For the general mass of men are satisfied with appearances, as if it exists, and many times are moved by the things which appear to be rather than by the things that are.—Niccolo Machiavelli
In this issue
The nCoV China Shocker: The Lockdown of 80 Cities and Provinces! BSP Drops Overnight Policy Rate as QE Supercharged in December
-BSP Chops Rates Anew, National Government Overlooks the Black Swan Risks of nCoV in China
-The nCoV Economic Shocker: China’s SMEs Sees Gloom and Liquidations!
-The NCOV Induced China’s Government Panic: 80 Cities and Provinces on Lockdown Affecting About 400 Million Citizens!
-Fake News or Information Suppression/Propaganda: The Dr. Li Wenliang Case
-BSP’s Policy Perspective: Throwing Money is the Solution to All Socio-Economic Ailments!
-BSP’s Record QE Jumps Anew in December! The Treasury Yield Curve Flattens
The nCoV China Shocker: The Lockdown of 80 Cities and Provinces! BSP Drops Overnight Policy Rate as QE Supercharged in December
BSP Chops Rates Anew, National Government Overlooks the Black Swan Risks of nCoV in China
With 2019’s historic actions combining cuts in RRRs and policy rates as well as debt monetization, last Thursday’s paring of overnight lending rates by the Bangko Sentral ng Pilipinas (BSP) came as expected.
From the Inquirer (February 7): “Ahead, rather than behind the curve.” Thus said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno in a text message to the Inquirer on Thursday afternoon after the policy making Monetary Board decided to cut its interest rate by a quarter of a percentage point. While the rate cut was widely expected by financial markets, the central bank’s stated reason for doing it signaled a major shift in the way the regulator—previously influenced mainly by lagging economic data—would decide on monetary policy going forward.”
Joined by Bank of Thailand, Central Bank of Brazil, and Bank of Russia, the BSP was one of the four other central banks that went supposedly "ahead of the curve" this week.
Interestingly, the BSP lopped off 100 bps in policy rates from 2019 in spite of another spike in its CPI. January CPI registered 2.9%, a third straight month of increase, since its low last October at .8%—that’s more than a threefold expansion!
Yet, what constituted the basis of the supposed monetary policy going forward? (bold added)
From the same article, “The Monetary Board concluded that the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence,” Diokno said at a briefing, announcing the Monetary Board’s decision to cut the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 3.75 percent…
“While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes that a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds,” he said.
Was “To support market confidence” meant to rescue the stock market index, which had recently endured substantial drubbing? Did some financial VIP drop a call to the BSP chief requesting for this?
And the BSP was alluding to what external headwinds?
From the BSP: The Monetary Board also observed that prospects for global economic growth have weakened further amid geopolitical tensions. At the same time, the Monetary Board noted that the spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months.
Ah, aside from attenuating global growth, which had been reeling from the onus of mounting debt, yes, the coronavirus (nCoV)!
And to cap the justification for their actions: “Meanwhile, the risks to the inflation outlook continue to tilt slightly toward the upside in 2020 and toward the downside in 2021. Upside risks to inflation over the near term emanate mainly from potential upward pressures on food prices owing in part to the African Swine Fever outbreak and tighter international supply of rice. Moreover, there continues to be the burden on the economy posed by the ongoing Taal volcano eruption and the aftermath of typhoon Tisoy. However, uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices.”
It is not clear which commodity prices the BSP referred to, but looking at the energy, grains, and industrial weighted Bloomberg Commodity Index, it has been downhill in January.
So ignore the CPI, and concentrate on infusing dry powder to the banks! That’s what it means by moving forward!
Also, the coronavirus should serve as a convenient pretext.
The coronavirus, the nCoV, would shave the GDP by less than 1%, according to the National Government's planning agency, the NEDA estimates.
From the Inquirer (February 8): A prolonged crisis over the novel coronavirus (2019-nCoV) would likely cut up to P133 billion from the country’s P19-trillion economy, the country’s chief economist said on Friday with the property sector already feeling the effects of the global contagion as well as the recent eruption of Taal Volcano. Overall, the contagion has already hit global travel and tourism—worth $8 trillion or 10 percent of global gross domestic product (GDP)—and the Philippines will likely be affected because tourism accounts for about P450 billion, or around 5 percent, of the country’s GDP, according to Socioeconomic Planning Secretary Ernesto Pernia. The National Economic and Development Authority (Neda) also said preliminary estimates indicate that the economy might lose from 0.06 percent of GDP, or about P11 billion, up to 0.7 percent, or about P133 billion, if the contagion persists inordinately.
And what, again, exactly do they know about the nCoV which everyone does not?
For the "economics is statistics" crowd, the economy, instead of representing human action’s spontaneous market operations are an embodiment of a mechanical machine operated by officials who adjust or tweak its gears or knobs.
The article provides an example, “Since China was the Philippines’ second-biggest source of tourists last year, the prevailing travel ban from that country and the forecast 10-percent reduction in visitors from other countries will likely cut economic production by P11 billion within a single month. If the contagion persists until June at its “steady state,” or similar to current conditions, the reduction in GDP will climb to 0.3 percent, Pernia said. But if the contagion lasts until December, 0.7 percent, or about P133 billion, will be shaved off the Philippine economy.”
If there is anything steady, change is it. But instead of small oscillations, the nCoV, with its present multiplicative process, may bring about fat-tailed risks or rare events that may produce large shocks.
The nCoV Economic Shocker: China’s SMEs Sees Gloom and Liquidations!
Because of the modicum impact of SARS into the domestic economy and the GDP, the mainstream has anchored on it as a paradigm. Yet nCoV is NO SARS. In just two months, the nCoV has already surpassed SARS in the number of infected, and sadly, the death toll as of February 8th. (figure 1, upmost window)
And another thing, in the economic and financial context, the SARS outbreak of 2003 came in the wake of a global recession and global bear market in stocks, which has been diametric of the current environment. There is no meaningful comparison between them.
But still, the stubborn predisposition to ignore the likelihood of a tail risk event.
Some developments emits significant indications of this.
Please pay attention to this survey, uncannily published by the Chinese government-owned media, the Global Times. [February 6, bold and underline mine] (figure 2, middle pane)
…sudden coronavirus strike has cast a shadow over many of China's small and medium-sized enterprises (SMEs), as the extended holidays and difficulties recalling staff will not only dampen production capabilities, but might also mean a whole-year loss for the main drivers of the country's economic growth.
Though there are still difficulties ahead, these fragile but flexible firms are striving to recover their production capability, meet domestic demand and complete export orders on time.
According to a survey from the CEIBS Business Review which polled 995 SMEs covering a wide range of industries including processing, logistics, retail and high-tech, only 9.96 percent firms said they could survive six months with current cash liquidity. More than 34 percent said they could survive only one month.
The Chinese government-controlled press typically redacts the publication of adverse events. So it is remarkable how the potential impact indicated by this survey managed to elude the authoritarian scissors. Was innumeracy the culprit?
Figure 1
How important are China’s Small and Medium Enterprises to the economy?
The OECD gives us a pointer: “In China, micro, small and medium enterprises (SMEs) comprise 97% of all firms, accounting for 80% of urban employment, and for 60% of total GDP in 2013. In 2013, there were about 11.7 million small and micro enterprises and about 44.4 million self-employed entrepreneurs; accounting for 94.2% of all firms. 60.2% of small businesses (excluding self-employed) operate in the services sector (with 36.5% in wholesale, retail and catering; 10.2% in tenancy and business services; 2.5% in information transmission services; 2.5% in real estate industries; and 8.5% in other service industries). In addition, 18.5 of small businesses operate in manufacturing and processing, 5% in construction, and 3.2% in agriculture-related industries.” (bold added)
Get that?
With SME’s accounting for 60% of the GDP as of 2013, and with more than half of these closing after a month, such would knock the winds out of the Chinese economy! How much more if the current pace of nCoV expansion extends to 6-months? Not only will a significant percentage of the population become casualties and devastated, but this would account for a complete MELTDOWN of China’s political economy!
The extent of pessimism is shocking! Though I barely believe in surveys, hey, that’s what their numbers show!
Even if one-fifth of the estimated losses do materialize, the damage to the Chinese economy would still be substantial.
And with the current nCoV official tally of the infected and lost constituting a speck of the population, why would SMEs think with such gloom? The likely answer is fear.
Fear of what?
Perhaps the official figures do not account for reality.
The NCOV Induced China’s Government Panic: 80 Cities and Provinces on Lockdown Affecting About 400 Million Citizens!
The Chinese government has imposed a lockdown to cover at least 80 cities and provinces, according to Taiwan’s media, the Liberty Times Net. The lockdown reportedly involved a stunning more than FOUR HUNDRED MILLION (400,000,000) million citizens or about 29% of the nation’s 1.4 billion population!
Following the flood of arrivals of mainlanders to avoid Hong Kong’s imposition of a mandatory 2-week quarantine starting February 8, the trend of repressive lockdowns expanded to cover the city of Shenzhen bordering Hong Kong on the same day!
The Liberty Times has a timeline of the of China’s stringent ‘closed city’ measures:
From January 23: Wuhan, Hubei, Ezhou, Xiantao, Zhijiang, Qianjiang, and Tianmen.
From January 24: Huanggang City, Xianning City, Chibi City, Xiaogan City, Huangshi City, Jingmen City, Yichang City, Enshi City, Dangyang City, Shiyan City, Hubei Province.
From January 25: Suizhou City, Hubei Province.
From January 31: Wanzhou District, Liangping District, Chongqing.
From January 31: Wuzhong City, Yinchuan City, Ningxia Hui Autonomous Region
From February 2: Wenzhou, Zhejiang.
From February 4: Hangzhou City, Yueqing City, Ningbo City, Zhejiang Province; Zhengzhou City, Zhumadian City, Henan Province; Linyi City, Shandong Province; Harbin City, Heilongjiang Province; Nanjing City, Xuzhou City, Nantong City, Jiangsu Province; Fuzhou City, Fujian Province ; Jingdezhen City, Jiangxi Province.
From February 5: Liaoning Province (14 cities); Kunming City, Yunnan Province; Jinan City, Tai'an City, Rizhao City, Qingdao City, Shandong Province; Nanchang City, Capital of Jiangxi Province; Hefei City, Capital of Anhui Province; Guangxi Zhuang The capital of the autonomous region is Nanning.
From February 6: Jiangxi Province (11 cities)
From February 7: Hubei Province (17 cities); Tianjin; Guangzhou, Shenzhen, Guangdong; Chengdu, Sichuan.
China’s central government has effectively immobilized about 29% of the population, most of whom are denizens of the ELEVEN of the top 15 contributing cities to the GDP! (the top 15 cities are signified by the bold fonts) [Figure 1, lowest pane]
[Nota Bene: Because of insufficient data, I can’t produce the % share of GDP for these closed communities.]
With people’s movements restricted, this translates to a total paralysis of economic activities within such communities!
The quarantining of communities is different than that of individuals. A quarantined community may still transmit diseases if the actions by its members continue to disregard the causes of transmission. And that’s why nCoV continues to surge in spite of such despotic measures!
Meanwhile, provisions to these communities have now become entirely dependent on the rationing from China’s central government! For sustenance at this juncture, China increasingly relies on the world. Thus, she recently announced a cut in tariffs recently imposed on the US.
However, should outbreaks spread to the world, supply chain disruptions would compound on the pressures to the Chinese government!
So for the residents of closed cities, it has become a dystopian Hobson's choice: death by nCoV or by the government. Thus, crimes have escalated, as some have attempted to escape the lockdowns.
Therefore, the despondent undertone of the SME survey reflects on the asphyxiating actions of the increasingly desperate efforts by China’s central government to contain the nCoV.
The Chinese government appears to be in a Panic!
Why the sudden transformation to a modern-day health gulag for 400+ million citizens when the official numbers state the infected population and deaths has signified a fraction of the population?
Has the Chinese government been engaged in a grand-scale cover-up?
And will China’s measures function as the proverbial cure is worse than the disease?
Why then should we discount the risk of the escalation of this tailed risk event to the domestic economy?
Because we have been told so?
Fake News or Information Suppression/Propaganda: The Dr. Li Wenliang Case
Political responses have signified a feedback loop. First, the Chinese government panics. Next, global governments panic. Then, some in the private sector panics. Possibly in the apprehension of class suits, many airlines have suspended flights to China. After, the Chinese government blames others for panicking. So the pot calls the kettle black!
Then the Chinese government whitewashes the mess they’ve created by promising all sorts of things. Drug trial tests, record injection of liquidity ($243 billion last week), and promising policies (mostly subsidies) that magically will expunge the impact of nCoVs!
Next, as part of the psyops, governments everywhere have been warning about misinformation or fake news about nCoV on social media.
The strange part is that who is to tell what defines or qualifies as fake news or misinformation from real events? Is it something really unlinked to the issue/pathology? Or is it something said that goes against the palate or interest of the establishment? Or is it the deliberate manufacturing of evidence?
From my understanding, because of its complexity, medical experts have different opinions about nCov. And the reason for this pandemic (which WHO refuses to admit), is because of this. No one can even establish its source! The US White House has even asked the medical field to investigate its origins.
One thing is certain though, transmissions from the nCoV have been fast, as fast as 50 seconds! And as WHO admits too, nCoV is hard to detect. Contra common viruses, the nCov even thrives in warm places as Singapore!
And even if the Chinese government stringently mandates the wearing of masks (they even use drones to censure people who defy this), some (local) experts insist that masks are unnecessary. Only those with colds and coughs should wear them. But what if they don’t? Should the irresponsibility of the others be a burden to the rest? Or are we being told to reduce demand for it so the government can gain access at the public’s expense? Now the public is told that nCoV can be transmitted by aerosol or is airborne. So fake news, which is which?
Post-mortem celebrity Wuhan’s Dr. Li Wenliang was originally one of the eight doctors who warned about the emergence of nCoV. Sadly, he was arrested for allegedly disseminating rumors and was forced to recant his statement. With the nCoV’s outbreak, Dr. Li turned out to be correct. The Chinese government suppressed essential information to the public. Unfortunately, Dr. Li wasn’t able to escape the disease and succumbed to it. Now he stands as an inspiration to the many against the Xi government’s handling of nCoV. Who peddled fake news anyway?
Here in the Philippines, outside the formal declaration of two infections, one of whom has perished, two other fatalities, reportedly due to severe pneumonia, were suspects of nCoV. However, the curious part is that they’ve been cremated immediately. The same applies to the OFW who died in UAE, which the DoH initially said was because of nCoV. But this was denied by the UAE government.
Have both the governments of the Philippines and UAE been suppressing evidence too?
BSP’s Policy Perspective: Throwing Money is the Solution to All Socio-Economic Ailments!
If all you have is a hammer, everything looks like a nail.
In the eyes of the central bank, the solution to every socio-economic problem is to throw money at them.
Will easing of the money supply conditions cure or help cure nCoV? How?
Will lower interest rates that encourage increased leveraging ease the dislocations brought about by nCoV or by the political responses to it? How?
Or, how will debt replace revenue losses from substantially diminished hotel occupancy from the decreases in tourist arrivals brought about by nCoV?
Figure 2
Partly designed to boost the GDP, the BSP has been resorting to tweaks in its overnight lending rates.
All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping.
As a rule, the more money created by the central bank and the banking sector, the larger the monetary spending will be. This in turn means that the rate of growth of what is labeled as the real economy will closely mirror rises in money supply.
The BSP’s M3 spiked 11.4% in the 4Q 2019 from 7.7% in the previous quarter, which has primarily been responsible for the 6.4% jump in the GDP from 6.05% over the same period.
Although total bank credit expansion improved to 10.63% in the last quarter of 2019 from 10.4%, the outsized growth of M3 has been a product of the BSP’s increasing monetization of NG’s debt.
The topmost chart in Figure 2 exhibits the congruity of the fluctuations between GDP and the M3, which reinforces the Austrian school’s view that monetary pumping has been responsible for shaping the GDP.
The subsiding pace of bank lending has been illustrated by the fading bank credit intensity, a significant factor for the diminishing annual GDP trend. (Figure 2, middle pane) This trend is further accentuated by the diminishing returns of bank credit expansion, expressed by the continuing rise of bank credit share of the GDP relative to its falling returns. (Figure 2, lowest pane)
Remember that the BSP chopped a whopping 400 bps in the banking system’s reserve requirement ratio in 2019, that’s aside from the 75 bps of ON RRPs rate cuts, both policies have barely improved bank lending in December.
Needless to say, the BSP’s tool of relying on bank credit expansion through easing policies appears to have maxed out.
The question is why and what has been stalling the ability of the banking system to deliver political objectives through credit expansion?
BSP’s Record QE Jumps Anew in December! The Treasury Yield Curve Flattens
Figure 3
In lieu of the banking system’s inability to juice up the GDP, the BSP has taken matters into its hands. It has been revving up its inflationary policy tool of financing the public debt.
The BSP injected a staggering Php 468 billion, a 24.4% spike YoY, to the banking system last December through its net claims on central government! Net claims on the NG soared to Php 2.378 trillion, representing 12.78% share of the GDP, a high last reached in 2010.
The combined effects of such massive injections of liquidity appear to have been channeled towards demand deposits, which growth jumped by 16.8% from 13.6% a month ago.
The RRR cuts, which must have infused some Php 100 billion, may have powered the growth in currency in circulation or cash to 13.3% from 11.3%.
On a month on month basis, injections from RRR cuts and QE must have reached Php 170 billion.
Why the need for such infusions with the scale of “shock and awe” if the banking system has been robust as popularly projected?
With the deluge of cash, has it been a wonder why the CPI has been spiking?
Figure 4
And while the BSP inundates the system, the overall effect has been to contribute to the decline of the NG’s measure of growth, the GDP. Naturally, the crowding out of the peso, through mass liquidity injections, which represent indirect taxation or the inflation tax, has taken its toll on the economy. Thus, even with an overstated GDP, redistribution has led to a lowered standard of living.
And yet domestic strains have resurfaced.
Even with record subsidies to the banking system, the bizarre part has been the recent relapse of the treasury yield curve, possibly signifying a re-tightening of the bank’s liquidity. So perhaps the CPI may soon peak, and start to taper off.
Finally, despite record highs in nominal levels, the growth in both public and private debt slowed in 2019. Nevertheless, with the growth of the overall systemic leverage running faster than the GDP, its share to the GDP jumped further to 92.06%, the highest in recent history!
If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase
In short, the BSP has been boxed into an unsustainable growth dynamic founded on mismatches from bank credit expansion.
And given all these, how should the Philippine banks and financial system fare in the face of the FEAR underwritten by nCoV, and possibly ventilated through the forthcoming economic and financial shocks from China?!
Interesting year of the Rat indeed!
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