Chinese Company delivers deep-sea engineering equipment

World's largest deep-sea engineering equipment built by a Chinese company was delivered on Wednesday to its Brazilian client.

Wuchang Shipbuilding Industry Co., Ltd. delivered four sets of buoys and 16 sets of foundations to Petrobras as part of the Sapinhoa-Lula NE BSR Buoys & Foundations Project, which will be installed in an offshore oilfield in Brazil to work for a period of 27 years.

The equipment is able to fit in deeper and more complicated marine environment and has extensively enlarged the scope of offshore oil exploitation, said Victor Bomfim, senior vice president of the project contractor Subsea 7 S.A.

Peter Wang, managing director of Eastern Horizon Consultant, said the delivery indicates that China is now capable of building high-end deep-sea engineering equipment.

China's GDP Growth Constraints

The unprecedented economic growth in China over the past 30 years can be attributed
largely to the demographic dividend. That is, growth of the working age population
guarantees an adequate supply of labor; a decline in the dependence ratio (the ratio of the
dependent population to the working age population) helps to maintain a high savings
rate, which is the condition for capital formation; and an unlimited supply of labor prevents
return on capital from diminishing, which allows heavy investment to be the main source of
GDPgrowth (Cai and Zhao, 2012).
The demographic dividend is not derived from population size or the growth rate of the
 population, but from a specific feature of the population age structure.
Simply put, an increase in the proportion of the working age population in the total population
and a decline in the dependence ratio provides a country an opportunity to have a high savings rate, heavy investment and rapid economic growth.
  The country thus benefits from the demographic dividend. Over the period of fast growth,
few would consider the population age structure as a constraint of economic growth in
China.
However, the population age structure is ever-changing. As a result of population aging
the working age population stops growing and the dependence ratio no longer
decreases; eventually, the demographic dividend will cease to exist. Labor shortage,
diminishing return on capital and a decline in the savings rate will lead to a slowdown in
economic growth. This is what has occurred in China in recent years, particularly since
2004.
The potential GDP growth rate is determined by supply-side factors, including labor
capital and total factor productivity(TFP). In a growth accounting equation, holding constant
the labor force participation rate and the natural unemployment rate (i.e. the non-accelerated
inflation rate of unemployment , a reduction in the working age population will
directly reduce the potential GDP growth rate. In addition, the reduced supply of labor,
which causes diminishing returns to capital, and the increase in the dependence ratio,
which causes a decline in the savings rate, do not support the fast growth of capital
formation. Therefore, ceter paribus,the working age population in China will inevitably slow its economic growth.

Based on the data of the 6th National Census, the China Development Research Foundation
 (CDRF, 2012) predicts the trend of the population age structure to change, and show that
 the working age population, when assumed to be aged 15 to 59 years, started to decline in size in 2011, while the population dependence ratio calculated  based on the working age
 population (aged between 15 and 59 years) began shrinking in
the same year. This trend will not be reversed even if there is a moderate relaxation of the
one-child policy. Given that the population factor has had such far-reaching impacts on the
determinants of China’s economic growth, including labor supply, the savings rate, the
marginal return on capital and total factor productivity, such a change in the population
age structure is bound to reduce the potential GDP growth rate in China.
Based on the latest population data, the present paper simulates a decline in the average
potential GDP growth rate from 9.8 percent over the period from 1995 to 2009 to 7.2 percent
during the 12th Five-year Plan period (2011–2015) and 6.1 percent over the 13th Five-year
Plan period(2016–2020).Therefore,determining how to sustain economic growth is an important
challenge facing China.In light of the properties of the potential growth rate and the experiences
of China and the rest of the world, we make the following two suggestions.

First, the government should not seek an actual growth rate exceeding the potential
growth rate.
Second, the potential growth rate can be enhanced through the application of measures
to enlarge the supply of labor and capital, and to improve productivity. This requires
deepening reforms in various areas, such as the household registration system reform and
institutional reform.

By: Fang Cai,Yang Lu
       Institute of Economics And Politics
       Chinese Academy of Social Sciences

Canadian TSX index closes lower

Canada's main stock index fell on Wednesday as sluggish economic data out of China and a resurgence of debt crisis fears in Portugal revived global growth concerns and caused declines in most major sectors, offsetting a jump in shares of gold miners.

Data showed China's services sector expanded only modestly in June with the vast construction industry acting as a drag on growth, a further sign that the world's second-largest economy is losing momentum.

Portuguese 10-year bond yields topped 8 percent and its stock market dived after the country's president summoned main political parties for crisis talks over the government's future.

The market fears a snap election could derail Lisbon's exit from an international bailout.

The Toronto Stock Exchange's S&P/TSX composite index was down 45.61 points, or 0.38 percent, at 12,132.71.

Nine of the 10 main sectors on the index were in the red on Wednesday.

Source: Reuters

Close of Half Day Session

Stocks ended slightly higher in a volatile half-day session on Wednesday as traders squared positions before the holiday and Friday's job market data.

The Dow Jones industrial average  rose 56.14 points or 0.38 percent, to end unofficially at 14,988.55. The S&P 500 gained 1.33 points or 0.08 percent, to finish unofficially at 1,615.41. The Nasdaq Composite added 10.27 points or 0.30 percent, to close unofficially at 3,443.67.

Source: Reuters

New Framework for Swiss Banks cooperation with U.S. Authorities

 According to an article in The Wall Street Journal,Switzerland's cabinet agreed Wednesday to a new plan for resolving disputes between the country's banks and U.S. authorities cracking down on offshore tax evasion, raising hopes the long dispute could be drawing to a close.

The Federal Council said it had designed a broad framework that would allow Swiss banks to cooperate with U.S. authorities investigating possible tax evasion by wealthy Americans. Banks would apply individually for permission to work with U.S. authorities to resolve tax disputes, according to the statement.

The plan doesn't allow Swiss banks to pass client information on to U.S. authorities, but does allow banks to provide information on accounts that were moved to other institutions, as well as details regarding bank personnel, attorneys and accountants. The plan calls for protection of bank employees and third parties.

With Wednesday's announcement, Swiss politicians have indicated they still hope to provide a framework for many of the country's more than 300 banks to settle matters with U.S. authorities.

The Swiss Bankers' Association said it welcomed the outcome, saying it would "finally create legal certainty" for Swiss banks.

New Finance Minister in Portugal

Portuguese former Secretary of State of Treasury Maria Luis Albuquerque (L) takes office as Portugual's new Finance Minister before President Anibal Cavaco Silva (R) at a ceremony held at the presidential palace in Lisbon on July 2, 2013. Albuquerque replaced Tuesday former Portuguese finance minister Vitor Gaspar who resigned on Monday

Increasing North American oil output already producing short term benefits

Growing North American oil supplies promise to increase U.S. energy security, but they already are helping deliver a more global benefit: stable oil prices. 

Among the beneficiaries of that are policy makers in Washington, who have less need to worry about the market impact of decisions they make.

On Jan. 15, the operator of a North Sea pipeline shut the system down after a leak, bottling up oil output from nine offshore production platforms. In years past, such an outage might have sent oil prices hurtling higher. Yet prices that day actually declined a bit.

The new supply isn't yet pushing prices lower, and analysts differ over whether it will. But it is acting as a shock absorber in a global supply chain that pumps 88 million barrels of oil to consumers each day.

In the late 1990s, oil prices started a long rally, climbing more than tenfold over a decade as demand outstripped production growth. Though prices plunged during the 2008 financial crisis, they soon started up again. The near-perpetual tightness conditioned markets to expect price jumps after even minimal supply interruptions. That is starting to ease, as U.S. benchmark oil moves in a relatively tight range between roughly $90 and $100 a barrel—closing regular trading Tuesday at $99.60 a barrel.

Certain developments could change this picture. If oil prices start falling, as some economists forecast, OPEC members would have less incentive to do the spending that keeps so much unused capacity at the ready. Alternatively, if a pickup in economic activity in big consuming countries drove up their demand, this could reduce the new global cushion.

There also are questions about the economics and geology of the U.S. oil boom itself. The cost of producing oil in America's hottest fields is unsettled, and varies widely. If costs generally end up on the high side, producers will need higher global prices to justify continued drilling. In addition, U.S. shale-oil wells have tended to deplete quickly, raising questions about the sustainability of the recent production growth.

Source: WSJ

Another Crisis in the EU

Another crisis in the E.U., this time it is in Portugal.Finance Minister Vitor Gaspar quit Monday, and Foreign Minister Paulo Portas, head of the junior member of the governing coalition, stood down Tuesday.

And why is it in crisis? Well, of course, it’s all down to the austerity needed to keep Portugal in the euro zone.

Gaspar is held responsible for the severe austerity program which was the price of bailout funds from the European Union and International Monetary Fund, and his departure comes shortly before the next review of the bailout by Portugal’s creditors, which starts mid month.

The austerity program was softened a little at the last review, but the country entered its third year of recession in 2013, with joblessness at record highs and struggling with the largest tax hikes for a generation.

Now its stocks are plunging and its ten-year bond yields are by almost 1.5 percentage points higher according to TradeWeb, yielding a high of 7.88%.

“A potential vote of no confidence could topple the government and pave the way to new elections. All this could be perceived as undermining Portugal’s commitment to its bailout program and fuel peripheral risks,”

Source: WSJ

Higher interest rates affects Housing

Expectations the Federal Reserve will slow its economic stimulus program by the end of the year continued to push mortgage rates higher last week, sapping demand from potential homebuyers, data from an industry group showed on Wednesday.

Rates jumped to the highest level since July 2011, which also cut into refinance activity. The share of refinance applications fell to the lowest level in more than two years.

Interest rates on fixed 30-year mortgage surged 12 basis points to average 4.58 percent in the week ended June 28, the Mortgage Bankers Association said.

While the rise in rates had appeared to cause some potential buyers to get into the market earlier in June, MBA's seasonally adjusted index of loan requests for home purchases decreased 3.1 percent last week.

Refinancing activity was hit much harder and the index tumbled 15.6 percent last week. The refinance share of total mortgage activity slumped to 64 percent of applications from 67 percent the week before. It was the lowest level since May 2011.

The overall index of mortgage application activity, which includes both refinancing and home purchase demand, slid 11.7 percent.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.
Source: Reuters

Economic rebalancing

We all know how the global economic crisis began. The banks over-lent to the housing market. The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans. Banking failure caused a credit crunch. Lending dried up and economies started shrinking.So governments bailed out banks and economies, producing a sovereign debt crisis. With everyone busy deleveraging, economies failed to recover. Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.

So how do we get out of this mess.The familiar debate is between austerity and stimulus. “Austerians” believe that only balancing government budgets and shrinking national debts will restore investor confidence. The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.

I am believer that the recovery from the crisis requires fiscal stimulus. I don’t think monetary policy, even unorthodox monetary policy, can do the job. Confidence is too low for commercial banks to create credit on the scale needed to return to full employment and the pre-crisis growth trend, however many hundreds of billions of whatever cash central banks pour into them. 

 So, like Paul Krugman, Martin Wolf, and others, I would expand fiscal deficits, not try to shrink them. I advocate this for the old-fashioned Keynesian reason that we are suffering from a deficiency of aggregate demand, that the multiplier is positive, and that the most effective way to reduce the private and public debts a year or two down the line is by taking steps to boost growth in national income now.

Robert Skidelsky says "Redistributive measures go quite well with stimulus policies, because they may be expected to increase aggregate demand in the short term (owing to lower-income households’ higher propensity to consume) and minimize the economy’s dependence on debt financing in the long term. Initial damage to the confidence of the business class caused by higher taxes on the wealthy would be balanced by the prospect of higher overall consumption"

Re-balancing the economy from gas-guzzling to energy-saving – and from private to public consumption – is bound to alter the goal of economic policy. Maximizing GDP growth will no longer be the top priority; rather, it should be something we might want to call “happiness,” or “well-being,” or the “good life.”

The radical case is that the pre-crisis economy crashed not because of preventable mistakes in banking, but because money had become the sole arbiter of value. So we should be energetic in seeking recovery, but not in a way that simply reproduces the structural flaws of the past.

By Robert Skidelsky

Precious Metals Quotes

Gold Price Futures     3 months                           1,250.13

Silver Price Futures   3 months                               19.65

Likonomics

China's financial policymakers are managing well and the reforms put forward by Premier Li Keqiang are essential for sustained economic growth, says Barclays CEO Antony Jenkins.

All financial crises in the banking system stem from two factors, he said Tuesday in an interview with Xinhua.

The first, is when risk is misunderstood, mispriced and mismanaged, and the second is the drying up of liquidity.

If there is mismanagement and mispricing of the risk within the system that could be addressed over time through deleveraging, the crisis can be avoided, Jenkins said during his first official visit to China as Barclays' new CEO.

Over the past two weeks, China's interbank overnight rate has reached 10 percent, compared with its normal level of around 2 percent. The People's Bank of China, the central bank, waited for several days before stepping in to backstop the banking sector.

Market analysts believe that the developments are intended policy results to press banks to deleverage and make better use of existing liquidity. The move sent a clear warning to China's financial institutions to step up efforts to contain risk.

"It seems to me that the authorities here are managing the situation well," Jenkins said.

Deleveraging, together with no stimulus and structural reform, is one of the three pillars of 

Likonomics," a term coined by Huang Yiping, Barclays' chief economist in emerging Asia. The term refers to the economic policies put forward in March by Premier Li.

"It is also consistent with my own view of the state of the global economy," he said. "We are entering a period of structurally lower economic growth globally than the period that we experienced in the run-up to the crisis of 2008."

Source: Xinhua

China's Consumer Price Index slowed to 2.1% in May

The prices of farm produce in 36 major Chinese cities slightly retreated for a second straight week due to rising supplies, the Ministry of Commerce said on Tuesday.

The wholesale prices of 18 kinds of vegetables went down 4.6 percent last week from a week earlier, while the prices of eight aquatic products shed 0.4 percent.

The cost of eggs dipped 0.1 percent week on week, but the price of pork, the country's staple meat, gained 0.5 percent, the ministry said.

Meanwhile, the prices of major production materials, including nonferrous metals, rubber and fuel, continued to ease last week, marking the seventh straight weekly decline.

Food prices account for about one-third of the prices used to calculate China's consumer price index (CPI), a main gauge of inflation.

China's CPI growth slowed to 2.1 percent in May.

Source: Xinhua

China's Central Bank boosts support to small business in rural areas.

The People's Bank of China (PBOC) said Monday that it has arranged a 12 billion-yuan (about 1.94 billion dollars) re-lending quota to boost financial support for small and micro-businesses and rural areas.

Re-lending is a monetary tool used by the PBOC, the country's central bank, to increase financial institutions' liquidity and guide credit flows.

The central bank requires that funds from the quota be credited to small and micro-businesses, as well as the agricultural sector, rural areas and farmers.

About 162 billion yuan has accumulated in the re-lending quota to date, and 45 percent has gone to small and micro-businesses and 27 percent to rural areas.