The Young and Restless, China vs India, Who’s on First

On the occasions we take public transit, our walk to the bus takes us by a cemetery. It’s a helpful reminder on our way to meetings which may contain challenges, puzzles and even on occasion acrimony, that in the long run, it will not matter. On a recent such walk, we were reading on our smartphone that Seattle has set a 122-year record for rain. It was, in fact, raining while we read this news. As we looked up from our phone, we saw a cemetery worker fixing an automatic sprinkler. We noted that all the sprinklers were turned on, spraying water onto the already damp environment, which we found neither efficient nor smart of the cemetery. Compounding this, one of the sprinklers was spraying directly into the sidewalk upon which we trod. We are one of the few Seattleites who uses an umbrella which we turned from the sky towards the sprinkler to block its rush of water. As we passed by another tombstone, we thought at least stupidity is not dead. But even as close our umbrella we open up the skies to France’s young and restless, to what India is exporting more than China and to who is emitting the most CO2 into the atmosphere. It’s this week’s International Need to Know, coming to you weekly, almost as inevitable as death and taxes, but much more useful, sweet and helpful.

Without further ado, here’s what you need to know.

The Young and the Restless

Explanations for the results of the French election, like explanations for most election results, like life itself,* are complicated. We could post a myriad of charts about the election but today we choose only two. The first shows who the young voted for, and it was not for the remaining centrist in the race, Macron. No, the populist on the left, Melenchon received the most number of votes from the age 18 – 24 crowd, with the populist on the right, Le Pen, coming in second among hip millennials. This is perhaps not surprising given a) that as in much of Europe, youth unemployment continues to be high in France (23.5%); and b) as we told you last year, democracy’s brand with the young is not as strong as it was with previous generations. The second chart below (courtesy of Ian Bremmer’s Twitter feed) maps high unemployment geographic areas with where Le Pen did best, and the similarities are striking. The French election like many elections in the last year have brought to the fore two crucial issues for the world–economic stagnation and an increasing affinity for authoritarianism. These two issues, of course, are related.

*We find ourselves thinking like a French philosopher.

    

China vs. India on Exports

China has far outpaced India in merchandise exports over the last 15 years. Everyone knows that. But perhaps not so well known, though obvious when one thinks about it, is that India is a much larger exporter of services than China, service exports being things like software, programming, architecture, engineering and the like. China is trying to transform into more of a services economy and one might expect that services export gap with India to narrow over the coming years. But, for that to happen, we expect China will have to do something about intellectual property theft and other associated issues. It will be difficult to have trust in services provided by China under the current legal and cultural norms there. That is not to say that China does not have a large services industry, including in information technology (Tencent is very large and very innovative), but will these services translate internationally? We expect they will over time and that will eventually compel China to open up its markets to foreign competition. Interestingly, both China and India’s economies are roughly equal in their dependence on exports. For China, exports are 22% of GDP and for India, they are 20%. But, China relies on goods exports, and India relies on service exports.

 

Who is on First?

We recently came across on Twitter (one of the worst human inventions of all time, and yet one we can’t stop ourselves from using) the first chart below showing China far and away as the largest emitter of CO2 into the atmosphere. China’s environmental problems are a huge challenge. Fortunately, they are working to address these environmental problems, although often it is a one step forward, one step back process. By its sheer size and increasingly developed economy, what China does or does not do, will have a huge effect on climate change efforts. But, it’s important to note China is not even close to being the largest emitter per capita. As you see in the second chart below, Australia takes that dubious prize. The U.S., the second-largest overall emitter, is a much larger emitter than China per capita. Everybody’s favorite northern cousin, Canada, is also, because of its large energy industry, a large per capita emitter.

 
 
Emissions per capita (t)    

IMF Explanations of Declining Labor, Are We Wrong about Chinese GDP, Where the Money is Going

It is all about the hunt, the seeking, the thrill of the chase in this little world of ours. And so after many years, countless hours of research, many false leads, we are ecstatic to announce that we have finally found a bialy worth its name here in the Pacific Northwest, the home of the worldwide headquarters of International Need to Know. Wait, what is a bialy you ask? Ahh, a bialy is like a bagel but a thousands times better–baked rather than boiled and rather than a hole, the middle contains onions or garlic. We sampled bialys as a child visiting family in New York and continued to enjoy them over the years whenever we were in the big city. But outside of New York they are hard to find and almost impossible in the Seattle area. A few local bakeries carry something they claim are bialys but they are virtually unrecognizable from the real thing. But then our friend (the now sainted) Pete Gladhart handed us a bialy from The Bagelry in Bellingham, Washington, and as we bit into it the skies opened and glory (and taste) rained down upon the land. For this was a bialy almost as good as Kossar’s on the Lower Eastside of Manhattan. Unfortunately, Bellingham is a long drive from our Seattle headquarters so as we make plans to develop a bialy food truck with a secret method of replicating New York bialys we bring you an explanation for the decline in labor’s share of income, ask whether we’ve been wrong about China’s GDP and tell you where the money is going. It’s this week’s International Need to Know, the new, better, more honest, non-harassing, no-spin zone of international news.

IMF-Splaining of Decline in Labor Share of Income

Earlier this year we pointed out that the global share of corporate income has been decreasing since the early 1980s, noting “it’s not just in developed countries like the U.S., Germany and Japan–China is seeing the same trend.” We did not hazard an explanation for this trend but just in time for kids and anarchists to dance around the May Day Pole, the International Monetary Fund (IMF) does, arguing that “this trend is driven by rapid progress in technology and global integration.” The reasons for the trend differ by type of economy. In advanced economies, the IMF asserts, “half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.” In emerging markets, on the other hand, the IMF states, “We find that global integration, and more specifically participation in global value chains, was the key driver of declines in labor shares in emerging markets.” The IMF’s claim is that such integration is “shifting the production in emerging markets and developing economies towards more capital-intensive activities.” We’re not sure we buy these explanations for the decline in labor’s share of income but since we raised the issue we offer up the IMF’s ideas for the cause of this trend.

Are We Wrong About Chinese GDP?

On more than one occasion we have joked about the validity of official Chinese government statistics on GDP growth, asserting they are higher than the actual growth of the economy. But is the joke on us? A new economic paper tells us we are wrong—not that the government’s statistics are correct but that the official GDP figure is actually undercounting GDP?!!! The method these three economists used was to count satellite-recorded nighttime lights, something that cannot be manipulated the way GDP statistics can be. To vastly oversimplify, these economists found that they could correlate the increase in these lights to increases in GDP and to other variables which simulate economic growth such as electricity use, freight volume and bank loans. Using the nighttime lights variable they calculate that Chinese GDP figures are actually higher than what was reported by the government. The  economists used nighttime light data from 2004 to 2013 before many of us thought China was having economic difficulties. But the paper also examined late 2015 data: ” We find that GDP growth in 2015 Q4, a time when the financial press was awash with stories about a hard landing of the Chinese economy, is somewhat higher, but quite close to the officially reported rate, with a 95% confidence interval…”  We are curious what nighttime lights show for 2016 GDP growth. This paper does note that the growth seems to be driven by credit which could foretell an economic stall when this credit growth is removed. While we await others analysis of this economic paper that is upending our beliefs, we file it in our increasingly large file labeled “China is complicated.”

China’s real GDP Growth. You do the math! Or, maybe not, the math the economists used is a bit complicated:

Where the Money is Going

The world seems to be more volatile than usual, at least if you scan the headlines. But even in the midst of the constant churning, money continues to flow around the world. In which places do investors currently have the most confidence? The 2017 A.T. Kearney Foreign Direct Investment Confidence Index tells us the United States is number one for the fifth year in a row. In fact, Canada, coming in at number five, makes North America an investment destination powerhouse. Rounding out the top five are Germany, which rose to second as China fell to third (but the nighttime lights?) and the United Kingdom comes in fourth. The folks at A.T. Kearney were surprised that the UK did so well given the uncertainty of Brexit. A.T. Kearney explains the the U.K.’s investment destination resilience, by noting that, “U.K. Prime Minister Theresa May has promised they will emerge as a ‘Global Britain,’ one with fewer cumbersome EU-mandated regulations…” We still hope to do a deep dive into Brexit in the coming weeks–in fact, we are assembling our mask and oxygen tanks as we type.

Who is the World’s Superpower, Where Taxes are High and Where Millennials Buy Houses

Earlier this week we spoke at a business event about the so-called Border Adjustment tax as well as about H1B visas. On the latter we noted that many analysts frame the issue as there not being enough talent domestically to fill certain high skill positions. This is certainly true (just as we are sure there are certain abuses in the H1B system–this is the nature of all such systems in this little world of ours). But, we also stressed it is important to recognize that companies are in a worldwide competition for talent. The best talent that is not allowed to work for Microsoft, Amazon or Google, will work for their competitors overseas. Think about our beloved Seattle Mariners baseball team without international players Felix Hernandez, Robinson Cano and Nelson Cruz…hold on a minute! The Mariners are horrible, bad, terrible even with this international talent!* As we search for a different sports analogy, we bring you news about which country is considered the world’s economic superpower, which countries tax labor the most and where millennials own houses. It’s this week’s International Need to Know, not giving up our plane seat as we fly into clouds of international information and data.

Without further ado, here’s what you need to know.

Who is the World’s Superpower?

If we utilized click bait to gain readership from Marvel Universe readers, that headline would have read, “What is the World’s Superpower?”  Fortunately we are not so sleazy in seeking eyeballs. But last week in asking whether China is dominant, we concluded: “..for now the world leadership vacuum is exactly that, a dark empty void, for good, bad or between.” This week, however, comes news that the world, when choosing between the U.S. and China, now sees the U.S. as the world’s economic superpower as you see in the chart below. According to a Pew survey, most countries now rank the U.S. higher than China for economic power. That’s very different than in 2012 when countries thought just the opposite, ranking China as the main economic superpower. But, today the world is looking through red-white and blue-colored glasses. “By contrast, in the most recent release of the survey, only three of 16 countries picked China over the US: France, Canada, and Australia.” Not sure why the French (and French Canadians and French Aus–, er, uh, Australians) have such a different view of economic power.  Regardless, in terms of leadership, there is still a void, perhaps even more so now since the country seen as the greatest economic power in the world is less so a political one.

World Tax Rankings

Most of our American readers are busy preparing to file income taxes next week, well, except for those in perpetual audit. But which countries have the highest tax rates on labor? Among Organization for Economic Cooperation and Development (OECD) countries, the answer is Belgium. The OECD measured “the level of personal income tax and social security contributions in each OECD country by calculating the ‘tax wedge’ – the total taxes on labour income paid by employees and employers, minus family benefits received, as a percentage of the labour costs of the employer.” Interestingly, this tax wedge for the average worker in OECD countries has been falling for a number of years and in 2016 the average fell to 36%. But, the OECD points out that although the OECD average tax wedge decreased slightly in 2016, it actually increased slightly in more countries (20) than it decreased in countries (14), with most of the increases and decreases driven by changes in personal income tax. So some countries have sizably cut their income taxes which lowers the overall average but the majority of countries are increasing their tax on labor. Keeping with the austerity program imposed there, Greece suffered the largest increase in these types of taxes. Regardless of the rate, how many Greeks actually pay their taxes is another matter.

Share of Millennials Owning Houses

As millennials increasingly take their rightful place on the world stage, let’s examine where they are most successful, or at least are fulfilling their dream to own their own home. According to HSBC, China has the largest share of millennials who own a home. The percentage in China, 70%, is so high, that we doubt the validity of the HSBC survey. Nonetheless, the numbers provide an interesting comparison. Mexico comes in second which helps to explain the continued net negative immigration of Mexicans into the U.S–there is not as much economic incentive for Mexicans to come work in the United States. France and Malaysia are third and fourth in the number of millennials owning a home. What does the future portend for millennial ownership? Pay particular attention to the second graph below comparing house price growth and salary growth in these countries. In many places, salary increases are not keeping up with housing price increases. Does this mean ownership rates will decrease, salaries increase, personal debt rise or some other factors change? As we go pay our latest mortgage bill, we await the answer.

 

Deep Dive into China Plus Changes in World Population

Recently at the gym while exercising, we were watching the Boston Celtics demolish the New York Knicks. It was a rather boring game. We looked across the room and saw a bank of TVs in front of a set of treadmills that were showing a different basketball game. We squinted our eyes to figure out who was playing. Later when we walked over to the TVs we realized the channel was showing a video game of basketball–the treadmillers preferred to watch two people playing a video game simulating a basketball game rather than watch an actual NBA game. I suppose we can’t entirely blame them given the poor entertainment value of the Celtics-Knicks matchup. We took two lessons from this: First, even admitting our bad eyesight, it is clear video game graphics have advanced so much that from a distance it is difficult to tell reality from virtual. Second, we are near a new era when it will be impossible to distinguish real life from artificial. Of course, if the recently popularized theory is true that we are all just a software simulation, then we are building imaginary worlds on top of illusions. Speaking of imaginary worlds, from time to time we will take deeper dives into issues and places, and this week, in honor of President Xi Jinping’s visit to the U.S., we look at the always confusing, confounding, complex China, including China’s role in the world and the state of its economy, finishing up with global population changes. It’s this week’s International Need to Know, using our game controller to keep you apprised of our massively multiplayer online role-playing world.

Without further ado, here’s what you need to know.

Is China Dominant?

Is China Dominant? That giant sucking sound you hear? Many people claim it is the United States abandoning its 70-year role as a global leader. Into that void many people assert (their voices are at least powerful enough that they reach our tender ears) strides China. They are asserting this is true for trade, the environment and the world economy in general. And it is true that China is much more important than it was twenty years ago and even ten years ago. But, as we noted in this space at the beginning of the year, it is difficult for China to be the leader of free trade when its borders remain mostly closed to trade and investment. China is working to clean up its environment and deserves credit for what they have accomplished, but China’s laws and practices have a long ways to go before they reach the standards of developed countries. And finally there is finance. China’s formal and shadow banking systems are murky and we’re not certain anyone, perhaps even the Chinese themselves, completely understand them. And when we look at global financial payments, China still lags far behind the U.S., the EU (the Euro is not gone yet!–soon we will dive deep into the roiling English Channel of Brexit and the EU) and even the British Pound. For that matter, though close, the Renminbi is still behind the Japanese Yen and Canadian dollar in its share of global payments. Barring catastrophe, we expect over the next two decades that China may become a leader in any number of these categories. But for now the world leadership vacuum is exactly that, a dark empty void, for good, bad or between.

China’s Economy is…?

As President Xi sits down to a meatloaf sandwich in Mar-a-Lago, what is the state of his country’s economy? By many measures, the economy is doing fine. After some worries last year, the economy appears to have stabilized. The government has launched a variety of initiatives including a new Silk Road initiative and a new Special Economic Zone in Hebei Province. On the other hand, we have warned before that official data in China is like a cable company saying it will be at your house between noon and three, not always to be trusted. A year ago, we looked at beer sales to see what was really going on in China’s economy and as we often do, we turn to beer again, and noodles. Reuters reports that “Tsingtao Brewery Company, China’s number two brewer, posted its steepest drop in net profit in 20 years last week, blaming tough competition and weak demand. Noodle maker Tingyi saw profits drop by a third.” The stable economic growth also appears to be built on credit which has grown at a much faster rate than the economy. Much of recent investment in China is by state owned companies. For how long can China goose its GDP with credit? Finally, perhaps most relevant to the host at Mar-a-Lago and as we noted in the post above is that China’s economy is still very much closed in many ways. For example, as you see in the graph below, China ranks as the second most restrictive major economy in the world. Or, as former Treasury Secretary Henry Paulson says, China’s market is far more closed today than it was a decade ago when he was negotiating with the Chinese. So China’s ship is doing well but has some rocks and treacherous islands (not necessarily in the South China Sea) to navigate ahead.

As the World Turns

Sixty some years ago in 1950, China, India and the U.S., in that order, were the largest countries in the world by population. The same is true today but many of the other top populous countries are very different. As you see below in the graph courtesy of Robert Ward of the Economist Intelligence Unit, Russia has fallen from fourth to eighth, Japan is barely in the top ten and Britain and Italy are nowhere to be found. Meanwhile places like Indonesia, Nigeria and Bangladesh have climbed into the top ten. If current trends continue, always an iffy proposition, India will be larger than China and Nigeria larger than the U.S. in 40 years. To give a sense on how long ago 1950 was and at the same time how much constancy there is in certain parts of life, this year is the first baseball season without Vin Scully or Connie Mack working in some level of it since 1885. Now graph that!