attainment rose. Instead, it has stayed strong, especially for higher education (see chart)....

Fears that China has hurt innovation in the West are overblown

Thu, 05/03/2018 - 14:49

POPULAR concern about free trade with China has focused on the loss of manufacturing jobs in America and Europe. Policymakers have an additional worry: that China’s rise is hurting innovation in the West. This fear is among the small set of issues that unites American Democrats and Republicans. In 2016 Barack Obama’s commerce secretary said that China’s state-driven economy would weaken the world’s innovation ecosystem. Donald Trump’s advisers allege that China makes it harder for foreign firms to invest in innovation by squeezing their returns. Mr Trump’s trade team was expected to raise this complaint, among others, with Chinese officials during talks in Beijing on May 3rd and 4th, as The Economist went to press. There is one problem. Data suggest that competition with China has coincided with more innovation in America, not less.

The relationship between competition and innovation is complex, even before considering trade with China. Economists agree that the right...