Yves here. It isn’t facetious to suggest that fund managers be taxed heavily, and not just Ray Dalio because China.
As most reader know, the post-financial-crisis “recovery” was so weak as to lead quite a few economists to dig into what was causing what they politely labeled “secular stagnation.” Many concluded that overfinancialization was the main reason. It’s not hard to think that nearly two generations of math PhDs preferring Wall Street to technology or medicine will have an effect.
And within finance, asset management was found to impose the biggest drag. Secondary market trading of securities isn’t productive from a societal perspective, even though asset management produces billionaires at twice the rate of Silicon Valley.
By David Llewellyn-Smith, Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. Originally published at MacroBusiness
It is Fifth Plenum week as the fifth plenary session of the 19th Central Committee of the Chinese Communist Party meets in Beijing from Monday through Thursday. Today Xi gave a work report and presented the “discussion drafts” of the proposals for the 14th Five-Year (2021-2025) Plan for Economic and Social Development and future targets for 2035.
There is always speculation around Plenums about personnel changes. I am not assuming there will be any particularly interesting ones, and I expect that more people will realize it has become obvious that there are no clear successors to Xi in the current top leadership and so third terms for Xi as General Secretary, President and Chairman of the Central Military Commission at the 2022 20th Party Congress are nearly assured.
Friday was the 70th anniversary commemoration for the PLA’s entry into the Korean War, and in his recounting of the CCP’s version of the history of the conflict Xi used some tough language that was directed at the US.
Also on Friday senior financial officials convened the Bund Summit aimed at “promoting China’s financial opening-up and global economic development”. The most important speaker at the event was Vice President Wang Qishan, an “old friend” for some of the foreign financiers in virtual attendance. Wang has not given a public speech in many months, so his appearance is noteworthy.
The Fifth Plenum will further push the “Dual Circulation Strategy” and increasing emphasis on self-reliance, Xi’s Friday comments are another indication of the official recognition of the structurally changed US-China relationship, and the Bund Summit is a reminder that the leadership understands China still needs foreign capital to achieve many of its goals.
Caixin – Four Things to Watch as China’s Leaders Map Out the Next Five Years
Expect to hear a lot more about some relatively new buzzwords, especially dual circulation, factor market reform and governance, along with older ones such as supply-side structural reform which first emerged in late 2015.
Far more than just buzzwords though, these are serious, well-thought-out strategies and policies to guide China’s economic development through a fundamental structural shift away from speed toward quality and sustainability. Dual circulation and factor market reform emerged earlier this year and will provide a broad framework for government ministries, officials and advisers to design and implement more detailed, specific policies that will help the economy flourish and grow in a sustainable way…
President Xi has continuously emphasized the need for self-sufficiency in key technologies, and at an August symposium (link in Chinese) to solicit input for the 14th FYP from economists and scholars, he said technology and innovation can foster new growth drivers and are key to building “internal circulation.” His remarks reaffirm expectations that China will double down on its efforts to reduce its reliance on technology from the U.S. and other economies and many analysts expect the 14th FYP to put even greater emphasis on funding for research.
Highly anticipated 14th 5-Year Plan may focus on ‘dual circulation,’ tech research independence – Global Times
“Technologies relevant to semiconductors, 5G and quantum computing, among others will be likely mentioned in the 14th Five-Year Plan. Policy support involving taxes support and talent nurturing will surely be included,” Li Chang’an, a professor at the University of International Business and Economics’ School of Public Administration, told the Global Times on Friday…
Li said that China may revise economic and social development targets during the 14th Five-Year Plan to stimulate growth but they will be within a range. He projected that China may set an annual GDP growth target of 4-5 percent for 2021-25.
What to Expect from China’s New Five-Year Plan | Rhodium Group
We see the following elements as the most important to watch:
The presence or absence of a longer-term GDP target. These targets have always featured in past Five-Year Plans, but the days of China doubling GDP every decade are in the past, and Beijing may gain policy flexibility by eliminating a target.
Details on how China plans to implement its “dual circulation” strategy. This could include measures to support domestic consumption and changes to technology and industrial policy goals in the face of a more hostile external environment. Whether the strategy is primarily focused on import substitution in high-tech supply chains or a more conventional consumer-focused stimulus for domestic demand will influence global views of this new policy element.
Environmental and energy policy changes that support Beijing’s recent pledge of carbon neutrality by 2060.
Abridged translation of the long piece extolling the successes during the 13th 5 five year plan –China makes historic progress over 13th Five-Year Plan period under Xi’s leadership – Xinhua
— The Chinese economy has grown close to 100 trillion yuan (about 15 trillion U.S. dollars) with a per capita GDP exceeding 10,000 U.S. dollars.
— China now has the world’s largest middle-income population and is set to end absolute poverty.
— The pollution control goals set out in the 13th Five-Year Plan have been accomplished.
— During the 13th Five-Year Plan period, China rolled out a slew of measures to address people’s concerns.
The original article – 历史性的跨越 决定性的成就
历史性的跨越 决定性的成就 ——以习近平同志为核心的党中央引领中国“十三五”时期发展纪实 《 人民日报 》（ 2020年10月25日 第 01 版）
The Bund Summit
China charm offensive wooing investors in Shanghai, with HSBC, Goldman answering | South China Morning Post
The pledges were made during the Shanghai Bund Summit, a two-day gathering of Chinese bankers and regulators, that offered the country’s leaders an opportunity to showcase their plans to the global financial community ahead of a key policy meeting in Beijing, where President Xi Jinping is expected to map out the country’s development blueprint for the next five years.
One key message China is trying to deliver is that it is committed to deepening its economic and financial ties with the rest of the world even though relations between Beijing and Washington have plunged to their lowest level in decades.
On Saturday, Vice-President Wang Qishan made a rare appearance at the summit and told delegates – who included former US treasury secretary Robert Rubin, hedge fund manager Ray Dalio and Bloomberg chairman Peter Grauer – that “win-win cooperation is the only right choice for the world”…
John Waldron, president and chief operating officer at Goldman Sachs, told the forum that the US bank was “encouraged by the enhanced access China providing foreign firms … which we believe will lead us to a stronger, more resilient Chinese financial sector.”
Waldron suggested that China should relax restrictions on outbound flows, allow foreigners to become market makers in the bond market, and align Chinese regulation with international norms to “bolster investors’ confidence in China’s capital markets, to pave the way for further inflows, and enable increased cooperation between the United States, the rest of the world, and China”.
China Mulls More Ways for Foreigners to Invest in Its Capital Market – Caixin
China will consider creating more channels for overseas investors to participate in the Chinese mainland’s capital market, China Securities Regulatory Commission (CSRC) Vice Chairman Fang Xinghai said at a financial summit in Shanghai on Saturday…
It’s also essential to give foreign firms easier access to the country’s securities and fund sectors, Fang said. Currently, China has approved eight foreign-controlled securities firms, the first wholly foreign-owned mutual fund manager and the first wholly foreign-owned futures firm.
Fang said the regulator will “further improve and foster an environment with fair competition for domestic and foreign securities and fund institutions,” and boost their cross-border services capabilities to better fulfill companies’ needs for cross-border investment and financing.
Financial Sector Should Avoid ‘Wrong Paths’ of Speculation, Bubbles and Ponzi Schemes, Vice President Says
China’s finance industry should stay off the “wrong paths” of speculation, self-circulating financial bubbles and Ponzi schemes, Vice President Wang Qishan told a financial summit on Saturday.
The industry should serve the real economy and focus on preventing financial risks, Wang said in a pre-recorded speech presented to the Bund Summit in Shanghai.
Wang made his remarks as China pushes ahead with its efforts to prevent systemic risks in the financial sector that have been created by high debt levels, many companies’ immature risk control, and underregulation of emerging areas such as internet finance.
Video and full text of Wang Qishan’s speech. No mention of Xi Jinping, wonder when the last time a senior leader gave a speech without mentioning him.
Page 1 People’s daily on Wang’s speech
Don’t be blind to China’s rise in a changing world | Financial Times $$ – Ray Dalio
The world order is changing, yet many are missing this because of a persistent anti-China bias. China’s extraordinary performance isn’t new. In fact, apart from the 1839-1949 “Century of humiliation”, it has historically been one of the world’s most powerful countries and cultures. Just over the past four decades its economic changes have been remarkable. Whatever criticisms you may have about Chinese “state capitalism”, you cannot say it hasn’t worked, even if you strongly disagree with how Beijing has done it…
As a global macro investor, I think a lot about how much I should invest where, looking at fundamentals and how others are positioned. China’s fundamentals are strong, its assets relatively attractively priced, and the world is underweight Chinese stocks and bonds. These currently account for 3 per cent or less of foreign portfolio holdings; a neutral weighting would be closer to 15 per cent.
This discrepancy is at least in part due to anti-Chinese bias. I think it is about to change. Chinese markets are opening up to foreigners, who can now access at least 60 per cent of them compared with 1 per cent in 2015.
Comment: Surely not coincidental timing that Dalio places this OpEd on the eve of his appearance at the Bund Summit
Authorities Looking to Loosen Rules for Foreign Investment in Chinese Assets
The State Administration of Foreign Exchange (SAFE) is considering loosening some restrictions on cross-border investment under its Qualified Foreign Limited Partnership (QFLP) program, a deputy SAFE head told a briefing in Beijing on Friday.
Wang Chunying said that the forex regulator is studying a pilot reform plan for the QFLP program to cut red tape, expand the range of investment open to foreign investors and explore a model for private equity funds’ cross-border financing and investment activities.
The free world needs to slap a Pigouvian Tax on Ray Dalio and his ilk.
If markets are incapable of protecting the liberalism that underpins capitalism (that is, markets) thanks to the apostasy of firms like Bridgewater then that is a kind of ideological imbalance requiring policy intervention.
A giant Pigouvian tax on anybody tipping free-market savings into building China would do it nicely.
I do think Ray Dalio has been compromised by his greed.
The hypocrisy is what is truly galling.
Yes, Tax the Hell out of him
Why do we have to beat China, again?
Oceania is always at war with Eurasia.
I guess Ray Dalio sees the risk reward trade off as being better in China than elsewhere. Since the financial crisis China has been busy looking at investment quality with a broad range of macro regulations. Maybe the fact that wall street cannot buy regulations in China is driving investment in its direction. I cannot help feeling the likes of Ray Dalio will cause havoc in Chinese financial markets though.
I think many Americans instinctively know that the US economy is deteriorating and that developing nations like China might be responsible. That may be why they support the bull in a china shop approach rather than the nothing to see here one. My personal view is that China is moving too slowly towards being developed (Good work life balance and focus on culture) through trying to copy aspects of the US economy. Billionaire Chinese industry moguls are undermining work life balance improvements by encouraging very long working hours which is hard to compete against. What would the US win against China anyway, the right to keep exporting large volumes of arms to foreign governments compared to china’s investment in infrastructure across the world (with strings attached). You only have to look at events in Hong Kong and china’s history on human rights to see serious issues with China as well. From the outside it looks like a competition to see who is the best at putting people last. It is interesting to me that the fifth plenary session of the 19th Central Committee does not seem to be planning to raise retirement ages (55 and 60) so perhaps there is glimmers of understanding.
I suppose the US politicians will always need a big bad wolf at the door to cover up their own limitations. There are other countries out there that pose economic competition to the US particularly those with very heavy investment in young people’s education and training (parts of eastern Europe, Malaysia or South Africa) but I guess some people have been too busy breaking china to notice or toadying with the money men.
I am just having one of those cynical days I suppose.
That competition you mention, simply isn’t: neither of them are big enough to pose a threat to the big players. You need a certain “size” of your economy and derived from that, military, to be a contender, a certain amount of people which ultimately underpin your economy and military. Right now the only “blocks”, not so much countries, I can see which might be able to do that are the US, EU, India and China. And EU is very iffy due to the way it’s constituted, forget BRICS or such.
A normal person cannot conceive of the limitless cynical well they must look down into. Kind of like at the end of WW1 when the armistice was a done deal but the higher-ups wanted to wait till the 11th minute, hour, day to officially stop killing each other. Men died so those a-holes could get symmetry(and also for their future book deals).
You must assume that all political ‘leaders’ are lying and self-dealing and adjust accordingly.
A Pigouvian tax on Ray Dalio? What an amusing fantasy. He’s just doing what all capitalists do. Didn’t Marx say something about capitalists making hangman’s rope? For the Chinese, capitalists methods are just some of many tools in the toolbox. For Americans worshippers, capitalism is the one trick pony, the only tool in the box.
Eliminating the “carried interest” provision on the “at risk” fees of the percentage of profit would result in those fees being taxed as ordinary income like the management fees in the year they are generated. Instead, the IRS allows them to defer those fees until they are removed from the account and then they are taxed as capital gains at much lower rates.This would mean that both the tax rates would be different but the compounding would be on previously taxed dollars, not untaxed dollars, which would dramatically reduce wealth increase. We can save in 401ks, IRAs etc., where those dollars compound tax free over time but the amounts are limited and the entire account is taxed as ordinary income when it is eventually spent.
The original carried interest provisions for real estate developers make some sense as they are profits from their own at risk investment that they leave in the business. The hedge fund carried interest fees are just a bonus for generating profits for the clients that year. When a typical employee gets a bonus from their employer because of good financial results, that is taxed as ordinary income – we can’t just reinvest it untaxed into company stock.
The tool to dramatically change taxation of the managers of hedge funds and private equity funds already exists in the tax code – it just needs a re-interpretation that politicians have shied away from due to the massive campaign contributions provided by the financial sector.
If they carry through on quality that would be a game changer that. Japan was notorious for producing junk until after WW2 when all their production facilities had been flattened. By listening to people like W. Edwards Deming on concentrating on quality, they rebuilt their facilities and never looked back. Funny reading John Waldron (president and chief operating officer at Goldman Sachs) and his ideas of how China ‘should relax restrictions on outbound flows, allow foreigners to become market makers in the bond market, and align Chinese regulation with international norms to “bolster investors’ confidence in China’s capital markets.’ Maybe while they were at it they could nail a wooden plank to their head at the same time. China has assessed the world situation and is undertaking course correction. Too many nation in the west are simply trying to get back to 2019
And as far as ‘free world needs to slap a Pigouvian Tax on Ray Dalio and his ilk’, I had to look that one up-
‘A Pigovian tax is a tax on any market activity that generates negative externalities. The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the external marginal cost of the negative externalities. Social cost include private cost and external cost. Wikipedia’
I don’t think that it will happen. If they did that, then they might do similar taxes for things like the fracking industry.
The story I’m telling is:
The China/U.S. trade relationship has resulted in China holding a lot of U.S. debt, whether in bank deposits or securities. These are vulnerable to seizure or default if U.S./China relations get difficult. It’s surely a point that could possibly be raised in any negotiations. Having some western investment lodged in China would restore the balance a little bit.
US “debt” nominally held by China is held on the Fed’s balance sheet, not in China.
China could sell all of it and the Fed could buy all of it.
China would be giving up it’s ability to export to all US trading partners. They are working toward the ability to do this as our policies have pressured them to do.
Yes. That’s the part that’s vulnerable to default and seizure. China could lose that.
Other people’s money that’s lent to China — that’s deposited in China — that’s the money that other people could lose, if push actually came to shove.
Doesn’t work that way.
Chinese exporters get paid in dollars; take dollars to local bank and convert to yuan; bank swaps dollars with Chinese Central Bank for yuan; CCB buys US treasuries.
CCB does this to keep the circuit going so we keep buying their exports.
China doesn’t borrow from abroad, the CCP through the CCB funds what it chooses in yuan and keeps tight grips on it industry and workforce through its control of the currency.
If CCB doesn’t buy Tbills, there’s not much else at the scale of their exports they can spend the dollars on.
It would be hilarious if they started funding their foreign black ops in dollars to sustain dollar demand so we’d continue buying their stuff, paying them to act against us militarily.
If we could export our financial sector to China, their economy would likely collapse within a decade.
I’m certainly not saying that they will, but replacing our income, payroll, and improvements on real estate taxes with carbon and maybe other Pigovian taxes would be a great idea IMO. If you view tax policy as intentional as spending policy, our governments most valued goal is to surpress wages to fight inflation. Which makes sense for the money makers(literally), inflation and wages are the limits on their power. Sucks for people who work for a living or make goods and services for people who work for a living, obviously…
Why assume that Ray Dalio and his ilk care especially for the “liberalism that under pins capitalism”?
China needs investment from the rest of the world to accomplish its economic plans? Since when? That should mean China needs trade deals. But that’s not the subject here. So then China must open up its own markets? Well, financial markets to be exact. So China is now saying they have accomplished their social goals to the point they can let a few foreigners enter their capital markets. They don’t mention anything about trade deals; they’re only talking about their “securities” markets. Bunds. And they are willing to allow foreign securities traders in. They are also willing to fund foreign enterprises – in other words, loan them money. So if this is all true why do they need foreign investment in order to accomplish their grandiose goals? It sounds more like diplomacy. They will let a few securities traders in on a limited scale. Ray Dalio thinks he can buy up Chinese securities and hold them in his private equity fund for 1% when there are other opportunities – like equities that will be forced to inflate with all this over investing? What exactly is Ray gonna buy? A new cracking plant in Saudia Arabia to produce mega plastics? China’s letting western fund managers in implies there is a good profit to be made somewhere which in turn requires that there is some exploitation going on with the business model of the companies doing the bonding because its still the only way they are going to make a profit to service that debt and that further implies that the environment and labor will be degraded. It will all serve to not really “open up” China – as in financialize China – it will financialize the rest of the world rushing to get in on some Yuan. And all this would be fine if the money were being spent to build a clean new world with a green infrastructure and secure fair wages and services everywhere. That would be fantastic. But that’s not how profit works. Profit is extractive, especially when the Chinese are obsessed with “inflation”. So it’s a good bet that I really do not understand a word of all this. It sounds like a diplomatic ploy to begin to become a new reserve currency. And its “stability” will come at the cost of the environment and poor populations. Because profit is synonymous with stability, unfortunately.
It looks to me like they’re trying, very guardedly, to create the conditions to denominate trade in their own currency.
Start by milking the likes of Dalio and other destroyers of real wealth and see how manageable that is for a few years and then expand liquidity through lessons learned.
Stepping cautiously into the cold pool of the post dollar world the US reliance on sanctions is underwriting.
“As most reader know, the post-financial-crisis “recovery” was so weak as to lead quite a few economists to dig into what was causing what they politely labeled “secular stagnation.”
How can you achieve Japanification?
Japan led the way and everyone followed.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently.
The PBoC saw the Minsky Moment coming unlike the BoJ, ECB, BoE and the FED.
How did Japan avoid a Great Depression?
They saved the banks
How did Japan kill growth and inflation for the next thirty years?
They left the debt in place and the repayments on that debt killed growth and inflation.
It’s not as bad as Japan as we didn’t let asset prices crash in the West, but it is this problem has made our economies so sluggish since 2008.
Then the coronavirus hit.
Japan did realise what the problem was and set about deleveraging and reducing private debt.
Western policymakers only worry about public debt, so we used monetary policy to try and cure a private debt problem with more private debt.
Japan did understand the problem, unlike Western policymakers.
What else did Japan know, we didn’t know?
Austerity is the worst thing you can do in a balance sheet recession.
When the private sector are deleveraging, you need to increase public borrowing to maintain the money supply and avoid debt deflation (a shrinking money supply)
In the West, we didn’t try and get private debt down; we didn’t even know that was the problem.
We tried to cure a private debt problem with more private debt.
QE can’t get into the real economy due to a lack of borrowers.
The banks are ready to lend, but there are too few borrowers as they are struggling with the debt they have already taken on. They had saved the banks, but left the debt in place.
We did the same thing.
QE can’t get into the real economy, but it can get into financial markets.
The gap between economic fundamentals and the US stock market widened until it reached 1929 levels.
This is why the Japanese didn’t do much QE until Kuroda, as they knew it couldn’t get into the real economy when people were more concerned with paying off existing debt than taking on new debt.
Richard Koo has no idea what Kuroda is doing and has put this down to him having no central banking experience.
Personally I think Kuroda does know what he’s doing.
He knows QE can’t get into the real economy due to a lack of borrowers, but is using it to inflate asset prices as this is what QE does best.
The Chinese have been doing something we didn’t see in the West.
Learning from their mistakes.
They have made all the classic mistakes everyone makes that uses neoclassical economics, but they learn from them to ensure they don’t make those mistakes again.
Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
The black swan flies in under our policymakers’ radar.
They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.
The Chinese know inflated asset prices are a problem, and tried to help the Americans by pointing out the US stock market was at 1929 levels in 2018.
Davos 2019 – The Chinese know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.
They had pumped bank credit into areas that don’t grow GDP and the private debt-to-GDP had risen to a level they were on the verge of a financial crisis.
Everyone does that with neoclassical economics, but they don’t usually see the financial crisis coming.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
The private debt-to-GDP ratio rises until you get a financial crisis
1929 – US
1991 – Japan
2008 – US, UK and Euro-zone
The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.
They have now realised high housing costs eat into consumer spending and they want to increase internal consumption.
Disposable income = wages – (taxes + the cost of living)
They let real estate rip and have now realised why that wasn’t a good idea.
Everyone that uses neoclassical economics trips up over “the cost of living”.
Western leaders still haven’t realised that a high cost of living makes you uncompetitive in an open, globalised world.
Disposable income = wages – (taxes + the cost of living)
It pushes up wages and reduces profit.
The Chinese have been announcing their findings at Davos.
I think this must have upset everyone else as they weren’t there for Davos 2020.
I was hoping the Chinese would tell me something I didn’t know already as they were making such good progress, but they weren’t there (as far as I could tell from the YouTube videos).