Third Quarter 2019 Economic and Wood Product News

weaponizing trade

The Economist

This quarter we focus on many aspects of weaponizing trade. The impacts affect every country, and directly or indirectly, all aspects of global trade and industries. May the force be with us and the Donald elsewhere…

Southeast Asian Leaders to Meet in Shadow of Trump’s Trade War


Michelle Jamrisko

June 20, 2019, 3:00 PM MDT

  •  U.S.-China tension throwing spanner into Asia’s export engines
  •  All heads of 10-member ASEAN due at weekend summit in Bangkok

Bangkok Port Thailand

Shipping containers sit stacked among gantry cranes at the Bangkok Port in Bangkok, Thailand.

Photographer: Brent Lewin/Bloomberg

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The leaders of Southeast Asia’s economies are set to gather in Thailand this weekend as the shadow of President Donald Trump’s trade war keeps the region on edge.

The summit of the Association of Southeast Asian Nations comes two weeks after Group of 20 finance ministers faced similar challenges: wobbling demand and bleeding business and investor sentiment as the U.S. and China feud. The weakening electronics cycle is particularly bad news for Asian exporters.

Aside from slowing growth, the 10-nation summit in Bangkok is expected to focus on sustainability, ways of knitting the region’s markets together and efforts to foster digital innovation without compromising privacy and security.

The 34th AESAN leaders’ summit is the first since Indonesian President Joko Widodo won re-election and Thailand’s Prayuth Chan-Ocha returned as premier this year. Midterms in the Philippines strengthened President Rodrigo Duterte’s grip on power.

Here’s a look at some top challenges AESAN will be tackling:

Quiet Factories

Trade War jitters

Another month, another slew of weak Asia purchasing manager index readings. While Indonesia and the Philippines saw production edge upward in May, much of ASEAN failed to improve, taking its cue from China. Sub-50 readings signal contraction. Singapore’s electronics PMI sub-index has been below that level for seven consecutive months.

Trade Dramas

Investors breathed a collective sigh of relief when the U.S. lifted a tariff threat on Mexico and Trump said he would meet Chinese President Xi Jinping in Japan. But some analysts continue to worry given Trump’s penchant for applying duties to help achieve his political goals.

Global Trade Tracker

ASEAN nations find themselves caught in the middle of the U.S.-China tussle. While China is the biggest trading partner for most of them, they also can’t afford to offend the U.S. Expect the eventual communique to avoid taking sides while promoting the need for cooperation.

Economic Growth

Down a notch

Standard Chartered sees Vietnam, Philippines, and Myanmar as part of an exclusive club that can achieve a critical 7% growth pace through the 2020s. But in the nearer term, they are being buffeted by global headwinds, and some Asia-Pacific central banks are already cutting interest rates.

Political Risk

Riask rising

Regional political risk climbed with elections and remains elevated in coup-prone Thailand, a Bloomberg gauge shows. Junta leader Prayuth was picked by lawmakers to return as premier after March’s disputed poll but has only a slim majority in the lower house.

crimp investment

The trade war is leading some firms to crimp investment

Much depends on whether hostilities between America and China intensify

“There’s tariffs on games and tariffs on toys—try explaining tariffs to your little boy. Santa’s workshop is struggling, you’ll find yourself saying. I think the reindeer are backed up with their sleighing.” Wendy Lazar, who runs a company called I Heart Guts, submitted this peeved poem to the United States Trade Representative (USTR) in June. As an importer of children’s toys from China, she was complaining about how the trade war could squeeze her firm.

She is not alone. In boardrooms across America, business people are scrambling to assess the impact of the latest escalation in the commercial confrontation between the two superpowers. For most firms the easy bit is calculating the immediate financial impact of more tariffs on demand, prices and costs. That can be done in a spreadsheet. Far harder is working out how to rejig your strategy and long-term investment plans to adapt to a new world of enduring trade tensions. Fund managers and Wall Street traders have begun to reach their own conclusion—that investment may slump, possibly triggering a recession. Hence the violent moves in markets since the first week of August, with a rush towards safe bonds and a sell-off in equities (see article).

That sell-off picked up pace on August 1st when President Donald Trump’s administration announced the imposition of tariffs on $300 billion of Chinese goods, at a rate of 10%, starting on September 1st. On August 13th the USTR announced a delay covering about two-thirds of the goods in question, including mobile phones, smartwatches and toys, which would be subject to duties starting on December 15th. As Mr Trump explained later that day, the move would allow American shoppers to splurge in the run-up to Christmas. The press release announcing the delay arrived at 9.43am; between 9.40 and 9.45 shares in Apple rose by 3%, and the S&P 500 share index jumped by 1%. But by the following day the stock market—and the iPhone-maker’s share price—slumped again as investors fretted that a global downturn might soon be on the cards.

America’s expansion may be cooling as it enters its second decade, but the US GDP still grew at a respectable pace of 2.1% in the second quarter of 2019, and the unemployment rate is a brag-worthy 3.7%. The direct effect of the tariffs should be small: in 2017, before hostilities began, goods trade with China amounted to just 3.2% of GDP. Even including the additional levies planned for December, they represent a tax rise offsetting only a fifth of the cuts introduced by the Tax Cuts and Jobs Act of 2017.

What really matters, though, is the wider effects of the uncertainty created by the trade war on corporate behavior. Most companies make plans over a five- to ten-year horizon and invest in assets with a life of 10-20 years. But with each new tariff announcement, the rules for trading their products become less stable. And the scope of the trade war has expanded beyond goods to technology and currencies. Perhaps the international banking system, shipping companies or foreign joint ventures could be next. The most sophisticated firms try to gauge such risks.

The high level of uncertainty is measurable. A study from 2016 by Scott Baker of Northwestern University, Nick Bloom of Stanford University and Steven Davis of the University of Chicago quantified policy uncertainty in America using newspaper reports. Their index of trade-policy uncertainty has soared in recent months (see chart). And such increases in uncertainty tend to have real effects. The researchers found that increases in their index were associated with dampened investment and slower hiring. More recently, Ryan Sweet of Moody’s Analytics, a financial firm, finds that changes in business confidence and economic-policy uncertainty appear to predict changes in managers’ capital spending.

getting real.jpg

Given all this, how is investment in America holding up? In the second quarter non-residential business investment shrank at an annualized rate of 0.6%. The question is to what extent the trade war is the culprit, rather than industry-specific factors, domestic economic trends or the global manufacturing cycle. To get a sense of this The Economist has analysed around 2,400 listed American companies in 42 sectors, considering both their investment levels and how dependent their sector is on Chinese inputs.

Firms with a higher degree of Sino-reliance do seem to have scaled back investment. The 20 sectors most exposed to inputs from China accounted for a third of total investment by the 2,400 firms. In total these sectors saw aggregate capital spending drop by 1% in the past four quarters compared with the prior year. Meanwhile the other 22 sectors, which are less exposed to China, saw investment rise by 14%. The analysis is simple: other factors may well have played a role.

But business executives too report an effect on investment. A survey compiled by the Federal Reserve Bank of Atlanta in January found that trade tensions had crimped investment by 1.2%. Tariffs were mentioned in a quarter of all earnings calls among companies in the S&P 500 index in the second quarter of 2019, according to figures from FactSet, a data-analytics firm. One of the sectors most exposed to China is chemicals. In July Jim Fitterling, chief executive of Dow, a big producer, told investors on an earnings call that he would keep capital spending “tight” until he got “better visibility”, adding that he thought a trade deal was needed to “get some confidence back in this market”.

trade policy uncertainty

Wall Street economists are also crunching data on how trade-policy uncertainty is altering companies’ behaviour. In June researchers at Goldman Sachs had been skeptical that the trade war was hampering investment, pointing out that overall policy uncertainty was low. But more recently they have altered their view, finding that, after adjusting for underlying trends, sectors that sell more to China (rather than those that buy from it) were seeing slower investment growth than those that were less exposed.

Goldman’s economists also found that tariff announcements were associated with worsening financial conditions (higher borrowing costs, lower equity prices or a stronger dollar). Expectations of interest-rate cuts by the Federal Reserve have only offset half of the shift in financial conditions. Overall the analysts reckon that, including indirect effects, the hit to GDP would be 0.6%—material, but not enough to tip America into recession.

The overall picture, therefore, is that there is now good evidence that the trade war is leading some firms to crimp investment. Pessimists worry that the knock-on effect from this capital-spending stumble could be far-reaching and more painful than the likes of Goldman expect. In the long run it could sap productivity. In the short run it could cause firms to scale back hiring. That could then damage consumers’ confidence.

Much depends on whether hostilities between America and China intensify. On August 13th Mr Trump said that he had a “very, very productive call” with China’s leaders. But few on the ground take seriously the prospect of a lasting reconciliation. Jake Parker of the us-China Business Council, a lobby group, reports that his members have realized that the threat of future levies would still lurk even if a deal were struck and tariffs lifted. Blows to China’s economy could also spill back to America.

And Mr Trump has plenty more ways of injecting fear into the economy. He must decide whether to reinstate onerous restrictions on American companies that do business with Huawei, a Chinese telecommunications giant, by August 19th. His labeling of China as a currency manipulator could ignite a currency war. If the sickness that is now visible in most trade-exposed sectors spills over to the rest of the economy, that would set off a downward spiral that not even lifting tariffs, and allowing in Ms Lazar’s stuffed toys, would reverse.


China No Match for Japan in Southeast Asia Infrastructure Race


Michelle Jamrisko

June 22, 2019, 6:00 PM MDT

Japan has pending infrastructure projects worth $367 billion

Vietnam is major focus of Japan’s investment in region infrastructure

vietnam infrastructure

A bridge stands under construction in Vietnam.

Photographer: Yen Duong/Bloomberg

Japan is still winning the Southeast Asia infrastructure race against China, with pending projects worth almost one and a half times its rival, according to the latest data from Fitch Solutions.

Japanese-backed projects in the region’s six biggest economies — Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam — are valued at $367 billion, the figures show. China’s tally is $255 billion.

Building Battles

Japan far outpaces China in value of infrastructure projects in Southeast Asia

Source: Fitch Solutions (data provided 18 June 2019)

japan vs china infrastructure

The figures underline both the rampant need for infrastructure development in Southeast Asia, as well as Japan’s dominance over China, despite President Xi Jinping’s push to spend on railways and ports via his signature Belt and Road Initiative. The Asian Development Bank has estimated that Southeast Asia’s economies will need $210 billion a year in infrastructure investment from 2016 to 2030, just to keep up the momentum in economic growth.

The latest Fitch figures, provided in an emailed response to Bloomberg, count only pending projects — those at the stages of planning, feasibility study, tender and currently under construction. Fitch data in February 2018 put Japan’s investment at $230 billion and China’s at $155 billion.

Vietnam is by far the biggest focus for Japan’s infrastructure involvement, with pending projects worth $209 billion — more than half of Japan’s total. That includes a $58.7 billion high-speed railway between Hanoi and Ho Chi Minh City in Vietnam.

For China, Indonesia is the primary customer, making up $93 billion, or 36%, of its overall. The prized project there is the Kayan River hydro power plant, valued at $17.8 billion.

Across all of Southeast Asia and by number of projects, Japan also carries the day, though by a smaller margin: 240 infrastructure ventures have Japanese backing, versus 210 for China in all 10 Southeast Asian economies.

Breaking Ground

Across Southeast Asia, Japan’s infrastructure projects overtake China’s

china vs china infrastructure project no

Inside the lose-lose trade fight between Japan and South Korea

Samsung’s chip business faces ‘burdens’ from Tokyo’s new export controls

lose lose fight

Mitsuru Obe and Kim Jaewon, Nikkei staff writers

AUGUST 4, 2019

The move, which took place on the day that campaigning kicked off for Japan’s upper house elections, launched a bitter trade dispute between Japan and South Korea that has worrying implications not just for their domestic economies, but also for a global trading system already roiled by US-China tensions. Financial analysts have warned that the global supply chain for tech equipment also could be disrupted.

Samsung Electronics, South Korea’s biggest company, is already feeling the heat, as are major chip makers such as SK Hynix. “It is one of the worst situations we have ever had,” said a senior Samsung official, who asked not to be named. “Politicians take no responsibility for the mess, even though it has almost killed us.”

Lee Jae-yong, Samsung’s vice-chairman, visited Japan in July hoping to receive assurances that supplies would continue to flow unabated. But when he returned to Seoul, Samsung sent a letter to local vendors asking them to stockpile three months’ worth of the Japanese chemicals. Meanwhile, South Korean companies are scrambling to find other sources of the materials.

Samsung acknowledged the challenges as it reported its financial results on July 31. “We are facing difficulties due to the burden of this new export approval process, and the uncertainties that this new process would bring,” vice-president Lee Myung-Jin said during a call to discuss its second-quarter earnings. “The visibility is low.”

It is one of the worst situations we have ever had. Politicians take no responsibility for the mess, even though it has almost killed us -A senior Samsung official

The Abe administration turn up the heat on August 2 by formally stripping Seoul of its “white list” status, meaning Japanese companies will need government approval before exporting sensitive materials to South Korea.

White list status, a symbol of mutual trust between governments, has allowed Seoul to join 26 other countries that are exempt from such scrutiny. Most of the machinery and components South Korea uses for its auto and semiconductor production is believed to fall under this category.

Washington has sought to ease tensions between Japan and South Korea, two of its biggest allies in Asia. According to a report by Reuters on July 30, a senior US official has urged Tokyo and Seoul to sign a “standstill agreement” that would prevent further escalation of the dispute to allow talks to take place. But Yoshihide Suga, Japan’s chief cabinet secretary, denied the report, saying “there is no such thing”.

Tokyo’s heavy-handed approach is widely believed to have been sparked by its concern over a Supreme Court decision in South Korea last October, which awarded four wartime laborers at Japan’s Nippon Steel Won 100 million (about $85,000) each in reparations. The ruling was seen as a direct challenge to the diplomatic understanding that all such claims were settled “completely and finally” under a 1965 treaty that established diplomatic relations between the two countries.

S korea sourcing

The concern in Japan is that the verdict could open the floodgates for other victims and their relatives, totaling more than 220,000, to file lawsuits against an estimated 300 Japanese companies accused of using forced labour during the colonial era. The potential reparations could swell to $20 billion or more.

A South Korean court in January approved the expropriation of some of Nippon Steel’s equity holdings in PNR (Pentair plc), a joint recycling venture with South Korean steelmaker Posco, to fund payments to the plaintiffs, prompting fears that other Japanese assets could be seized in the future.

“The Japanese government won’t just watch South Korea seize Japanese assets,” said Hajime Izumi, a professor of international relations at Tokyo International University, adding that further asset seizures by South Korea would be met by even tougher measures by Japan. “Japan would demand a return of any seized assets, no matter how long it takes, [whether] 100 years or 1,000 years.”

suwan s korea

Karl Friedhoff, fellow in public opinion and Asia policy at the Chicago Council on Global Affairs, is concerned that the dispute may drag on, harming both economies.

“The only way that this reaches some sort of short-term truce is if the Korean courts decide not to liquidate the seized assets of Japanese companies as reparations for Korean forced laborers, and Japan removes its export curbs,” Mr Friedhoff said.

“But that liquidation is going to take place, and when it does the genie will be well and truly out of the bottle. Japan will retaliate and both sides will then settle in for an extended battle which will make them both losers.”

‘Weaponizing trade’ South Korea has taken the dispute to the World Trade Organization, where its representatives argued that the curbs constitute unfair retaliation for the court rulings. This, they say, runs counter to the principle of free and fair trade. “South Korea is the top exporter of semiconductors. Japan’s measures will harm third countries,” warned Kim Seung-ho, deputy minister for multilateral and legal affairs at South Korea’s ministry of trade, industry and energy.

But Japan claims that its move was unrelated to the wartime labour issue and was made on national security grounds, though it has offered little specific information publicly to back up this claim.

Japan’s use of national security grounds to justify the export controls has worried some trade experts. Governments have historically been reluctant to cite national security in trade cases, but US president Donald Trump has made something of a habit of it — opening the door for others to follow. In 2018, the Trump administration cited national security when it slapped tariffs on steel and aluminium imports from US allies Japan, Canada, Mexico and the European Union. More recently, his administration used the same label to describe cars from Europe and Japan, and equipment made by Chinese telecoms company Huawei Technologies.


While Mr Trump is a protectionist, Mr Abe has wrapped himself in the cause of free trade. He championed the Trans-Pacific Partnership after the US pulled out of the trade agreement and has sought new rules for promoting cross-border data flows. But his administration’s use of the national security argument may undermine those credentials.

“Japan is the latest country to mix trade with politics, following the US and China,” said Peter Kim, global strategist at Mirae Asset Daewoo in Seoul. “Very much like the ‘Entity List’ from the US aimed at China, the measure is a continuing global trend of weaponizing trade at the expense of multilateral agreements and transparency.”

A Japanese government official says preparations to impose the curbs began early this year, as tensions between Japan and South Korea were escalating over the reparations court ruling. Mr Abe’s office instructed the ministry of foreign affairs, the ministry of economy, trade and industry and other government ministries to propose ways to apply pressure to South Korean president Moon Jae-in.

In the end, his office adopted a proposal from the METI (Maritime Environmental Training Institute) to tighten export controls on the three materials — hydrogen fluoride, fluorinated polyimide and photoresist.

“While Japan has a staff of 120 for screening and inquiring, South Korea has only 11 in charge,” said Rui Matsukawa, a member of the Japanese upper house, speaking in a personal capacity to reporters on July 24. In addition, there are other loopholes in South Korea’s export controls, the ruling party lawmaker said.

A South Korean government official refuted this, saying the country has 110 officials in three ministries and two state-run institutions who are dealing with approval and examination of strategic materials’ export.

G20 Japan

Of the three chemicals subjected to Japan’s export restraints, hydrogen fluoride is the most sensitive. Not only is it used to produce semiconductors, but also in the enrichment of uranium and production of the lethal gas Sarin. Concerns have grown in Japan about roundabout exports of Japanese-made hydrogen fluoride to North Korea via South Korea, but a METI official denied this speculation.

Given the sensitivity around hydrogen fluoride, it is likely that questions about exports to South Korea would have been raised whether the question of wartime labour came to the fore or not, insiders say.

‘Fight and win’

The trade tensions come as both South Korea and Japan are facing slowdowns in their economies. Neither side wants new headwinds, given the challenge of the trade war and the deceleration of the Chinese economy. But it appears they are also determined to teach each other a lesson.

japan korea WTO

This is a far cry from the relationship envisaged by the two countries’ business leaders: a pair of US allies forming an integrated market of 180 million people that can compete against China.

“The 21st century is said to be the Asian century, but which country will be leading the world?” asked Nobuya Takasugi, a counselor at the Asia-Eurasia Institute who was a business executive in South Korea for 19 years. “Is it OK to allow China to become the leader? Should Japan and South Korea not work together and take leadership?”

South Korea provides highly educated, international talent for Japan, which faces a labour force shortage amid an ageing and shrinking population. Samsung symbolizes South Korean industrial strength in designing the Galaxy, a smartphone that stands head-to-head against Apple’s iPhone. But it depends on Japan for technology and components to bring such products to market.

danger to recovering trade

The tit-for-tat economic reprisals are not benefiting anyone — and may hurt the Japanese suppliers of the three chemicals, who will see increased competition if the Moon administration’s plans to jump-start domestic production are successful. The chemical exports are estimated to be worth about $500 million a year, a relatively small market that Tokyo may be willing to sacrifice for Japan Inc. But the business community is not happy.

“No industry wants to see its fate depend on a government policy,” said Sota Kato, research director at the Tokyo Foundation for Policy Research and a former senior official at the METI. “The Japanese semiconductor industry doesn’t have its own lobbying organisation because the Japanese government never previously resorted to a trade war; but if it does, then the industry needs a way to protect its interests.”

He was referring to an open letter issued by the largest US tech industry groups on July 24, pressuring Tokyo and Seoul for a negotiated solution to the dispute. Japan has economy-wide groups like Japan Business Federation, known as Keidanren, but lacks an industry group that actively lobbies the government.

security risk

However, some in Japan’s chip equipment industry downplayed the impact of the trade spat. Even if South Korea loses “white country” status, it would simply be on the same footing as China, Taiwan and Singapore, said Ken Sasagawa, vice-president of accounting at Tokyo Electron, a major chip making machinery supplier to Samsung Electronics and SK Hynix. “We have been able to deliver a substantial quantity of machines to these countries in a timely and precise fashion,” he told reporters on July 26.

The restrictions may be hurting South Korea’s economy already. Bank of Korea governor Lee Ju-yeol cited Japan’s export restrictions as a factor behind the central bank’s decision to cut its growth forecast to 2.2 per cent from an earlier projection of 2.5 per cent.

“If export restrictions are realised and expanded, we cannot say that its impact on exports and the economy is small,” Mr Lee said on July 18. “It is not desirable that it expands and worsens. It needs to be resolved.”

korean protests

But South Korea’s politicians are encouraging the anti-Japan sentiment, betting it will help boost their popularity ahead of general elections next year. Cho Kuk, a high-ranking official in the Moon administration, leads the trend.

“Japan’s state power is apparently stronger than that of South Korea,” Mr Cho said in a Facebook post. “But let’s not be afraid of this. South Korea’s state power has grown up to the level that cannot be compared to 1965 when the South Korea-Japan treaty was signed.”

He said diplomacy was the best option for ending the battle. “But, if we cannot avoid [a] legal and diplomatic battle, we should fight and win,” he said.

The ruling Democratic Party of Korea set up a committee to deal with the matter, titled “The Special Committee on Japan’s Economic Invasion”, criticizing Tokyo for using a “suicide bombing” strategy that hurts its own economy.

Such rhetoric suggests that politicians in both countries are unlikely to back down any time soon. “I can’t foresee a short-term resolution to this. It’s clear that both sides made miscalculations in letting this get to this point but are now so invested that backing away is going to be politically damaging,” says Mr Friedhoff.

Contributing writer Steven Borowiec in Seoul and Nikkei Asian Review columnist Yasu Ota and Nikkei Asian Review chief business news correspondent Kenji Kawase in Tokyo contributed to this report.

South Korea’s birth rate falls to new developed world low Fertility rate well below neighbours such as Japan despite campaign for more babies South Korea’s fertility rate — the number of expected babies per woman — fell from 1.05 in 2017 to 0.98 in 2018

korean babies

Song Jung-a in Seoul AUGUST 28, 2019

South Korea may be known for its high levels of productivity when it comes to manufacturing televisions, smartphones and ships but there is one crucial area in which the country is struggling to keep up with its competitors: babies.

South Korea’s birth rate, already the lowest in the developed world, has fallen to a new low on factors such as the high cost of private education despite various government initiatives to prop it up, raising concerns about the country’s bleak demographic outlook.

The country’s fertility rate — the number of expected babies per woman — fell to 0.98 in 2018, according to the latest government data released on Wednesday. It was already the lowest at 1.05 in 2017 among members of the OECD, far lower than Israel, which was the highest in the organisation with 3.11 expected babies in 2017, the US at 1.77 and Japan’s 1.43.

The replacement level — the total fertility rate for developed countries needed to keep the population constant — is 2.1.

Given it’s falling birth rate, Asia’s fourth-largest economy is expected to grow older more quickly over the next four decades than any other country, including Japan and China, despite the latter’s former one-child policy.

korean fertlity rate

“This is really bad news for our long-term growth outlook. The lower birth rate shows how pessimistic people are about our future economy,” said Park Chong-hoon, an economist at Standard Chartered. “There is no short-term fix for this problem, which is linked to [the high cost of] education, welfare and property issues.”

Concerned about the impact of a falling birth rate on productivity and fiscal stability, the government has spent billions of dollars to fund free nurseries and the provision of public day care services. South Korean parents have the right to one year of subsidized childcare leave and access to government-trained babysitters. The Seoul city government last year introduced cash incentives of Won 100,000 ($82) per childbirth.

Yet the number of South Korean babies being born has continued to fall, dropping 8.7 per cent last year compared with 2017, following declines of 11.9 per cent and 7.3 per cent in the two previous years.

fertlity rates OCED

Many South Koreans seem reluctant to have more than one child because of the steep cost of private tuition, considered essential in the education-obsessed country. This consumes a 10th of household income, according to government data. About three quarters of high school students receive private tuition and a similar proportion of those go on to university.

“One child seems enough for me, given the expected cost. The government incentives and subsidies do not help much,” said Lee Jung-woo, a newly wed 36-year-old resident of Seoul, who is expecting a baby in November.

Baek Da-som, a mother who had to quit her job recently at a big construction company to take care of her one-year-old daughter, said she did not plan to have another child. “It is all about welfare. It is difficult to raise a child without enough state support,” she said.

Policymakers are also concerned about the country’s falling potential growth rate due to ageing, with South Korea now having more economically active people aged over 60 than in their twenties.

Despite growing concerns about the looming labour shortages, South Korea maintains a strict immigration policy, not allowing foreign workers to migrate with their families or apply for South Korean citizenship in most cases.

Experts predict the country’s demographic problem will worsen in the coming years. “The birth rate keeps falling for various reasons such as later marriages, high education and housing costs, high youth unemployment, just to name a few,” said Lee Sang-jae, an economist at Eugene Investment & Securities. “There are limits to what the government can do to reverse the trend.”

Taiwan Set to Top Other Asian Tigers With Fastest Growth in 2019

By Chinmei Sung and Samson Ellis

August 16, 2019, 3:11 AM MDT


Taipei, Taiwan. Photographer: Tomohiro Ohsumi/Bloomberg

Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars.

Taiwan projects its economy to top all of the other three Asian tiger economies this year, with full-year growth seen at just under 2.5%, according to a government estimate published Friday.

Benefiting from business activity repatriating from China amid the trade war with the U.S., Taiwan’s economy is outperforming South Korea, Singapore and protest-hit Hong Kong, which have all trimmed forecasts in recent weeks.

runnin ahead

The government points to its program to lure Taiwanese companies with production facilities in China to invest at home as the main reason for economic resilience. Around 100 companies have applied to invest close to NT$500 billion ($15.9 billion), creating more than 43,000 jobs, since the program began at the beginning of the year, according to the Ministry of Economic Affairs.

Michelle Lam, greater China economist at Societe Generale SA in Hong Kong, said the trade war had also bolstered investment and manufacturing in Taiwan by persuading U.S. customers to switch their orders from China to Taiwan.

“Hong Kong and South Korea both have their own problems affecting domestic demand and trade,” she said. “And Singapore’s main drivers of growth, energy and financial services, are both feeling the effects of the trade war.”

Taiwan also projected growth to accelerate further to 2.58% in 2020 in Friday’s announcement. While exports are projected to fall 1.24% this year, the bureau sees them rebounding to 3.58% in 2020.

Officials also confirmed second-quarter growth came in at 2.4%.


Australia Is Finally Debating QE, Even If Its Central Bank Isn’t


Michael Heath

June 23, 2019, 8:00 AM MDT

RBA only likely to use unorthodox policies to combat recession

Australia’s floating exchange rate an important shock absorber

The prospect of interest rates going below 1% has prompted Australia’s economists to start exploring what much of the developed world has already contended with: the introduction of unconventional monetary policy.

While the Reserve Bank is unlikely to embark on quantitative easing for now simply to accelerate inflation and support hiring, a consensus is forming about when it would. Should a serious shock occur — most likely from offshore and probably China — that drives up the jobless rate and threatens recession, the central bank will then need to look elsewhere for ammunition.

“If the global outlook worsens sharply from the trade war, we see the RBA feeling the need to get ahead of a potential slowing in the global economy and provide additional stimulus,” said Hayden Dimes, an economist at Australia & New Zealand Banking Group Ltd. “With the cash rate rapidly closing on its likely lower bound, this would almost inevitably need to be quantitative easing.”

lowes lower bound

Voracious demand from China for resources helped Australia motor through the 2009 global recession, with the cash rate only dropping to 3% before the RBA started tightening toward the end of that year. Australia’s escape from contraction and avoidance of the lower bound allowed policy makers to study how unorthodox policy played out globally — from bond buying to negative rates to forward guidance — and draw conclusions on how to apply it.

Governor Philip Lowe has said he doesn’t regard QE as a serious option in the central bank’s current easing cycle. When reiterating last week that rates were likely to head lower again, after the RBA cut to 1.25% earlier in June, he said policy was unlikely to follow the path of overseas peers because the central scenario for Australia’s economy was still “quite reasonable.”

“I am very hopeful that we will not need to go, certainly into negative territory, or to these very low interest rates that the Federal Reserve and the Bank of Canada got to,” Lowe said in a Q&A session following a speech in Adelaide, citing those central banks’ 0.25-0.5% rates in the past.


Australia, Japan: Tokyo Seeks to Adjust CPTPP Safeguard Provisions Amid U.S. Trade Deal

What Happened: Japan is pushing for an adjustment of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) safeguard provisions to take into account increased beef imports from the United States as both countries are expected to sign a trade deal in late September, the Nikkei Asian Review reported Aug. 27. However, Australia, the leading CPTPP beef exporter, has already rejected including U.S. beef as part of the quota.

Why It Matters: Japan fears that an influx of cheap beef imports from Australia and the United States would overwhelm its domestic market and harm its farming industry. However, Tokyo will be required to walk a careful line between its commitments under the CPTPP, the terms of its U.S. trade deal and the risk of threatened U.S. auto tariffs.

Background: Japan imports 55 percent of its beef from Australia and over 34 percent from the United States, making Japan the third-largest markets for U.S. beef exports. Australian beef exports to Japan have risen substantially since the signing of the CPTPP due to lower tariffs, while the United States is seeking to increase its agricultural exports to Japan through a bilateral trade deal.

Read More:

room to maneuver

RBA No. 2 Guy Debelle has already painted a picture of how QE might look in Australia, in a December speech marking a decade since the global financial crisis. He also defended its use in extreme circumstances during the central bank’s semi-annual testimony before lawmakers in February. Based on his comments, the following lessons apply:

  • There are less government bonds in Australia, which may make QE more effective because the bank wouldn’t need to buy as many bonds to bring down yields. However, most of the traction in borrowing rates Down Under is at the short end of the curve, which might reduce the effectiveness of QE because in other markets it has been designed to bring down yields on longer-dated securities
  • The RBA’s balance sheet can also expand to help reduce upward pressure on funding, as occurred in 2008 when it provided cheap funding to banks. The U.S. experience suggests the RBA would need to buy securities equivalent to 1.5% of GDP to achieve the same effect as a 25 basis-point rate cut, according to Stephen Kirchner, an economist at the United States Studies Centre in Sydney
  • The floating exchange rate remains an important shock absorber

Veteran economist Saul Eslake, who studied the options for QE several years ago, reckons the floating currency is Australia’s key advantage. Policies that lead to a lower local dollar would be the best option because Australia isn’t a globally significant exporter of manufactured goods, and so efforts to encourage a depreciation shouldn’t draw the level of opposition that others would, he says.

once dominant

QE could work if implemented decisively and in an unlimited commitment, says Kirchner. He argues Australia could implement a smaller but more effective program than the Federal Reserve, which bought assets equivalent to 29% of GDP in the five years through 2014, his research shows.

“If necessary, the RBA should transition quickly from a cash rate target to large and open-ended purchases of government bonds,” as well as non-government and non-debt securities, Kirchner said in a report last week. “These purchases should be tied to achieving explicit macroeconomic objectives, in particular, maintaining the stability of nominal spending.”

The view from the continent, where the European Central Bank and Bank of England have run unorthodox policies, is that Australia’s challenges are very different to those institutions, according to Bill Evans, chief economist at Westpac Banking Corp., after speaking with bankers there. There are always unintended consequences and costs, he cited them as saying.

“Such a policy should only be adopted when a credit crisis has emerged,” Evans said. “It should not be adopted as a form of stimulus,” particularly when that mainly involves trying to push unemployment down to a level that fuels faster inflation.

— With assistance by Garfield Clinton Reynolds

Modi victory leads to surge of money into India stocks

Financials have drawn the most interest, with the average fund having a 5.4% exposure

modi election

Steve Johnson JULY 9, 2019

Narendra Modi’s re-election as prime minister of India has seen a wave of foreign money flow into the country’s stock market, extending a multiyear rally for the Sensex. Equity funds targeting Asia, excluding Japan, had 13.2 per cent of their assets in India at the end of May, the highest level on record and a big leap from 5.2 per cent at the end of 2011, according to analysis of 120 funds with assets of $70 billion by Copley Fund Research. Average holdings jumped 1.2 percentage points in May alone as Mr Modi triumphed and ignited hopes of further reforms. A typical fund is now overweight the Indian market by 2 percentage points, twice the level of Indonesia, the next most favored country in emerging Asia, with 65 per cent of funds having above-market exposure. Before Mr Modi’s first election victory in 2014, overseas funds had for years held India at below-index weight. Financials have been the most attractive sector, with the average fund having a 5.4 per cent exposure to stocks such as HDFC Bank, Housing Development Finance Corporation, ICICI Bank, IndusInd Bank and Axis Bank, twice as much as in early 2016.

modi victory turbocharges

The buying spree has coincided with a crisis in India’s shadow banking sector following a default by one of the country’s largest non-bank financial companies and a sharp rise in bad loans at India’s public sector banks. Together with economic growth slowing to a five-year low of 6.8 per cent, this prompted a market sell-off. Eric Moffett, manager of the T Rowe Price Asian Opportunities fund that has led the charge into India, said a “credit heart attack” had sent some stocks plummeting after the freeze in the real estate market. These included non-bank financial companies with no real estate exposure.

fund managers

“While the overall market always screens expensive versus the rest of Asia, part of the financial sector had become downright cheap, with opportunities to buy companies with double-digit returns on equity at just over price-to-book,” Mr Moffett said. The election result was the “best case” outcome, he added. Moreover, interest rates were falling, oil prices remained in check and the fact that India was still “somewhat disconnected” from global trade made it a beneficiary of some of the deglobalization trends due to the breakdown in the US-China trade talks.


Can China beat its addiction to real estate?

Housing stimulus has been ruled out but economy will struggle with withdrawal symptoms

china real estate

AUGUST 5, 2019

By explicitly denying last week that the real estate market will be used to stimulate the economy, the Chinese government is seeking to break with past practice and make good on its commitment to focus on the quality, rather than the quantity, of growth.

That will either prove to be a watershed moment in the history of modern Chinese economic policy making, or just another failed pledge from a Communist party that has run out of ideas about how to manage a structural growth slowdown.

If the party is to be taken at its word then this is a very big deal — the housing market (and its ancillary industries) is the biggest driver of Chinese economic activity, playing a decisive role in investment and financial market behaviour, and in supporting consumer sentiment.

This commitment looks doubly ambitious against a backdrop of deepening economic tension with the US.

Financial repression, an under-developed asset market and strict capital controls have meant there has always been pent-up demand to buy property in China, which is why the market has been the government’s policy go-to whenever the economy has run into trouble over the past decade — during the global financial crisis, when growth flagged in 2012 and following the stock market collapse of 2015.

china policy levers

Although the economy is now slowing towards the lower bound of this year’s targeted range, the Communist party said after a half-yearly review meeting last week it would “not use real estate as short-term economic stimulus”, dousing market speculation that the swath of restrictions introduced starting at the end of 2016 would be lifted.

Signs of relaxation are already giving way to a more constrictive stance. The day after the politburo meeting, the People’s Bank of China ordered banks to “reasonably control” their lending to the property sector. The flow of trust loans to developers is again being crimped — trust loans fell 23 per cent in July after rising 26 per cent the previous month — while restrictions have been imposed on the sale of bonds by developers in overseas markets.

public trust lending

The leash on cash-strapped local governments is also being shortened. Kaifeng, a city of 5m in central Henan province, last month withdrew plans to relax its housing market restrictions after just one day after Beijing stepped in. Dalian recently introduced price controls to keep a lid on prices.

The pains of withdrawal

The arguments against relying on the property sector to boost growth are easily made. Real estate is one of the main drivers of financial risk — which the leadership elevated to a national security threat in 2017 — and ever-increasing house prices exacerbate affordability problems which sow widespread discontent among young urbanites.

But the government, which is still tied to meeting growth targets, will struggle to break its bricks-and-mortar habit because of the market’s systemic importance. The strains of a slowing market are set to become more pronounced as weakening new housing starts pass through to construction activity later this year, while tighter funding conditions among smaller developers will compound the weakness.

tighter funding.jpg

Reduced construction activity could ripple out across the system because local governments are so reliant on land sales, which account for as much as 38 per cent of their fiscal intake. A strong end of quarter helped land sales revenue complete a difficult first half of the year, down just 0.8 per cent, but could resume falling in the second. R&F Group, one of China’s biggest developers, intends to stop buying land in the second half and focus on sales.

fiscal hole

Financial pressures on developers also risk more breakages in a financial system that is already struggling to cope with the introduction of counterpart risk. Nearly 300 small developers have gone bankrupt so far this year, while Huang Qifan, the outspoken former Chongqing mayor, recently forecast that two-thirds of China’s 97,000 registered developers could eventually go under.

Further out, the risk of falling house prices could exacerbate these financial pressures because real estate is by far the most popular collateral in the banking system. The sentiment of an increasingly leveraged household sector depends in large part on how the property market is performing.

Bigger deficits or slower growth

If the government does not want to use the housing market to support growth for now, then it faces a very simple calculus. All things being equal, if real estate investment growth, which hit 11 per cent in the first half, slowed to 5 per cent then nominal GDP growth would fall by about 0.8 basis points. As manufacturing investment slows, exports wither and consumption comes under pressure, either the leadership accepts a lower rate of economic growth or it increases investment in infrastructure.

The government still has fiscal room to respond. It could further relax rules on how local governments finance infrastructure projects or could let them sell bonds in excess of the annual quota agreed at the National People’s Congress in March. A Rmb 700 billion ($99 billion) increase in the quota, raising this year’s planned sales by a third, would be likely to compensate for real estate investment growth slowing to 5 per cent.  But increased infrastructure investment cannot compensate for the problems associated with a cooling property market, including failing developers, rising collateral risk and bigger fiscal holes at the local government level.

Last week’s bold statement is potentially good news for China’s long-term economic future, indicating a less alarmist, less interventionist approach to policymaking. But the near-term threats to growth mean the government may struggle to stay on the wagon.

He Wei, Finance Researcher, FT Confidential Research

China’s nervous consumers choose saving over spending

Economy at risk as fewer households inclined to consume or invest, despite tax cuts
AUGUST 25, 2019

As uncertainty builds, Chinese consumers are squirreling away more money, piling even more pressure on an already slowing economy.  The results of our latest survey of 1,000 urban households showed 48 per cent saying they are opting to save over investing or consuming, the biggest proportion since February 2013.  The results of the question, which is based on a quarterly survey of households conducted by the People’s Bank of China, provide fresh evidence that income tax cuts introduced by the government have failed to move the dial on consumption. In fact, just 10.5 per cent of respondents in August said they were more inclined to consume in the current environment, just below the 11.5 per cent average of the previous three years.

china consumers

The survey results do not suggest that consumers are panicking in the face of rising risk, but they also do not support the idea that they are in a position to support economic growth as other key drivers falter.

Nonetheless, while our headline consumer sentiment index fell to a six-month low in August, the reading was broadly in line with the average of the previous 12 months, while the year-to-date average also pointed to relatively buoyant sentiment.

FTCR consumer spending

Key year-on-year measures of incomes and views on the economy remained well above the 50 mark, suggesting a solid pace of improvement. Consumers also estimated their costs of living rose 6.8 per cent over August 2018, the slowest increase in five months, despite surging food prices. They said their discretionary spending increased on the same month last year, but at a slower pace than was seen last year.

household spending

The government began rolling out meaningful cuts to personal income tax at the end of last year to boost consumption. For example, someone earning Rmb 120,000 ($16,950) a year now takes home an extra Rmb 451 per month, excluding other deductions.

When we asked consumers last October, as the tax cuts were being unveiled, what they intended to do with any extra income, just 11 per cent said they would spend it. The following months have borne this out — as we have consistently argued, the government will have a hard time convincing its consumers to spend as the economy slows, investment returns fall, and job security comes into question.

This is a problem for policymakers, who have already stated their commitment to weaning China off its addiction to real estate. Consumption, of which nearly three-quarters is by households, is already flagging, contributing to just 60 per cent of growth in the second quarter of this year, its lowest share since the final quarter of 2015. The contribution from gross capital formation, a measure of investment activity, and net exports in April-June was their biggest since 2017.

consumption share

As the US-China trade war grinds on, and the global economy slows, the onus is put on investment, and infrastructure investment to support growth. This may be achievable — the economy grew 6.3 per cent in the first half, implying that sub-6 per cent growth in the second would still put Beijing on track to hit this year’s 6 per cent to 6.5 per cent annual expansion target.

However, growth driven by barely accountable local governments investing in fixed assets, with consumers in the back seat, is not what Xi Jinping’s government has envisioned for China’s economic future.

The FTCR China Consumer survey is based on interviews with 1,000 consumers nationwide. For further details click here. This report contains the headline figures from the latest Consumer survey; the full results are available from FT Database.

China adding six new pilot free trade zones

shanghai free trade zone

china new frees trade zones

China is expanding its free trade zones (FTZ) scheme adding six pilot free trade zones as it continues to push for reform.

China’s State Council announced six new provincial pilot free trade zones in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang, which will make the total number of China’s free trade zones to 18.

According to the plan, the six new pilot FTZs will be developed with differentiated reform experiments.

The development of the marine economy and exploring co-operation opportunities among South Korea-Japan-China are the focuses for the pilot FTZ in Shandong.

Supporting innovation and development of the manufacturing industry, improving overseas investment cooperation and strengthening financial market development are the focuses for the pilot FTZ in Jiangsu.

Guangxi, located at southwest China, will deepen cooperation with the ASEAN region and develop land-sea transportation connection.

Building a new industrial base and supporting international trading are part of the plan for Hebei.

Yunnan will strengthen international cooperation on technology sector and cross-border economy.

Heilongjiang will focus on logistics services development for Russia and Northeast Asia.

“The new pilot FTZs will highlight innovation, further opening-up, high-quality development and integration with major national strategies,” said Wang Shouwen , Vice Minister of the Ministry of Commerce.

China launched the first pilot FTZ in Shanghai in 2013, and then established eleven more. This summer, China expanded Shanghai pilot free trade zone with the addition of a new section.

Posted 27 August 2019

Idle hands The growing ranks of unemployed graduates worry China’s government

But some of the jobless may only have themselves to blame

china graduates

Print edition | China

Aug 1st 2019| BEIJING

Throngs of young people roam around the makeshift booths in an exhibition hall in northern Beijing. They are at a job fair organised by the municipal government, aimed at unemployed college graduates. Like most jobseekers in attendance, Su Jian has brought along a stack of CVS to hand out to prospective employers. But Mr Su (not his real name), who graduated in June from a second-tier university in the capital, is unimpressed by what he sees.

The most popular booth at the fair belongs to China Railway, a state-owned behemoth. The firm’s recruiter says it pays new graduates around 4,000 yuan ($580) a month. That is less than half the average salary in Beijing and not even double the city’s minimum wage. Mr Su nonetheless submits his CV. “What can you do? There are too many of us,” he laments.

Chinese universities produced a record 8.3m graduates this summer. That is more than the entire population of Hong Kong, and up from 5.7m a decade ago. Tougher visa policies in much of the West mean that China will also receive nearly half a million returning graduates from foreign institutions this year. It is not a propitious time to enter the job market. China’s economy, buffeted by the trade war with America, is growing at its slowest pace in nearly 30 years. This year fully two-thirds of all workers joining the labour force will be university graduates, up from around half just three years ago. Mr Su wonders whether the number of graduates has outstripped the labour market’s ability to absorb them.

As recently as the early 1990s the government simply assigned graduates to jobs. It no longer dictates people’s lives so crudely, but it is clearly worried about what will happen if they do not find work. On July 12th five state agencies warned local governments that boosting employment “has become more onerous”. They linked the “employment of graduates” with “overall social stability”. Such warnings have been made annually since 2011, but this year, unusually, the public-security ministry attached its name to the notice.

Last month the government announced measures aimed at getting more graduates into work. Small firms that hire unemployed graduates can apply for a tax rebate. The national system of household registration, hukou, which restricts where people can receive subsidized public services, will be kinder to new graduates. The new rules instruct all provincial capitals (but not mega cities such as Beijing and Shanghai) to make it easier for graduates to apply for local hukou, boosting labour mobility.

Graduates who want to start their own businesses may be eligible for a state loan with little or no collateral, the ministry of human resources says. Those who cannot get hired and lack entrepreneurial drive are invited to visit one of its many local branches for “one-on-one assistance”. Local governments are also trying to help. One city in Guangxi province announced on July 26th that helping graduates find jobs had become “the utmost priority”.

There are no official statistics on the employment status of fresh graduates, but MyCos, a consultancy on education in Beijing, found that the proportion of them who had found full-time jobs within six months of graduation had fallen from 77.6% in 2014 to 73.6% in 2018. The average monthly salary for new graduates fell from a peak of 4,800 yuan in 2015 to 4,000 yuan in 2017, according to Zhaopin, China’s biggest job-recruitment platform.

The trade war with America seems to have tempered hiring, especially in export industries. A crackdown on shadow banks (lenders that do not take state-guaranteed deposits), which have been enthusiastic recruiters of new graduates, has forced mass layoffs. Growing international suspicion of Chinese tech firms may slow their expansion plans, too. Civil-service recruitment, meanwhile, was cut to 14,500 this year, the lowest intake in a decade.

A recent graduate from Peking University recounts how she was laid off by a financial-services firm earlier this year. She is looking for a job at an internet firm. Prospective employers, she says, have extended the probation period from two or three months to six. “During the probation period employers are legally entitled to pay only 80% of the normal salary,” she explains. “More and more companies are exploiting this power.”

With a degree from China’s most prestigious university, she is at least confident she will soon secure a good job. Graduates from lesser-known institutions face a much harder time. Several recruiters at the job fair in northern Beijing admit to chucking CVS from “no-name schools” straight into the bin. Part of the problem, says Joshua Mok, a professor at Lingnan University in Hong Kong, is that the “average quality” of graduates may have deteriorated in recent years. The number of universities has increased from just over 1,000 in 2000 to around 2,700 today. Employers, unfamiliar with so many new names, often dismiss the obscure ones as degree mills. They are not always wrong.

In 2009 a sociologist coined the term yizu, or “ant tribe” to refer to struggling graduates from the provinces who swarm to mega cities. An estimated 100,000 so-called “ants” lived in Beijing in 2010. But the term is no longer widely used, says a graduate from the southern province of Yunnan who lives in Beijing. Rising rents, combined with a crackdown on the illegal subdivision of flats, have driven most provincial graduates away. She, too, may move home soon: salaries may be lower in Yunnan, but so is the cost of living.

Many graduates have unrealistic expectations, says Yao Yuqun of Renmin University: “Everybody wants to be a manager right away.” There are plenty of jobs to go around, he says. A report in May by the China Institute for Employment Research, a think-tank, found that there were 1.4 entry-level vacancies (excluding unskilled work) for each graduating student. Many jobs are in second- and third-tier cities. Graduates, it seems, are too snooty to take them. One calls this the “bat or bust” mentality, referring to Baidu, Alibaba and Tencent, three sought-after online giants. The government counsels humility. Anyone blessed with a job offer, it said recently, should “promptly sign the contract”. ■

China Economic Update

eric wong

By Eric Wong

Managing Director, Canada Wood China

August 8, 2019

Posted in: ChinaMarket News

China’s GDP increased 6.2 percent year-on-year in the second quarter of 2019, slowing from a 6.4 percent expansion in the previous three-month period and matching market expectations. It was the lowest growth rate since the first quarter of 1992, amid ongoing trade tensions with the United States, weakening global demand and alarming off-balance-sheet borrowings by local governments.

The Caixin China General Manufacturing PMI rose to 49.9 in July 2019 from 49.4 in the previous month, beating market expectations of 49.6, but still pointing to a slight deterioration in business conditions. Output was little-changed following a decline in June amid a slight increase in overall new orders, while new export sales were flat. Looking ahead, business confidence regarding output for the year ahead improved to a three-month high.

2019 Economic Outlook

Economist Intelligence Unit forecasted that China’s real GDP will grow by 6.2% per year on average in 2019-20—just above the minimum level required for the government to achieve its 2020 goal of doubling real GDP from its 2010 level. Growth is expected to slow to an annual average of 5.5% in 2021-23. Beijing set a 2019 economic growth target of between 6 and 6.5 percent in March.

Meanwhile, the organization has amended its trade war forecast. It does not anticipate a trade agreement being reached between China and the United States until 2021.  In the interim, it expects both sides to refrain from further tariff escalation, although the risks to this forecast are high.

The Construction Sector

Home prices in 70 major Chinese cities were flat in Q2 2019, especially in first-tier cities in China, amid continuous government controls to curb speculation and prevent an overheated market.

Total investment in real estate had an accumulated increase of 10.9 percent year-on-year in June, slowing slightly compared to the previous months in 2019, at a growth rate above 11 percent.

Total floor area completed in Q2 was at 757 million m2, up 13.5 percent compared to Q1, but still below the same periods in 2018.

total real estate construction

CAD/CNY gained strong overall momentum in Q2 2019. Although there was a correction last month it was still below the highs reached in October 2018.

China Wood Imports (cited from China Bulletin)

Softwood log inventories at China’s main ocean ports totaled 4.1 million m3 at the end of June 2019, a slight increase of 1.5 percent versus the previous month. Radiata pine log inventories were 6 percent higher from the prior month and represented 72.5 percent of log inventory. North American Douglas-fir and hemlock volumes declined 13.7 percent form the month before.

Softwood lumber inventories at Taicang port and the surrounding area were 1.56 million m3 in late June 2019, up nearly 10 percent from last month, excluding inventories of about 60,000 m3 at some new warehouses. The inventory level of SPF was 520,00 m3, the same as last month.

lumber exports to select markets

Vietnam Investors Shrug Off U.S. Trade Risk for Growth

vietnam investors

By Ishika Mookerjee and Ian C Sayson

August 15, 2019, 3:30 PM MDT Updated on August 15, 2019, 11:05 PM MDT

Foreign investors in Vietnam stocks are shrugging off the threat of additional U.S. tariffs on the country’s exports, even as the Southeast Asian manufacturing hub draws increased scrutiny from President Donald Trump’s government.

Robust economic growth and the government’s planned sale of stakes in state-controlled companies will offset dips in equity prices triggered by trade frictions, according to investors including Federico Parenti at Sempione Sim SpA in Milan.

“I didn’t change my view,” said Parenti, who helps manage about $3 billion including Vietnam equities at Sempione Sim in Milan. “When you invest in a country, you do it for the long term.” Vietnam Dairy Products JSC and Saigon Beer Alcohol Beverage Corp. are among the firm’s holdings.

Foreign investors have poured $854 million into Vietnam’s $193 billion stock market in the 12 months through Aug. 15, even as the benchmark Ho Chi Minh Stock Index was little changed in the period. The gauge has climbed 10% so far this year, the most among Southeast Asian markets and outpacing the 0.8% rise in the MSCI AC ASEAN Index.

rising wealth

The government’s sale of shares in state-enterprises helped raise about 5.16 trillion dong ($222 million) in the first half of this year, adding to a record $5.09 billion from initial public offerings last year. Corporate tax breaks, along with economic expansion exceeding 6%, “augur well for the capital market,” said Mark Mobius, who runs Mobius Capital Partners LLP.

To be sure, most investors can’t ignore the risk of the U.S. increasing duties on Vietnam goods, said Felix Lam, who manages close to $2 billion in Asia Pacific equities at BNP Paribas Asset Management. While Lam doesn’t hold Vietnam shares as turnover is too low for his mandate, he said an increase in liquidity could allow him to buy the stocks.

READ: Vietnam Won the U.S.-China Trade War But Is Now in Trouble

“If trade negotiations take longer and are more severe, then Vietnam will be affected alongside other Asian countries,” said Lam. Still, he added, “one would expect that companies would have captured quite a lot of that in their share prices already.”

The Trump administration has been increasing pressure on Vietnam to reduce its growing trade surplus with the U.S., including increasing to 400% in July the duty on steel imports that it alleges originated in Taiwan and South Korea. Exports to America equaled 20% of gross domestic product last year and almost 26% in the first half of 2019.

For Bharat Joshi, who helps oversee $650 billion as a fund manager at Aberdeen Standard Investments, Vietnam’s domestic demand outweighs risks arising from trade tensions. The firm counts Vietnam Dairy Products as an “anchor investment” in the country.

“There is structural growth happening on the ground, you have rising middle-class income, demand for credit is starting to expand, and the government is doing all it can to privatize,” said Joshi.

— With assistance by Nguyen Kieu Giang


Vietnam’s losing battle against trade abuses risks more Trump action

Officials struggle to tackle origin fraud as bilateral surplus grows in shadow of trade war
Vietnamese officials are losing their game of cat and mouse with manufacturers that mislabel the origin of their products to bypass the US tariff regime.  The stakes are high — the US trade deficit with Vietnam ballooned to nearly $40 billion in 2018, and economists expect it to grow to about $50 billion this year. This is fuelling anger in Washington, where US trade terms are one of the few areas on which there is bipartisan agreement and piling pressure on Hanoi to take more meaningful steps to narrow the gap.

ballooning trade deficit

Vietnam has become a victim of its success in attracting foreign direct investment. The country’s low labour costs have long been a draw for manufacturers and buyers who are put off by an increasingly expensive China. But this process has gone into overdrive as companies look to bypass the impact of US tariffs on Chinese goods.

change in US trade deficit

In among the yawning US-Vietnam bilateral trade gap are goods that originated in China and other countries, which have been rerouted through Vietnam to take advantage of the country’s friendlier tariff treatment.  Although the true size of this origin fraud is unknown, surging imports from China and exports from Vietnam in key categories such as wood and furniture and computers and parts have rung alarm bells, forcing Hanoi to act.

selected vietnamese trade groups

The administration of US president Donald Trump — who in June called Vietnam “the single worst abuser of everybody” — has already imposed tariffs on Vietnamese steel imports, on the basis that at least some of these originated in South Korea and Taiwan, and added the Vietnamese dong to the US Department of the Treasury’s currency manipulator watchlist.

Officials in Vietnam fear worse is to come. Factory inspections are one of a series of measures introduced by Nguyen Xuan Phuc, the prime minister, to demonstrate Vietnam’s commitment to addressing US complaints. Customs data collection is also being overhauled and scrutiny of foreign investment is being stepped up.

But these measures are having a limited impact on the ground, and the trade deficit continues to grow.

“The US is quite concerned about goods being rerouted from not just China but Korea and Taiwan, and Vietnam is taking this seriously — they may be under-resourced but they’re at risk and they’ll have to step up vigilance,” said Sian Ferrer, lead Asia economist at Oxford Economics.

Ms. Ferrer estimates a 10 per cent tariff on those exports most at risk of trade action would cut Vietnam’s gross domestic product growth to an average 5.9 per cent in 2020-21, from a baseline of 6.2 per cent.

In the wood industry — where FDI approvals before the end of the first half almost matched last year’s total — officials are struggling to tackle origin fraud because they have so little visibility. Dien Quang Hiep, president of the Binh Duong Timber and Forest Product Association, says foreign investment in Vietnam’s wood-processing sector is “another country within Vietnam”.

wood prime suspect

Chinese investments in wood processing in Vietnam are hard to monitor because they are usually small, typically less than $2.5m per project. The strategy of customs investigators is also flawed in that manufacturers are notified in advance of a site visit, providing an opportunity to clean up.

“We don’t know what the companies are doing before and after our visits,” said a local timber association representative who recently joined an inspection of a Chinese plywood manufacturer in north-east Bac Giang province.

At the Vietnam Chamber of Commerce and Industry, a quasi-government organisation that shares responsibility for granting certificates of origin to exporters, staff are struggling to cope with the workload. The VCCI office in Hanoi has just five staff members who are overwhelmed by the 500 applications they receive on average each day.

In sectors such as clothing and footwear — where 90 per cent of capital goods come from China — strong links between Vietnamese companies and their Chinese counterparts make it especially difficult to identify collusion in mislabeling goods, said an official with the Vietnam Leather, Footwear and Handbag Association, who asked not to be identified. The torrent of FDI inflows is not letting up — the value of newly licensed investment projects from China so far this year already exceeds the total for 2017 and 2018.

FDI from china

Vietnam could limit inbound investment from China but doing so would risk further inflaming tensions with its economically powerful neighbour. This anxiety is feeding into industry’s concern that Vietnam’s efforts so far are insufficient, and that this threatens incurring fresh action from Washington.

“All origin fraud has been identified by the US authorities, not by the Vietnamese authorities — this is Vietnam’s weakness. We have to take a much stronger, proactive approach if we want to mitigate this sizeable risk,” said Mr Dien. He said government agencies needed to work more closely, and companies needed to stop being tipped off.

The Vietnamese government is beginning to take direct action to tackle the trade surplus, including holding talks on increasing purchases of US goods. Doing so appeals to Mr Trump, who is known to focus on bilateral trade numbers rather than looking at the US trade balance in its entirety.

Mr Trump and Mr Phuc in June discussed long-term and large-scale co-operation that could result in a big increase in imports of US liquefied natural gas to Vietnam. Executives from state-owned coal producer Vinacomin and Pennsylvania-based Xcoal Energy & Resources met in Hanoi last month to discuss potential coal purchases. Analysts believe Vietnam could also increase purchases of goods ranging from aircraft to cotton to close the gap, and even military equipment, provided it could address Russian and Chinese concerns.

Vietnam’s problem is that it faces structural constraints on how much it can buy. For example, even if it agreed to take $5 billion in US LNG, it has nowhere to store it. Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, noted that Vietnam bought just $5 billion in goods from the US in the first half, but sold it goods worth $30.4 billion .

“Even if they had doubled imports from the US, it still wouldn’t have made much of a difference because of the size of the trade deficit — they’re facing huge pressure to meaningfully narrow that trade deficit and it’s going to take more than a year to do that,” he said. — To Xuan Phuc is a contributor to FT Confidential Research. Thu Vu is a Vietnam researcher for FT Confidential Research.

Supply chains are undergoing a dramatic transformation

This will be wrenching for many firms, argues Vijay Vaitheeswaran

supply chain

Print edition | Special report

Jul 11th 2019

Tom Linton, chief procurement and supply-chain officer at Flex, an American contract-manufacturing giant, has his finger on The Pulse. That is the name of his firm’s whizzy command centre in California, which is evocative of a Pentagon war room. The kit allows him to monitor Flex’s 16,000 suppliers and 100-plus factories, producing everything from automotive systems to cloud-computing kit for over 1,000 customers worldwide. Mr Linton is one of the acknowledged kings of the supply chain—the mechanism at the heart of globalization of the past few decades by which raw materials, parts and components are exchanged across multiple national boundaries before being incorporated into finished goods. Ask him about the future, however, and he answers ominously: “We’re heading into a post-global world.”

A few years ago, that would have been a heretical thought. The combination of the information-technology revolution, which made communications affordable and reliable, and the entry of China into the world economy, which provided bountiful cheap labour, had transformed manufacturing into a global enterprise. In his book “The Great Convergence”, Richard Baldwin argues that the resulting blend of Western industrial know-how and Asian manufacturing muscle fuelled the hyper-globalization of supply chains. From 1990 to 2010, trade boomed thanks to tariff cuts, cheaper communications and lower-cost transport.

The Organisation for Economic Co-operation and Development (OECD), a think-tank for advanced economies, reckons that 70% of global trade now involves global value chains (GVK’s). The increase in their complexity is illustrated by the growth in the share of foreign value added to a country’s exports. This shot up from below 20% in 1990 to nearly 30% in 2011.

Western retailers developed networks of inexpensive suppliers, especially in China, so that they in turn could deliver “everyday low prices” to consumers back home. Multinational corporations (MNCs) that once kept manufacturing close to home stretched supply chains thin as they chased cheap labour and economies of scale on the other side of the world. Assuming globalization to be irreversible, firms embraced such practices as lean inventory management and just-in-time delivery that pursued efficiency and cost control while making little provision for risk.

But now there are signs that the golden age of globalization may be over, and the great convergence is giving way to a slow unraveling of those supply chains. Global trade growth has fallen from 5.5% in 2017 to 2.1% this year, by the OECD’s reckoning. Global regulatory harmonization has given way to local approaches, such as Europe’s data-privacy laws. Cross-border investment dropped by a fifth last year. Soaring wages and environmental costs are leading to a decline in the “cheap China” sourcing model.

The immediate threat comes from President Donald Trump’s imposition of tariffs on America’s trading partners and renegotiation of free-trade agreements, which have disrupted long-standing supply chains in North America and Asia. On June 29th, Mr Trump agreed a truce with Xi Jinping, China’s president, that suspends his threatened imposition of duties of up to 25% on $325 billion-worth of Chinese imports but leaves in place all previous tariffs imposed during the trade war. He threatened in May to impose tariffs on all imports from Mexico if it did not crack down on immigration but reversed himself in June. He has delayed till November a decision on whether to impose tariffs on automobile imports, which would hit European manufacturers hard.

Look beyond politics, though, and you will find that supply chains were already undergoing the most rapid change in decades in response to deeper trends in business, technology and society. The rise of Amazon, Alibaba and other e-commerce giants has persuaded consumers that they can have an endless variety of products delivered instantly. This is putting enormous pressure on MNCs to modify and modernise their supply chains to keep pace with advancing innovations and evolving consumer preferences.

Arms race

The biggest force for change is technology. Artificial intelligence (ai), predictive data analytics and robotics are already changing how factories, warehouses, distribution centres and delivery systems work. 3D printing, block chain technologies and autonomous vehicles could have a big impact in future. Some even dream of autonomous supply chains requiring no human intervention.

new convergence

However, technological advances also raise the spectre of an arms race in supply-chain security. Aggressive private hackers and state-sponsored cyber-warriors appear to have the upper hand over beleaguered corporations and governments. Recent headlines have focused on America’s crackdown on Huawei, a Chinese telecoms giant. But the issues involved go far beyond one firm, given that much of the world’s electronics-manufacturing and hardware innovation takes place in China.

If a technology cold war breaks out, it would smash today’s highly integrated technology supply chains and force an expensive realignment. It may even lead to a bifurcation in the roll out of 5G, a new telecoms-network technology that is the essential enabler of coming marvels such as the internet of things (IOT). With the proliferation of inexpensive sensors, the IOT will allow homes, factories and cities to be digitally monitored and managed. A “splinter net of things” (in which America followed one standard and China another) would not only be costly and inefficient, it would also fail to address legitimate security concerns about future cyber-threats in the age of 5G.

Even if Huawei is eventually spared, and the truce in America’s trade war with China turns into a frosty peace, the era of frictionless supply lines flowing from Shenzhen to San Francisco and Stuttgart has ended. As globalization is transformed into something messier, the consequences for MNCs and the world economy could be momentous.

This report will show that supply chains were already becoming shorter, smarter and faster before politicians started taking a hammer to the trading system. Given today’s riskier world, supply chains will need to become safer too. This transformation threatens firms that have entrenched supply networks, but it also presents opportunities for those that adapt nimbly.

new capitol of indonesia

Indonesia: Country Will Begin Moving Its Capital to Borneo by 2024, President Says

What Happened: The Indonesian government will begin the estimated $33 billion process of moving its capital from Jakarta to the island of Borneo by 2024 to alleviate the current capital’s congestion, flooding and pollution problems, according to President Joko “Jokowi” Widodo, Bloomberg reported Aug. 26.

Why It Matters: Although Indonesia’s government has been discussing the issue of potentially moving its capital for the decades, Jokowi’s announcement indicates a timeline for the relocation in the coming years. Besides offering some congestion and pollution relief to Jakarta, the move is also intended to mitigate inequality among Indonesia’s regions and spur economic growth for Borneo’s Kalimantan province.

Background: Jokowi’s announcement comes as Indonesia’s president enters a second term after securing a resounding electoral victory earlier this year. Before the relocation can proceed, however, Indonesia will be required to obtain the necessary funding for the move; the government only plans to fund 19 percent of the total.

Read More:


New UN Singapore Convention drives shift to mediation of trade disputes

Signatories aim to ease global commerce and promote ‘alternative and effective’ resolution


UN convention singapore

Delegations from around the world gather in Singapore this week for the signing of the UN’s Singapore Convention on Mediation. The driving force behind the convention is to assist international trade and promote mediation as an “alternative and effective method” of resolving trade disputes, according to the UN. The aim is that an internationally ratified framework will give businesses greater confidence to mediate cross-border disagreements rather than take them to court. A priority is to keep commercial disputes out of local courts, where litigation can be costly and there may be bias in favour of local operators.

A mediation convention was proposed by the US in 2014, and its development assigned to a working group of the UN’s commission on international trade law. Timothy Schnabel, then a State Department attorney, headed the US delegation to the group.

“In some jurisdictions like the US and the UK, mediation is already used frequently for commercial disputes,” says Mr Schnabel. “But in many other legal cultures, mediation is not as widely accepted,” he adds. The convention will help mediation gain wider acceptance by “providing an international standard for recognition and enforcement”.

“The convention will give businesses the assurance that they can enter mediation and rely on any settlement reached,” says Mr Schnabel. He adds that mediation is usually a faster and cheaper way to resolve disputes than arbitration, which has been “the preferred method of alternative dispute resolution for years”.

In arbitration, decisions can be imposed on quarreling parties by an arbiter, but in mediation the parties involved voluntarily agree. “Mediation preserves business relationships, because at the end of the day you come to agreement through consensus,” says Mr Schnabel. He is now executive director of the Chicago-based Uniform Law Commission, a non-profit organisation of lawyers appointed to draft legislation in areas of US state law where uniformity is beneficial

While supporters suggest the convention has the potential fundamentally to change cross-border commercial dispute resolution, others are skeptical. Some practitioners of international commercial mediation question whether the convention is necessary.

“The need for an international convention to ensure mediation agreements are enforceable was not exactly something businesses or lawyers were crying out for,” says F. Peter Phillips, at US-based Business Conflict Management.

Aspects of the convention, he adds, “seem inconsistent with the way commercial mediation is practiced in major jurisdictions such as the UK and the US”. The way the convention handles enforceability of mediated outcomes, he argues, is antithetical to the process of mediation: “mediation results from consensus between parties who won’t be made to do something they didn’t already agree to.”

The convention also specifies that one criterion needed for settlements to be enforced by a court is proof that an agreement resulted from mediation. Yet Mr Phillips says it becomes problematic to prove such a claim. “Under the convention, a mediator can attest by either signing the settlement agreement or another document certifying that the mediation was carried out,” he notes.

Mr Phillips adds: “But mediators conscientiously refuse to sign settlement agreements, either as part of their obligation of confidentiality, or so that they cannot be subpoenaed as a witness or be included as a party to the agreement. In some jurisdictions, a mediator is immune and cannot testify about the agreements on which they mediate.”

signing ceremony

The Singapore Convention protects only settlements resulting from commercial mediation. It expressly excludes personal consumer disputes and those relating to family, inheritance or employment law. It also excludes settlements reached and enforceable as part of an arbitration judgment or award: there is a separate convention for such settlements, known as the New York Convention, signed in 1958.

Such an exclusion makes sense, says Mr Phillips, given that mediation is “a different animal” to arbitration. Yet he — and other lawyers — say large parts of the Singapore Convention seem to be “lifted almost entirely” from the New York Convention.

George Bermann, director of the Center for International Commercial and Investment Arbitration at Columbia Law School in New York, welcomes the Singapore Convention. “There’s no reason why it shouldn’t be as conducive to mediation as the New York Convention has been for arbitration,” he says. Meanwhile, Mr Bermann sees in the new convention plenty of shades of the New York Convention, including the conditions the Singapore Convention provides for parties to reject the enforcement of a mediated settlement.

“It would now appear necessary to pin down, with clarity and certainty, the criteria for determining whether an apparent mediation was a real one,” says Mr Bermann. He adds that one potential complexity of the Singapore Convention is the necessity to prove that a settlement emerged from a genuine mediation.

“With the Singapore Convention, counter parties in signatory countries can have faith that settlement enforcement should not be required, if they have reasons to doubt the mediation procedure or the legitimacy and integrity of the mediator,” says Mr Bermann. Because, now, “mediation is better anchored in some jurisdictions than others”, he argues, “the convention is a powerful tool to expand its usage around the world.”

Matthew Skinner, partner at law firm Jones Day in Singapore, notes that the New York Convention’s value in establishing the legitimacy of arbitration was not realised for decades. “It was a slow burn,” he says. “I would not anticipate the Singapore Convention taking so long but with all these things it takes time to be established.”

Jan O’Neill, lawyer at law firm Herbert Smith Freehills in London, thinks there is potential for the Singapore Convention — if it receives widespread ratification — to encourage people to use mediation, not least in jurisdictions with limited experience of alternative dispute resolution.

Understanding of mediation is still “frustratingly patchy”, says Ms. O’Neill. “So, regardless of how many mediated settlements actually need to be enforced under the new convention, its real value will probably lie in reinforcing the credibility of mediation.”

She adds: “Just the existence of a global enforcement regime will go a long way to reassuring parties less familiar with the process that it’s a reliable dispute resolution option, which courts around the world will recognise.”

McKinsey Sees ‘Ominous’ Signs of Another Asian Debt Crisis

By Subhadip Sircar August 19, 2019, 8:59 PM MDT

Firms in most of Asia are under debt-servicing stress: report

Trade war has increased risk adversity in Asian debt markets

More than two decades since the Asia debt crisis gripped the region, global consulting firm McKinsey & Co. is warning that signs of a rerun are “ominous.”

Increased indebtedness, stresses in repaying borrowing, lender vulnerabilities and shadow banking practices are some of the concerns cited by McKinsey in an August report. Whether building pressures are “enough to trigger a new crisis remains to be seen” but governments and businesses need to monitor potential causes, authors Joydeep Sengupta and Archana Seshadrinathan wrote.

McKinsey’s warning shot comes as a slowing global economy puts pressure on earnings at Asian companies, and the U.S.-China trade war makes debt investors more risk-averse. Still, fund managers point to improved credit metrics of Asian dollar bond issuers in recent years, and Moody’s Investors Service said last week it expects most Asian economies can offset the domestic impact of the global slowdown through monetary and fiscal policy measures.

McKinsey examined the balance sheets of more than 23,000 companies across eleven Asia-Pacific countries, and found firms in most of Asia face “significant stress” in servicing debt obligations. In countries such as China and India, those pressures have risen since 2007, while falling sharply in the U.S. and U.K. during the same period, according to McKinsey.

The analysis looked at the share of long-term debt at corporations with an interest coverage ratio of less than 1.5 times. At these levels, corporations are using a predominant share of their earnings to repay their debt, according to the study. In 2017, in China, India and Indonesia, more than 25% of long-term debt was at by companies with a ratio of less than 1.5, it said.

Since 1997, financial regulators have put in place safeguards to prohibit a repeat of the crisis that engulfed Thailand, Korea, Indonesia and several other Asian nations and had long-lasting repercussions. Potential triggers of a crisis that need to be monitored include defaults in repayment of debt, liquidity mismatches, and large fluctuations in exchange rates, according to McKinsey.

— With assistance by Finbarr Flynn

debt stress

Economic data, commodities and markets

Print edition | Economic Indicators

Aug 22nd 2019

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North American Housing First and Second Quarter 2019




Airbnb likely removed 31,000 homes from Canada’s rental market, study finds

Short-term rental sites are ‘having rather large impacts on our housing markets,’ McGill researchers say in ground-breaking paper

Tom Cardoso and Matt Lundy

More than 31,000 homes across the country were rented out so often on Airbnb in 2018 that they were likely removed from the long-term rental supply, according to a ground-breaking study by McGill University researchers.

Put another way, that’s more than enough homes for everyone in North Vancouver.

As the popularity of short-term rentals has soared, the effect on rental supply in Canada’s cities, towns and rural areas has grown, according to the study. Shared exclusively with The Globe and Mail, the report is the most comprehensive analysis of Airbnb’s impact to date, and reveals the extent of the global rental service’s footprint, even as local officials implement rules that target the short-term rental industry.

How small Canadian towns are grappling with Airbnb’s explosive growth

Those 31,000 homes are equal to about 1.5 per cent of residences across the country that have been built for the rental market.

Airbnb and similar platforms are among several factors, including a lack of rental construction and high barriers to home ownership, that have affected rental markets. Housing advocates say not enough rental housing is being built in Canada’s largest cities to accommodate population growth.

In 2018, the platform had a daily average of 128,000 active listings in Canada, which includes everything from a basement suite to a lakefront cottage, an increase of 25 per cent from 2017, according to the report. And for hosts, it’s been a profitable time: They brought in $1.8-billion in revenue last year, up 40 per cent from 2017.

“Many people believe that they interact with these services mainly as guests,” said David Wachsmuth, a McGill professor and one of the report’s co-authors. “What my research has been showing is that, actually, we interact with short-term rentals every day of our lives in a different way – they’re having rather large impacts on our housing markets.”

In the past, Prof. Wachsmuth has done consulting work and produced reports for governments, and civic and business groups, including a hotel-industry association. This study, which has been peer reviewed, was funded solely by the federal government, however.

est homes airbnb

david wachsmouth

David Wachsmuth , Canada Research Chair in Urban Governance, poses in Le Plateau, a neighborhood where Airbnb’s are becoming more prevalent, in Montreal, on June 14, 2019.

Christinne Muschi/The Globe and Mail

Over the past decade, short-term rentals have become increasingly popular. Sites such as Airbnb, HomeAway and VRBO have developed into global platforms, allowing people to rent out spare rooms or entire homes to travellers, with a cut going to the company.

“When you offer your place as a short-term rental, you have more control over it, you can use it for yourself whenever you want, [and] it makes more money” than renting to long-term tenants, said Dany Papineau, who operates four listings at two properties he co-owns, one in Montreal and another in the Eastern Townships, about 90 minutes east of the city. “Personally, I’m not interested in doing long-term rentals at all,” he said.

As short-term rental activity has grown globally, regulators in many of the world’s tourist hubs – Barcelona, New York, Amsterdam, Los Angeles – are cracking down on short-term rentals, citing concerns over distortions to the local housing supply and lost tax revenue, along with a host of other issues.

In New York, for instance, Airbnb directly accounted for a US$380 increase in median annual rent costs, according to a separate report from Prof. Wachsmuth last year that was funded, in part, by a hotel-industry organization. “The more Airbnb activity you see in a city, the higher housing prices and the higher rents are going to get,” he said. “There’s no question that [Canadian] cities are now past that point.”

Within Canada, short-term rental activity is highly concentrated in a few cities. The Montreal, Toronto and Vancouver areas accounted for close to half of Canada’s average daily listings in 2018, and hosts there brought in $710 million, up 27 per cent from 2017. They’re also where the most rental supply is under threat: Forty per cent of the roughly 31,000 homes that were frequently rented last year were found in those cities, amounting to more than 12,000 “lost”

daily airbnb listings

“It’s a relatively significant number,” said Graham Haines, research manager at the Ryerson City Building Institute, of the total number of frequently rented homes. Between the Montreal, Toronto and Vancouver areas, “that’s almost enough housing to add a whole percentage point back onto our vacancy rates,” he added.

Vacancy rates for purpose-built apartments in the Montreal, Toronto and Vancouver areas were 1.9 per cent, 1.1 per cent and 1 per cent, respectively, in 2018, according to the Canada Mortgage and Housing Corp. – all below historical norms. Over the past five years, Toronto has added 18 times more condominium units (80,000) than purpose-built rentals (4,500 units), according to a city report from January.

When asked about the study’s findings, Airbnb said it takes housing affordability seriously. “In Canadian cities such as Toronto and Vancouver, there’s no question they’re facing real housing challenges,” said Alex Dagg, director of public policy at Airbnb Canada.

Ms. Dagg contested the McGill team’s findings, saying they are based only on publicly accessible information collected from Airbnb’s website. For instance, she said that when an Airbnb unit is unavailable for bookings, researchers would be unable to fully ascertain whether it is occupied by its owner rather than a guest.

“We don’t agree with the validity of that number,” Ms. Dagg said of the report’s finding that 31,000 homes were frequently rented. She also disagreed that Airbnb was having an impact on rental housing. “[They have] no way of knowing those houses or those units would ever be on the long-term rental market,” she said.

To calculate lost housing numbers, the McGill team looked for entire-home listings available for rent at least half the year and rented at least 90 nights. According to the study, any home that’s listed for most of the year likely doesn’t house a long-term resident.

percentage homes airbnb listed

“There are people who are being evicted from their apartment buildings to convert those units into Airbnb’s,” Prof. Wachsmuth said. “That’s a fact right now.”

The McGill authors note that frequently rented homes “are still a small fraction of total housing” in any Canadian city. However, listings can be highly concentrated in some neighborhoods. In parts of Montreal, for instance, one in five homes were listed on Airbnb.

As short-term rental platforms continue to grow, policymakers have started to respond.

In 2016, Quebec became the first major Canadian jurisdiction to regulate the short-term rental industry, requiring some hosts to obtain permits. Vancouver’s rules went into effect last year, and only allow short-term rentals in a host’s principal residence. Toronto has passed its own regime, although zoning amendments are tied up in appeals proceedings, with a hearing set for August.

Enforcement has proved tricky, however. In the early days of Quebec’s regulations, virtually no hosts were complying, Prof. Wachsmuth said. The province later shifted enforcement to its revenue department, giving it expanded powers to target wrongdoers. Still, just two weeks ago, Quebec overhauled its rules again.

“We’ll find them, and we’ll fine them,” Tourism Minister Caroline Proulx said of rule-breaking hosts.

Despite provincial regulations, Airbnb has continued rapidly growing in Montreal, fuelled by the outsize impact of another nationwide trend: the rise of hyperactive, professional hosts who manage several listings.

Nearly half of all Canadian Airbnb revenue in 2018 was generated by commercial operators, or those who manage multiple listings, the McGill report said. Their share of sales increased from 2017 in nearly all metro areas. Among this group, there are some hosts that vastly eclipse the competition: Fifteen managed at least 100 active listings apiece in the past year, the report said, and nearly 60 hosts earned more than $1 million in 2018.

“Canadian cities really stand out when you look around the world, for having their short-term rental market dominated by commercial operators,” said Prof. Wachsmuth, whose team has established itself as world leaders in measuring the global impact of Airbnb. “Montreal in particular is the worst in the whole world.”

It vastly differs from how Airbnb often pitches itself: as a personal platform through which residents, either out of town or looking to put a second bedroom to good use, will occasionally rent out their spaces.

Often, the largest “hosts” are in fact businesses that manage vacation rentals on behalf of homeowners. That’s the case for Maryrose Coleman and Ross Halloran, who together run Muskoka District Rentals, a cottage-rental service. They conduct roughly a third of their business on Airbnb.

How one Toronto man’s mini-empire of Airbnb ‘ghost hotels’ exacerbates the city’s long-term rental market

Listing your place on Airbnb can land you in trouble with your mortgage lender

In Muskoka, Ont., a cottage can easily sell for upward of $2-million, even though it may only be occupied for a few weeks out of the year. These days, if you have a cottage, Mr. Halloran said, “it’s good business to rent it out – mitigate the costs, if you can, when you’re not using it.”

Data from the McGill team suggest Muskoka District Rentals is among the largest Airbnb hosts by revenue. As of mid-June, it had 76 listings on the platform.

Back in Montreal, more than 30 per cent of the city’s Airbnb revenue was generated by 1 per cent of hosts in 2018, and many link the rise of commercialization to lost housing supply.

City councillor Richard Ryan estimates that “a couple of thousand units” in the city’s central areas were lost to commercial operators. He was a driving force behind new bylaws in the Plateau-Mont-Royal and Ville-Marie boroughs, where listings can be restricted to particular streets.

Beyond questions over supply, short-term rentals are roiling communities in other ways. “These issues are significantly affecting the quality of life in the neighbourhood: noise, parties at any time of day or night, safety concerns, garbage strewn out on the street, a lack of respect for neighbours and so on,” Mr. Ryan said via e-mail.

Even with new regulations in place, there remain broad swaths of the country – from big cities such as Calgary, to small communities in Ontario’s cottage country – where short-term rentals are subject to few restrictions, if any at all. As such, Prof. Wachsmuth expects Airbnb to continue growing, given that Canada is less of a mature market than the United States.

Even then, he is near certain his research is still underestimating the size of the short-term rental market in Canada. But he notes that the Canadian market has hit a turning point.

“Airbnb, HomeAway and other companies in the sector enjoyed a period of several years where policy-makers weren’t really paying attention,” he said. “I think that period is over now

December 5, 2018 by On-Site Staff


Between trade battles over steel and aluminum tariffs and halts to major projects such as the Trans Mountain Pipeline, Canada needs to ensure investors still see it as a safe bet

There is no shortage of changes, both positive and negative, the industry faces as 2018 comes to a close.

On-Site caught up with Mary Van Buren, the president of the Canadian Construction Association, to discuss the trends the industry association will be watching closest over the next 12 months. For a more in-depth look, you can read through our 2019 Canadian construction forecast here.

But without further ado, here are the 10 items that should be on every Canadian construction firm’s laundry list in 2019:

1 — Confidence in Canada

Approval issues for major projects and Canada’s relative tax disadvantage versus the U.S. could cause trouble for builders as investors think twice about their Canadian spending.

2 — Competition for talent

Despite near-record employment and a strong economy, the industry faces a significant challenge from an impending wave of retirements and competition for the next generation of talent.

3 — Inclusive workplaces

The construction industry has worked hard to better integrate women and First Nations on job sites. While attracting new recruits remains tough, companies are also shifting their focus beyond diversity and pursuing more inclusive, flexible workplaces.

4 — Social procurement

The federal government has tied social policy into its $180 billion infrastructure plan through, among other strategies, community employment benefits. It’s a trend the CCA expects to continue.

— Millennial leadership

culture of construction

Boomers are retiring and family-owned businesses are being passed down to sons and daughters. The culture of construction is certain to change as tech-savvy Millennials take the reins.

The industry continues to reach new heights, but adopting innovative new approaches will ensure growth continues

— Pay to play

Building new and repairing aging infrastructure isn’t cheap. Institutions such as the Canada Infrastructure Bank, as well as tools like toll roads, are expected to play a larger role as investors look for revenue streams.

7 — Innovation

Industry players are expected to step up their efforts to leverage new partnerships and technologies in 2019. Ultimately, these new solutions should solve long-standing industry problems.

8 — Privacy

Smart cities, smart roads and related data-gathering technologies are expected to become increasingly important. Keeping the data under wraps and collecting it with permission will prove a challenge.

9 — Productivity

Technology and innovation will continue to help the sector improve productivity, while embracing new strategies, such as accelerated capital depreciation for equipment, could also be beneficial.

10 — Trade war and trade woes

Canada, Mexico and the U.S. finally agreed to a new trade deal, but the months-long battle along with steel and aluminum tariffs should have companies looking for non-traditional suppliers.

This article originally appeared in the December 2018 issue of On-SiteYou can read through the complete issue here.

Housing affordability monitor

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CHMC starts and completions

Source: CMHC Starts and Completions Survey / Market Absorption Survey Notes:

Seasonally adjusted annual rates (SAAR) are monthly figures adjusted to remove normal seasonal variation and multiplied by 12 to reflect annual levels. The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR).

Year-to-Date (YTD) numbers are calculated using the sum of the individual months. There may be slight differences due to rounding when these are compared to quarterly or annual data in other CMHC tables or publications.

For more detailed definitions, please see refer to:


Brock Commons Tall house UBC

B.C. building code adjusted upwards to allow 12-storey wood buildings

The Canadian Press

OKANAGAN FALLS, B.C. — The height limit for wood buildings in British Columbia is rising to 12 from six storeys in a move that Premier John Horgan expects to spur development using timber and give the province a head start on other parts of the country.

B.C. is changing its building code to allow the construction of taller wood buildings as a safe, economic and environmental alternative to concrete apartments and office buildings, Horgan said Wednesday.

B.C.’s building code changes come one year ahead of expected changes in the national building code, which are also expected to increase height limits for wood buildings to 12 storeys, Horgan said.

“We’re not waiting for the rest of the country to get here,” said Horgan. “We already know that the product we’re building, that we’re creating here, is fire resistant. We know that we can build faster and we know it’s better for the environment.”

He said he expects local governments and First Nations to approve more wood buildings for family apartments, student residences and business locations.

Horgan made the announcement at Structurlam, a timber production company in Okanagan Falls near Penticton that has been a North American leader in wood products used in buildings.

“We need to get more value out of every log,” he said. “It’s cost effective. It’s environmentally sensitive and it’s putting British Columbians to work with a B.C. product.”

A mass timber building is one where the primary load-bearing structure is made of either solid or engineered wood. Encapsulated mass timber is where the timber components are surrounded by fire-resistant materials like drywall.

Hardy Wentzel, chief executive officer of Structurlam, said the height change allows the company to continue being an innovator on mass timber products and building designs.

He said the company uses B.C. wood, including spruce, pine and fir.

Canada is a leader in wood technology, using different forms of timber and lumber to create products that can be formed into pre-fabricated wood used as beams, columns, walls, arches, floors and roofs, says the Canadian Wood Council.

Wentzel said mass timber buildings are safe and faster to build, but the long-standing tradition of concrete buildings holds strong.

“The builders may be set in their ways, but when they actually do the economics of building 12-storey wood buildings versus a 12-storey concrete building, and they do a full cradle to grave analysis, they’re going to find this is the better way to build,” he said.

Eric Andreasen, vice-president of sales and marketing at Vancouver building company Adera, welcomed the change, which he said will likely convince more developers to consider wood buildings.

“I do believe a lot of people are going to start having an awareness and that’s going to lead to more tall wood construction,” he said. “It’s got some natural characteristics and it just looks better.”

A Housing Ministry news release says mass timber buildings meet or exceed performance standards for safety, structural resilience and fire protection. It says the 17-storey Brock Commons student residence at the University of British Columbia was the world’s tallest mass-timber building when it opened in 2017.

— By Dirk Meissner in Victoria

United States

U.S. Payrolls, Wages Cool as Trade War Weighs on Economy

By Reade Pickert  and Jeff Kearns

‎June‎ ‎7‎, ‎2019‎ ‎6‎:‎30‎ ‎AM Updated on ‎June‎ ‎7‎, ‎2019‎ ‎8‎:‎22‎ ‎AM

U.S. Payrolls, Wages Cool as Trade War Weighs on Economy

By Reade Pickert and Jeff Kearns

‎June‎ ‎7, ‎2019‎ ‎6‎:‎30‎ ‎AM

  • Revisions subtract 75,000 jobs from prior two months
  • Unemployment rate unchanged at half-century low of 3.6%

US jobs

What the U.S. May Jobs Report Means for the Fed and Markets

U.S. employers added the fewest workers in three months and wage gains cooled, suggesting broader economic weakness and boosting expectations for a Federal Reserve interest-rate cut as President Donald Trump’s trade policies weigh on growth.

US job additions

Non farm payrolls rose 75,000 in May after a downward revised 224,000 advance the prior month, according to a Labor Department report Friday. The increase missed all estimates in Bloomberg’s survey calling for 175,000. The jobless rate held at a 49-year low of 3.6% while average hourly earnings climbed 3.1% from a year earlier, less than projected.

The dollar and Treasury yields fell as the data signaled the labor market — a pillar of strength for an economy headed for a record expansion — was facing new pressures even before Trump threatened tariffs on Mexican goods in addition to proposed higher levies on Chinese imports. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-expected growth in the first three months of the year.

Read more: Bets on July Fed Rate Cut Gain Momentum After U.S. Jobs Report

“It definitely looks like we’ve downshifted in the pace of job growth,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. “Overall it’s a disheartening report particularly since you may have some trade effects there, but a lot of the trade tensions escalated” since the reference period for the Labor Department’s surveys in the middle of the month, he said.

The U.S. added 75,000 jobs in May and the jobless rate held at 3.6%. Mike McKee reports.

US jobs 2

Daybreak: Americas.” (Source: Bloomberg)

Stocks jumped as traders focused on the interest-rate implications of the report. Fed funds futures showed a quarter-point cut almost fully priced in for July.

Fed policy makers have described the economy as solid, though recent remarks from Chairman Jerome Powell signaled openness to lower rates if needed. St. Louis Fed President James Bullard, who votes on policy this year, this week became the first official to indicate likely support for a rate cut; others suggested they’re waiting for more data.

As the world’s largest economy nears its longest-ever expansion in July, the employment report may amplify rhetoric that Fed rate cuts are needed to support growth.

Revisions subtracted 75,000 jobs from the prior two months, bringing the three-month average to 151,000.

What Our Economists Say

“The disappointing payroll result suggests uncertainty surrounding trade tensions are starting to extract a larger toll on the domestic economy. The payroll diffusion index, a measure of the breadth of hiring in the labor market, also worsened, sending an additional warning that tariffs are hindering job creation.”
— Eliza Winger, associate

Payroll changes by industry showed broad weakness. Manufacturing growth slowed to 3,000 jobs, as forecast, while construction employment expanded by 4,000, down from the prior month. Professional and business services added 33,000, about half the prior month’s number.

Retail jobs fell by 7,600 for a fourth-straight drop while transportation and warehousing and non-durable goods also slipped. Government payrolls contracted by 15,000, highlighted by drops in state and local education.

Kevin Haslett, the departing chairman of Trump’s Council of Economic Advisers, said on CNBC that the report was disappointing, but wage gains mean the economic outlook is still solid. Flooding in the central U.S. may have reduced the May payroll number by 40,000 jobs, Haslett said on Bloomberg Television.

The Labor Department report, which sometimes can mention special factors that affected jobs or survey responses, didn’t cite any such as weather for the latest month. The number of people not at work due to bad weather was 72,000 in May, a figure roughly in line with the same month in prior years. It tends to spike during major storms or natural disasters.

Cooling Pay

Wage growth in U.S. climbed 3.1% in May from a year earlier, slightly less than forecast

cooling pay

Average hourly earnings rose 0.2% from the prior month, missing estimates. That indicates the tight labor market may offer limited support for consumer spending.

The participation rate or share of working-age people in the labor force, held at 62.8%. The average workweek for all private employees was unchanged at 34.4 hours.

Other Details

  • The U-6, or underemployment rate, fell to 7.1% from 7.3%; the gauge includes part-time workers who’d prefer a full-time position and people who want a job but aren’t actively looking.
  • Private employment grew by 90,000 after a downward revised 205,000 increase. This follows ADP Research Institute data earlier this week that showed companies added the fewest workers since 2010 in May.
  • Economists in Bloomberg’s survey had projected 3.6% unemployment and annual wage gains at 3.2%.

— With assistance by Chris Middleton, and Sophie Caronello

(Updates with Hassett comment in 11th paragraph.)




Fed Scraps Patient Approach and Opens Door to Potential Rate Cut

By Craig Torres and Christopher Condon

‎June‎ ‎19‎, ‎2019‎ ‎12‎:‎00‎ ‎PM Updated on ‎June‎ ‎19‎, ‎2019‎ ‎4‎:‎03‎ ‎PM

  • Holds rates steady for now as 8 officials project cuts in 2019
  • Fed Chair Powell says he fully intends to serve four-year term


The Federal Reserve signaled it was ready to lower interest rates for the first time since 2008, citing “uncertainties” that have increased the case for a cut as officials seek to prolong the near-record U.S. economic expansion.

While Chairman Jerome Powell and fellow central bankers left their key rate in a range of 2.25% to 2.5% on Wednesday, they dropped a reference in their statement to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target this year.

“My colleagues and I have one overarching goal, to sustain the economic expansion,” Powell told a press conference following the decision. He noted that apparent progress on trade talks had “turned to greater uncertainty” and many Fed officials “now see that the case for somewhat more accommodative policy has strengthened.”

The shift followed attacks on the Fed by President Donald Trump for not doing more to bolster the economy and Tuesday’s report by Bloomberg News that the president asked White House lawyers earlier this year to explore options for demoting Powell from the chairmanship.

US Bond benchmark

U.S. stocks rose after the decision and Treasuries erased losses. Yields on benchmark 10-year Treasuries fell to 2.03%. Fed funds futures priced in increased odds of a rate cut at the July meeting and investors now see around 74 basis points of easing by the end of the year.

Powell ducked a question on whether the Fed would ease by as much as a half-percentage point, if it decided to act. But he acknowledged there was merit in the argument that a central bank should move decisively when its policy rate is already close to zero.

“An ounce of prevention is worth a pound of care,” Powell said. “That is a valid way to think about policy in this era” of near-zero rates, he said.

Read more: Fed Likely to Consider Half-Point Move If and When It Cuts

The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.


The Federal Open Market Committee (FOMC) said in a statement that in light of increased uncertainties and muted inflation pressures “the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The FOMC vote was not unanimous, with St. Louis Fed President James Bullard seeking a quarter-point rate cut. His vote marked the first dissent of Powell’s 16-month tenure as chairman.

Officials were starkly divided on the path for policy. Eight of 17 penciled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

Political Shadow

Trump’s attacks on the Fed risk casting a political shadow over whatever policy decision the Fed makes, though Powell and his colleagues say they’re focusing only on the economic goals Congress gave them.

Powell declined to comment directly on the president’s public criticism of the central bank, but said the Fed is “deeply committed to carrying out our mission” and that its independence from politics is an “important institutional feature that has served the economy and the country well.”

In the statement, officials downgraded their assessment of economic activity to a “moderate” pace from “solid” at their last gathering. They also noted that “growth of household spending appears to have picked up from earlier in the year” and that indicators of business fixed investment “have been soft.” They repeated that the labor market “remains strong.”

Read  More…

Recent U.S. economic data have been mixed. Consumer spending held up in May, but job gains were disappointing, and some gauges of business sentiment have cooled on uncertainty around the outlook for trade. The Fed remains be devilled by inflation continuing to undershoot the central bank’s 2% target despite unemployment being at a 49-year low.

What Our Economists Say

“Bloomberg Economics retains the view that if economic data firm somewhat and trade tensions cool, the Fed may avoid embarking on insurance cuts — or at the very least will deliver far less accommodation than what markets have started to price in.”
–Carl Riccadonna, Yelena Shulyatyeva and Eliza Winger
Click here for more.

The Fed, which raised interest rates four times last year and as recently as December projected further hikes in 2019, isn’t alone in changing tack. European Central Bank President Mario Draghi on Tuesday paved the way for a rate cut, and central banks in Australia, India and Russia have lowered borrowing costs this month.— With assistance by Chris Middleton, Alexandre Tanzi, Ben Holland, Katia Dmitrieva, and Reade Pickert

us homebuilder

Photographer: Luke Sharrett/Bloomberg


U.S. Home builder Sentiment Unexpectedly Posts First Drop in 2019


Ryan Haar

‎June‎ ‎17‎, ‎2019‎ ‎8‎:‎00‎ ‎AM

Sentiment among U.S. homebuilders unexpectedly posted the first decline this year, suggesting lower mortgage rates are failing to give the housing market a sustained boost amid property prices that remain out of reach for many buyers.

The National Association of Home Builders/Wells Fargo Housing Market Index fell two points to 64 in June, according to a report Monday that was below all estimates in a Bloomberg survey predicting a gain. All three components declined, with sales expectations hitting a four-month low. Readings above 50 indicate more builders view conditions as good than poor.

Key Insights

  • Homebuilders cited rising costs for development and construction, along with concern over trade issues and labor shortages, according to the report. The figures contrast with some signs that the housing market is picking up, as a gauge of mortgage applications jumped earlier this month by the most in four years, while new-home construction advanced in March and April.
  • The report follows a record decline Monday in the New York Fed’s Empire State factory index, suggesting some parts of the economy are heading to a weak finish in the second quarter. Reports out Friday showed solid retail sales and manufacturing output in May, indicating growth is uneven as Federal Reserve policy makers prepare to discuss interest rates at a meeting this week. Investors expect the central bank to lower borrowing costs in July.

Official’s View

“Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers,” NAHB Chief Economist Robert Dietz said in a statement. “Builders continue to grapple with excessive regulations, a shortage of lots and lack of skilled labor that are hurting affordability and depressing supply.”

Get More

  • The index declined in the Northeast and West while rising in the Midwest to the highest since October. It was unchanged in the South.
  • Economists in a Bloomberg survey had projected the main housing sentiment index would rise from 66 to 67.
  • The Washington-based trade association represents more than 140,000 members in areas ranging from building and remodeling to housing finance.

— With assistance by Jordan Yadao

Housing Starts Take a Step Back in May

Posted by John Greene on June 20, 2019

Despite some promising signs in April—and on the heels of March data that was revised upward—the US homebuilding industry can’t seem to string together a few consecutive months’ worth of significant growth. Housing starts inched down in May, surprising economists and analysts who had predicted another month of gains now that we’ve entered peak building season.


Housing Starts, Permits & Completions

Privately-owned housing starts decreased 0.9 percent in May to a seasonally adjusted annual rate (SAAR) of 1.269 million units. Single-family starts decreased 6.4 percent to a rate of 820,00 units; starts for the volatile multi-family housing segment surged 10.9 percent to a rate of 449,000.

Privately-owned housing authorizations inched up 0.3 percent to a rate of 1.294 million units in May. Single-family authorizations were up 3.7 percent at a pace of 815,000 units. Privately-owned housing completions were down 9.5 percent to a SAAR of 1.213 million units. Per the US Census Bureau Report, seasonally-adjusted total housing starts by region included:

  •     Northeast: -45.5 percent (+84.6 percent last month)
  •     South: +11.2 percent (-5.7 percent last month)
  •     Midwest: -8.0 percent (+42.0 percent last month)
  •     West: -2.4 percent (-5.5 percent last month)

Seasonally-adjusted single-family housing starts by region included:

  •     Northeast: -25.8 percent (+29.6 percent last month)
  •     South: +3.3 percent (-5.6 percent last month)
  •     Midwest: -5.8 percent (+37.9 percent last month)
  •     West: -19.9 percent (+13.7 percent last month)

US Housing Starts

Home builder confidence dropped two points in June to 64, per the National Association of Home Builders’ (NAHB) index. The 30-year fixed mortgage rate continued to decline in May, dropping to 4.07 percent for the month, which is 11.3 percent lower than a year ago. The rate has now dropped 16.4 percent since peaking at 4.87 in November 2018.

“Single-family permits usually track new home sales but are lagging behind, either because homebuilders doubt the recent revival in sales will last – we think it will – and/or because they have too much inventory still after the disastrous drop in sales in Q4 last year,” said Ian Shepherdson, chief economist for Pantheon Macro. “If we’re right, and new home sales rise in the second half of the year, new construction will follow.”

monthly new construction may

For comprehensive real estate trend analysis please refer to PWC outlook reports for Canada and USA.

Second Quarter 2019 Economic and Wood product News

2019 3rd q


Please Note: This is an abbreviated version of the Stratfor forecast that focuses on regions of interest for wood product trade implications. Please follow this link if you wish to see forecasts for Europe, Africa and South America.

The U.S.-China Trade War Will Drag On. While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports. Nearly every move China makes to push back and cope with tariff pressure, including ramping up state backing for strategic industries and retaliating against U.S. businesses, will drive the two economic giants further apart as the trade war continues to damage the global economy.

Iranian Retaliation Will Raise the Risk of a Military Confrontation. Iranian retaliatory moves against the United States, including the resumption of nuclear activities and threats to shipping in the Strait of Hormuz, will raise the threat of U.S. punitive strikes on Iran. Even though the White House intent will be to limit offensive action and avoid bogging itself down in another politically unpopular war in the Middle East, the potential exists for a more serious escalation. Short of the negotiation Trump envisioned for Iran, progress could be made toward establishing a deconfliction channel via third-party mediators.

A High Stakes Tech Battle Will Drive Fragmentation in the Global Tech Sector. Far-reaching U.S. export restrictions against Chinese telecom giant Huawei Technologies Co. will nearly paralyze the company in the near term, and it could strengthen the White House’s ongoing campaign to deter other countries from working with Huawei on 5G roll outs. Even if the United States agrees to a partial relaxation of its ban against Huawei, China will move full steam ahead to accelerate indigenous semiconductor development and software alternatives to its Western competitors. At the same time, U.S. regulators will ramp up their investigations of U.S. tech giants over antitrust, privacy and data protection concerns.

Mexico Faces an Uphill Battle to Appease Trump and Avert Tariffs. Though Mexico narrowly averted U.S. tariffs by pledging to do more on border security, it is not out of the danger zone yet. Mexico will fall short of meeting Trump’s demand that it chokes off migrant flows, and Trump will likely rely on tariffs, or at least the threat of tariffs, as his preferred enforcement tool.

5 key themes.JPG Risk Will Create Significant Headwinds for the Global Economy.

Global economic growth estimates are headed for another downgrade in the third quarter. Intensifying U.S. trade conflicts with China, along with the lingering threat of a major disruption to North American trade, will continue to sap investor confidence and drive a U.S. Federal Reserve decision to ease interest rates. The Chinese yuan is likely to depreciate past 7 to the dollar, though China’s Central Bank will intervene to avoid a much steeper devaluation that would accelerate capital flight and apply stress on a number of emerging markets. Between slowing consumer demand and a higher risk of supply disruptions from a potential Iran conflict, oil markets will remain in flux.

Brexit Chaos and Italy Will Weigh on Europe. The United Kingdom will get a new hardline prime minister, who will inevitably hit a wall with Brussels when negotiating the terms of the United Kingdom’s future relationship with the European Union. The risk of a no-deal Brexit will rise through the quarter, but the likely result will be more delays and possibly a path to early elections. And even as Rome manages to dodge EU sanctions over its ballooning deficit, Italy’s fiscal policies, weakening banking sector and fragile government coalition will continue to stress the European Union.

Great Power Competition Will Create Opportunity But Mostly Risk for Middle Powers. As U.S. competition with Russia persists, Poland will be able to take advantage of the White House’s strategic focus on Eastern Europe, advancing plans to rotate more U.S. troops through Poland and pushing for targeted U.S. sanctions against Nord Stream 2. Turkey and India, meanwhile, will remain in the White House’s crosshairs over their energy relationships with Iran and defense ties to Russia, with New Delhi facing the additional threat of tariffs this quarter.

Military-Backed Transitions in North Africa Face Major Hurdles. The fall of legacy dictators in Sudan and Algeria have emboldened opposition groups hungry for political change. The military s of each country trying to manage the tumultuous transition will struggle to satisfy opposition demands while navigating elite power spats behind the scenes. Sudan will rely more on brute force to quell unrest, while Algeria’s more diverse set of power brokers will likely become mired in political negotiation as unrest persists.

global trends.JPG

Section Highlights

  • There is a small window for a trade truce, but the White House is more likely to escalate its trade war and broader strategic competition with China.
  • Iranian retaliation against the White House’s maximum pressure campaign will raise the risk of U.S. punitive strikes against Iran.
  • Mexico will continue to live in fear of tariffs as the country falls short of Trump’s demands for choking off migrant flows.
  • Rising trade frictions, the potential for military conflict in the energy-vital Persian Gulf and growing political uncertainty will create major geopolitical headwinds for the already-slowing global economy.

The U.S. “Tariff Man” Strikes Again

More Information

U.S. President Donald Trump, the self-proclaimed “Tariff Man,” is likely to be the single most important source of geopolitical risk to the global economy in the third quarter of 2019. A deepening standoff with China increases the probability that Trump will follow through with threats to impose 25 percent tariffs on all remaining Chinese imports. Tariff threats against Mexico over auto imports will continue to linger at a time during which global trade risk creates headwinds for global economic growth. Trump nonetheless appears to be operating under the assumption that the U.S. economy is on solid enough footing to justify tariffs, both as a wide-ranging negotiating tactic and to drive down the U.S. trade deficit.

global impacts

Of all its trade battles, the United States will maintain a particularly hard line on China as Washington’s strategic competition with Beijing deepens on nearly all fronts. A deliberate attempt by the White House to cripple Chinese tech giant Huawei Technologies Co. has narrowed what little middle ground there was last quarter for a trade compromise. And for every U.S. action designed to coerce Beijing into making greater concessions, there will be a Chinese reaction that pushes the economic giants further apart in the negotiation. For example, U.S. trade assaults on China will prompt Beijing to increase financial support for strategic sectors, such as the semiconductor industry, directly violating a U.S. demand to reduce state support and level the playing field for foreign businesses. Chinese tariff retaliation and possible boycotts of U.S. goods will counteract Washington’s demand for China to buy more American products to reduce the U.S. trade deficit. Chinese attempts to push back against the United States by selectively blacklisting and fining American firms only feeds into a familiar White House complaint: that China actively discriminates against foreign businesses.

Washington will not ease up on Beijing over the quarter, but every U.S. action will have a Chinese reaction.

A potential Chinese restriction of rare earth exports will amplify threats to U.S. commerce that the White House is citing to legally justify Section 301 tariffs in the first place. And the unavoidable depreciation of the yuan from the stress of the trade war will be used by the White House to name and shame China as a currency “manipulator” bent on disadvantaging U.S. exporters. This burning economic dispute is meanwhile unfolding against a backdrop of rising security tensions in the South China Sea and growing pushback against Beijing in China’s periphery, where the United States has the potential to apply sanctions against the Chinese government and its affiliates in the name of protecting human rights and democracy.

estimated costs

This geopolitical climate does not bode well for Trump and Chinese President Xi Jinping to reach a breakthrough in negotiations when they meet at the G-20 summit in Japan in late June. Beijing will keep the door open for future dialogue, and Trump still has the option of buying more time in the negotiation before resorting to all-encompassing tariffs. But the window for a truce is closing fast, and Xi and Trump will have enough political backing to prolong their economic war well beyond the quarter.

trade war scenarios

While Mexico has been among the main beneficiaries of the U.S.-China trade war, it has now found itself squarely in Trump’s trade cross hairs. Having narrowly averted tariffs this time around, Mexico’s government is facing a tight timeline and an uphill battle to appease the U.S. president. Given the Mexican national guard’s questionable ability to crack down on migrant traffic coming across its southern border — coupled with escalating unrest in parts of Central America and the reluctance of countries in the region to overhaul their asylum laws — the best Mexico City may be able to hope for is a temporary lull in migrant flows as smugglers adapt to expanded border controls. Moreover, Mexico’s already robust trade relationship with the United States and lack of market-based purchasing does not leave much room for the current administration to make a showy concession to Trump by increasing agricultural imports.

Fearing a descent into recession, Mexico will carefully avoid a confrontation with the United States this quarter as it tries to steer clear of costly tariffs.

Trump’s tariff threats against Mexico could resurface around July 22 and again on Sept. 5, when the Mexican government is supposed to deliver to the White House its progress report on curbing illegal border crossings. Already on the edge of recession, Mexico will be careful to avoid a confrontation with the White House to steer clear of costly tariffs. After more than a quarter of a century of tariff-free trade on the U.S.-Mexico border, the economic impact of just 5 percent tariffs on Mexican imports, as Trump earlier threatened, would be tantamount to ripping up the North American Free Trade Agreement and returning to average World Trade Organization-level tariffs for most sectors. Supply chain disruptions would reverberate across the auto, electronic, industrial and food sectors. Furthermore, U.S. agricultural producers would be singled out for retaliatory tariffs, and Congress could even regain momentum to challenge the president’s trade authority — though a veto-proof majority on such a measure would be far from assured. Even if Trump avoids the heavy economic and political toll that comes with disrupting North American trade through tariffs, the uncertainty that comes with merely keeping the threat alive will continue to erode investor confidence.

The threat of auto tariffs will meanwhile continue to loom large as Trump waits for U.S. trading partners to come to him with a “solution” by November, in the form of voluntary export restraints and/or acceptance of U.S. quotas. While Japan has a better chance of negotiating a trade compromise with the White House that includes agriculture and autos, EU leaders, too divided and consumed with horse-trading over political positions in the European Union for most of the quarter, will resist the White House’s ultimatum on restricting auto exports to the United States. As a result, there won’t be much movement in Continental trade negotiations with the Trump administration.

The psychological impact of Trump’s tariff weaponization strategy will linger well beyond the quarter.

The White House has already raised the WTO’s hackles by stretching the definition of national security to justify a variety of tariffs, all while discrediting the global trade body’s authority to arbitrate trade disputes. With a Dec. 10 deadline pending for the United States to lift its siege on the WTO Appellate Body or else drive it into paralysis, European leaders will prepare for the worst and work on convincing other WTO members to sign onto an ad hoc solution that would have former WTO appeals judges settle trade disputes under WTO arbitration rules until a compromise — likely with the next White House — can be found.

The European Union’s creative workaround at the WTO points to a growing assumption among U.S. allies and adversaries alike that negotiation with the current White House may be futile. Erratic U.S. negotiating tactics and the elusiveness of a final, negotiated settlement will bruise business confidence and investor sentiment globally. Ham-fisted diplomacy will also convince a number of powers, including China, Europe and Iran, that seeing out the result of the 2020 U.S. election makes more strategic sense than entertaining heavy concessions in a negotiation with the Trump White House over a deal that may or may not last.

Geopolitical Risk Bludgeons the Global Economy

More Information

In the face of yet another major tariff escalation, China will erect stronger capital controls and draw on its reserves to defend its currency, the yuan. China’s Central Bank will intervene to avoid a steep and sudden devaluation because a depreciation beyond 7 yuan to the dollar will exacerbate China’s economic slowdown and place greater stress on emerging market currencies. Heavy downside risk from the White House’s trade wars will drive the U.S. Federal Reserve to ease interest rates this quarter.

A variety of competing factors will slow but not quite stall the global economy in the third quarter.

The European Central Bank has already abandoned plans to tighten monetary policy this year as crises of the European Union’s own making roil the bloc. We do not think this quarter will end in a no-deal Brexit, but an escalation of political chaos in the United Kingdom, along with a drawn-out confrontation between Rome and Brussels over Italy’s expansive fiscal policies, will continue to sap at European growth amid rising global trade frictions.

For energy markets, between the opposing forces of slowing consumer demand and the threat of military conflict in the Persian Gulf creating a sharp supply disruption, oil prices will remain in flux. When the Organization of Petroleum Exporting Countries meets early in the quarter (with its expanded retinue of crude-producing partners, a collective known as OPEC+), Saudi Arabia and Russia will drive an agreement to extend production cuts into the second half of the year as the world’s biggest oil producers try to contend with rising U.S. inventories and weaker global demand.

Great Power Competition Drives Global Tech Fragmentation

More Information

An aggressive U.S. move in the second quarter to ban Huawei from selling and operating in the United States and, more importantly, to proscribe U.S. tech suppliers from working with the company goes well beyond trade leverage and fits into a broader White House strategy to cripple China’s tech giants as a U.S.-China battle for technological dominance intensifies. If Xi and Trump agree to de-escalate the trade war this quarter, the White House could offer a selective and partial relaxation of export controls on goods and/or licenses that fall outside of highly strategic applications — specifically, dual-use technologies that could be used for security, surveillance or defense purposes. Pressure from affected U.S. businesses and ongoing court challenges could also have the effect of weakening U.S. restrictions against Huawei.

Regardless of their country of origin, global tech companies will find themselves on the firing line as the U.S.-China trade dispute heats up.

Uncertainty surrounding the U.S.-China trade negotiation and the viral nature of U.S. export law, in which even a minimal amount of U.S. components, software and technology could subject a company to sanctions, will accelerate Chinese efforts to shore up indigenous semiconductor development. Huawei will further seek to roll out an independent operating system for smartphones to maintain the company’s global market share. China will struggle to reduce its reliance on major international chip providers — such as Intel Corp., Samsung Electronics and the Taiwan Semiconductor Manufacturing Company (TSMC) — that are now liable for U.S. sanctions. But over time, the rise of Chinese competitors in the chip manufacturing sector and the roll out of Chinese software alternatives — such as Huawei’s mobile operating system challenger to iOS and Android — are likely to contribute further to the fragmentation of the global tech sector.

telecom operators

Ongoing U.S. diplomatic efforts to pressure countries in Europe, Latin America and Southeast Asia into imposing similar bans against Huawei equipment on national security grounds are already stalling. This is because most countries are unwilling to tolerate the much higher costs and implementation delays for 5G networks that would come with blacklisting Huawei. But the broad reach of U.S. export controls against Huawei will now give many of these governments and relevant telecommunications partners pause as they weigh a much bigger compliance risk in dealing with the Chinese firm.

Even as its efforts to defang Chinese tech leaders gain momentum, the U.S. government has also made a point of targeting the exact Silicon Valley tech giants that Washington relies on to outperform China in a global race for technological supremacy. In line with Stratfor’s 2019 Annual Forecast, bipartisan momentum is quickening behind U.S. efforts to scrutinize Big Tech over antitrust, privacy and free speech concerns. Google and Facebook are likely at the top of the list for the Federal Trade Commission and the Justice Department, which share oversight duties over the United States’ largest tech firms. U.S. tech companies will also remain a prominent target in the European Union, where Ireland has launched a probe into Google for violating the European Union’s General Data Protection Regulation on privacy protections.

The White House Struggles to Find Order in Its Cluttered Foreign Policy

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As well as juggling trade wars, the White House will also have to balance competing foreign policy priorities. Iran remains at the top of that list. The Trump White House is operating under an assumption that its ability to choke off Iranian exports and inflict heavy economic pain on the Islamic Republic will drive Tehran to the negotiating table or, better yet, instigate a grassroots overthrow of the clerical regime. Neither is likely to happen, though — and certainly not this quarter. At most, Tehran could rely on third-party mediators to establish a “cooling off’ channel with the United States as military frictions rise. Trump appears well aware of the political flack he would receive by committing the United States to yet another massive military conflict in the Middle East and so is likely to exercise some restraint in trying to avoid a costly military scenario with Iran. But there are several triggers that will arise this quarter, such as Iran telegraphing threats to shipping in the Persian Gulf and restarting parts of its nuclear program, that will embolden White House hawks to argue for punitive strikes against Iran.

iran response

potential responses

A lingering threat of military confrontation between the United States and Iran will detract from Washington’s focus on its burgeoning great power competition with both China and Russia. Beyond high-stakes economic battles, the potential for skirmishes between the United States and China in the South China Sea and in the Taiwan Strait will rise as the U.S. Navy and Coast Guard steadily expand their footprint in China’s near abroad. Russia, meanwhile, will oscillate between instigator and mediator in multiple theaters that have the potential to dominate the White House’s attention. While Russia already provides significant political and economic backing to Iran and Venezuela, it can always dial up military support should it see an opportunity to generate leverage against a highly distracted White House. U.S. attempts to coax Russia and China into a trilateral strategic arms control treaty are unlikely to gain much momentum this quarter as arms buildups continue on all sides.

The White House will have its hands full this quarter when it comes to foreign policy — Iran, Russia, China, Venezuela, North Korea and Afghanistan all require Washington’s attention in differing measures.

Unlike most countries dealing with the current White House, North Korea is trying to accelerate negotiations while Trump is still in office. Now that the United States has little choice but to plan for a military contingency around Iran, Pyongyang will have more room to push the line on missile testing while trying to break through a stalemate in negotiations. North Korean leader Kim Jong Un remains confident that Trump would rather keep North Korea in diplomatic limbo and call it a foreign policy win than return to a military confrontation with Pyongyang.

When compared to a prospective nuclear-equipped nation, Venezuela inevitably falls much lower on the list of U.S. foreign policy priorities. Even as the persistent threat of another coup attempt and the specter of greater Russian involvement in Venezuela will vie for Washington’s attention, the White House is unlikely to risk a messy military intervention at this stage to force regime change. A steady intensification of U.S. sanctions and ongoing back channel dialogue with military leaders to try and crack the rule of President Nicolas Maduro will be the White House’s preferred method of managing Venezuela as the country descends further into chaos.

Additional Forecasts

More Information

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

More Information

  • June 25-26: OPEC+ members meet in Vienna, Austria.
  • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
  • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
  • July: If the U.S. economy continues to grow, this month will mark the longest U.S. economic expansion in its history.
  • July 7: The 60-day deadline Iran gave to the European Union expires, after which time Tehran vowed a partial nuclear restart.
  • July 22: 45-day review of the U.S.-Mexico deal on border security.
  • 5: 90-day review of the U.S.-Mexico deal on border pacificKey Trends for the QuarterMore InformationChina Hunkers Down for an Economic StormTime is running out for the United States and China to call another trade cease-fire ahead of the G-20 summit in Japan in late June, and both sides appear to be digging their heels in for the long fight. In an extreme and very plausible scenario in which the United States follows through with threats to impose additional 25 percent duties on nearly all remaining Chinese imports, China could suffer a 1 percent hit to its gross domestic product (GDP) and millions of job losses over the next two years. If the White House and Beijing fail to reach a truce, China will stoke nationalist fervor to withstand the economic hardship — at the risk of inciting anti-U.S. boycotts and protests that could escalate beyond Beijing’s intent.If the U.S. follows through with threats to impose additional 25 percent duties on remaining Chinese imports, China could suffer a 1 percent hit to its GDP and millions of job losses in the next two years.US China trade imbalanceChina will also boost domestic infrastructure spending and even employ risky property stimulus measures in rural areas and lower-tier cities to avoid social disruptions from unemployment ahead of the 70th anniversary of the People’s Republic’s founding. Enacting such measures also means Beijing will struggle to contain debt risks in the coming months as fiscal burdens rise for local governments and bureaucracies. The extreme tariff scenario will most likely see China’s currency depreciate past 7 yuan to the dollar, creating more currency stress for emerging markets but also forcing the Chinese central bank to intervene to prevent sharp depreciation. Read more about why China will expand stimulus measures to ensure employment stability.U.S.-China Confrontation SpreadsIn the next quarter, the United States will maintain its strategic offensive against China in the Asia-Pacific through a more assertive security posture. It will also lobby support from allies and partners to counter Beijing’s claims over the South China Sea and Taiwan as well as commit to regional infrastructure development. The risk of U.S.-China collisions — both literal and figurative — will increase as Beijing feels pressured to respond to Washington’s intensifying maneuvers in the Taiwan Strait. Contentious activity in the South China Sea will also grow as the U.S. Navy increasingly challenges China’s coast guard and maritime militias and vice versa. Separately, unrest in Hong Kong over an extradition law could provide an opportunity for the United States to exert targeted trade or sanctions pressure.taiwanHoping to muster waning public support ahead of the Taiwanese 2020 presidential election, Taiwan’s ruling Democratic Progressive Party will lobby Washington for elevated security and diplomatic support while ramping up pro-independence narratives. Possible visits by senior U.S. Cabinet officials to Taiwan, completion of pending arms sales or a resumption of trade talks will draw Chinese military intimidation — including increased patrols and flyovers — risking escalation around the Taiwan Strait. Read more about Taiwan’s position in the U.S-China competition.Regional Powers Find Footing in the Middle

    A number of countries in the Asia-Pacific region will be caught in the middle of the great power competition between the United States and China. Australia and Japan broadly align with the United States when it comes to restricting Chinese investments in each country’s tech sector, but they draw the line at engaging in maritime Freedom of Navigation operations and overt support for Taiwan (though enhanced security cooperation with regional states is a given). Tokyo may aid Washington’s efforts to counter Beijing’s Belt and Road Initiative by financing and providing technical expertise to participants to help scrutinize projects underway. But Tokyo will not limit its own infrastructure and technological cooperation with China, seeking instead to set up a security mechanism with Beijing to manage East China Sea tensions.

    Many countries caught between the United States and China in the Asia-Pacific region are choosing to play both sides, with varying degrees of success.

    With the United States embroiled in a trade confrontation with China, and having struck a tenuous deal with Mexico, U.S.-Japan trade talks will proceed slowly, allowing Tokyo to focus first on elections before having to deal with Washington. Meanwhile, U.S. lobbying to block Chinese tech giant Huawei’s 5G rollout and other infrastructure projects will face further constraints among smaller states in the Indo-Pacific region. Southeast Asian states — besides Vietnam — will avoid provoking Beijing out of necessity, despite cooperation with the United States. Read the latest Stratfor assessment on Japan’s rising role as a regional third power.

    The U.S. Muddles Through on North Korea

    The U.S.-North Korea dialogue will remain open throughout the quarter. Although no breakthrough toward a deal is expected, neither side is willing to fully derail the talks, thereby avoiding the risky escalatory cycle of previous years. Washington will deprioritize its outreach to Pyongyang to free resources to deal with Iran and Venezuela. To ensure that it remains on the U.S. radar, North Korea will continue missile testing only in a manner calculated to exert pressure but not run afoul of the Trump administration. However, a miscalculated weapons test could empower White House hard-liners. China and Russia will continue to support Pyongyang’s outreach to the United States in the interest of stability. Amid trade tensions, China will be more willing to slacken enforcement of sanctions on North Korea, prioritizing economic lifelines. However, U.S. President Donald Trump’s personal commitment to a North Korea deal leaves open the small possibility of the United States offering a compromise deal of incremental sanctions relief. To learn more about why the U.S.-North Korea outreach still has momentum, read Stratfor’s assessment on the matter.

    Additional Forecasts

    More Information

    These Stratfor assessments provide additional insights for the Quarter


    Key Dates to Watch

    More Information

      • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
      • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
      • July: The United States will decide on whether to sell 66 F-16V fighter jets to Taiwan.
      • July or August 2019: Japan will hold upper house elections with the potential for lower house snap elections.
      • July 27: North Korea’s Day of Victory in the Fatherland Liberation War holiday marks the signing of the Korean War armistice.
      • September: Taiwan will conduct “Indo-Pacific Democratic Governance Consultations” with the United States.  south asia.JPGKey Trends for the QuarterMore InformationIndia Grapples With Its Economy and Foreign PolicyArmed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India’s government will focus on reviving consumption by stimulating demand in the country’s vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India’s restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter.south asiaKey Trends for the QuarterMore InformationIndia Grapples With Its Economy and Foreign PolicyArmed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India’s government will focus on reviving consumption by stimulating demand in the country’s vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India’s restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter.Indias cooling economyIndia’s relationship with the United States presents a major foreign policy challenge for New Delhi. When it comes to dealing with Washington’s trade demands — specifically, lower tariffs to grant better access to U.S. firms exporting to India — New Delhi has limited retaliatory options. It will, therefore, avoid escalating the ongoing trade dispute beyond tit-for-tat measures — such as imposing $235 million in retaliatory tariffs — against the United States, which is India’s largest export market. The fate of the dispute will ultimately depend on the White House and whether it chooses to launch a Section 301 investigation into Indian tariffs that it complains are too high. For India, trade tensions with the United States heighten the importance of entering regional trade blocs such as the Regional Comprehensive Economic Partnership (RCEP), a grouping of 16 countries, including China (though disagreements over market access between New Delhi and Beijing persist).

        The United States wants to ensure its allies align with its objectives, especially when it comes to managing China, Russia and Iran. India imports Iranian oil — albeit in small quantities — and Russian arms, which puts New Delhi in the cross hairs of Washington’s Countering America’s Adversaries Through Sanctions Act (CAATSA). While India will reduce its oil purchases from Iran (potentially to nothing) and pay in rupees as opposed to dollars, New Delhi is highly dependent on Russian military equipment. Though it will not curtail its arms purchases from Russia, India is actively seeking to procure U.S.-made equipment, which will likely be enough to avoid CAATSA sanctions in the third quarter. And though India still counts China as its main strategic rival, the two will maintain calm on their disputed frontier as each country wrestles with other issues abroad. Even so, New Delhi’s strategic and economic competition with Beijing will advance across South Asia as India cultivates deeper ties with Sri Lanka, the Maldives, Bangladesh and Nepal through a mix of foreign aid, diplomacy and security cooperation — in keeping with Modi’s “Neighborhood First” policy. Pakistan, of course, will remain the outlier: talks, at least publicly, are unlikely this quarter since Modi rode to power on an anti-Pakistan platform.

        Washington Wants an Afghan Deal by September

        Though the war in Afghanistan rages on, the Taliban will remain in negotiations with the United States because dialogue offers the surest path to clinching the insurgency’s paramount objective: the withdrawal of foreign forces. For its part, Washington will remain committed to talks in the hopes it can seal a peace deal ahead of Afghanistan’s presidential elections in September.

        The sticking point for negotiations has always been the sequencing of demands: The Taliban insist that U.S. forces leave Afghanistan first, whereas Washington wants a Taliban cease-fire, counter terrorism pledge and dialogue with the Afghan government first.

        us talibanIf, however, a deal eludes both parties this quarter, it will be because of the fundamental disagreement over the sequencing of their respective demands: The Taliban will insist that the United States first announce a withdrawal of forces, whereas Washington will demand a Taliban cease-fire, counterterrorism pledge and commitment to hold talks with the Afghan government. Iran could choose to spoil any peace deal, too, if it anticipates a U.S. military strike against it. The country could ramp up its support for the Taliban, emboldening the insurgency on the western fringes of Afghanistan. Iran would, however, seek to balance such a move with its need to maintain good relations with Kabul. Beyond Iran, regional actors including Russia, China and Pakistan — the Taliban’s key external sponsor — will support efforts to enable a durable resolution to the long-running conflict.

        Pakistan Endures Rising Opposition to Austerity Measures

        Though Pakistan’s government will face a social and political backlash arising from the government’s austerity measures — which are tied to the International Monetary Fund’s $6 billion loan — its survival won’t be at stake. Prime Minister Imran Khan recognizes the importance of maintaining military support for his political survival, so he will accommodate the army’s demands, principally delegating control over foreign and defense policy with respect to India and Afghanistan. A key constraint against protests over high inflation will be the sidelining of leaders from Pakistan’s two main opposition parties — the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).

        Unpopular austerity measures will create social and political fallout, but thanks to the support of the armed forces, the government will hold strong through the quarter.

        But even if protests grow, the army not only has the ability to control public disorder but can silence dissent in the media as well. Khan and the army want to avoid anything that could hurt business confidence in Pakistan, especially as the country’s $300 billion economy prepares for an abrupt slowdown. For Pakistan, projecting an image of stability abroad is paramount.

        pakistan foriegn exchange

      • Additional ForecastsMore InformationThese Stratfor assessments provide additional insights for the Quarter

        Key Dates to Watch

        More Information

        • June 16-21: The Financial Action Task Force (FATF) will meet in the United States.
        • July 1: The fiscal year will begin in India, Pakistan and Bangladesh.
        • July 5: India’s government will present its federal budget.
        • Sept. 28: Afghanistan will hold presidential elections.
        • Unknown: Kashmir will stage state elections (unscheduled but due this year).
        • Unknown: The next round(s) of U.S.-Taliban talks will be announced.


        Apr 17, 2019 | 15:50 GMT

        chinese pensioners

        China: Urban Worker Pension Fund Will Be Empty by 2035, Study Finds

        What Happened: China’s urban worker pension fund will be empty by the year 2035 due to a shrinking workforce and insufficient contributions, according to findings by the World Social Security Center at the Chinese Academy of Social Sciences, Caixin reported April 15.

        Why It Matters: China is facing a demographic cliff in the coming years similar to other Asian countries, which is aggravated by the legacy of its one-child rule as well as lax enforcement, local mismanagement and various exemptions to promote employment. The ongoing economic slowdown has only compounded efforts to get the system back on track.

        Background: The urban worker fund was established in 1997 and is designed to replace roughly 59 percent of an employee’s salary on retirement through individual and employer contributions.

        Read More:

        pension coverage



        China turns again to infrastructure to support growt

        Reliance on old economic driver reflects failed efforts to boost private companies


        FT Confidential Research              June 12, 2019


        The Chinese government has turned again to infrastructure to support a slowing economy facing a barrage of threats, not least a worsening bilateral relationship with the US.

        By itself, a tentative loosening of infrastructure project funding rules might not be enough to stabilize an economy that may be growing near the lower bound of the 6 to 6.5 per cent range the government is targeting for this year.

        But a joint party-state announcement published on June 10 suggests that the leadership is prepared to do more to shore up the economy, even if this means giving more ground on its “critical battle” to tackle financial system risk.

        The announcement also suggests recognition by policymakers that attempts to boost the economy by cutting taxes and encouraging sectors such as private companies, while closing off critical funding channels, have had limited success. Tougher action may be necessary and may be forthcoming, as pressure on the economy builds into the second half of the year.

        Local governments have been given more scope to use debt to capitalize infrastructure projects that meet official investment criteria. Specifically, funds raised through the sale of special local government bonds may be used to help meet capital requirements, usually set at 20 to 25 per cent of financing. The government this year earmarked Rmb 2.15 trillion ($310 billion) in sales of such bonds, which pay out from project cash flows rather than from fiscal resources.

        Although this year’s quota was increased from Rmb 1.35 trillion, strained local government finances — worsened by the collapse of land sales — and constraints on shadow finance have hurt their ability to finance infrastructure spending, just as the government needed this to support the economy.

        china infrastructureAlong with the real-estate industry, government-led investment in areas such as transport and utilities has been a key driver of growth in the modern Chinese economy, accounting for more than a quarter of total investment activity this year.

        Looser project financing rules will help, but probably not by much. Just over Rmb 1 trillion in local government bonds have been sold so far this year, and only 6 per cent of the funds raised have gone to the kinds of projects, including transport and electricity investments, targeted in this latest announcement (most goes towards preparing land for auction and the redevelopment of slum areas).

        If the proportion of funding going to qualified infrastructure projects were to rise to 10 per cent of the total for the remainder of this year, it would imply an extra Rmb 456.4 billion in additional infrastructure investment, once additional leverage is calculated in. This suggests that investment growth would rise to just 5.6 per cent, compared with the 3 per cent growth recorded in January-April.

        The announcement did not spell out how much of the funding would go to meeting project capital requirements. However, a more aggressive, if less likely, scenario is that all funding from special bond sales is permitted to go towards such projects, excluding that going towards land preparation and slum area renovation. This would imply an extra Rmb 1trillion in infrastructure investment this year, enough to lift investment growth to nearly 9 per cent, and nominal GDP growth by 0.7 percentage points.

        This is the fourth time since 2004 that rules have been tweaked to increase the ability of local governments to invest in infrastructure. Not coincidentally, this includes adjustments in 2009 and 2015, when China’s economy faced the threat of a hard landing.

        Allowing more special bond funds to flow to infrastructure would have a more meaningful impact on economic growth in the short term, whereas incremental steps to give back more money to households and business through tax cuts have not.

        infrastructure  projects.JPGThe danger of such a policy is that local governments would be emboldened to borrow more. Although the joint announcement was explicit in its warning to keep debt levels under control, local governments will be forced to tread a very fine line.

        On the other hand, the balance of economic risks is continuing to shift — US president Donald Trump has threatened to raise tariffs on all Chinese imports into the US if Xi Jinping does not meet him at the G20 leaders’ meeting in Osaka at the end of this month.

        Our latest survey of small, private companies shows weak appetites to invest because of prevailing economic conditions, while People’s Bank of China data released on Wednesday showed that total social finance, a broad measure of funding conditions, grew just 10.5 per cent in the first five months of this year, in line with the average of the previous 12 months.

        A recovery in infrastructure investment growth would at least help cushion the blow of a deepening trade war and might also deliver the confidence boost necessary to convince private companies to invest more.

        The risk of storing up yet more problems for the future has again taken a back seat.

        He Wei, Finance Researcher, FT Confidential Research

        FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

        China: Transformation of the Nanxun wood industry

        naxun industry parkJune 20, 2019

        Source: ITTO/Fordaq

        Major changes have taken place in the Nanxun timber industry over the past few years. Naxun leads a significant trend in China manufacturing to reduce their environmental footprint and gain huge gains in productivity. The main change has been the shift from family workshops to modern factories, from single product lines (plywood and veneers) to diversified solid wood flooring, home furnishing and the adoption of ‘clean green’ manufacturing.

        Nanxun District of Huzhou City in Zhejiang Province has become one of the most important flooring production bases in China. More than 300 flooring manufacturers are located there.

        The old-style manufacturing created pollution. In particular, the use of volatile organic compounds (VOCs) was not well managed. To address this a ‘Special Action Plan for Environmental Pollution Control in Wood Industry’ was formulated in Nanxun District in 2017.

        This says no production shall be allowed if the production processes do not meet the requirements of environmental protection standards. Nanxun District government has acted to close or relocate many industries. Of the 3,922 wood enterprises listed in the City, over 80% have been forced to close, the balance have undertaken renovation measures.

        The changes have promoted the development of industrial clusters and the surviving enterprises have become bigger and stronger and the environment continues to improve.

        Data show that the emission of volatile organic compounds (VOCs) from wood product enterprises in Nanxun districts has been reduced by more than 2,000 tonnes and the tax revenue has increased by more than Rmb 600 million.

        China recognizes WFC technology in new Green Building Standard

        eric wongBy Eric Wong

        Managing Director, Canada Wood China

        June 5, 2019

        Posted in: China

        green buildingWood Frame Construction Technology (WFC) has officially been recognized for the first time by China’s Green Building Evaluation Standard as a viable solution for the country’s green building credit rating. This is another milestone for WFC in China on the government regulations front after a series of prefabrication policies favourable to wood has been published in the past few years.

        The newly revised standard, printed in May and scheduled to be implemented in August 2019, includes WFC as one of the three building solutions along with concrete and steel systems. It also awards credits to wood frame solutions for being an innovative construction technology. The new standard also introduces the entry Certified Level, making it aligned with the LEED certification system and offering more accessible eligibility. This also means that green building standard is likely to be implemented as de-facto compulsory measures in the future.

        In 2006, the Chinese Ministry of Housing and Urban-Rural Development (MOHURD) released its first Evaluation Standard for Green Building, otherwise known as the Three Star System. Different from LEED’s total points rating system, the Chinese system requires that a building must obtain a certain number of points in all rating categories to qualify for a star rating.

        Based on the 2006 Evaluation Standard for Green Building, MOHURD further revised the document the standard in 2015, vowing that 30% of all newly constructed buildings will be green by 2020. However, the 2015 revision still did not specify whether WFC was considered a green building solution.

        In recent years, unremitting lobbying efforts by Canada Wood China contributed to the official recognition of WFC in a series of policies and industrialized construction standards. MOHURD realized that WFC should also be a part of green building policies and standards, and started working on revising the Three Star System again in 2018, merely three years after its second iteration.

        The standard is expected to be revised again in 2020. Canada Wood China will maintain close communications with MOHURD to ensure the inclusion of WFC content in the revised standard.

        China Economic Update

        eric wongBy Eric Wong

        Managing Director, Canada Wood China

        May 6, 2019

        Posted in: China

        China’s economy continued to slow in 2019, with Q1 GDP growth at 6.4%, compared to 6.6% in 2018. However, the growth is slightly higher than market expectations. This is attributed to higher factory production, which has benefited from additional tax cuts, infrastructure spending, and other government fiscal stimulus.

        The Caixin China General Manufacturing PMI rose to 50.8 in March 2019 from 49.9 the previous month, beating market expectations of 50.1. The latest reading was the first increase in manufacturing activity in four months and the strongest since July 2018.

        2019 Economic Outlook

        Many organizations raised their economic forecast for China in April. OECD forecasted in its recent report that China’s economic growth will be above 6% percent this year and next. The IMF raised its forecast to 6.3% from the previous 6.2%.

        Yet, analysts warned it was too early to put a timetable on when there will be sustainable turnaround, adding further policy support was needed to maintain momentum in the world’s second-largest economy. Many had expected a recovery only in the second half of 2019, according to a recent Reuters report. Beijing set a 2019 economic growth target of between 6 and 6.5 percent in March.

        Looking ahead, China’s economy continues to be under pressure this year. The trade conflict with the United States and related uncertainties ranked as the top risk to China’s economy, according to the Economist Intelligence Unit.


        The Construction Sector

        In March, on average home prices in 70 major Chinese cities increased, indicating a recovery in the property sector amid government controls to curb speculation and prevent an overheated market.

        Total investment in real estate increased 9.5 percent year-on-year in 2018, and continued the strong momentum in March 2019, with growth of 11.8 percent year-on-year.

        investment real estateHowever, total floor area completed in 2018 was flat (4,135 million sq. m, down 1.3% from 2017), of which 2,784 million sq. m (-0.7%) was residential.

        CAD/CNY was on a downward trend in Q1 2019, compared to Q4 2018. The currency hit below five briefly on March 7th and 8th but bounced back to the level of 5 afterward.

        China Wood Imports (cited from China Bulletin)

        According to information released by Mucairen, there were 117,183 wagons of log and lumber imported from Russia to the Manzhouli port (border with Russia) in 2018, a decline of 13% over 2017.

        Furthermore, there were an estimated 7,300 wagons in total for both log and lumber that arrived in Manzhouli in January 2019, a decline of 20% compared with January 2018, the lowest volume in five years.

        Softwood lumber inventories at Taicang port and the surrounding area were 1.48 million cubic meters in late February 2019, up 370,000 cubic meters or 33% compared to last month. It was the second consecutive monthly increase. The inventory level of SPF was 500,000 cubic metres, a surge of 200,000 cubic metre, or 67% from last month.


        MLIT Streamlining Fire Regulations for Wooden Buildings

        fumotoBy Hidehiko Fumoto

        Deputy Director and Manager Technical Services, Canada Wood Japan

        June 5, 2019

        Posted in: Japan

        fire test

      • Full Scale 3-Storey Wooden School Building Fire Test on February 22, 2012 in TsukubaAs reported in this blog in August 2018, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) amended the Building Standard Law to streamline fire-related regulations for wooden buildings. One of the streamlined requirements was to allow mass timber to be visually exposed in midrise buildings. Another amendment was to allow the architects to design any wooden buildings as long as the building height is 16 m or less (Article 21 in BSL: Building Standard Law). The BSL used to require 1-hour quasi-fire resistive performance in case that the building height and the eaves height exceed 13 m and 9 m, respectively. The BSL amendments were announced in June 2018 and are going to be enacted in June of this year, after the MLIT releases the relevant enforcement orders and the notifications. It is anticipated that the demand and supply of wooden large-scale buildings are accelerated by these amendments.TwitterLinkedInSummary 2018 Non-Residential Construction Marketjapan non resCanada Wood Today | The Canada Wood GroupSummary Review of 2018 Japan Housing StartsshawnBy Shawn LawlorManaging Director, Canada Wood JapanApril 5, 2019

        Posted in: Japan

        In 2018 total housing starts declined 2.2% to 942,370 units. Wooden housing fell 1.1% to 539,394 units. As a percentage of overall housing, wooden homes increased to 57.2%, the strongest showing in over three decades. Of all housing, post and beam starts were the most resilient: falling 0.5% to 409,873 units. Non-wood others starts fell 3.0% to 284,103 units. Platform frame starts declined 2.6% to 116,988 units. Wooden prefab fell 5.8% to 12,533 units and total prefab fell 5.5% to 131,406 units. In terms of relative market share prefab housing fell half a percentage point and 2×4 housing was essentially stagnant at twelve and a half percent.

        In recent months, we’ve been seeing some strength in single family custom ordered and speculative housing starts as we lead up to the implementation of the consumption tax hike of 8% to 10% coming in October of this year. Market feedback is indicating that construction activity should pick up over spring and summer. The strength in single family housing is also leading to a recent slight increase in overall average wooden floor area. On the downside, the environment for wooden multi-family apartments has been challenging. One of the key things we are hearing is that in 2018 the Ministry of Finance implemented some tightening measures for regional lenders which is resulting in significantly higher mortgage down payments for property developers. These credit restrictions appear to be restraining multi-family starts and the issue could be with us for some time.

        Urban Regeneration, Led by Wood Frame Construction. – Completion of Korea’s Tallest Hybrid Wood Building

      • taiBy Tai JeongCountry Director, Canada Wood KoreaJune 5, 2019Posted in: Koreakorea clt
      • Urban regeneration is quickly becoming the most important core value and the best urban management method in Korea’s urban policies. In response to the rising demand for more urban buildings, the National Institute of Forest Science (NIFoS) introduces the wood frame construction to the city in order to set an example of how tall wood hybrid building can be part of the urban regeneration project for the improvement of declined or underdeveloped areas in the city.korea clt 2
        This recent completed 5-story project in Youngju-si Gyeongsangbuk-do, which is the tallest wood hybrid building in Korea was celebrated by NIFoS on March 23, 2019. The case for this project is driven by the significant environmental benefits that wood building can provide to create safe and livable space for urban residents.korea hybrid showcase
      • The wood structure of this building reaches 18 meters high with a 19.12 meters concrete core. The Korean Building Structure Code limits the maximum height of wooden buildings to eighteen meters at the ridge and fifteen meters at the eave. The rest of the above ground structural system of this building consists of reinforced concrete for core and CLT panels, Glulam posts and beam and I-joists for floor and non-load bearing wood frame infill walls. Under the current fire code, buildings between five and twelve stories are required to reach two-hour fire ratings for most of the main structural components of buildings. For the construction of this building, NIFoS successfully tested and achieved two-hour fire resistance rating for CLT wall and floor panels and glulam posts and beams.In a KBS broadcasting video, Dr. Kim Se-Jong from Institute of Forest Science said, “The building was exposed to 1,000 degrees of heat for 2 hours and the structure endured the environment.”“A special engineering technique was used to tackle the weight issue as the higher a building gets, the heavier it is. The new building is also found to be more earthquake resistant than steel-framed or reinforced concrete structures. Lumber’s elasticity disperses the force of impact, making wooden buildings more resistant to quakes.” Dr. Kim added.Another example includes the four-story research building constructed in Suwon, Gyeonggi-do. This research building was constructed for NIFoS’ use and it is Korea’s first modern and large scaled building entirely built with wood.NFOS
      • NIFoS has already announced a plan for building a ten-storey wood multi-unit dwelling by the year 2022, which will require amending the structural code to allow higher wooden buildings in Korea. The experience and knowledge gained and accumulated from this project will be instrumental for future wood building projects.TwitterLinkedInPrevious article  Next articleKorea Economy Updatetai
      • By Tai JeongCountry Director, Canada Wood KoreaApril 5, 2019Posted in: KoreaSouth Korea’s economy grew 2.7% in 2018, marking a six-year low amid sluggish investments, but its gross national income per capita, a gauge of the population’s purchasing power, exceeded the $30,000 mark for the first time – be more specific, $31,349, up 5.4% on-year.The latest figures are considered crucial for the South Korea economy amid the prolonged slow economic growth, as the $30,000 mark is generally considered an entry line for top-tier economies.
        South Korea ranked 9th in per capita GNI among countries with 20 million or more people, standing next to the US, Japan, Britain, France, Germany, Canada, Austria, and Italy.

        On GDP growth, facility investment fell to a nine-year low of 1.6% in 2018 as cooling global demand for semiconductors discouraged companies from expanding their factory lines.

        Construction investment tumbled 4% as the Seoul government has been making efforts to calm down the overheated housing market. The 4% drop marked the sharpest contraction since 1998 when the sector plunged 13.3% amid the Asian financial crisis.

        The construction sector retreated 4.2%, marking the first negative growth since 2012, while services rose 2.8% in 2018.

        Private spending rose 2.8%, the highest in seven years, while government spending jumped by an 11-year high of 5.6% in 2018 on its efforts to prop up the economy.

        Exports, which account for around 50% of the GDP, rose 4.2%, up from a 1.9% increase in 2017, while growth in imports slowed down to 1.7% from 7%.

        The exchange rate for Canadian Dollar averaged at 848.98 won in February 2019, down by 1.17% from 859.00 in February 2018 and slightly up by 0.76% from 842.59 in the previous month.


        Summary of Korean Housing Start

        taiBy Tai Jeong

        Country Director, Canada Wood Korea

        May 6, 2019

        Posted in: Korea

        Due to declining construction investment amid the ongoing government intervention to curb rising house prices and cool down the overheated housing market, South Korea’s housing starts for 2018 decreased 16% to 81,300 buildings and decreased 13.5% to 470,706 units.

        Housing permits in a number of buildings and units for 2018 also decreased by 15.3% and 15.2% respectively from a year earlier.

        korea housing starts comparisonIn 2018, the number of wood building starts and permits decreased by 15.1% and 26% respectively. This was due to the overall slowdown of the housing market together with the more stringent requirements for seismic design on small scale buildings and soundproof floor requirement in Dagagu house.korean wood building permits

      • Reflecting the market response to the government’s real estate regulations, the home purchase sentiment has dwindled to the lowest level in nearly six years. The Seoul’s Weekly Apartment Supply-demand Index stood at 73.2 as of Feb. 11.Note:
        Measured on a scale of 0 to  200, with 100 indicating neutral status, the index refers to the ratio of apartments available for transactionsTwitterLinkedInFor latest Canada Wood market summaries in Asia see this link, a rising star in wood exports
      • Friday, 2019-06-21 11:33:16
      • NDO – With its abundant potential in wood processing, Vietnam is emerging as a major exporter of finished wood products in the global wood market. However, the local wood industry is being challenged by shortages of imported materials which may affect its future exports. Thu Ha reports.Since early this year, Hoang Vinh Wood Processing JSC in the southern province of Binh Duong, which is Vietnam’s wood export hub, has been mobilising all its 500 employees to work at full speed to meet the company’s contracts signed with a partner from France, worth US$20 million. The contracts must be fulfilled by early next month.Last year, the firm reaped total export turnover of US$50 million, up 20% year-on-year, from some European and Asian markets.In its business strategy, this firm will likely establish a joint venture with a partner from the Republic of Korea (RoK). “If the joint venture is established, we will be able to boost our exports significantly,” the company’s director Nguyen Hoang Vinh told VIR. “Currently, both sides are in negotiations and we hope a deal will be reached by the third quarter of this year.”Nguyen Ton Quyen, vice chairman of the Timber and Forest Product Association of Vietnam (VIFORES), told VIR that many foreign firms are seeking to co-operate with Vietnamese firms, like the potential Korean partner of Hoang Vinh, to boost exports to their nations.

        “The wood industry’s export turnover has been rising strongly over the past few years, with US$7 billion in 2016, US$7.66 billion in 2017, and US$8.48 billion last year. Moreover, when Vietnam and the EU approve their shared Forest Law Enforcement, Governance and Trade Voluntary Partnership Agreement (FLEGT-VPA), Vietnam’s exports to the EU, one of its key export markets, will likely soar,” Quyen said.

        The FLEGT-VPA is aimed to help improve forest governance, address illegal logging and promote trade in verified legal timber products from Vietnam to the EU and other markets.

        Signed in October 2018, Vietnam and the EU are now working with each other towards taking the deal into effect this year.

        Rising star

        IMM Mission, funded by the EU and managed by the International Tropical Timber Organisation, stated, “Vietnam is emerging rapidly as a major player in international wood markets, both as an importer of wood materials and as a large exporter of finished wood products”

        Vietnam signed FLEGT-VPA early this year and this presents unique opportunities, IMM said.

        The IMM’s role is to use trade flow analysis and market research to independently assess trade and market impacts of VPAs in the EU and partner countries.

        EU imports from Vietnam consist almost entirely of wooden furniture, with trade in this commodity strengthening this year after a dip in 2017. The twelve-month rolling total for EU furniture imports from Vietnam increased from 220,000 metric tonnes at the end of 2017 to 232,000 metric tonnes in November 2018, according to the IMM.

        “Another potentially significant trend is that Denmark started to import larger volumes (up to 2,500 metric tonnes per month) of waste wood (for biomass energy) from Vietnam this year,” the IMM stated.

        During her recent working visit to Vietnam, Heidi Hautala, Vice President of the European Parliament, told VIR that after the VPA takes effect, it will turn Vietnam into a more attractive investment spot for European wood investment, which remains humbly now.

        “The VPA process and implementation will add to the confidence of European businesses in Vietnam’s business environment,” she said. “This will help Vietnam attract more investment from the EU, which is tending to increase now.”

        “Currently the European consumers and businesses have growing demand for imported wood products with fairly transparent production and origins,” she said. “This will further prompt European investors to come to Vietnam to both implement projects directly and co-operate with local partners in exports. I am seeing many European businesses making plans to expand business and investment into Vietnam.”

        Under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which took effect for Vietnam on January 14, 2019, and the Vietnam-EU Free Trade Agreement, which is expected to be signed soon, almost all import tariffs will be eliminated, offering great potential for Vietnam’s wood exports, and for foreign firms to come to Vietnam to invest in the wood industry.

        In 2018, Vietnam has about 3,200 enterprises engaging in exporting wood and wood products, including 529 foreign-invested enterprises which earned a total export turnover of nearly US$4 billion.

        “Not only foreign firms, but many local ones have also been performing very well, and have secured export orders until the end of the second quarter of this year,” Quyen said. “While enterprise production is improving, the global demand for Vietnam’s wooden products are strongly rising, focusing on key markets including the US, China, Japan and the RoK.”

        Last year, Vietnam’s wood exports turnover strongly increased from many markets, such as France (25.5%), Japan (16%), Malaysia (100%), the RoK (48%), and the US (17.5%).

        The US, Japan, China, and the RoK purchased over around 80% of Vietnam’s total wood exports.

        Nguyen Viet Vinh, Director of Vinh Hanh Furniture JSC in the south-central province of Binh Dinh, told VIR that this firm’s export turnover hit US$17 million last year – up about 18% over 2017. The figure is expected to be about US$10 million in the first half of 2019, up 20% year-on-year.

        “We expect the figure will be about US$20-22 million in this year. We will continue seeking more export markets, in addition to our existing markets of Japan and the US, so that we can reach our target of US$25-27 million by 2020,” Vinh said.

        VIFORES’s Quyen said many other firms are also performing very well in exports. For example, the export turnover of Nam Dinh Export Foodstuff and Agricultural Products Processing is expected to rise from US$50 million last year to nearly US$55 million this year. Meanwhile, many other firms like Tien Dat, Dai Thanh, Cancia Pacific, Hiep Long, Minh Phat and Phu Tai are also expected to reap export turnovers of US$30-50 million this year, up 10-15% year-on-year.

        Early this year, Prime Minister Nguyen Xuan Phuc said the wood industry has grown by over 800% over the past 10 years. He ordered it to reach an export turnover of over US$11 billion worth of wood and forestry products in 2019.

        Shortages of materials

        However, one of the biggest challenges facing Vietnam’s wood industry is the upcoming shortages of imported material supplies, which will affect the country’s future wooden exports.

        Currently, Vietnam must largely depend on foreign supplies to ensure its local production. Annually, it spends US$1.7-1.8 billion importing timber materials, which are largely from Laos (60% of round and sawn timber – the main timber for production), Cambodia (70% of precious timber), Papua New Guinea, and Africa.

        According to a wood industry report from VIFORES, Handicraft and Wood Industry Association of Ho Chi Minh City, and Forest Products Association of Binh Dinh, Vietnam will face major shortages of timber materials from these markets.

        For example, Laos, which used to export nearly one million cubic metres (m3) of round timber to Vietnam annually, has stopped exporting timber materials since May 2017.

        The policy has almost curbed all timber supplies from Laos for Vietnam. The volume of round timber has reduced from 322,000 m3 in 2015 to 36,000 m3 in 2016, and 6,000 m3 in the first half of 2017.

        In another case, Cambodia’s government is planning to more strictly control the country’s timber exports.

        According to the report, timber supplies from Papua New Guinea and Africa are facing issues regarding timber quality and legality, which are also affecting Vietnam’s wood processing and exports.

        Hoang Vinh Wood Processing JSC is also suffering from wood materials. “We are trying to find new sources from EU. Though if the new sources offer at higher prices, we will have to accept, meaning that we may have to increase product prices,” said this firm’s director Vinh.

        VIFORES’s Quyen said his association and businesses have been working with many partners in the US, France, Finland, some other EU nations, Japan, and New Zealand about wood material supplies.

        “These are Vietnam’s new wood material suppliers. They even come to Vietnam to seek supplying contracts. Despite higher prices, materials from these markets have higher quality and clearer origins,” Quyen said.

        Price drops in China for logs, decrease less in India. Some export sawn timber products suffering big price drops. Local market remains very stable

      • scott17th Jun 19, 9:16amby Scott DownsNew Zealand lumber
      • The CFR sale prices for New Zealand logs in China has dropped -US$4 to -US$6 over the last month, with A grade logs now selling at around US$130 per JASm3.The weakening of the NZD against the USD through May somewhat buffered the drop for the June At Wharf Gate (AWG) prices offered to log suppliers at NZ ports. The average drop in AWG prices was -US$5-6 per JASm3. The Chinese Yuan (CNY) has recently stabilised against the USD providing some relief to the Chinese log buyers. The NZD however has recently strengthened against the USD, and if this continues will have an adverse effect on July AWG prices.The markets for sawn timber produced by New Zealand mills has not changed from last month. The large Clear1 grade boards are selling well in Europe and parts of the US, but there is too much volume of the smaller Clear2 grade and knotty grades in Asia. Volume is still moving but at much lower prices.The domestic market for sawn timber remains very stable.

        Due to the drop in the AWG log prices the PF Olsen Log Price Index for June decreased -$2 to $128. The index is currently $1 below the two-year average, $2 above the three-year average, and $10 higher than the five-year average.

        Domestic Log Market

        Log Supply and Pricing

        Prices for domestic log sales in June are mostly unchanged from May as we move to the end of Quarter 2. Most mills anticipate some relief in log prices in Quarter 3 due to the lower export log prices. Most mills will start to get more discerning over the quality of log they receive as the economic returns between the sawn timber grades is widening. The larger pruned and structural grades are selling well but marketing the rest of the log is a struggle.

        The domestic market for sawn timber has remained stable with settled weather through May. The start of the winter season will see demand drop in some sectors. We are seeing more finger joint, mouldings and other remanufactured products being imported from China and this will place pressure on supply.

        Export Log Markets


        Total softwood log stocks across China have reduced slightly from last month to around 3.8 million m3. Daily uplift from the ports is averaging about 78,000 m3 per day so demand is still reasonably healthy. Construction activity in China has started to slow with the start of the hottest months of June and July.  Most industry commentators expect the China government to introduce some stimulation spend into the construction market, but it will take a few months before the effect is felt in the log market.

      • china softwood by region
      • The CFR sale prices for pine logs in China dropped a further -US$4-6 through May and the A grade sale price is now around US$130 per JASm3.Supply of softwood logs from other countries continues to reduce. Logs from the US have been hit with further tariffs of up to 25% introduced by China’s Ministry of Finance on June 1st within the Harmonized Tariff Schedule (HMS). The Southern Yellow Pine (SYP) from the South East of the US had already significantly reduced and is now just a trickle of container volume. There has been more volume from the Pacific North West, but this is now expected to slow considerably.Many harvesting operations in South America have stopped and this will also reduce softwood supply into China. Current stocks in China are being heavily discounted in an effort to move this stock before the hot sticky season in China. The smaller sized South American softwood logs are more perishable than the New Zealand pine logs.India

        The Indian market for New Zealand pine logs has held up better and not completely followed the China CFR trend. The CFR price for ‘A grade’ New Zealand pine logs is US$147 to US$150 per JAS m3. The INR has traded consistently between Rs 69.4 to RS 70.0 for 1 USD. Domestic prices for sawn New Zealand  pine are Rs 511/CFT in Kandla and Rs 511/CFT in Tuticorin. Demand is lower in Tuticorin.

        Low inventories due to low volume of shipment from New Zealand to India has kept the market price relatively firm. In March, April and May only three break bulk vessels per month were shipped. The arrival of a vessel with Uruguay pine is expected around mid-June, and there is a bit of anxiety around penalty on fumigation on arrival and the quality of the cargo.

        South African pine is consistently supplied at 10,000 m3 per month in containers between Kandla, Tuticorin and Calcutta. It is priced at US$135 per tonne for P40 (pruned with a 40 cm small end diameter) and US$135 per tonne for A Grade. Due to problems of fungus and log quality it does not have a significant impact on the New Zealand pine log market.

        SYP from the US is holding at US$123 for 12” minimum and US$118 for 10” minimum.

        The previous government was re-elected with a resounding majority and that significantly reduced any potential for market volatility. It should augur well for the construction sector as many of the projects and initiatives of the government can continue unabated. The Indian Government is also expected to announce initiatives to lure Foreign Institutional Investors (FIIs) into real estate and the construction sector to boost the economy.

        The only macroeconomic negative is that the recent Indian GDP growth figures of 5.8% are much lower than the expected 6.5%. The banking industry corrections with tougher rules around availability of bank funding for business has had an impact. One of the major log exporters of New Zealand pine to India, Aubade New Zealand Ltd, believe that the correction phase is almost completed, and the coming year should see better business prospects. The Indian Reserve Bank is reducing the key policy rate to spur domestic growth and private investment and the results will be visible in the second half of this year. They predict public sector banks will adopt a more conservative less helpful approach whereas private banks will step-up to lend to businesses.

        Exchange rates

        The New Zealand Dollar (NZD) weakened against the United States Dollar (USD) through May and this partially buffered New Zealand forest owners from the falling CFR log prices in China. The NZD has recently strengthened against the USD. As stated last month and worth reiterating, how the NZD and the CNY fare against the USD over the next couple of months will have a significant impact on AWG prices at New Zealand ports.

      • FX NZ-CN-USOcean FreightOcean freight rates from New Zealand to China have increased +US$2-3 for vessels on shorter term charter. Congestion at New Zealand ports is adding costs of up to +US$2-3 per JAS m at times. There is often 6-8 log vessels waiting at Tauranga Port for a berth. Freight rates to India have been relatively stable with rates holding at US$34-36 per JAS m3.
      • baltic handysize
      • Source: Investing.comThe bunker prices have also peaked and show a downward trend, with a slight recent increase.Singapore Bunker Price (IFO380) (red line) versus Brent Oil Price (grey line)
      • Singapore bunker price
      • The Baltic Dry Index (BDI) is a composite of three sub-indices, each covering a different carrier size: Capesize (40%), Panamax (30%), and Supramax (30%). It displays an index of the daily USD hire rates across 20 ocean shipping routes.  Whilst most of the NZ log trade is shipped in handy size vessels, this segment is strongly influenced by the BDI.The graph of the BDI over the last year below shows the recent increase in the BDI. (The handysize is about 35% of the global shipping fleet). As mentioned in Wood Matters last month this increase in the BDI is an indication that raw materials are growing in demand around the world, but not in the handysize vessels that are predominantly used to cart logs.

    BDIDue to the drop in the AWG log prices the PF Olsen Log Price Index for June decreased $2 to $128. The index is currently $1 below the two-year average, $2 above the three-year average, and $10 higher than the five-year average.PF olsen

    • Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.
    • Taiwan Economic OutlookJune 18, 2019

      Growth decelerated slightly in Q1, following Q4 2018’s already feeble showing. Weaker domestic demand was behind the print, as private consumption growth ticked down while government consumption contracted. On the flipside, investment growth picked up thanks to a solid rebound in private investment. Meanwhile, though export growth slowed, imports decelerated faster, leading to an improved contribution to headline growth. Looking at Q2, PMI data for April-May suggests the manufacturing sector remains weak amid low tech demand and the shadow of the trade war. This is confirmed by a further contraction of export orders in April and of exports in May, indicating external sector weakness will likely continue beyond Q2. Moreover, Taiwan is very vulnerable to potential U.S. tariffs on Chinese tech products, even though it could benefit somewhat from manufacturing firms repatriating production from mainland China. (Please note that I clipped the tables out of this article to reduce the length. If you want to see the tables, please refer to: 

      Taiwan Economic Growth

      Growth will likely slow this year due to trade uncertainty and lower tech demand. The possible imposition of U.S. tariffs on Chinese tech imports is a key downside risk as Taiwan is heavily involved in the Chinese electronics supply chain. Nevertheless, public infrastructure investment, coupled with low unemployment and inflation, should support domestic dynamics. Focus Economics panelists forecast GDP growth of 2.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.0% again in 2020.

    • taiwan econ data
    • taiwan econ data 2
    • FDI flows into emerging markets fall to lowest levels since 1990sSlowing globalization and weaker economic growth blamed for pullback

      FDI flows

    • Foreign direct investment in emerging markets has plunged to its lowest level this century as mounting trade tensions build on weakening economic growth in the developing world.FDI, which involves buying companies and building new facilities, fell to just 2 per cent of gross domestic product across emerging and frontier markets last year, according to the Institute of International Finance, which tracks cross-border capital flows. This compares with a peak of 4.4 per cent in 2007, immediately prior to the global financial crisis, as the first chart shows.

      non res FDI

    • The trend, which could further sap weakening economic growth in emerging markets, plays into a narrative of declining globalization at a time when growth in global trade is also juddering to a halt.“FDI fell particularly strongly last year as trade policy uncertainty escalated, but also as part of a broader retrenchment of all types of capital flows in the context of the spike of risk aversion, especially in the fourth quarter,” said Guillermo Tolosa, economic adviser at Oxford Economics, a consultancy.

      flagging direct investment

    • Murat Ulgen, global head of emerging market research at HSBC, who forecast FDI flows would tumble to just 1.5 per cent of EM GDP this year, added: “Given the lingering concerns about global economic activity on the back of rising trade tensions, FDI flows are likely to remain weak in 2019.”Sergi Lanau, deputy chief economist at the IIF, believed a series of factors had conspired to cause a “secular decline” in FDI in emerging markets since the financial crisis, whether measured in traditional terms or in “true” terms — stripping out reinvested earnings to focus on “new” investment flows — a metric the IIF prefers, illustrated in the second chart.


      First, rising commodity prices boosted investment in mining FDI, “which in some countries accounts for a very large share of total FDI,” in the immediate aftermath of the crisis. However, this has fallen back, in line with commodity prices.

      Second, Mr Lanau said the 2000s “were a period of strong growth for developed market banks, which invested heavily in subsidiaries in EM”. However, “the world looks very different now for banks,” he added.

      Third, significant house price increases in emerging markets between 2003 and 2007 led to a rise in real estate based FDI, “a major category in many countries”.

      True FDI also in decline

    • All three factors “have a lot to do with a period of exuberant asset prices across the board in the run-up to the global financial crisis,” Mr Lanau said, while “years of quantitative easing and low interest rates have encouraged hot money flows to EM,” giving an advantage to portfolio investment over FDI.“It is not clear to me that these factors are set to reverse any time soon. If anything, growing trade tensions and nationalist political forces around the world will make a turnaround in FDI to EM more difficult,” he added.

      Mr Tolosa argued there was a strong correlation between FDI inflows into emerging markets and the degree to which EM economic growth outstrips that of the developed world, a differential that has tumbled from 6.1 percentage points in 2009 to just 2.3 points last year, shown in the third chart.

  • Well thanks for wading through this quarterly news blog sampling The Donald Parallel Universe-Happy Summer Everyone!
  • trump

First Quarter 2019 Economic and Wood Product News

The steam has gone out of globalization

A new pattern of world commerce is becoming clearer—as are its costs

global snail

Print edition | Leaders

Jan 24th 2019

WHEN AMERICA took a protectionist turn two years ago, it provoked dark warnings about the miseries of the 1930s. Today those ominous predictions look misplaced. Yes, China is slowing. And, yes, Western firms exposed to China, such as Apple, have been clobbered. But in 2018 global growth was decent, unemployment fell and profits rose. In November President Donald Trump signed a trade pact with Mexico and Canada. If talks over the next month lead to a deal with Xi Jinping, relieved markets will conclude that the trade war is about political theatre and squeezing a few concessions from China, not detonating global commerce.

Such complacency is mistaken. Today’s trade tensions are compounding a shift that has been under way since the financial crisis in 2008-09. As we explain, cross-border investment, trade, bank loans and supply chains have all been shrinking or stagnating relative to world GDP (see Briefing). Globalization has given way to a new era of sluggishness. Adapting a term coined by a Dutch writer, we call it “slowbalisation”.

The golden age of globalization, in 1990-2010, was something to behold. Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalized. International activity went gangbusters, as firms set up around the world, investors roamed and consumers shopped in supermarkets with enough choice to impress Phileas Fogg.

Globalization has slowed from light speed to a snail’s pace in the past decade for several reasons. The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20-ft  containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

This is the fragile backdrop to Mr Trump’s trade war. Tariffs tend to get the most attention. If America ratchets up duties on China in March, as it has threatened, the average tariff rate on all American imports will rise to 3.4%, its highest for 40 years. (Most firms plan to pass the cost on to customers.) Less glaring, but just as pernicious, is that rules of commerce are being rewritten around the world. The principle that investors and firms should be treated equally regardless of their nationality is being ditched.

Evidence for this is everywhere. Geopolitical rivalry is gripping the tech industry, which accounts for about 20% of world stock markets. Rules on privacy, data and espionage are splintering. Tax systems are being bent to patriotic ends—in America to prod firms to repatriate capital, in Europe to target Silicon Valley. America and the EU have new regimes for vetting foreign investment, while China, despite its bluster, has no intention of giving foreign firms a level playing-field. America has weaponized the power it gets from running the world’s dollar-payments system, to punish foreigners such as Huawei. Even humdrum areas such as accounting and antitrust are fragmenting.

Trade is suffering as firms use up the inventories they had stocked in anticipation of higher tariffs. Expect more of this in 2019. But what really matters is firms’ long-term investment plans, as they begin to lower their exposure to countries and industries that carry high geopolitical risk or face unstable rules. There are now signs that an adjustment is beginning. Chinese investment into Europe and America fell by 73% in 2018. The global value of cross-border investment by multinational companies sank by about 20% in 2018.

The new world will work differently. Slowbalisation will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia are sourcing more from closer to home. In Asia and Europe most trade is already intra-regional, and the share has risen since 2011. Asian firms made more foreign sales within Asia than in America in 2017. As global rules decay, a fluid patchwork of regional deals and spheres of influence is asserting control over trade and investment. The European Union is stamping its authority on banking, tech and foreign investment, for example. China hopes to agree on a regional trade deal this year, even as its tech firms expand across Asia. Companies have $30 trillion of cross-border investment in the ground, some of which may need to be shifted, sold or shut.

Fortunately, this need not be a disaster for living standards. Continental-sized markets are large enough to prosper. Some 1.2 billion people have been lifted out of extreme poverty since 1990, and there is no reason to think that the proportion of paupers will rise again. Western consumers will continue to reap large net benefits from trade. In some cases, deeper integration will take place at a regional level than could have happened at a global one.

Yet slowbalisation has two big disadvantages. First, it creates new difficulties. In 1990-2010 most emerging countries were able to close some of the gap with developed ones. Now more will struggle to trade their way to riches. And there is a tension between a more regional trading pattern and a global financial system in which Wall Street and the Federal Reserve set the pulse for markets everywhere. Most countries’ interest rates will still be affected by America’s even as their trade patterns become less linked to it, leading to financial turbulence. The Fed is less likely to rescue foreigners by acting as a global lender of last resort, as it did a decade ago.

Second, slowbalisation will not fix the problems that globalization created. Automation means there will be no renaissance of blue-collar jobs in the West. Firms will hire unskilled workers in the cheapest places in each region. Climate change, migration and tax-dodging will be even harder to solve without global co-operation. And far from moderating and containing China, slowbalisation will help it secure regional hegemony yet faster.

Globalization made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglected problems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is not really a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent.

For more on slowbalisation, listen to The Economist Asks, our weekly podcast.

Cause for concern? The top 10 risks to the global economy 2019

A report by The Economist Intelligence Unit

chess play

© The Economist Intelligence Unit Limited 2019

The outlook for the global economy is worsening. Given concerns over slowing growth in key economies, including China and the EU, and the wider impact of a trade war between the US and China, The Economist Intelligence Unit expects global growth to decelerate from 2.9% in 2018 to 2.8% in 2019 and 2.6% in 2020. However, even when taking into account this downbeat assessment, there remain a number of risks emanating from three key areas that could drive growth even lower than we
currently forecast in 2019-20.

First, geopolitical uncertainty is on the rise and will remain a source of significant risk, potentially impacting trade, financial markets and the oil sector. The impact of the increase in populist and nationalist leaders in recent years has yet to become fully apparent; however, it has already contributed to growing protectionist sentiment that could escalate and widen the current US-China trade war, with a damaging effect on the global economy. On top of slowing global growth and rising geopolitical
uncertainty, there are also significant vulnerabilities in large economies—including sizeable debt burdens in China, the US and Italy, among others—and also in emerging markets, which are, in some cases, highly exposed to global trade and capital flows. If badly managed, these frailties have the potential to significantly accentuate any downturn as the global economy cools.

Lastly, a longer-term shift in global power dynamics, particularly regarding the rise of China in competition with the US, ensures that security risks continue to threaten global economic stability. Moreover, while there remain long-standing territorial disputes and conventional military threats, the security landscape continues to develop, as technological innovation adds new dimensions and more complex requirements. With various sources of risk in play, policymakers and businesses attempting to
operate in such an uncertain environment will need to devote greater resources to contingency plans,which in itself is likely to constitute a drag on global growth.

In the latest edition of this report, we offer a snapshot of our risk-quantification abilities by identifying and assessing the top ten risks to the global political and economic order. Each of the risks is outlined and rated in terms of its likelihood and its potential impact on the global economy. We also provide operational risk analysis on a country-by-country basis for 180 countries through our Risk Briefing, and detailed credit risk assessments on 131 countries via our Country Risk Service. Together,
these products enable our clients to anticipate and plan for the main threats to their organisations,supply chains and sovereign creditors. We offer robust risk modelling, scenario analysis and daily events scanning for the threats and opportunities that abound in today’s global economy.

Global Risks in order intensity

Global Risks in order intensity 2

A US-China trade conflict morphs into a full-blown global trade war

Moderate risk; Very high impact;

Risk intensity = 15

China and the US have started negotiations to resolve the current trade dispute, and the US government has decided to suspend further increases in tariffs on US$200bn-worth of Chinese goods. Talks are likely to yield a limited trade deal—involving Chinese purchases of US agricultural and energy products, but with only broad commitments to domestic economic reform, particularly over structural issues, including technology transfer and intellectual property. While this will avoid an escalation in tensions for now, a full-blown trade war between the US and China remains a significant risk to the global economy, owing mainly to the fact such a deal will lack the necessary enforcement measures to ensure Chinese commitment to the structural reforms demanded by US negotiators. Moreover, beyond bilateral protectionism, there remains a risk that trade conflicts will escalate on additional fronts in the coming years, to the extent that global trade could actually decline, with major knock-on effects for inflation, business sentiment, consumer sentiment and, ultimately, global economic growth. Currently, the most immediate risk emanates from threats by the US president, Donald Trump, to impose additional tariffs on imports of EU cars, which would result in a broader trade conflict as the EU attempts to defend its interests. However, there are further related risks. Given rising negative sentiment over national security concerns from countries such as Germany, the UK, Canada and Australia towards Chinese network providers such as Huawei, there is a risk that a number of additional countries could be dragged into a technology trade war, with international companies’ supply chains disrupted by split global network coverage. As global growth slows, this scenario could also be triggered if a number of countries were to decide to impose broad-based import tariffs and subsidize local industries in order to combat international protectionism. In either of these cases, we would expect global trade to shrink, inflation to rise, consumers’ purchasing power to fall, investment to stagnate and global economic growth to slow.

Trade Risks

US corporate debt burden turns downturn into a recession

Moderate risk; High impact;

Risk intensity = 12

Falling consumer sentiment and manufacturing activity indicators highlight the worsening outlook for the US economy as it faces the effects of a trade war with China, the impact of a lengthy government shutdown in December-January and an eventual turn in the business cycle. Nonetheless, the economy’s fundamentals remain fairly robust, with economic growth at an estimated 2.9% in 2018, and inflation slowing to 1.9% year on year in December, despite gradually rising wage growth. In addition, the Federal Reserve (the central bank) moved to a more cautious approach to monetary policy in early 2019. Therefore, although we expect economic growth to slow to 2.3% in 2019 and to just 1.5% in 2020, our central forecast is that the US will avoid a damaging recession in 2019-20. However, along with a number of external headwinds, such as the trade war and slowing growth in Europe, domestic financial sector vulnerabilities could make the downturn much deeper than we currently expect. Fueled by a prolonged period of ultra-low interest rates, corporate debt as a percentage of GDP has surged to just under 47%, higher than the previous peak during the global financial crisis in 2008-09. In addition, the quality of this debt has fallen, with over half of US corporate debt rated BBB—the lowest investment grade—and about 60% of loans were issued without maintenance covenants in 2018. As a result, a downturn could lead to an increasing number of firms cutting investment and hiring, while also struggling to meet debt repayments, as their profits decline and as ratings agency downgrades lead investors to withdraw funding to corporations. In this scenario, a US recession would greatly exacerbate a global slowdown, with countries affected by declining US demand for goods and weakening investment.

Us Corporrate Investment grade

Contagion spreads to create a broad-based emerging-markets crisis

Moderate risk; High impact;

Risk intensity = 12

Many emerging markets suffered currency volatility in 2018, primarily as a result of US monetary tightening and the strengthening US dollar. In a few instances, such as Turkey and Argentina, a combination of factors, including external imbalances, political instability and poor policy making, led to full-blown currency crises. More recently, however, the pressure on most emerging markets’ capital accounts has eased, as the US Federal Reserve has adopted a more cautious monetary policy stance. Nonetheless, market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect. One trigger for this could be if a number of major emerging markets were to fall into crisis, either through domestic issues and/or the impact of external pressures such as the US-China trade war. Indeed, several are already at risk, including Brazil, Mexico and South Africa. Alternatively, investors could flee emerging markets if the recent currency crises in Argentina and Turkey escalate into full-blown banking crises as the rising value of foreign-currency debt leads to defaults (although this appears unlikely). In this scenario, capital outflows from emerging markets could become more indiscriminate and severe, forcing countries with external imbalances to make painful adjustments, with the most vulnerable falling deep into crisis. Emerging-market GDP growth would fall sharply as a result, weighing on the global economy.

emerging markets exchge

China suffers a disorderly and prolonged economic downturn

Low risk; Very high impact;

Risk intensity = 10

In China, a shift towards looser macroeconomic policy settings is under way as a result of the escalating trade conflict with the US. This will support domestic demand in the short term, but in the process previous goals of lowering unsold housing stock and corporate deleveraging are receiving less emphasis. There is a risk that, in the government’s efforts to support the economy, policy missteps will be made. The stock of domestic credit remained at over 230% of GDP at the end of the third quarter of 2018, a major vulnerability. Although it is likely that the authorities would make every effort to prevent a funding crunch in any bank, even a hint of banking sector distress could cause problems, given the boom in debt over recent years. Resolving these issues, particularly as the trade conflict with the US also weighs on economic activity, could prove challenging, forcing the economy into a sudden downturn. The bursting of credit bubbles elsewhere has usually been associated with a sharp deceleration in economic growth and, if this were accompanied by a house-price slump, the government might struggle to maintain control of the economy—especially if a slew of small and medium-sized Chinese banks, which are more reliant on wholesale funding, were to falter. If the Chinese government were unable to prevent a disorderly downward economic spiral, this would lead to much lower global commodity prices, particularly in metals. This, in turn, would have a detrimental effect on the Latin American, Middle Eastern and Sub-Saharan African economies that had benefited from the earlier Chinese-driven boom in commodity prices. In addition, given the growing dependence of Western manufacturers and retailers on demand in China and other emerging markets, a disorderly slump in Chinese growth would have a severe global impact—far more than would have been the case in earlier decades.

Supply shortages lead to a globally damaging oil-price spike

Low (Medium?) risk; High impact;

Risk intensity = 8

Market fears of oil-supply shortages have eased since the US granted six-month sanction waivers to eight of the key purchasers of Iranian oil in December. Along with higher output from Saudi Arabia and Russia, and global growth concerns, this has caused the price of dated Brent Blend to fall to close to US$60/barrel, compared with highs of over US$80/b in September. However, the risk of major supply disruptions remains. Should the US manage to crack down efficiently on Iran’s “ghost tankers” and also strike deals with other importers to switch their supplier bases away from Iran once the waivers have expired, Iran’s oil exports could drop well below the 1.2 million barrels/day that we currently expect in 2019-20. To combat this, Saudi Arabia and Russia have the capacity to ramp up supply, and US shale production could also fill the gap. However, as spare production capacity is used up to cover Iranian cuts, it will become more difficult to cover a sudden and sizeable cut to supply elsewhere, particularly in volatile countries such as Libya and Venezuela. As a result, prices could soar to well above the US$80/b seen in 2018, with producers unable to increase output sufficiently to put a lid on price rises. Such a scenario would push up inflation and weigh on global growth.

brent oil price

Territorial or sovereignty disputes in the South or East China Sea lead to an outbreak of hostilities

Low risk; High impact;

Risk intensity = 8

The national congress of the Chinese Communist Party in October 2017 was a milestone in terms of China’s overt declaration of its pursuit of great-power status, setting the goals for China to become a “leading global power” and have a “first-class” military force by 2050. The president, Xi Jinping, is keen to develop China’s global influence, probably sensing opportunity during a period of US retrenchment. How China intends to deploy its expanding hard-power capabilities in support of its territorial and maritime claims is a source of growing concern for other countries in the region. In the South China Sea the sovereignty of a number of islands and reefs is in dispute. Several members of the Association of South-East Asian Nations (ASEAN) have sought to strengthen their own maritime defense capabilities amid increasingly aggressive moves by China to place military hardware on the disputed territories. A partial abdication of US leadership of global affairs could embolden China to exert its claimed historical rights in the South China Sea. Distinct possibilities include an acceleration of China’s island reclamation measures and the declaration of a no-fly zone over the disputed region. There is also a risk that an emboldened Mr Xi will step up his government’s efforts to unify Taiwan with mainland China, with the president having previously noted that the cross-Strait issue was one that could not be passed “from generation to generation”. Were military clashes to occur over any of these issues, the global economic consequences would be significant, as regional supply networks and major sea lanes could be disrupted.

disputed island groups

Cyber-attacks and data integrity concerns cripple large parts of the internet

Moderate risk; Low impact;

Risk intensity = 6

Public, corporate and government faith in the internet as a source for global good is under strain. Revelations of major data breaches across a range of social media, and the use of that data for propaganda, are likely to see social media companies facing tighter regulation in the coming years. Meanwhile, cyber-attacks continue apace. In March 2018 the US blamed Russia for a cyber-attack on its energy grid. At a similar time there was a sustained attack on German government networks. Although these attacks have been relatively contained so far, there is a risk that their frequency and severity will increase to the extent that corporate and government networks could be brought down or manipulated for an extended period. Cyber-warfare covers a broad swathe of varying actors, both state-sponsored and criminal networks, as well as differing techniques. Recent data breaches and cyber-attacks could well be part of wider efforts by state actors to develop the ability to cripple rival governments and economies, and include efforts to either damage physical infrastructure or gain access to sensitive information as a means to influence democratic processes. These breaches of security have shaken consumer faith in the security of the internet and threaten to put at risk billions of dollars of daily transactions. Were government activities to be severely constrained by an attack or physical infrastructure damaged, the impact on economic growth would be even more severe.

cyber attacks

There is a major military confrontation on the Korean peninsula

Very low risk; Very high impact;

Risk intensity = 5

There was a pick-up in diplomatic activity on the Korean peninsula in 2018, peaking with a historic summit in June between Mr Trump and the North Korean leader, Kim Jong-un, in Singapore. Decades of carefully planned approaches between the US and North Korea have failed, but there is a glimmer of hope that a more improvised and personal approach by two unorthodox leaders could make progress, with a second meeting between the two scheduled for late February. However, we maintain the view that there are irreconcilable differences between the US and North Korea on both the pace and the breadth of denuclearization. Although recent statements by the US Department of State have hinted at a slight easing of demands for complete, verifiable and irreversible denuclearization by 2020—the end of Mr Trump’s term—US goals nevertheless remain significantly at odds with the North’s long-term commitment to its nuclear programme. Any realistic denuclearization (which would be a step-by-step programme) would require 1020 years of sustained engagement. Such levels of bilateral trust are unlikely to be achieved under the current administration. Our core forecast is that the US will eventually be forced to revert to a containment strategy. However, should the diplomatic talks fall apart, the Trump administration could see this as justifying a more aggressive stance, including strategic strikes on the North. This option has been publicly favored by some of Mr Trump’s close advisers, such as John Bolton, the national security adviser, who was at the summit on June 12th with Mike Pompeo, the secretary of state. Under such a scenario, North Korea would almost certainly retaliate with conventional weaponry and, potentially, short-range nuclear missiles, bringing devastation to South Korea and Japan, in particular, at enormous human cost and entailing the destruction of major global supply chains.

conflict risak magnitude

Political gridlock leads to a disorderly no-deal Brexit

Low (medium?) risk; Low impact;

Risk intensity = 4

Although a withdrawal agreement between the EU and the UK was finalized at an EU summit on November 25th, it was initially rejected by UK members of parliament in a vote in mid-January, and only received parliamentary backing in a later vote on condition that the Irish border backstop be renegotiated. (The backstop stipulates that the UK would remain in a customs union with the EU indefinitely should a trade agreement preserving an open Irish border not be found.) However, the EU has so far rejected any reopening of withdrawal agreement negotiations. With so little room for maneuver before the March 29th deadline, we think that the UK prime minister, Theresa May, will be forced to delay Brexit by requesting an extension of the Article 50 window. The alternative would be to crash out of the EU without a withdrawal agreement and transition arrangements in place, which the government and parliament would wish to avoid. Were a no-deal Brexit to occur, we would expect this to trigger a sharp depreciation in the value of the pound and a much sharper economic slowdown in the UK than we currently forecast. In addition, the EU has indicated that under a no-deal scenario it would treat the UK as a “third country”, leading to tariffs, border checks and border controls, a stance that the UK would probably respond to in kind. Although some contingency plans have been made, the hit to UK and EU trade and investment under a disorderly no-deal scenario is likely to go beyond just the negative impact on EU economies and prove sizeable enough to dent global economic growth.

govt impact assessment

Political and financial instability lead to an Italian banking crisis

Low (medium?)risk; Low impact;

Risk intensity = 4

After growth in the preceding 14 quarters, the Italian economy contracted in both of the final quarters of 2018, constrained by a mixture of domestic political and economic uncertainty, tightening liquidity conditions and the worsening global trade outlook. In the light of this, we expect real GDP growth to slow from 0.8% in 2018 to just 0.2% in 2019. There is, however, a risk of a much deeper recession should investor confidence lead to another spike in bond yields. Triggers for this could include an early general election being called, following the possible splintering of the fragile governing coalition, or another budget stand-off (we expect weak economic growth to result in a much larger budget deficit than the stipulated 2% limit agreed with European Commission). With government debt already at over 130% of GDP, and a significant amount still held by domestic banks, this could, in turn, lead to a banking crisis, given the already-weak state of the country’s banks. As Italy is Europe’s third-largest economy, such a scenario would weigh on the region’s overall GDP growth, risk contagion to other European banks holding Italian assets and lead to volatility in global financial markets.

Italy debt

Canadian lumber makes inroads in Huzhou, China

alex wu

By Alex Wu

Wood in Manufacturing, CW China

March 5, 2019

signing ceremony

A Sino-Canadian timber co-operation event organized by Canada Wood China was held on January 23, 2019 in Huzhou City of eastern China’s Zhejiang Province. The goal was to help the city diversify its wood sourcing channels amid a bruising U.S.-China trade war.

Canada, as one of the world’s largest lumber producers and exporters, boasts abundant timber resources that can be used in both industrial building and manufacturing. Canadian lumber provides a big opportunity for timber companies in Huzhou as they seek new trade partners since China announced an additional 10 percent tariff on imported wood products and logs from the United States in September 2018 as a response to Washington imposing new tariffs on Chinese goods.

The matchmaking event attracted 58 people, including Katrin Spence, vice chancellor of the Consulate General of Canada in Shanghai; representatives from wood associations (including Canada Wood China and the Quebec Wood Export Bureau); Canadian wood suppliers like Interfor and Canfor, as well as wood materials and production companies in Huzhou.

The event came after Canada Wood China worked for months with its two partners, the China Council for the Promotion of International Trade (CCPIT) Huzhou Committee and the Canadian Consulate General in Shanghai.

The CCPIT Huzhou signed co-operation agreements with Canada Wood China and the Quebec Wood Export Bureau during the event. The deals are designed to enhance communication and promote trade activities between companies in Huzhou city and Canada.

The majority of Huzhou’s wood imports are from North America. In the first 11 months of 2018, imported wood products from the United States were valued at around 662 million yuan (CAD$130 million), accounting for 33.5 percent of the city’s total wood imports.

Chongqing Yuanlu Community Center nabbed International Design Award

lance tao

By Lance Tao

Director of Communications, Canada Wood Shanghai

March 8, 2019

Posted in: China

Chongqing Yuanlu Community Centre (Click here for gallerydesigned by Jie Lee from Challenge Design, won the International Design Award on March 4. The news was announced at the 15th annual Wood Design Awards ceremony held by the organizer, WoodWORKS! BC at the Vancouver Convention Centre. A total of 10 projects from China running under this category were shortlisted in the final award.

The project, sitting next to Longxing Ancient Town in southwestern China’s Chongqing, consists of three buildings of different sizes side-by-side on the hillside. Wood is used in the Chongqing Yuanlu Community Center to closely link space and structure. Exposed Canadian Douglas fir glulam provide a crucial visual element on the interior while the order and form similar to traditional Chongqing sloping roofs are adopted for expression.

“I should say thanks to the judges and really appreciate that our project is recognized by this prestigious award. Projects in China could not accomplish this high achievement without Canadian government and Canada Wood China (CW China)’s consistency in promoting wood frame construction in China, as well as the technical support that they provide to the market, “said Jie Lee, chief designer of the Chongqing Yuanlu Community Centre (in picture), adding that they will co-operate with CW China to boost modern wood architectures in China.

China makes up two-thirds of award nominees in the International Wood Design category this year. These nominees feature in the resort and public service sectors. Seven of the projects are in eastern China, including two in Shanghai. The remaining three projects are in central and southwestern China.

In total, 103 projects in 14 categories (including designs, environmental performances, western red cedar, wood innovation, engineer, and architecture) were nominated this year. Submissions are from the United States, China, South Korea and Tajikistan, in addition to British Columbia.

A diversity of projects of various types and sizes demonstrating outstanding architectural and structural achievement using wood are among the nominees. They include a research laboratory, an energy facility, a winery, First Nations structures and mid-rise projects, according to the award’s press release.

To celebrate wood design projects at home and abroad, the Wood Design Awards are presented by Wood WORKS! BC, the Canadian Wood Council and its member associations; with funding support from Natural Resources Canada and Forestry Innovation Investment.

Click here to learn more about the 10 China Nominee Projects for the 2019 Wood Design Awards.

‘PRIMO VILLAGE’, Rental House Exclusively for U.S. Army Civilians

Sunny Kim

By Sunny Kim

Program Manager / Market Development & Market Access, Canada Wood Korea

January 3, 2019

Posted in: Korea

As the transfer of the U.S. military facilities in Yongsan Seoul to Pyeongtaek Gyeonggi-do is picking up speed, the housing market for U.S. army civilians is heating up. In the market, the ‘PRIMO VILLAGE – Rental House Exclusively for U.S. Army Civilians’, a village with 45 housing units developed by Gahee Development in Eumbong-myeon, Asan-si, is drawing attention.
PRIMO VILLAGE, In-cheol Jeong, the president of Gahee Development said, “These are rental houses for U.S. army civilians and designs specifically for American housing culture is most important. PRIMO VILLAGE, was designed in the US and constructed with the best materials imported from North America and Germany.”
One of the major materials used is ICYNENE foam, an insulation material imported from Canada that is increasing in popularity in Korea.


For latest Canada Wood market summaries in Asia see this link

chinese affordable housing.JPG

Rising borrowing costs, increased government regulation and volatile stock markets playing a role, along with dwindling demand from Chinese buyers


Updated: January 4, 2019

Asia is finally succumbing to the global property slowdown that’s jolted homeowners and investors from Vancouver to London, with markets in Singapore, Hong Kong and Australia showing fresh signs of softening.

The economic ramifications could be serious. Lower house prices and higher mortgage rates will not only dent consumer confidence, but also disposable incomes, S&P Global Ratings said in a report last month. A simultaneous decline in house prices globally could lead to “financial and macroeconomic instability,” the IMF said in study released in April.

While each city in the region has its own distinct characteristics, there are a few common denominators: rising borrowing costs, increased government regulation and volatile stock markets. There’s also dwindling demand from a force so powerful it pushed prices to a record in many places — Chinese buyers.

“As China’s economy is affected by the trade war, capital outflows have become more difficult, thus weakening demand in markets including Sydney and Hong Kong,” said Patrick Wong, a real estate analyst at Bloomberg Intelligence.

Hong Kong

After an almost 15-year bull run that made Hong Kong notorious for having the world’s least affordable property market, home prices have taken a battering.

Values in the city have fallen for 13 weeks straight since August, the longest losing streak since 2008, figures from Centaline Property Agency Ltd. show. Concerns about higher borrowing costs and a looming vacancy tax have contributed to the slide.

hong kong residences

buildings stand illuminated in Hong Kong, China. PAUL YEUNG/BLOOMBERG

The strike rate of mainland Chinese developers successfully bidding for residential sites is also waning, tumbling to 27 per cent in 2018 from 70 per cent in 2017, JLL’s Residential Sales Market Monitor released Thursday showed. Of the 11 residential sites tendered by authorities last year, only three were won by Chinese companies.

“The change in attitude can be explained by a slowing mainland economy,” said Henry Mok, JLL’s senior director of capital markets. “Throw in a simmering trade war between China and the U.S., the government has taken actions to restrict capital outflows, which in turn has increased difficulties for developers to invest overseas.”


Home prices on the island, which regularly ranks among the world’s most expensive places to live, posted their first drop in six quarters in the three months ended December. Luxury was hit the hardest, with values in prime areas sinking 1.5 per cent.

Government policies are mainly to blame. Cooling measures implemented unexpectedly in July included higher stamp duties and tougher loan-to-value rules. Extra constraints since then have included curbs on the number of “shoe-box” apartments and anti-money laundering rules that imposed an additional administrative burden on developers.

It’s all worked to put the brakes on a home-price recovery that only lasted for five quarters, the shortest since data became available.

“Landed home prices, being bigger ticket items, have taken a greater beating as demand softened,” said Ong Teck Hui, a senior director of research and consultancy at JLL. (In Singapore, most people live in high-rise apartments, called housing development board flats. Landed homes by contrast occupy their own ground space.)


Sydney-siders have begun to wonder — what sort of economic fallout will there be from the wealth destruction that comes with the worst slump in home values since the late 1980s?

Average home values in the harbor city have fallen 11.1 per cent since their 2017 peak, according to CoreLogic Inc. data released Wednesday — surpassing the 9.6 per cent top-to-bottom decline when Australia was on the cusp of entering its last recession.

While prices are still about 60 per cent higher than they were in 2012, meaning few existing homeowners are actually underwater, it’s economist forecasts of a further 10 per cent fall that’s making nervous investors think twice about extraneous spending.

The central bank is also worried that a prolonged downturn will drag on consumption and with the main opposition Labor party pledging to curb tax perks for property investors if it wins an election expected in May, confidence is likely to be hit further.

Treasurer Josh Frydenberg on Thursday urged the nation’s banks not to tighten credit any more as the deepening downturn threatens to weigh on the economy.

Shanghai, Beijing

A crackdown on overheating prices has hampered sales and left values in the nation’s biggest cities around 5 per cent below their peak. Rules on multiple home purchases, or how soon a property can be sold once it’s bought, are starting to be relaxed, and there are giveaways galore as home builders try to lure buyers.

One developer in September was giving away a BMW Series 3 or X1 to anyone wishing to purchase a three-bedroom unit or townhouse at its project in Shanghai. Down-payments have also been slashed, with China Evergrande Group asking for just 5 per cent compared with the usual 30 per cent deposit required.

“It’s not a surprise to see Beijing and Shanghai residential prices fall given the curbing policies currently on these two markets,” said Henry Chin, head of research at CBRE Group Inc. An index that measures second-hand home prices in Beijing has been falling since September while one that tracks Shanghai has been on the decline now for almost 12 months, he said.
Mar 13, 2019 | 11:00 GMT

7 mins read

China Opts for Tax Cuts to Jolt Its Economy Awake


(KEVIN FRAYER/Getty Images)


  • With its economy slowing, China will rely more on fiscal policies — including tax relief — to re balance its economy to bolster private consumption and investment.
  • However, tax relief, coupled with the overall slowdown, will result in tighter budgets for local and central governments, particularly in the central and western regions.
  • Beijing will issue more local bonds, increase fiscal transfers and expand the local tax base with new property tax reforms to ease local governments’ financial burden.

Spurred in part by its slowing economy, China is gathering steam in its efforts to re balance its tax structure. During the country’s annual legislative session this month, Chinese Premier Li Keqiang announced an expanded 2 trillion-yuan ($298 billion) reduction — or 10 percent of China’s total government budget revenues last year — in taxes and fees for individual taxpayers and private business this year. Together with a smaller package last year, the measures could free 100 million individual taxpayers (mainly lower- and middle-class citizens) from income tax and lower the tax burden for private enterprises by as much as 20 percent. The tax package is designed to ease the growing financial stress on private businesses and kick-start flagging consumption amid the Chinese economy’s struggles with high debt and the lack of impact from traditional government-led investments.

The Big Picture

In the decade since the global financial crisis, Beijing has relied on expanded credit to develop infrastructure and the property market to ameliorate economic pain amid a slow-moving economic transition. But as China faces multiple challenges, including an extended economic slowdown, the U.S. trade war and diminishing returns from its previous stimulation policies, Beijing is turning more toward different fiscal policies to address economic challenges.

See 2019 Second-Quarter Forecast

See Asia-Pacific section of the 2019 Second-Quarter Forecast

See China in Transition

Although the central government is on a relatively sound financial footing, growing imbalances (overall revenue sources are slowing — or even declining — while expenditures are growing) mean local governments will bear the brunt of the expected shortfall, since many are already wallowing in high debt. In response, Beijing will use various methods, including fiscal transfers, more bond issuance and the cultivation of new tax bases, to plug the gap; yet these measures have their drawbacks, ensuring that China’s continued economic slowdown will limit just how far Beijing can go in righting the ship.

Providing Tax Relief

Beijing’s resort to tax cuts speaks volumes about China’s present reality. But following a decade long credit boom, the majority of which flowed into government-led infrastructure projects and property investments, the costs of the expansion are now outweighing the benefits. Beyond high debts and excessive industrial capacity in state-owned sectors, as well as over speculation in the property market, policies that funneled capital into state-owned enterprises instead of the private sector — the focus of most production and innovation — hurt the latter. At the same time, China is finding itself in a tight squeeze as it tries to incentivize domestic spending (a critical aspect of Beijing’s attempts to re balance) due in part to rising mortgage and overall household debt, which have grown the last three years. Essentially, now that quick-fix solutions are no longer as effective as before, China’s leaders have no choice but to resort to less-palatable measures to put the country back on track to sustainable growth.

china provincial financing self sufficiency.jpg

Still, tax cuts for corporations and households alone are unlikely to deliver the same effects as credit expansions or state-led investment spending. Although the relief will certainly help alleviate the burdens for companies and individuals, its net impact will be relatively light since the extended economic slowdown will deter consumption and private investments at a time when many small- to medium-sized private corporations are struggling to make ends meet. Last year, for example, overall industrial profits contracted for several key manufacturers in the information technology, automotive and other sectors, even though the government offered 1.3 trillion yuan in tax relief. Likewise, this year’s tax package, which amounts to roughly 2 percent of gross domestic product, is only expected to generate 0.5 percent in GDP growth. In other words, if China’s tax strategy is to succeed, Beijing must complement its supplementary policies with a more sustainable approach to support the real economy so consumers can spend and companies can expand their business scale and capital expenditures.

Tightening the Belt

Given the limited impact of the tax cut, the government will have to continue pumping money into infrastructure and investments and pursue other monetary policies to stimulate the economy. The challenge for China, however, is that it must do so against the backdrop of slowing, and perhaps even declining, overall revenue sources. Central government revenues have already slowed for two years straight, even dipping into the negative a few times in the final months of 2018 as a result of the decelerating economy and the tax cut.

chinas provinces local debt lelvl

Provincial and regional governments, meanwhile, are likely to come under greater stress. Significantly, land sales, which accounted for roughly half of local governments’ total revenue sources in 2017, slowed sharply in 2018 because of continued restrictions on the property market. Partly as a result of these limitations, nearly half of China’s provinces reported slower growth in local fiscal revenues last year. (Tianjin, meanwhile, even reported falling revenue.) And unless the government takes action to boost the real estate market in the coming months by loosening restrictions preventing homeowners from buying additional property or engaging in speculation, continued economic stress will likely further weaken provincial governments’ fiscal position, just as tax cuts are taking effect and other expenditures are growing.

Chinas local govt budgets.jpg

Ultimately, the growing fiscal stress has compelled both the central and local governments to tighten the belt this year. At present, China has forecast a budget deficit of 2.8 percent of GDP for 2019 — a figure that is far below that of many other major countries like the United States (3.9 percent) and Japan (3.7 percent) — but the final number is likely to be much higher. In the recent legislative session, nearly all provincial and regional governments reduced their projections for revenue growth this year, with several provincial governments, even those in wealthy coastal regions, looking to tighten bureaucratic expenditures by as much as 5 percent this year. In less prosperous regions, including Guizhou in the southwest or Inner Mongolia in the north, the target for cuts is as high as 10 percent. And with many provinces and regions already facing debt stress (especially those in the central and west with weaker financial abilities), fiscal constraints will add further challenges, undermining their ability to maintain economic and, by extension, social stability.

Coping With the Stress

To address the problem, Beijing has increased this year’s local government bonds by 3.08 trillion yuan, a 41 percent rise year on year. Officially, local government debts remained at a healthy level of 18.4 trillion yuan, or 20 percent of GDP, at the end of 2018, but the true figure is estimated to be as much as 40 trillion yuan. In the end, with the fiscal stress unlikely to abate in the next two years, the local bonds essentially presage a greater local debt burden.


Chinas local vs central financial structure

The current tax structure, which is based on a 1994 tax reform, has widened the fiscal imbalance between the central and local governments, privileging the former. But because local governments must foot the bill for the tax reduction and the growing fiscal burden, these jurisdictions will have greater cause to demand that Beijing increase fiscal transfers — even though such payments could erode the central government’s financial strength in the long term. In 2017, 80 percent of the central government’s revenue found its way to local governments, accounting for roughly 40 percent of local jurisdictions’ total expenditures. Among the country’s 31 provinces, just a handful of them — primarily eastern or coastal regions such as Beijing, Shanghai and Guangdong — are close to fiscal self-sufficiency, thereby allowing them to contribute to the central government’s coffers. But as tax bases in these wealthy regions begin to evaporate, the growing outflow in financial transfers could also create disagreements between Beijing and these wealthy regions, as well as among local governments themselves.

Beijing, meanwhile, has been attempting to cultivate new tax bases by increasing dividends from state-owned companies, exercising tighter fiscal enforcement and finding new sources of tax, especially the long-discussed property tax. While the efforts to find new tax bases could raise the ire of the state-owned companies, the property tax could further hit the moribund property sector and, thus, the economy at large. With its economy facing strong headwinds, China will struggle to implement the necessary measures, leaving it on course for a more precarious position down the road.

Putin’s Russia Embraces a Eurasian Identity

By Eugene Chausovsky

Senior Eurasia Analyst, Stratfor





  • In the years to come, demographic change will further distinguish Russia from the West culturally and politically and more strongly emphasize its unique Eurasian identity.
  • Russia’s prolonged standoff with the West will spur Moscow to develop closer economic and security ties with countries in the eastern theater, particularly in the Asia-Pacific and the Middle East, as Moscow seeks a greater balance in its relations between East and West.
  • In the long term, China’s rise will temper Russia’s shift to the East and could bring about an eventual rapprochement with the West, with Moscow’s maneuvering between the Western and Eastern poles serving to shape the Eurasian aspect of Russia’s identity.

In a New Year’s message to U.S. President Donald Trump, Russian President Vladimir Putin wrote that Russia was “open to dialogue with the United States on the most extensive agenda.” The message was a hopeful one for 2019, written to close out a year in which relations between Russia and the West continued to deteriorate along numerous fronts. Russia’s standoff with the West will likely only intensify this year. A key evolution in Russia’s strategy — indeed, in Russia’s very identity — over the course of the Putin era is a big reason why.

The Big Picture

Since Vladimir Putin came to power nearly 20 years ago, Russia has developed a Eurasian identity and strategy that has made it increasingly distinct from the West. Looming demographic changes and Russia’s foreign policy maneuvering between the West and China will only solidify its Eurasian identity in the years to come.

See Russia’s Internal StruggleSee The Fight for Russia’s BorderlandsSee Moscow Looks to the East

From the Cold War to ‘Eurasianism’

To understand this evolution, it is important to understand the context in which Putin came to power nearly 20 years ago. When he was appointed acting Russian president on Dec. 31, 1999, his country was reeling from a decade of chaos and instability following the collapse of the Soviet Union. The economy was in shambles, the political system had fragmented, a separatist conflict raged in Chechnya, and oligarchs in many ways had become more powerful than the state. Even the country’s very territorial integrity was at stake.

Over the next decade, Putin reined in the oligarchs and re-established a strongly centralized state. He squashed the Chechen conflict with a combination of brute military force and political maneuvering. And the economy, with the help of strong energy prices, surged. Putin’s consolidation of power on the domestic front enabled Russia to reassert itself across the former Soviet periphery and beyond.

Russia’s resurgence as a regional power brought it into greater confrontation with the West, as Moscow sought to stop and reverse the spread of European Union and NATO membership and Western influence into the European borderlands and re-establish its own influence and integration efforts. These dynamics were seen in the Russia-Georgia War in 2008 and intensified with the Euromaidan uprising in Ukraine in 2014. The result has been a prolonged and growing standoff between Russia and the West, with its involvement in the conflicts in Ukraine and Syria, plus military buildups and Western sanctions bringing Moscow’s relations with Europe and the United States to their lowest point since the Cold War.

In the two decades since Putin ascended to the presidency, a distinct Russian identity emerged under him, one that can be called “Eurasianism.” This identity includes components of a political ideology and a foreign policy strategy that are rooted in Russia’s position in both Europe and Asia, and in geopolitical imperatives that long predate Putin. It’s an identity key both to understanding Russia’s policies now, and forecasting what can be expected in the years to come.

Eurasianism as a Political Ideology

An important political attribute of Eurasianism in the Putin era — one in line with Russian tradition — is the pursuit of collective stability over individual liberty. For most Russians, the country’s chaotic experiment with democracy and capitalism in the 1990s proved that Western-style structures were not appropriate or effective within Russia. The political culture that has arisen under Putin is incompatible in many ways with the liberal, democratic values of the West. Indeed, Moscow sees support by the United States and the European Union for pro-democracy and human rights movements inside Russia as subversive attempts to weaken it.

Russia is run as a centralized state, with Putin representing himself as a strong, decisive leader who holds together a country that otherwise would splinter apart. While the Kremlin frequently cracks down on protests and independent media, it does allow selective demonstrations and at times will even concede to certain demands — such as allowing direct elections or adjusting unpopular pension reforms — if it comes under enough pressure.

Under Putin, Russian nationalism has replaced the universal Communist ideology of the Soviet Union. However, because he must incorporate the country’s more than 150 ethnic minorities — Tatars, Chechens, Ukrainians, Armenians and so on — into this nationalism as well as its ethnic Russians, Putin manages Russia’s nationalist tendencies carefully. Orthodox Slavs are not the only face of Russia, and Putin risks alienating the country’s minority groups and undermining the stability he has worked to reinstate if he pursues a nationalist line too strongly. The same is true for religion: Muslims in Russia number in the millions, and many are concentrated in the volatile North Caucasus region.

Projected pop change eurasia

Russia’s minority populations also are growing, while the ethnic Russian population is decreasing. Ethnic Russians made up about 77 percent of Russia’s population, according to the last official census taken in 2010, but their low birthrates (1.3 children per woman, on average) means the ethnic Russian population will decline at a faster rate than Russia’s Muslim population, which has a birthrate of 2.3 children per woman. Increased migration from the Caucasus and Central Asian states, which are also growing in population, will be necessary to meet Russia’s labor needs and will swing the country’s demographics even further. Russia will become less Slavic and Orthodox and more Asian and Muslim in the coming years, further distinguishing it culturally and politically from Europe and the West. The need to promote Russian nationalism — the greatness of Russia itself, not ethnic Russians — will only intensify.

Eurasianism as a Foreign Policy Strategy

Because Russia lacks significant natural barriers, a constant throughout its history has been the need to maintain a regional power to establish buffer space both in the east and west to protect its Moscow-St. Petersburg core. Thus, Moscow wants to keep the former Soviet republics in its fold — not necessarily officially, but certainly in a de facto manner.

It is no coincidence that the countries most closely aligned with Russia are members of the Eurasian Economic Union and its military counterpart, the Collective Security Treaty Organization, the two primary integration blocs created in the Putin era. These states share numerous features with Russia in terms of their Eurasian character — strong leaders, state-dominated economies and an emphasis on stability over democracy. They also share strong suspicions of the West and its promotion of democracy and human rights.

Ideally for Russia, every state in the former Soviet Union would be part of the Eurasian union. But states like Azerbaijan, Uzbekistan and Turkmenistan have chosen to remain neutral, while other states, including the Baltic countries and more recently Ukraine, have sought a pro-Western path. Russia’s goal is to align each of the countries in the former Soviet periphery with Moscow or at least keep them neutral. If not, Russia will aim to undermine their pro-Western governments and their Western integration efforts. The intent of the United States and its EU and NATO allies to deprive Russia of this sphere of influence is a key factor behind Moscow’s enduring standoff with the West

eurasian econ union

Eurasianism as a foreign policy concept is not limited to the lands immediately surrounding Russia. It extends to those countries that also behave in contradiction to Western liberal values and/or Western interventionism, and can include European countries that have illiberal tendencies. One example is Hungary, whose government Russia works to support in order to undermine EU unity on issues such as sanctions against it. The common thread is that Russia seeks to cooperate with countries challenging the U.S.-led world order, or at least stoke division within U.S.-allied blocs like NATO and the European Union.

Under Putin, Moscow has worked to build other economic and security relationships, not only to replace or supplement its weakened ties with the West, but also to enhance its global position as a counterweight to the West, and especially to the United States. One such place has been Syria. Russia’s intervention on behalf of Syrian President Bashar al Assad is motivated by its historical ties to the country, including maintaining a naval base at Tartus, and a strategic interest to combat the spread of the Islamic State. But just as importantly, Russia wanted to draw a red line around efforts by the West, and by the United States in particular, to force regime change in Syria. Russia’s intervention was not to save al Assad per se, but rather to serve notice to the United States that it still carried enough military and diplomatic heft to hold its own in the conflict.

This, in turn, allowed Russia to expand its influence elsewhere in the Middle East. With its economic ties with the United States and the European Union on the downswing, Russia was interested in expanding its arms sales, with Middle Eastern countries like Egypt and Turkey representing promising markets. Russia also wanted to expand its leverage against the United States in a crucial theater to Washington.

Perhaps the most important partner to emerge for Russia in the wake of Moscow’s standoff with the West is China. Russia and China had been steadily tightening their economic and energy ties since the early post-Soviet period. However, the Euromaidan uprising and Russia’s ensuing standoff with the West accelerated the development of the Moscow-Beijing relationship, not only in terms of trade and investment but also on security and military aspects. Russia and China have also coordinated their efforts on political matters when it comes to U.N. Security Council votes on issues like North Korea and Syria, particularly when it means opposing the U.S. position in these theaters.

However, Russia’s shift toward China is unlikely to last forever. China’s own rise and overlapping spheres of influence in Central Asia, the Russian Far East and the Arctic ultimately will limit the extent of their partnership. This could pave the way for a future rapprochement between Russia and the West, particularly as China emerges as a more serious economic and military competitor for both the United States and Russia down the line.

Ultimately, Russia’s maneuvering between West and East will further solidify the Eurasian aspect of its identity. The cohesion of the Russian state and society on the home front and Russia’s ability to overcome external challenges and pressures, whether from the West or China, will serve as key factors shaping the evolution of this identity.

worldwide cost of living

Economist Intelligence Unit

The findings of the latest Worldwide Cost of Living Survey

Cost convergence across continents

For the first time in the survey’s history, three cities share the title of the world’s most expensive city: Singapore, Hong Kong and France’s capital, Paris. The top ten is largely split between Asia and Europe, with Singapore representing the only city in the top ten that has maintained its ranking from the previous year. In the rest of Asia, Osaka in Japan and Seoul in South Korea join Singapore and Hong Kong in the top ten. The Japanese city has moved up six places since last year, and now shares fifth place with Geneva in Switzerland. In Europe, the usual suspects—Geneva and Zurich, both in Switzerland, as well as Copenhagen in Denmark—join Paris as the world’s most expensive cities to visit and live in out of the 133 cities surveyed.

Within western Europe it is non-euro area cities that largely remain the most expensive. Zurich (in fourth place), Geneva (joint fifth) and Copenhagen (joint seventh) are among the ten priciest. The lone exception is Paris (joint first), which has featured among the top ten most expensive cities since 2003. With west European cities returning to the fold, the region now accounts for three of the five most expensive cities and for four of the top ten. Asia accounts for a further four cities, while Tel Aviv is the sole Middle Eastern representative.

Across geographic regions and countries, the survey observed a degree of convergence in 2018 among the most expensive locations. Some of those economies with appreciating currencies, like the US, climbed up the ranking significantly. In seventh and joint tenth place respectively, New York and Los Angeles are the only cities in the top 10 from North America. A stronger US dollar last year has meant that cities in the US generally became more expensive globally, especially relative to last year’s ranking. New York has moved up six places in the ranking this year, while Los Angeles has moved up four spots. These movements represent a sharp increase in the relative cost of living compared with five years ago, when New York and Los Angeles tied in 39th position.

Tel Aviv, which was ranked 28th just five years ago, sits alongside Los Angeles as the joint tenth most expensive city in the survey. Currency appreciation played a part in this rise, but Tel Aviv also has some specific costs that drive up prices, notably those of buying, insuring and maintaining a car, all of which push transport costs 64% above New York prices.

Last year inflation and devaluations were prominent factors in determining the cost of living, with many cities tumbling down the ranking owing to economic turmoil, currency weakness or falling local prices. Places like Argentina, Brazil, Turkey and Venezuela experienced all of the aforementioned conditions, leading to cities in these countries seeing a sharp fall in their cost of living ranking. Unsurprisingly, it is Caracas in Venezuela which claims the title of the least expensive city in the world. Following inflation nearing 1,000,000% last year and the Venezuelan government launching a new currency, the situation continues to change almost daily. The new currency value has varied so much since its creation and the economy was demonetized compelling people to use commodities and exchange services and personal items like clothing, auto parts and jewelry to purchase basic goods such as groceries.© The Economist Intelligence Unit Limited 2019 2

The impact of high inflation and currency denominations is reflected in the average cost of living this year. Taking an average of the indices for all cities surveyed using New York as the base city, the global cost of living has fallen to 69%, down from 73% last year. This remains significantly lower than five years ago, when the average cost of living index across the cities surveyed was 82% and ten years ago was 89%.

US cities rise up to meet European veterans

Much of 2018 was marked by continued strong US economic growth and steady monetary policy tightening by the Federal Reserve (the US central bank), which led to a sharp appreciation of the US dollar. With the dollar strengthening against other currencies, all but two US cities rose up the ranking in 2018. The highest climbers were San Francisco (25th up from 37th previously), Houston (30th from 41st), Seattle (38th from 46th) and Detroit and Cleveland (joint 67th from joint 75th). New York (seventh), Los Angeles (tenth) and Minneapolis (20th) are all ranked in the top 20. Domestic help and utilities remain expensive in North America, with US cities ranking highly in these categories.

On the other side of the Atlantic, despite the euro making gains against the US dollar in 2017, these gains went into reverse in 2018 as economic momentum slowed and the election of a populist coalition in Italy raised new concerns about challenges to European integration. Paris stands out as the only euro area city in the top ten. The French capital, which has risen from seventh position two years ago to joint first, remains extremely expensive to live in, with only alcohol, transport and tobacco offering value for money compared with other European cities. Copenhagen in Denmark, which pegs its currency to the euro, also features in the ten priciest cities in joint seventh place, largely owing to relatively high transport, recreation and personal care costs.

When looking at the most expensive cities by category, Asian cities tend to be the priciest locations for general grocery shopping. European cities tend to have the highest costs in the household, personal care, recreation and entertainment categories—with Zurich and Geneva the most expensive in these categories—perhaps reflecting a greater premium on discretionary spending.


ten most expensive cities

The impact of high inflation and currency denominations is reflected in the average cost of living this year. Taking an average of the indices for all cities surveyed using New York as the base city, the global cost of living has fallen to 69%, down from 73% last year. This remains significantly lower than five years ago, when the average cost of living index across the cities surveyed was 82% and ten years ago was 89%.

US cities rise up to meet European veterans

Much of 2018 was marked by continued strong US economic growth and steady monetary policy tightening by the Federal Reserve (the US central bank), which led to a sharp appreciation of the US dollar. With the dollar strengthening against other currencies, all but two US cities rose up the

ranking in 2018. The highest climbers were San Francisco (25th up from 37th previously), Houston (30th from 41st), Seattle (38th from 46th) and Detroit and Cleveland (joint 67th from joint 75th). New York (seventh), Los Angeles (tenth) and Minneapolis (20th) are all ranked in the top 20. Domestic help and utilities remain expensive in North America, with US cities ranking highly in these categories.

On the other side of the Atlantic, despite the euro making gains against the US dollar in 2017, these gains went into reverse in 2018 as economic momentum slowed and the election of a populist coalition in Italy raised new concerns about challenges to European integration. Paris stands out as the only euro area city in the top ten. The French capital, which has risen from seventh position two years ago to joint first, remains extremely expensive to live in, with only alcohol, transport and tobacco offering value

for money compared with other European cities. Copenhagen in Denmark, which pegs its currency

to the euro, also features in the ten priciest cities in joint seventh place, largely owing to relatively high transport, recreation and personal care costs.

When looking at the most expensive cities by category, Asian cities tend to be the priciest locations for general grocery shopping. European cities tend to have the highest costs in the household, personal care, recreation and entertainment categories—with Zurich and Geneva the most expensive in these categories—perhaps reflecting a greater premium on discretionary spending.

Prices no and then

A year of currency fluctuations and inflation

Currency fluctuations continue to be a major cause for changes in the ranking. In the past year a number of markets have seen significant currency movements, which have in many cases countered the impact of domestic price changes.

Several emerging markets suffered currency volatility, primarily as a result of monetary tightening in the US and the strengthening US dollar. In a few instances, however, such as Turkey and Argentina, a combination of factors, including external imbalances, political instability and poor policymaking, led to full-blown currency crises. Istanbul, in Turkey, which experienced the sharpest decline in the cost of living ranking in the past 12 months, fell by 48 places to joint 120th. The reason for this drastic decline was the recent sharp slide of the Turkish lira and annual consumer price inflation surging to 25.2% in October 2018.

The impact of currency devaluation was also felt in Argentina’s capital, Buenos Aires, which has joined the bottom ten in joint 125th place. Like Istanbul, the city also fell by 48 places in the ranking following a crisis of confidence in Argentina, resulting in the peso weakening sharply against the US dollar in August.

In contrast, the endemic high cost of living in the French territory of New Caledonia partly reflects a lack of competition, particularly in the wholesale and retail sectors, which are dominated by a small number of companies. These factors drove its capital, Nouméa, 33 spots up the ranks in joint 20th place.

Another big mover, Sofia (currently joint 90th) in Bulgaria, reflects a rise up the rankings of 29 spots.

Bulgaria is an economically stable east European country, which pegs its currency, the Bulgarian lev, to the euro but is yet to join the euro zone. Like many cities in the region, Sofia continues to offer good value for money. Nevertheless, prices for groceries in the capital city are beginning to converge with west European destinations in anticipation of the country adopting the euro currency in the coming years. Growth in food prices (one of the main drivers of 3% inflation in the country for 2018) averaged 2.6% year on year in December 2018. Utility prices (electricity, gas, district heating and water) as well as recreation and culture prices, continued to rise at the slightly higher pace of around 4% over the last 12 months.

biggest movers

Changes at the bottom

The cheapest cities in the world have seen some changes over the past 12 months. Asia is home to some of the world’s most expensive cities, but also to many of the world’s cheapest cities. Within Asia, the best value for money has traditionally been offered by South Asian cities, particularly those in India and Pakistan. To an extent this remains true, and Bangalore, Chennai, New Delhi and Karachi feature among the ten cheapest locations surveyed. India is tipped for rapid economic expansion but, in per- head terms, wage and spending growth will remain low. Income inequality means that low wages are the norm, limiting household spending and creating many tiers of pricing as well as strong competition from a range of retail sources. This, combined with a cheap and plentiful supply of goods into cities from rural producers with short supply chains as well as government subsidies on some products, has kept prices down, especially by Western standards.

Nonetheless, although South Asian cities traditionally occupy positions among the ten cheapest, they are no longer the cheapest in the world. Last year that title was held by Syria’s capital, Damascus, which is ranked second-cheapest this year. The citizens of Damascus might not have felt that the city was getting cheaper, however, with inflation averaging an estimated 28% in the country during 2017. Yet local price rises have not completely offset a near-consistent decline in the value of the Syrian pound since the onset of war in 2011.

This year, Damascus bestowed the title of least expensive city in the world to Venezuela’s capital, Caracas, which saw a significant worsening of economic conditions in 2018, with hyperinflation and a breakdown in public services fueling growing social unrest. The Venezuelan government unified and devalued the official exchange rates in early 2018 in an attempt to reduce currency pressure, but amid hyperinflation, the currency remains hugely overvalued, as reflected in an extremely large black- market premium.

ten cheapist cities

Cheap but not always cheerful

As Damascus and Caracas show, a growing number of locations are becoming cheaper because of the impact of political or economic disruption. Although South Asia remains structurally cheap,

political instability is becoming an increasingly prominent factor in lowering the relative cost of living. This means that there is a considerable element of risk in some of the world’s cheapest cities. Karachi in Pakistan, Tashkent in Uzbekistan, Almaty in Kazakhstan and Lagos in Nigeria have faced well- documented economic, political, security and infrastructural challenges, and there is some correlation between The Economist Intelligence Unit’s Worldwide Cost of Living ranking and its sister ranking, the Global Livability survey. Put simply, cheaper cities also tend to be less livable.

prices now and then bottom ten

A bumpy ride ahead

The cost of living is always fluctuating, and there are already indications of further changes that are set to take place during the coming year. After an encouraging albeit slower 2018, The Economist Intelligence Unit expects 2019 to proceed along similar lines, with global growth slowing further this year and reaching its nadir in 2020. External conditions deteriorated late last year owing to the US- China trade war and externalities related to this are expected to continue throughout 2019.

The strong US dollar observed last year is also not set to last. Since December the dollar has softened and is expected to depreciate further against the euro and the yen from late 2019 onward as the US economy slows more sharply.

After five consecutive years of decline, oil prices bottomed out in 2016 and rebounded in 2017 and 2018, along with other commodity prices. At the very basic level, this will have an impact on prices, especially in markets where basic goods make up the bulk of the shopping basket. But there are further implications. Oil prices will continue to weigh on economies that rely heavily on oil revenue. This could mean austerity, economic controls and weak inflation persisting in affected countries, depressing consumer sentiment and growth.

Equally, 2019 could see the fallout from several political and economic shocks having a deeper effect. The UK has already seen sharp declines in the relative cost of living owing to the Brexit

referendum and related currency weaknesses. In 2019 these are expected to translate into further price rises as supply chains become more complicated and import costs rise. These inflationary effects could be compounded if sterling were to stage a recovery.

There are other unknowns as well. The US president, Donald Trump, has caused some significant upheaval in trade agreements and international relations, which may push up prices for imports and exports around the world as treaties unravel or come under scrutiny. Meanwhile, measures adopted in China to address growing levels of private debt are still expected to prompt a slowdown in consumption and growth over the next two years. This could have consequences for the rest of the world, resulting in further staged renminbi devaluations that would affect the relative cost of living in Chinese cities. The lasting impact of the US-China trade war is still to be judged, but there are already signs of the weaker global economic environment, which is only set to deepen.

Instability and conflict around the world could continue to fuel localised, shortage-driven inflation, which would have an impact on the cost of living in certain cities. Caracas, currently sitting at the bottom of the ranking, has moved down the index significantly in recent years. Equally, exchange- rate volatility has meant that, while Asian cities have largely risen in cost-of-living terms, many urban centres in China, South Africa and Australia have seen contrasting movements from year to year. It is also worth remembering that local inflation driven by instability is often counteracted by economic weakness and slumping exchange rates. As a result, cities that have the highest inflation will often see their cost of living fall compared with that of their global peers.

With emerging economies supplying much of the wage and demand growth, it seems likely that these locations will become relatively more expensive as economic growth and commodity prices recover. However, price convergence of this kind is very much a long-term trend, and in the short and medium term the capacity for economic shocks and currency swings can make a location very expensive or very cheap very quickly.

Background: about the survey

The Worldwide Cost of Living is a biannual Economist Intelligence Unit survey that compares more than 400 individual prices across 160 products and services. These include food, drink, clothing, household supplies and personal care items, home rents, transport, utility bills, private schools, domestic help and recreational costs.

The survey itself is a purpose-built Internet tool designed to help human resources and finance managers calculate cost-of-living allowances and build compensation packages for expatriates and business travellers. The survey incorporates easy-to-understand comparative cost-of-living indices between cities. The survey allows for city-to-city comparisons, but for the purpose of this report all cities are compared with a base city of New York, which has an index set at 100. The survey has been carried out for more than 30 years.


More than 50,000 individual prices are collected in each survey, conducted each March and September and published in June and December. Economist Intelligence Unit researchers survey a range of stores: supermarkets, mid-priced stores and higher-priced speciality outlets. Prices reflect costs for more than 160 items in each city. These are not recommended retail prices or manufacturers’ costs; they are what the paying customer is charged.

Prices gathered are then converted into a central currency (US dollars) using the prevailing exchange rate and weighted in order to achieve comparative indices. The cost-of-living index uses an identical set of weights that is internationally based and not geared towards the spending pattern of any specific nationality. Items are individually weighted across a range of categories, and a comparative index is produced using the relative difference by weighted item.

For more information on the Worldwide Cost of Living Survey visit

economic data

economic data 2


Third and Fourth Quarter 2018 North American Housing News

Canada Housing News

The big chill: A five-year house price forecast for 33 Canadian cities


Michael Babad

Published October 3, 2018

New forecasts suggest it’s “time for slower price growth” in Canadian housing markets.

Indeed, Moody’s Analytics and RPS Real Property Solutions have cut their five-year projections for many of the 33 cities studied from earlier forecasts in May.

The predictions from Moody’s Analytics, the sister company of the credit rating agency, which are based on RPS data, indicate federal and provincial policy makers have pulled off what they set out to do when they brought in measures to tame bubbly markets such as those in Toronto and Vancouver.

They also come amid fresh numbers that show the Vancouver-area market still struggling after British Columbia imposed an additional tax on foreign buyers of local real estate in 2016 and new federal mortgage-qualification rules were introduced last January.

At the same time, interest rates are rising, and are expected to continue to do so, further pressuring demand in what had, until recently, been unstoppable housing markets.

“Two macroeconomic projections now dominate housing markets in Canada,” said Moody’s economist Andrew Carbacho-Burgos.

“The first is that the [Bank of Canada] will continue to tighten short-term interest rates through 2020 in order to head off inflation and main­tain the value of the Canadian dollar rela­tive to its U.S. counterpart,” he added in his report released today, titled “Canada housing market outlook: Time for slower price growth.”

“With some lag, monetary tightening will pull up mortgage rates. The five-year mortgage rate is now at about 4.4 per cent after bottoming out at 3.6 per cent in mid-2017; the Moody’s Analytics baseline projection is that it will continue to increase until it levels off at about 6 per cent by late 2020.”

Here’s what Moody’s expects over the course of five years:

avg home price increases

Source: RPS, Moody’s Analytics

There are other interesting tidbits in the report along with projections, these based on single-family homes:

1: Most Ontario cities “are still significantly overvalued, but this overvaluation has, on average, started to decrease.”

2: Toronto is overpriced to the tune of 51 per cent, compared to 53 per cent in May. Others that have come down even more sharply are the Ontario centres of Barrie, Guelph and Brantford.

3: The overpriced Vancouver market has also cooled off, but overvaluation still tops 40 per cent.

4: Montreal’s market is undervalued, but by less than 4 per cent.

5: Edmonton remains “the most undervalued metro area” in the country, by about 20 per cent, but it should see a faster pace of price growth after mortgage rate hikes end “thanks to a combination of reduced listings and increased opportunistic purchases.”

6: Saskatoon and most Atlantic cities are “moderately undervalued.”

“The national housing market still has a long way to go before it regains the level of affordability it had before 2015, when prices in Toronto and Vancouver took off, but has now taken the first steps to do so,” Mr. Carbacho-Burgos said.

“The important points are, first, that there is no serious projected house price correction,” he added.

“Second, median family income growth will have a good chance of keeping up with and even outpacing house prices in coming years, improving affordability. Third, the lack of a significant house price decline will prevent mortgage debt performance from deteriorating, especially after 2020, when mortgage rates level off.”

But along with that came a few notable warnings. Among them:

1: “Given that most of the house price increases took place in Toronto and Vancouver, there is still the downside risk that higher mortgage rates and the borrower stress tests could push down demand in the Atlantic and Prairie provinces, leading to a full house price correction and a perceptible drop in sales in these regions.”

2: “The main downside risk now is that the measures taken to stabilize housing affordability and mortgage credit quality may prove too strong and may precipitate not just a house price correction, but also an extended decline in sales and possibly a reduction in home ownership. However, the data for July and August indicate that home sales and house price growth have started to rally, so it is too soon to be pessimistic.”

3: While financing is showing little sign of stress, it is “starting to show the first looming danger signs.” Mortgage delinquency rates are at their best since the early 1990s, though those in Alberta, Saskatchewan and eastern Canada are notably above the national average.

“More important, the slow growth of income relative to house prices has led to a steady increase in the ratio of mortgage debt service to disposable income over the past 15 years, and this ratio is likely to keep increasing before the [Bank of Canada] finishes tightening interest rates,” Mr. Carbacho-Burgos said of that last part.

“Although it is possible to disagree over the merits of the new mortgage lending stress tests, the move to make mortgage lending more stringent is not surprising, given this 15-year trend.”

Vancouver, of course, is unique in Canada, with numbers released Tuesday showing a sales plunge of 43.5 per cent in September from a year earlier.

That’s “the steepest decline since the financial crisis and about 35 per cent below typical September activity seen over the past decade,” said Bank of Montreal senior economist Robert Kavcic.

“All the while, new listings jumped strongly in the month. To put it lightly, the market continues to struggle with past policy measures and higher interest rates. Indeed, prices continue to fade.”

The benchmark price is up, but just slightly above 2 per cent from a year earlier, while the cost of a detached home is down 4.5 per cent.

“We would not be holding our breath for a quick rebound in this market,” Mr. Kavcic said.

reater vancouver house prices

Greater Vancouver home sales

Sales volume in September for detached houses, condos and town homes

And, as The Globe and Mail’s Janet McFarland reports, Toronto’s housing market chalked up a modest sales gain in September after two much stronger months.

Sales climbed 1.9 per cent from a year earlier, as average prices gained 2.9 per cent in the same period, though dipped 0.5 per cent from August, according to Toronto Real Estate Board numbers released today.

“Looks like the whole market is balancing out about as well as policy makers could have hoped,” Mr. Kavcic said of the Toronto report.

“This could set us up for a period of price stability as solid demographic and job fundamentals are countered by rising interest rates.”

Separately, Mr. Kavcic’s colleague, BMO chief economist Douglas Porter, took a run through the latest Canadian credit numbers, noting they continue to show a slower pace of borrowing.

“The slowdown in credit – most notably, overall mortgages – syncs well with the broader cooling in housing market activity,” Mr. Porter said, citing the fact that the rise in total household borrowing eased in August to 3.7 per cent from a year earlier, while disposable income eclipsed that, at 3.9 per cent.

“The biggest chill has been in mortgage growth (not surprisingly), which has softened to a 3.6-per-cent year over-year clip from an average growth rate of about 6 per cent in the past two years,” he added.

“We are on the cusp of seeing the slowest growth in mortgage balances outstanding since the early 1980s.”

Read more

Janet McFarland: Toronto housing market’s hot rebound cools in September

Janet McFarland, Brent Jang: Vancouver housing prices slowly easing as sales tumble 43.5 per cent in September

Poltergeist II: The demons that still haunt Canada’s housing and credit markets

2018 has been unruly for housing markets: What’s ahead for your province

Rob Carrick: How the new NAFTA helps end a generational chance to score big in the housing market

Rob Carrick: It’s officially normal to have a big, fat balance on your line of credit

House price inflation in Canada suddenly trails that of 36 other countries

How $8-billion in added mortgage costs will squeeze Canadians and the economy

‘Cue the comeback’: The reawakening of many Canadian housing markets

Canada’s housing market scores first annual price gain in months

‘Good value for your money’: How downtown condo prices in Canadian cities compare globally

Carolyn Ireland: Sale by trial and error in Toronto’s housing market

Canadian index falls as 8 markets decline

year to year price changes.jpg

Canada’s home prices dropped 0.3 per cent in November from October, according to the latest numbers from the Teranet-National Bank House Price Index.

The retreat marks only the fourth time in the index’s 20-year history that the national market dipped in November, according to National Bank of Canada senior economist Marc Pinsonneault.

The decline was quite broad-based, Mr. Pinsonneault adds, with eight of the 11 major metropolitan markets in negative territory.

Compared with November of 2017, the composite index rose 3.1 per cent last month to stand at 224.74. The national index is down 0.66 per cent from its peak in September of 2018.

Mr. Pinsonneault says that demand has cooled significantly – particularly in the country’s most expensive real estate markets – because of more stringent mortgage qualification rules and the rise in interest rates.

But Mr. Pinsonneault adds that interest rates appear set to rise more slowly than most economists previously thought. Hopes for a soft landing of the Canadian resale market are therefore still warranted, in his opinion.— Carolyn Ireland

victoria house prices

Cost of owning a home in Vancouver, Victoria ‘off the charts’ — and likely to get worse, warns RBC

It now costs 88 per cent of a typical income to carry a home in Vancouver, and 65 per cent of an income in Victoria.

Bloomberg News

Updated: September 28, 2018

cost of owning home canada

The cost of owning a home in Canada is at the highest level in 28 years and likely to get only more onerous as interest rates continue to rise, according to a report from Royal Bank of Canada.

Carrying a home, including the cost of a mortgage, property taxes and utilities, took up 54 per cent of a typical household’s pre-tax income in the second quarter, the Toronto-based bank said in a report on Friday. That’s up from 43 per cent three years ago.

“From overheating to correction to the onset of recovery, we’ve seen pretty much everything in the past three years in Canada’s housing market,” economists at the Toronto-based bank said in the report. “Yet an eye-watering loss of affordability has been a constant.”

Lack of affordability is “off the charts” in Vancouver, Toronto and Victoria, with RBC’s index at 88 per cent, 76 per cent and 65 per cent respectively — the highest in records going back to the mid-1980s. The measure uses an aggregate of all housing categories, including single-family detached homes and condos.

house poor

While rising prices had been the culprit behind the loss of affordability between 2015 and 2017, mortgage-rate increases accounted for the entire rise in carrying costs over the past year, the bank said. The country’s central bank has risen interest rates four times since July, 2017.

“We expect the Bank of Canada to proceed with further rate hikes that will raise its overnight rate from 1.50 per cent currently to 2.25 per cent in the first half of 2019,” the report said. “This will keep mortgage rates under upward pressure and boost ownership costs even more across Canada in the period ahead.”

B.C. is in a “mild” housing market recession, with the Lower Mainland shifting from a seller’s market to a “mild” buyer’s market, according to a new housing forecast report.

A recession is usually used to describe a period of significant decline in the economy, but that term also applies to a B.C. housing market marked by a sharp decline in home sales, eroding prices, and a slowdown in housing starts, said Bryan Yu, deputy chief economist of Central 1 Credit Union, which released its B.C. housing forecast for 2018 to 2021 on Tuesday.

“When we look at it through these lens, it’s the first time we’ve seen these slowdowns, a cycle where there’s a decline in the number of transactions, erosion of home prices … and new home construction activity seeing a contraction,” said Yu.

Resales of residential properties dropped 17 per cent from 2017 to 2018, said the report, while housing starts slowed by 10 per cent, with another 18 per cent drop forecast for 2019.

Aggregate sales in the province’s urban centres — the Vancouver, Kelowna, Victoria and Abbotsford-Mission CMAs — fell 40 per cent from the end of 2017, but even medium and small markets were hit with a 10 to 20 per cent reduction in activity.

“When you add all these factors together, from a buyer’s standpoint, you have less access to credit and less confidence in the market as well,” said Yu, who expects these factors to be reflected in prices in the coming year.

western investor av house price

A sales slump has cooled B.C.’s red-hot housing market, with the Lower Mainland shifting from a seller’s market to a “mild” buyer’s market, said a new report by Central 1 Credit Union. JONATHAN HAYWARD / THE CANADIAN PRESS

While median resale prices recorded a six per cent increase in 2018 compared to the previous year, it’ll dip a modest two per cent in 2019 to $520,000, said the report.

The trend will be more pronounced in the Lower Mainland/southwest region of B.C., where prices are expected to drop 3.6 per cent next year to $651,000.

But because the downturn is driven by policy measures such as the federal government’s mortgage stress test, the province’s introduction of the speculation tax and school tax, and Vancouver’s empty homes tax, and not by a broader economic slump, economists don’t see a major crash in housing prices.

There’s room for buyers to negotiate, but on the flip side, “the economy is strong enough that there aren’t that many sellers who have to bring down their price,” said Yu. “For most sellers, they don’t have to sell … It puts a cushion under the market.”

The report also examined B.C.’s rental housing market.

It said “renters will continue to experience stressful conditions,” with the province’s low rental vacancy rate of 1.4 per cent expected to hold steady through 2021 as renters struggle rents and continuing strong demand.

“Options are very limited,” said Yu. “There’s not a lot of supply out there.”

to shift into home ownership given tighter mortgage qualification require

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United States Housing News

US Housing Starts Up, Permits Down: August 2018

September 26, 2018 Kéta Kosman

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U.S. housing starts rose 9.2% in August, driven by an outsize leap in apartment building that masked weakening across single- and multifamily construction.

Single-family housing starts in August rose 1.9% to a seasonally adjusted annual rate of 876,000 units, and multifamily starts soared 27.3% to an adjusted annual rate of 392,000 units, according to the U.S. Department of Commerce’s monthly estimates.

SOURCE: U.S. Department of Commerce via For Construction Pros

U.S. housing starts rose 9.2% in August, driven by an outsize leap in multifamily building that masked softening housing construction conditions.

Monthly housing starts numbers are notoriously volatile, said For Construction Pros September 20. From the first of 2018, multifamily starts had trended down slightly through July. Multifamily starts year to date as of August, however, were 8.5% higher than the first eight months of 2017. The much larger category of single-family starts has been a bit more consistent, and the year-to-date total remains 6.9% above the same period last year.

The number of building permits issued tends to be a more stable measure and can help predict future home construction volume. Total permits dropped 5.7% from July to August, with single-family permits down 6.1% and multifamily permits down 4.9% for the month. The year-to-date totals show single-family permits more-consistently 6.5% above the first eight months of 2017, and multifamily permits 1.8% above last year.

Weekly Softwood Lumber Blog

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Housing Fundamentals Still Supportive For Lumber & Panel Markets- Madison

Preferred Solid Wood Names Remain TSX:IFP and NYSE:LPX

The U.S. housing market has turned in several months of lackluster performance, from slower-than-expected housing starts to weaker existing-home sales to a drop in pending home sales. It’s not exactly clear what is driving the disappointing results, or if they will last beyond the current spell (housing permits remain positive!), but they are of concern for investors in lumber- and OSB-leveraged stocks.

In this report, we review various scenarios for housing and repair and remodeling activity, combined with capacity additions for both lumber and OSB. Our analysis indicates that supply and demand for both lumber and OSB should remain reasonably tight through 2020, even if growth in both new construction and repair & remodeling market activity slows. There will continue to be volatility driven by seasonal factors, transportation, capacity ramp-ups, etc., but over the forecast period we see persistently solid fundamentals.

We caution, however, that headline risk in these names is elevated, as the industry reference forecasters continue to have high annual housing-start forecasts (table below): these numbers will have to come down based on recent housing-market performance and given that home builders are short labour and cannot make up for lost time. Similarly, consensus estimates for OSB names (Norbord in particular) look stretched to us, and we expect they will come in over time. Despite these risks, we anticipate continued strong cash flow generation from the solid wood names. The names have shown good discipline in M&A and balance sheets are in excellent shape. Large capital programs are either winding down or fully funded, and dividends have begun to rise. While we believe near-term peaks in commodity pricing are in (and past!) we see good fundamentals in solid wood for long-term investors. Our preferred route to lumber exposure remains IFP, given the larger relative impact from its capital program and its geographic diversification. In OSB, we favor LPX, with growing diversification into siding in new homes and the R&R market.

as good as it gets

The latest data is not encouraging: The housing recovery has slowed from its prior modest pace, with potential for further slowing

Through the first half of 2018, single-family starts were up 8% y/y (not seasonally adjusted), in-line with market expectations. Multi-family starts have been more volatile, up 9% y/y in Q1, up 4% y/y in Q2 (up 7% through the first six months).

Through June and July, however, housing starts have disappointed, with June’s 1.158 (SAAR) falling 5% y/y. The decline was broad-based, with singles down 1% y/y and multis down 17%. In the South, home to about half of all U.S. housing activity, singles were flat y/y. It is worth noting that there were no big adverse weather events or major holidays to blame for the weaker-than-expected June stats.

The refrain we often heard following the June stats was “one month does not make a trend”. Fair enough. But July stats underwhelmed as well, coming in at 1.168MM (million) on a SAAR (Seasonally Adjusted Annual Rate) basis.  Singles were up just 3% y/y and multis were down another 12%. The timing of the July 4th holiday did deserve some of the blame for the weaker-than-hoped for result, but clearly there was no catch-up on whatever was holding back June numbers. The one silver lining has been strong permit numbers over the last few months. July permits totaled 1,311MM, up 15% from June, and 4% higher than July 2017. Year-to-date, permits are up 6%.

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As we head into the end of the year, there are several plausible paths forward for the U.S. housing market, and strong arguments for each. We summarize the alternatives below, with our housing-start forecast under each scenario and the attendant wood products demand summarized in the table above.

  • Low: The U.S. housing recovery has hit an inflection point, and will see slower growth in starts — including single family starts — going forward. This scenario models demand if total housing start improvement fell to 4% and 2% growth in 2019 and 2020. The silver lining in this scenario is that housing could continue to grow at the new, slower pace even if the current torrid pace of U.S. GDP slows or falters, as home builders continue to meter out supply to a chronically under supplied market.
  • Base case: June and July were just hiccups…just predictable bumps in the traditionally volatile housing market. Growth in single-family starts returns to its prior 5%–6% y/y growth rate.
  • High: The pace of growth in the housing market accelerates through the remainder of the year on pent-up demand. Growth remains above trend at 6%–7% though 2020, taking total housing starts to 1.45MM.

Given we are already seven months into 2018, this year’s wood product demand numbers look very similar in all scenarios. The differences between absolute demand levels are really only meaningful in 2020 (e.g., a 2 Bbf (Billion board feet) difference in lumber demand in High scenario vs. Low). That said, if we see housing activity slow to the pace in the “Low” scenario, the impact on equities (and not just solid wood producers) would be much more significant and immediate.

 Primary forecasters’ views are lagging the market; we expect downward revisions

Housing starts are the most watched, and variable, component of the various end uses for wood products. To start this year, consensus estimates for 2018 total housing starts were 1.27MM (table). Surprisingly, forecasts have actually nudged higher since the initial forecasts, with the current figures now just above 1.3MM starts. This comes in spite of lower-than-expected housing start numbers through the summer months. While home builder stocks have under performed and worries have begun to spread to other housing-related names, we have yet to see consensus housing forecasts come down. Likely downward revisions represent headline risks for solid wood stocks.

Factors that will determine the path forward for the housing market

 Housing Supply: The supply of new housing is constrained…or is it?

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The inventory of new homes for sale is often characterized as being low, but in fact inventories of both new and existing homes have returned to pre-housing crisis ranges (chart). After bottoming at less than 150k (1000) units in 2012, the inventory of new homes for sale has taken six years to return to more normal levels. Inventory of existing homes for sale has also fallen to about the same level as the glut of homes available after the crash has been absorbed. In terms of months’ supply (i.e., the supply measured against the pace of sales), new homes are actually running a little higher than pre-GFC (Global Financial Crisis) levels at ~5.5 months. Months of inventory is a more volatile, backward-looking metric, and we do not weight it heavily in our analysis.

Perhaps the better metric is the supply of lower-priced homes: it is clear that the supply of these homes has lagged the recovery of the more expensive categories. Sales of entry-level homes priced below ~$200k (and particularly below $150k) have seen more declines than increases since the recovery began in 2012.

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The average cost of a home has also been rising more quickly than average wages (charts, below). In addition, rents have been rising nationally, making it more difficult for prospective buyers to save for a down payment. Coupled with higher levels of student debt relative to prior cohorts, this puts the Millennial generation into a tight spot when looking at buying a first home.

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On the home supply side, home builders are only building homes if they can make their 20% gross margin, which is more difficult to achieve on smaller, cheaper starter homes. Gross margins for the biggest home builders including DR Horton, Lennar, DR Horton and Toll Brothers have been remarkably flat right around 20% for the past five years (chart, left). Burned by the fires of the GFC, they now have an iron grip on costs, and no longer build ahead of demand. They have commented that they have not seen adverse impacts from cost escalation in “sticks and bricks” input costs, which likely reflects both their purchasing advantage given their size and their determination to pass costs on to buyers. Similarly, although lumber costs increased significantly in the past twelve months, they still represent just a fraction of overall building costs. A 50% increase in lumber prices, from $350 to $525, would have added roughly $2,625 to the cost of building a median single family home (requiring 15mfbm (Thousand Foot Board Measure) of lumber).

Rising lumber costs have not had an impact on builders’ margins (perhaps with the exception of entry level homes).

Home builders are also facing less competition in pricing from their peers, in part because they have fewer peers than they did in the last housing cycle peak. According to Census Bureau surveys, the total count of home builder businesses fell from just over 98,000 in 2007 to about 49,000 by 2012 (the 2017 survey numbers are not yet available). Industry concentration is greater in primary metro markets, while smaller builders operate in smaller regional markets.

Home builders have consistently indicated that their ability to supply homes (profitably) is constrained by labor and lot scarcity. Unfilled construction job openings hit at a peak of 263,000 in June according to the Bureau of Labor Statistics. This problem has been increasing for some time, and has been exacerbated by the crackdown on undocumented workers in the U.S. (no builder admits to using undocumented workers, but all suggest their competition does). The shortage of skilled builders is not easy to solve, and it will remain a restraint on housing supply for the foreseeable future.


Tight labor markets have also renewed interest in modular and off-site construction (chart). Roof, wall and floor truss manufacturing has expanded over the past few years even if full modular construction remains a tiny sliver of the total market. Increased use of trusses has alleviated some pressure on labor, but will not be sufficient to increase the total supply of housing units. We expect ventures like LPX’s $45MM investment in Entekra will help drive full modular home construction to ~20k units per year, concentrated in dense, costly U.S. metro markets like San Francisco, but will have limited application outside of these areas.


As for lots, big builders have slowly been improving their lot position, but primarily through options on land (large land positions were sold down through the GFC and builders have focused on options this time around). The improvement in access to lots is welcome, but we believe it is unlikely to spur a noticeable pick-up in home building over our forecast horizon.

Housing Demand: The need for housing is there, but the resources may not be, and desire could be flagging

 Millennials (born between 1981 and 1996) have been much maligned for not doing their part for rampant consumption, preferring sharing over owning, and apparently preferring to work gigs rather than full-time permanent jobs. But whatever they lack in individual commitment and current resources, they make up in sheer numbers: at 83MM, they are the largest demographic cohort in the US. They are also entering prime home buying years. Even if home ownership rates are lower for this cohort than for prior age groups, we will see increased numbers of potential buyers over the next five years.

Through the GFC, the home ownership rate fell and the “Renter Nation” became a thing. Home ownership rates have been improving since their trough in early 2016, but remain far below pre-recession levels. Vacancy rates have fallen, too, and sit far below pre-recession levels. Tightness in the rental market has allowed rents to rise, which in turn has limited renters’ ability to save for a down payment. In addition, debt burdens — including student debt — have been higher for the current generation of potential homebuyers than for previous generations. An offset to this has been an increase in high loan-to-value lending, which reduces down payment requirements.


Affordability measures remain good relative to long-term trends, but as we all know, interest rates have been heading up, with another two Federal Reserve hikes expected through the balance of 2018, bringing the Fed rate to between 2.25% and 2.50%. Rising interest rates, however, generally only have a fleeting short-term negative impact on home buying. In fact, if accompanied by economic expansion, they are historically correlated with strengthening housing markets. With GDP growth running at 3%–4% in 2018, the rate hikes alone should not be a lasting drag on housing activity.

What does appear to be a drag, however, are home prices. The University of Michigan Consumer Sentiment survey indicates consumers believe it is a “bad time to buy” a home based on current “high” prices. It is interesting to note that consumers do not cite rising interest rates as a disincentive to purchasing a home (although low rates are no longer an incentive to buy a home), and have an overwhelmingly positive economic outlook. It just seems to be sticker shock, which is understandable given that the U.S. Census Bureau data indicates new home prices are twice what they were back in 2000, while real median household income has finally recovered…back up to the same level it was in 2000.

 If housing starts do slow or stall out, where does that leave solid wood demand?

Continued steady growth in repair and remodel activity would bolster lumber markets, but the impact on OSB would be less significant. The outlook for R&R remains positive, despite uncertainty in the housing recovery. Harvard’s Leading Indicator of Remodeling Activity (LIRA) is used to project the rate of change in U.S. spending on home improvement and repair spending (R&R) for owner occupied homes.

Spending on R&R has been steadily increasing since Q1/10, climbing from an annualized $223B at that time, to $324B in Q2/18. According to the latest projections from Harvard, recent trends in homeowner spending on R&R will continue. The rate of growth may taper slightly in early 2019, but at 6.9% in Q1 and 7% in Q2, will remain at healthy levels. Annual spending on residential home improvements is expected to cross the $350B mark before the end of 2019, in part reflecting the increasing average age of US housing stock. The prognosis could be even better, but low transactions of existing homes for sale are currently hindering greater gains in remodeling activity, as significant R&R projects often occur around the time of a sale (particularly afterwards). With a slate of capacity expansion projects scheduled (or underway) for both lumber and OSB supply, growth in demand from R&R will play an increasingly significant role.

 Solid wood demand: Lumber demand is more is more dependent on Repair & Remodeling activity, while commodity OSB is more leveraged to the U.S. single family housing market


Total U.S. lumber demand has grown steadily since the housing crash crushed consumption. Operating rates are finally returning to levels that can produce price spikes like the epic price run we saw earlier in 2018, which in turn pushed lumber producer EBITDA margins above 20%. Total U.S. demand was 47.6Bbf in 2017, up 1% or 0.6Bbf from the prior year. Since the depths of the housing collapse in 2009, U.S. lumber demand has grown at a CAGR of 5% or about 2.0Bbf per year, although this growth has been far from steady.

The single-largest end market for lumber in the U.S. remains the repair & remodeling market. This end market has been larger than the residential construction market since 2007, and represented 37% of lumber end demand in 2017, while new residential construction represented 32% of end demand (chart below). Given the aging U.S. housing stock and the lower supply of new homes, we expect growth in R&R activity to continue at 6%–7% annually for the next couple of years.

Growth of demand from new residential construction, however, has outpaced R&R since the trough, with a compound annual growth rate (CAGR) of 10% since 2007 against 5% for R&R. Materials handling and non-residential construction end demand have represented 10%–15% of lumber end demand over the past decade, with “Other” markets representing a fairly steady 6%–8%. Demand in non-residential and material markets was flat to marginally down in 2017.

For OSB, the picture is somewhat different. In 2017, total U.S. demand for OSB was 20.3Bsf (Billion Square Feet), up 5% or almost 1.0Bsf from 2016. Demand bottomed in 2010 at 12.8Bsf, and has grown at a CAGR of 7% or about 1.0Bsf annually since then. Unlike lumber, the largest end market for OSB is, by far, residential construction at 55% of 2017 total demand. Repair & remodel demand was less than half of this at 21%, followed by the smaller industrial (15%) and non-residential construction (9%) markets .

Demand growth has been greatest in residential construction, with the same 10% CAGR since 2009 as lumber. Growth in R&R demand has been lower at 4% since 2009.

House size and the multi-family/single-family split are important for wood products usage

While the total volume of solid wood products going into new residential construction has increased over the past 10 years, the intensity of solid wood use per square foot of new floor space has been quite consistent. We have kept our estimates of usage unchanged over our forecast horizon.

Measures of home size as well as the proportion of single-family versus multi-family starts are therefore the key variables in determining total solid-wood consumption in new residential construction. Housing square footage has ebbed and flowed over time, with median single-family unit size falling to a low of 2,100 sqft in 2009 before returning to 2,435 sqft in Q1/18. At our reference lumber intensity of 6.2 bf per square foot, the 16% increase in median size since 2009 corresponds to 2m bf implied incremental wood demand per unit. The increase in median unit size has amplified the effect of the 91% increase in single-family starts between 445k in 2009 and 849k in 2017 (adding roughly 1.7Bbf of demand).

The gains in single-family unit size are not uniformly good news, however. The housing recovery has been most robust in the upper end of the housing market price categories, while the smaller, cheaper, entry-level gains have lagged. Potential new home buyers are more likely to be shut out of home ownership (or have to postpone purchases) if affordable housing stock is not more readily available. We note median single-family square footage has been trending down — albeit unevenly — since peaking at 2,490 sqft in Q3/15, suggesting that smaller, more affordable homes are finally gaining market share.

Multi-family units are about half the size of single-family units. Multi-family units have occasionally hit 1,200 sqft, but have mostly bounced around 1,100 sqft. There has been some concern that Millennials (and other demographic cohorts) would forgo the traditional shift to a single-family unit in the suburbs and instead chose to remain in urban multi-family units as they form households. We would have expected to see an increase in the median size in multi-family units if this were the case, but we see no evidence of it in the stats (charts below).

Solid wood supply: lumber additions will be smaller, slower and have some offsets, while more net OSB supply is coming

 Upcoming lumber projects will add 5Bbf lumber capacity (or about a 20% increase) in the U.S. South, but bottlenecks with contractors and equipment vendors, declining output from Western Canada, and continued growth in R&R demand means that new supply should be gradually added and easily absorbed.

We expect to see upward of 5Bbf of new lumber capacity in the U.S. South over the next three years — 1.1Bbf in 2018, a further 2.3Bbf in 2019, and 1.9Bbf in 2020 (which would represent 1.8%, 3.7% and 3.0% of total 2017 North American output, respectively). Nine proposed greenfield projects will account for just over 2.1Bbf of the incremental capacity, while the balance will be made up by a host of rebuilds and upgrades.

Taking our most conservative or “Low” scenario from the “Potential paths of U.S. housing” and comparing it to the total U.S. lumber demand from residential construction in 2017, lumber demand from residential housing and R&R would grow by roughly 4.5Bbf through 2020. With our “Base” housing outlook, 6.8Bbf of new demand would be created, and finally, under our “High” scenario for housing, an incremental 8.3Bbf of lumber demand would be created.

On the supply side, our “Low” scenario entails ~125% of announced new capacity making it to market (i.e., all recently announced projects, plus a few extra, are successfully completed), adding 7.8Bbf of new supply. Our “Base” case involves all of the projects announced to-date being completed by 2020, and would add 6.3Bbf of new capacity. Finally, the “High” case would see roughly 75% of announced capacity make it to market by 2020, adding 5Bbf of new supply.

Though there could be some short term loosening of markets or regional pricing weakness depending on the timing and location of capacity additions, as the table above shows, in all but the “low” scenario, new supply is absorbed by incremental demand, keeping lumber markets strong through at least 2020.

Tightly bunched OSB capacity additions are expected to overwhelm markets if the housing recovery doesn’t deliver

There are currently five new mills, representing ~2.7Bsf of capacity (almost 12% of North American production in 2017), in the process of ramping up. We expect to see between one and three further restarts in the next three years. A restart at Norbord’s 550MMsf Chambord, QC mill is more likely than not (we expect to see activity begin in earnest in H1/19 and meaningful production by H1/20), and start-ups at Louisiana Pacific’s Val D’Or, QC and Cook, MN mills could come the year after.

Our range of estimates for housing shows OSB demand from residential construction and R&R increasing by between 2.4Bsf and 3.9Bsf through 2020, with between 1.9Bsf and 3.2Bsf of additional supply set to ramp up over that time frame. Unlike lumber, supplemental demand from R&R growth won’t add massively to demand.

In our low scenario, new supply exceeds forecast demand growth, but not by much. We would expect incremental pressure on OSB prices, but no collapse. Our current benchmark NC OSB price forecast is $310 for 2019 and $307 for 2020, down from highs of $353 in 2017 and a forecast $379 average in 2018.

Investment recommendation: Opportunity for volatility will no doubt continue, but supply and demand look balanced

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November 16, 2018  Kéta Kosman

CoreLogic® Thursday released the CoreLogic Home Price Index (HPI™) and HPI Forecast™ for September 2018, which shows US home prices rose both year over year and month over month. Home prices increased nationally by 5.6 percent year over year from September 2017. On a month-over-month basis, prices increased by 0.4 per cent in September 2018. (August 2018 data was revised. Revisions with public records data are standard, and to ensure accuracy, CoreLogic incorporates the newly released public data to provide updated results each month.)

Looking ahead, the CoreLogic HPI Forecast indicates home prices will increase by 4.7 per cent on a year-over-year basis from September 2018 to September 2019. On a month-over-month basis, home prices are expected to decrease by 0.6 per cent from September to October 2018. The CoreLogic HPI Forecast is a projection of home prices calculated using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

The CoreLogic Year-over-Year increase has been in the 5 per cent to 7 per cent range for the last few years.  This is still near the middle of that range.  The year-over-year comparison has been positive for over six consecutive years since turning positive year-over-year in February 2012




Elsewhere, according to the US Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) and National Association of Home Builders analysis, released November 6, the count of unfilled jobs in the US construction sector pulled back in September, off a upwardly revised August estimate that marked a post-recession high.

the number of open construction sector jobs decreased to 278,000 in September. The August estimate of open construction jobs was revised up to 317,000, the largest count since the Great Recession.

The open position rate (job openings as a percentage of total employment plus current job openings) fell back to 3.7 per cent in September. The rate was 2.5 per cent last September. On a smoothed, twelve-month moving average basis, the open position rate for the construction sector increased slightly to 3.3 per cent, a post-recession high. The peak (smoothed) rate during the building boom prior to the recession was just below 2.7 per cent. For the current cycle, the sector has been above that rate since November 2016.

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SOURCE: NAHB Eye on Housing


October 31, 2018  Kéta Kosman

Nationally, home price appreciation continued in August. Based on a seasonally adjusted annual growth rate, home prices in Seattle, New York and San Diego declined faster in August than in July. Home prices in New York has decreased for the fifth consecutive month.

The S&P CoreLogic Case-Shiller U.S. National Home Price Index, reported by S&P Dow Jones Indices, rose at a seasonally adjusted annual growth rate of 7.2% in August, following an unusual 0.5% annual rate in July. On a year-over-year basis, the S&P Case-Shiller U.S. National Home Price NSA Index rose by 5.8%, the lowest annual gain in the past twelve months. The Home Price Index, released by the Federal Housing Finance Agency (FHFA), rose at a seasonally adjusted annual rate of 3.1% in August, slower than the 4.4% increase in July.


Elsewhere, in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Krainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS, said Bill McBride on Calculated Risk Wednesday.

Here is a similar graph using the Case-Shiller National and Composite 20 House Price Indexes.

This graph shows the price to rent ratio (January 2000 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2004 levels, and the Composite 20 index is back to November 2003 levels.

In real terms, prices are back to mid 2004 levels, and the price-to-rent ratio is back to late 2003, early 2004.

Home Prices in 20 U.S. Cities Rise Least in Almost Two Years

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Sho Chandra

November 27, 2018, 7:00 AM MST Updated on November 27, 2018, 7:39 AM MST

Home-price gains in 20 U.S. cities grew in September at the slowest pace in almost two years, adding to signs that buyer interest is waning amid higher mortgage rates and elevated property values.

The 20-city index of property values increased 5.1 percent from a year earlier, the least since November 2016, after rising 5.5 percent in the prior month, according to S&P CoreLogic Case-Shiller data released Tuesday. The median estimate in a Bloomberg survey of economists called for a gain of 5.2 percent. Nationally, home prices were up 5.5 percent from September 2017.

coolin prices

Key Insights

  • The report marks the sixth straight deceleration in price gains. It’s the latest in a spate of reports indicating housing is in a broad slowdown, with sales and home-building also showing signs of weakness.
  • While the 0.3 percent monthly increase in the seasonally adjusted 20-city index was slightly above projections for 0.2 percent, economists look at the year-over-year gauge for a better indication of trends.
  • The results also indicate more prospective buyers may be able to enter the market in coming months, though property values remain elevated, mortgage rates are near an eight-year high and the supply of affordable properties is still limited.
  • The respite on price appreciation may be especially attractive for younger buyers or those purchasing a house for the first time; on the flip side, softer price gains also mean smaller advances in equity for owners.
  • “Home prices plus data on house sales and construction confirm the slowdown in housing,” David Blitzer, chairman of the S&P index committee, said in a statement.

Get More

  • All 20 cities in the index showed year-over-year gains, led by a 13.5 percent increase in Las Vegas and 9.9 percent in San Francisco.
  • Prices in Seattle fell 0.3 percent from the prior month; annual gains have slowed to 8.4 percent from double digits earlier this year. San Diego was the only other city to record a monthly drop, at 0.1 percent.
  • New York, hit by new federal limits on mortgage and property-tax deductions, had the weakest annual price gain at 2.6 percent, while Washington was second-lowest at 2.9 percent.
  • Separate figures released Tuesday by the Federal Housing Finance Agency also showed prices climbing at a slower pace. The agency’s index rose 6.3 percent in the third quarter from a year earlier, compared with a 6.8 percent in the second quarter. For September, prices rose 0.2 percent from the prior month.

— With assistance by Jordan Yadoo, and Christine Maurus

(Updates with FHFA index in last bullet point.)


November 1, 2018  Kéta Kosman

A very good indicator of current construction activity, thus future lumber prices, is US construction spending. New data out this week from the US Commerce Department shows construction spending flat in September 2018 after a 0.8 per cent rise in August, said the New York Times Thursday. Spending on US construction projects was essentially unchanged in September, the weakest showing since June, as an increase in home construction was offset by a slide in spending on government projects.

The strength last month was driven by a 0.6 per cent increase in residential construction and a smaller 0.1 per cent increase in nonresidential activity, which pushed this category to an all-time high. However, these gains were offset by a 0.9 per cent drop in spending on government projects.

The increase in residential construction featured an 8.7 per cent jump in apartment construction, which offset a 0.8 per cent drop in single-family homes.

private res construction spending index

SOURCE: NAHB Eye on Housing

Drilling down to more detail, the National Association of Home Builders said it’s analysis of Census Construction Spending data shows that total private residential construction spending inched up 0.6 percent in September, after a dip of 0.4 percent in August. On a quarterly basis, private residential construction spending climbed 0.9 percent in the third quarter. Private residential construction spending increased in September, despite the decline of the total housing starts amidst the shortage of construction labor and land, rising mortgage rates, and ongoing building material price volatility.

The monthly gains are largely attributed to the strong growth of spending on multifamily.

Why Have Lumber Prices Fallen?

Posted by Pete Stewart on December 10, 2018


The US housing sector—a bellwether for economic health—has showed signs of stagnation (and even the prospect of reaching peak housing in this market cycle) in recent months. As I wrote last month, forecasts for housing starts are simply overblown, as there isn’t much room for an increase beyond the 2018 level of 1.266 million units.

As a commodity largely tied to housing starts and broader building and construction activity, lumber prices also reflect the general health of this market via supply and demand metrics. After steady increases beginning in 4Q2017, lumber prices skyrocketed to new record highs in 2Q2018 before dropping precipitously across the board over the last four months. Southern yellow pine (SYP) lumber prices recently hit their lowest point since August 2017; Forest2Market’s SYP composite index price for mid-November was $376/MBF—a 35% drop from the record high of $576/MBF achieved in May.

Despite the one–two hurricane punch that recently impacted the US South and the continued wildfires in the Pacific Northwest (PNW)—extreme weather events that have significantly impacted forest inventories, harvests and supply—the drop in lumber prices over the last six months is largely, though not entirely, demand driven. Fewer new-home builds = less lumber.

The sudden reversal begs a serious question: Did the lumber market simply over drive its headlights in the price run-up earlier this year, or are there more structural forces at work? Several dynamics are combining to impact housing starts and, by extension, the North American lumber market.

Supply Analysis

Housing starts kicked off 2018 with a bang, leading many to believe that there would be a gap in supply once the busy part of the building season hit. January starts were up 9.7 percent over December 2017 to a seasonally adjusted annual rate (SAAR) of 1.326 million units, and speculation began to drive lumber prices ever higher.

US new housin starts.jpg

But as the meat of the building season came and went and housing starts failed to live up to expectations (now on pace at a SAAR of 1.228 million units), lumber production numbers confirm that any supply concerns were exaggerated. Both US softwood lumber production and total softwood imports have increased year-over-year (YoY). Through August 2018, US production was 23.8 Bbf (+4.8%) and total imports were 10.3 Bbf (+1.3%). Despite the tariffs on Canadian product, imports from Canada were only off 1.4% YoY to 9.3 Bbf through August. Latin America (primarily Brazil) and European producers more than made up for the difference in Canadian volume; LatAm shipments to the US totaled 306 Mbf (+8.3%) while European shipments totaled 589 Mbf (+65%) through August.

We may see this trend reverse course when full 3Q and 4Q trade statistics are reported; however, those numbers will be immaterial to this analysis. The data show that domestic and import supply was ample through the price run-up that began in 1Q2018 and peaked in 2Q. Neither US production nor imports through August suggest any supply-side disruptions that would account for such a dramatic surge in price. 

 Decreasing Demand for Homes 

“Housing is no longer a tail wind for the economy, but [so far] the headwinds are blowing very gently,” wrote Michelle Meyer, a Bank of America Merrill Lynch economist, in October. One sign of a shifting housing market is slowing demand—including buyer traffic—for existing homes. Resales earlier this fall suffered the largest drop in 2½ years to the slowest pace since November 2015. Though still high, resale price appreciation has been decelerating (below +6% YoY for the first time in 12 months) and the supply of existing homes, while still low, is gradually expanding; there were 4.4 months of supply in September, up from the year-earlier 4.2 months.

Based on the behavior of the exchange-traded fund iShares US Home Construction (ITB), which tracks a basket of 47 US home builders and construction-related companies, investors apparently agree with Meyer’s sentiment. As of mid-November, ITB’s share price had fallen over 34% from its mid-January peak. Builders are in a tough spot, as they have been hit with a number of challenges this year including an increase in materials costs, land and labor shortages and a shrinking appetite of prospective buyers who are willing pay up.

Real private residential investment (PRI) declined for a third quarter in 2Q2018; as a percentage of total GDP, the decline has been in place since 1Q2017. Although both metrics have receded only modestly from their corresponding recent peaks, they nonetheless paint a potentially disconcerting picture for the sustainability of this market cycle.

 Increasing Inventory of Homes 

Interestingly, especially since there is a consensus that more new-home supply is needed, rising inventory is even more pronounced in newly-built homes. After meandering around an average of 5.3 months between July 2013 and December 2017, new-home inventory has trended higher in 2018 (to September’s 7.1 months of supply). In addition, the ratio between starts and new-home sales reached 1.5 in September, which is in the top 14% of monthly ratios since January 1995. The implication is that unless the pace of new-home sales picks up, starts will ultimately be forced lower.

With long-term Treasury yields helping to push mortgage rates upward, the median new-home prices less than 7% off November 2017’s record high, and resale appreciation only gradually slowing, it is entirely possible that housing demand could weaken further in coming months. Despite sustained high home prices (and surging prices in some markets) some regions are now drifting into the “buyer’s market” column.

 Interest Rates

With home appreciation and mortgage rates trending higher, the reality is that many potential borrowers simply can’t make the mortgage numbers work. One way to measure the impact of inflation, mortgage rates and home prices on affordability over time is to use CoreLogic’s “typical mortgage payment,” which is a mortgage-rate-adjusted monthly payment based on each month’s US median home sale price. The number is calculated using Freddie Mac’s average 30-year fixed-rate mortgage rate with a 20% down payment, and it doesn’t include taxes or insurance. As such, the typical mortgage payment is a good measure of affordability because it shows the monthly amount that a borrower needs to purchase a median-priced US home.

The US median home sale price in August 2018 ($226,155) was up 5.7% YoY, while the typical mortgage payment was up 14.5% YoY due to a nearly 0.7-percentage-point rise in mortgage rates over that period. Tight housing inventories coupled with rising home costs are a real barrier for potential homebuyers, but a typical mortgage payment that is rising at over twice that pace is a much more serious concern, and a number of forecasts call for even higher rates next year.

Moody’s Investors Service has observed the deteriorating quality in mortgage loans noting that “The broad conditions under which loans are being granted have grown less favorable for future mortgage performance. For instance, home prices are no longer very affordable and rising interest rates are reducing refinancing incentives and prepayments.” Hence, “mortgages being originated today appear more likely to face a stressed environment within only a few years, [compared to] loans originated earlier during this long period of economic growth.”

And that’s just mortgage rates, which function independently of the federal funds rate instituted by the Federal Reserve (Fed). Though speculative at this point, the Fed is expected to raise interest rates once more this year and, potentially, three to four times next year, which will impact short-term and variable (adjustable) interest rates. Strategists warn that if the Fed tightens too much, economic growth could slump and trade wars could intensify, destroy demand and negatively impact earnings.

The potential scenarios in the wake of these rate hikes are many. However, the impacts of continued increases would most certainly discourage any expansion in new home ownership that would drive an increase in housing starts and additional demand for lumber. 

 Home Size

Not only have housing starts been decelerating since 2013, but home size has also been shrinking. Median floor area of new single-family completions peaked at 2,647 square feet (SF) in 2015 and has subsequently been declining on trend (to 2,426 SF in 2017). The median new home cost a record $133/SF in 2017, +30% relative to 2010. Apartments, by contrast, have been gradually expanding (2017 median: 1,096 SF) from 2013’s 1,059 SF. If these trends continue, net changes in demand for lumber and other building materials could well be negative. While the trend of slightly-shrinking single-family home sizes may seem minimal, the cumulative impact of fewer builds using less lumber is resulting in diminished demand.

Analysis of Economic Health: Forecasting Gross Domestic Product

Posted by Forest2Market on November 26, 2018

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Every month, Forest2Market publishes updated forecasting products designed specifically for participants in the forest value chain. The Economic Outlook is a macroeconomic indicator forecast that supplies critical information, context and insight about general economic trends and direction, and the 4Cast supports regional operational decision making for those who buy and sell timber. With an understanding of economic indicators, future stumpage prices and insight into buying and selling windows (periods in which buyers or sellers hold relative market advantage), subscribers are better able to time sales or purchases, negotiate prices, manage workloads and control inventory levels. The following commentary is just a sampling from the most recent Economic Outlook for November, 2018.

The robust economic momentum we’ve seen over the last several months may be slowing against the backdrop of a strong dollar and cooling global growth, which is restraining exports. There are few signs so far that US-China trade tensions are disrupting factory production, but manufacturers argue future output could be hurt as tariffs disrupt supply chains. Further, more than 70% of US firms operating in China and polled by the American Chamber of Commerce in South China are considering delaying further investment there and moving some or all of their manufacturing to other countries as a way to avoid the tariffs.

Trends in GDP

In its first estimate of 3Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the US economy at a seasonally adjusted and annualized rate (SAAR) of +3.50% (3.3% expected), down 0.65 percentage point (PP) from 2Q2018’s +4.15%. Three groupings of GDP components—personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE)—contributed to 3Q growth. Net exports (NetX) detracted from growth.

trends US GDP.jpg

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 3Q2018 was 3.04% higher than 2Q2017; that growth rate was slightly faster (+0.17PP) than 2Q2018’s +2.87% relative to 2Q2017.

Despite moderating from 2Q’s torrid pace, 3Q growth appeared quite solid—at least at the headline level; taken together, the 2&3Q GDP results also represent the strongest back-to-back quarterly growth rates since 2&3Q2014. Glancing below the headline of the latest report revealed some less appealing details, however. In contrast to relatively steady contributions from PCE (growth in goods and services spending: +0.11PP from 2Q) and GCE (+0.13PP from 2Q), commercial fixed investment was shown to be contracting at a 0.04% annualized rate (-1.14PP from 2Q); exports: -0.45% (-1.57PP from 2Q), and imports: -1.34% (-1.44PP from 2Q).

Inventories propped up 3Q’s result by contributing nearly 60% of the 3Q headline GDP number (+3.24PP from 2Q). Reflecting that influence, the BEA’s real final sales of domestic product, which excludes the effect of inventories, tumbled to +1.42% (-3.91PP from 2Q).

“The economy has reverted back to the ‘same old’ model of consumers accounting for most of the growth,” commented Bloomberg’s Carl Riccadonna, referring to the 2.7% PCE number. “Supply-siders will be disappointed to see business fixed investment essentially stalling out after a robust first half.

The implication is that the surge in growth is not the onset of the economy evolving toward a new speed limit,” concluded Riccadonna, looking forward; “rather, the frothiness in 2&3Q really does appear to be largely due to a sugar high from tax cuts. Unfortunately this is not sustainable barring tax cuts 2.0.”

“When we got the 2Q number,” concurred economic consultant Joel Naroff, “I suggested it could be the high water mark for this expansion. It is looking more and more like it will be. Household incomes are just not expanding fast enough to sustain the rapid spending paces posted in 2&3Q… [Also,] most business leaders have become somewhat cautious about the future and are holding off… major investment plans.”

“The fate of the consumer rests with the willingness and ability of businesses to keep hiring,” echoed former Federal Reserve researcher Julia Coronado. The slowdown in business spending “came earlier and was more than we expected, given where the [tax-cut] stimulus is,” Coronado said. “That suggests some of this stimulus won’t last, it’s not going to turn into higher-trend growth through the channel of investment and greater capacity and greater potential growth.”

“Don’t expect 4Q growth to be anywhere near what we have seen over the past two quarters,” Naroff concluded. “The economy is not faltering, it’s just that we are moving back toward more sustainable growth.”

The impacts on GDP of inventories and imports will bear watching as tariffs on $250 billion of Chinese products percolate through the economy. US companies appear to have “front-loaded” orders from China to beat the September 24 tariff deadline. Hence, it is possible the contributions to 4Q’s GDP headline from inventories and imports may flip relative to 3Q.




Fourth Quarter 2018 Economic and Wood Product News

supply chain disruption.jpg

October 17th 2018

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EIU global forecast – Trade war will disrupt supply chains

The Economist Intelligence Unit expects the global system to be characterized by competition between the major powers in the next five years. Of most importance to the global economy is the relationship between the world’s two largest economies, China and the US. The bilateral trade war between these countries will drag down global economic growth in 2019, as well as disrupt global supply chains. However, the trade dispute is increasingly spilling into areas of political and security concern. On October 4th the US vice-president, Mike Pence, signaled a significant hardening of US strategy towards China. The most explosive allegation from Mr. Pence’s speech was that China was meddling in US politics ahead of the mid-term elections in November. However, the speech also addressed several larger issues, including the controversy over the “Made in China 2025” initiative, the debt issues surrounding China’s Belt and Road Initiative and the campaign against Taiwan. In a clear signal of US intent, the revised North American Free-Trade Agreement, officially re-branded as the United States Mexico Canada Agreement (USMCA), contains an anti-China provision aimed at increasing the trade pressure on the country. The USMCA casts a spectre over potential future trade deals between China, Canada and Mexico by stipulating that any party would have grounds to withdraw from the deal if another party were to enter into a free-trade agreement with a non-market economy (a term used by the US to describe China).

Signs of renewed tensions over Taiwan are of concern, given the island’s key strategic significance for China. On September 25th Geng Shuang, a spokesman for China’s Ministry of Foreign Affairs, told a press briefing that China had lodged a complaint against the US regarding the approval of a US$330 million arms sale to Taiwan, announced the previous day. This followed a statement on September 7th by the US Department of State that it had recalled its ambassadors to El Salvador, Panama and the Dominican Republic following the decision by those countries to no longer formally recognise Taiwan. All three countries switched diplomatic recognition from Taiwan to China in 2018. We expect that nationalist sentiment is also likely to increase in Asia, given our view that the trade war is likely to endure until at least 2020. For China, reunification has long been designated a core national issue, and Xi Jinping, China’s president, may also view Taiwan as a legacy issue for his presidency. Moreover, if Mr Xi has concerns about China’s medium-term growth prospects, owing to issues such as an ageing population and unsustainable debt, he may be tempted to address these sooner rather than later. Consequently, risks are developing around the question of Taiwan, suggesting that the likelihood of conflict erupting at some point in the next five years is higher than it has been in decades.

The world’s other major power, Russia, is also expanding its global presence, presenting a challenge to the US’s dominance of global security. During a recent visit to India by the Russian president, Vladimir Putin, Russia signed a US$5.4  billion deal for the sale of S‑400 Russian air defense missile systems to India. The deal is in line with our view that Russia will strive to be on the same level as the US in terms of its economic and security relationships, a process that risks increasing tensions in the region. Other flash points also present a significant risk to the global economy, and, with the lack of co‑operation between the US, China and Russia, diplomatic options to resolve tensions look remote. North Korea continues to be a threat to global stability, despite the country’s current rapprochement with the US. A breakdown in talks is possible, as differences remain over the terms of denuclearization, and, with US‑China relations deteriorating, China is unlikely to give full support to the US’s engagement with North Korea. A return to heated rhetoric between the US and North Korea is possible, which would be of particular concern since the room for diplomatic maneuver is limited. In the Middle East, a conflict between Iran and Israel is a medium-term risk. The two countries are involved in a proxy conflict in Syria, but a direct confrontation would further destabilize the region. The source of this risk is Iran’s decision to consider restarting its nuclear program in the coming years, owing to the collapse of the Iran nuclear deal with the US. If the program were to be restarted, a direct attack on Iran by Israel would be a possibility.

Set against this backdrop of geopolitical shifts are the trends of declining democracy and authoritarian regimes. According to our 2017 Democracy Index, 89 out of 167 countries saw a decline in their democracy scores, and about one‑third of the world’s population lives under authoritarian rule. Following the decision by Mr. Xi to abolish presidential term limits, authoritarian rule is set to endure in China. Russia is also an authoritarian regime under Mr. Putin’s rule. Examples of authoritarian-leaning, strongman leadership also exist in Hungary, the Philippines, Turkey and Saudi Arabia. Brazil could join this group if Jair Bolsonaro wins the second-round presidential election against his opponent, Fernando Haddad. Given this picture, we expect a growing number of economic and diplomatic disputes, and although we do not expect a major power conflict to occur, businesses should be cautious of bilateral tensions escalating to a breakdown of relations between countries.

The US-China trade war will escalate and endure

The US president, Donald Trump, has moved ahead with tariff increases on a further US$200 billion-worth of Chinese imports. China responded with additional tariffs on US$60 billion-worth of US imports. The trade dispute is likely to escalate further, and we now expect the Trump administration to move ahead with tariffs on most of the remaining Chinese imports that have yet to be covered in the dispute. At the heart of the dispute between China and the US is a disagreement over intellectual property and China’s technology transfer practices, although the US trade team is divided on this issue, with Mr. Trump also focusing on the US’s trade deficit with China. Given this, discussions thus far between the two countries have failed to resolve the dispute, and a resolution looks unlikely in the short term. By 2019 this will dampen growth in both economies and act as a drag on growth in the wider global economy. We expect that, combined with softening economic growth in key emerging markets, especially those in Latin America, global growth will slow to 2.7% at market exchange rates in 2019, from 3% in 2018.

Growth in the US and China will slow more than expected in 2019

The trade war comes at a challenging time for the Chinese economy. Concerns over the strength of domestic demand have returned as momentum in both private consumption and investment has weakened. The effects of tighter monetary policy, corporate deleveraging efforts and a crackdown on shadow financing have become more apparent in the economy this year, having raised the cost and availability of capital for both firms and consumers. The trade war will lessen the focus on deleveraging, with authorities needing to take measures to support growth in the short term. We are likely to see a moderate easing in fiscal policy, such as cuts to taxes and fees, together with an easing of reserve requirements from the People’s Bank of China (the central bank). There is recognition from policymakers, however, that capacity to support the economy will be limited by China’s debt profile. On the back of these assumptions, in July we revised down China’s growth forecast for 2019 to 6.2%, from 6.4%. Although we expect growth to be maintained to reach the government’s target of doubling real GDP this decade, the trade war has again raised the spectre of China’s financial vulnerabilities, which will cloud the economy’s outlook for the foreseeable future.

The trade war will also affect the US economy, which has so far had a stellar year in 2018. We have revised up our forecast for real GDP growth in 2018 to 2.9% (from 2.8%), to reflect faster than anticipated growth in the second quarter, of 4.1% in annualized terms, and heightened expectations of a similar rate of growth in the third quarter. The economy continues to receive support from the Trump administration’s fiscal policies, as well as from the ongoing strength in the labor market. However, the escalating trade dispute with China will start to weigh on growth later in 2018 and into 2019—we expect growth to slow in 2019 to 2.2%. The US manufacturing and agricultural sectors will be hit by the trade dispute, and rising interest rates will cause private consumption to slow. Growth will continue to slow in 2020, to a low of 1.3%, as the lingering effects of the trade dispute, higher interest rates and softening corporate balance sheets result in a business-cycle slowdown. A mild recovery will take place in 2021‑23 as these effects unwind, with growth averaging 1.9%.

Financial market volatility will remain high in 2019-20

The US-China trade war and growing geopolitical tensions will add to the risks facing emerging markets. Volatility in emerging-market currencies in recent months has fueled fears of a full-blown crisis. Capital flight has so far led to genuine currency crises in Turkey and Argentina, and we expect recessions in both. The Argentinian and Turkish crises have intensified the sell-off in emerging-market assets, which began in April because of the strengthening US dollar. Further periods of market volatility are likely as several key trends—tightening monetary conditions, the global trade dispute, heightened geopolitical risk and, in many emerging markets, a significant increase in debt levels in recent years—interact in challenging ways. Turkey and Argentina have experienced a perfect storm of external imbalances, namely weak monetary policy credibility and political risk, which few other economies currently share. As a result, we expect future exchange-rate crises to remain confined to the most vulnerable countries, with non-Organization for Economic Cooperation and Development (OECD) economic growth remaining steady in 2019‑20. However, there is a moderate risk (21‑30% probability) that a souring of market sentiment towards emerging markets as an asset class could lead to a noticeable slowdown in emerging-market growth in 2019‑20.

Our forecasts crucially assume that US monetary tightening will remain controlled and relatively gradual in 2019‑20, with inflation picking up only modestly. However, there remains a risk that US inflation and interest rates could rise faster than the rate that is currently built into financial market pricing, leading to falls in a wide range of asset prices that have been supported by years of extraordinary monetary policy support. Financial markets could also prove more sensitive to rises in interest rates than we currently assume. By keeping long-term interest rates extremely low through quantitative easing programs, major central banks have forced investors to look elsewhere for attractive returns, pushing up the prices of bonds, stocks and property. The effects on financial markets of withdrawing huge amounts of monetary stimulus are not well understood. The sharp sell-off in global share markets in October, amid rising US bond yields, shows the fragility of financial market sentiment. We have raised from low to moderate the likelihood of a sharp global slowdown brought about by a faster than expected increase in US interest rates.

World economic Growth forecast

World economic Growth forecast 2

Global GDP forecasts OCED

Nov 27, 2018 | 13:49 GMT


The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come. Read the Synopsis

Paddy fields

(Thoyod Pisanu/

Table of Contents



Key Trends for 2019

China Weathers the Trade Storm

Beijing will try to keep its lines of communication with Washington open on trade by offering to buy more U.S. goods and selectively lower barriers to investment, but its concessions won’t meet U.S. demands for structural economic reform. Still, China will only respond in kind to U.S. measures targeting Chinese firms and entities and not take any blanket punitive action against U.S. businesses. Beijing will also deepen public-sector reforms by soliciting foreign investment for its financial, auto and energy sectors. Furthermore, it will ease restrictions in sectors that align with China’s prime interests, such as medical services and education.

China’s refusal to concede to U.S. demands will prolong the ongoing trade dispute.


The United States will maintain its demand that China ease state support for its tech sector, but that will only compel Beijing to accelerate its efforts to ease China’s dependence on foreign technology and diversify its supply chain — thereby necessitating increased state support for the sector. China’s refusal to bow to U.S. pressure on tech will prolong their trade dispute. At the same time, China will strive to acquire technology and cooperate on sector-specific activities with advanced tech powers like Japan, Israel, Taiwan and the European Union, but such activities will face increased scrutiny over concerns about Chinese investment and industrial espionage. Read more on China’s efforts to reform its state sector.

Chinas Domestic market Share percents

Beijing Battens Down the Hatches

Because the extended trade war threatens the economy in China’s coastal regions (and, thus, social stability), Beijing will ease its tight regulations designed to contain debt and protect the environment while upgrading infrastructure, generating credit and offering direct subsidies to boost growth. China will also carefully manage the yuan’s value to mitigate the damage to exports, allowing it to cope with reduced growth. But an accumulation of debt and the fragility of the housing market will limit Beijing’s ability to use massive credit flows and sharp currency devaluations as a means of economic stimulus.

China will have to rely more on fiscal stimulus — including reducing taxes — to encourage consumption and private sector activity.

It will also encourage the increased use of the yuan in currency swaps and in trade with countries participating in the Belt and Road Initiative to mitigate currency volatility. And to keep hedging against U.S. trade pressure, Beijing will pursue bilateral and regional free trade agreements, such as the Regional Comprehensive Economic Partnership in the Indo-Pacific region and trilateral negotiations with Japan and South Korea, all while forging ties with new export markets along the Belt and Road and in Africa. Southeast Asia’s emerging economies, meanwhile, will be ready to lure any factories that relocate from China amid the trade war. Threats to the overall regional supply chain and external financial volatility could also present challenges to countries with higher debt or current account deficits, such as Malaysia, Indonesia and the Philippines. Learn more about why state-owned enterprises are so important to China.

China Local Govt debt risk

Chinese Household debt

Great Power Competition in the Asia-Pacific

As it tries to chip away at the U.S. regional alliance structure, China will continue its conciliatory outreach to Japan, India and the member states of the Association of Southeast Asian Nations (ASEAN) by privileging dispute resolution efforts and economic partnerships while also making overtures to Australia, whose April elections could foster some rapprochement. At the same time, Washington will bolster its naval presence in the South China Sea and the Taiwan Strait and further challenge the One China principle by elevating Taipei’s status at international associations and regularizing arms sales, naval patrols and high-level visits.

The U.S. Navy will be more prevalent in the South China Sea and the Taiwan Strait, which will provoke China to adopt a more robust military posture.

In response, China will adopt tougher naval and aerial postures to assert its territorial claims, increasing the chances of accidents involving the U.S. military. The United States is considering making a naval port call in Taiwan — an event that would trigger a more direct Chinese military response. Japan, India and Australia will increase security cooperation with Washington, but they will refrain from joining U.S. freedom of navigation operations in the South China Sea or patrols in the Taiwan Strait. Elsewhere in the region, U.S.-ASEAN military exercises and U.S.-Vietnamese defense cooperation will complicate Chinese efforts to limit the further regional expansion of U.S. influence. Find out more about Taiwan’s role in U.S.-China competition.

A Fraying Consensus on North Korea

The United States is intent on extracting tangible concessions from North Korea in 2019. But this is also the year that Pyongyang hopes to squeeze the most out of the Trump presidency before the United States becomes distracted by its election cycle. Given the obviously high stakes of open warfare, neither will deliberately scuttle the dialogue. North Korea will carefully offer tangible pledges but will also expect concrete progress on sanctions relief or toward a peace deal; throughout the process, it will obfuscate and delay where it can. Pyongyang will also insist on assurances that any bilateral deal will have staying power beyond the current administration.

The United States will hesitate to extend an economic lifeline to North Korea by lifting sanctions, but time is on Pyongyang’s side as the international consensus on maintaining sanctions unravels.

For the moment, Washington’s veto power on the U.N. Security Council will allow it to block any effort to repeal the multilateral measures, even as China and Russia push for the international community to reward North Korea for its cooperation. At the same time, the United States will pressure others to fall into line on sanctions by shaming transgressors and threatening secondary sanctions against those who deal with Pyongyang. Complicating matters, inter-Korean detente is reaching the point where it cannot proceed much further without sanctions exceptions — something the United States will only approve after careful consideration. The growing discrepancy between the pace of the inter-Korean dialogue and the pace of the U.S.-North Korean discussions will leave room for China to extend its influence on the Korean Peninsula. Overall, while swings towards breakthroughs and breakdowns will occur throughout the year, North Korea will still maintain possession of many elements of its hard-won nuclear program at the end of 2019.

connecting Koreas.jpg

Moving the Belt and Road Forward

With its access to U.S. markets under strain, Beijing will redouble its efforts to find new export markets and partners through the Belt and Road Initiative. Washington will work principally with Japan and Australia to offer alternative infrastructure investments to counter China’s ambitions in the Indo-Pacific, but Beijing will temper potential partners’ concerns regarding financial sustainability, political influence and national security threats by attracting third-party investors. It will also work to undermine Washington’s regional initiatives by pursuing joint projects with middle powers, including Japan, the European Union and India. Take a more in-depth look at the resistance to the Belt and Road Initiative.

China Port Investments.jpg

A Japanese Awakening

Secure in his position through 2021, Japanese Prime Minister Shinzo Abe will aim to pass constitutional reforms before the end of 2019 while offsetting the economic impacts of a consumption tax hike through public works spending, incentives for private sector investment and tax exemptions for certain products. And though Russia and Japan will continue to negotiate over the disputed Kuril Islands, a larger standoff between Moscow and the West will scuttle any hopes of a deal.

When it comes to trade, the United States and Japan have an arrangement for now, but much will depend on how far Washington pushes Tokyo.

Meanwhile, Tokyo will grant concessions that will partly placate U.S. trade concerns — so long as the U.S. push for agricultural access does not exceed the limits outlined in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Japan trade deals. If Washington pushes further, Tokyo will experience a backlash from its powerful farming lobby — although it will weigh whether to sacrifice its agricultural sector to avoid U.S. tariffs on its critical auto sector. Beyond that, Tokyo will also resist U.S. attempts to limit any future Japanese trade deal with China. Read more on Japan’s calculations on automotive and agricultural trade in the face of U.S. pressure

japan Agriculture Imports

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Early 2019: Release of a World Trade Organization panel report on China’s challenge of the European Union’s refusal to grant China market economy status.
  • Early 2019: Next Trump-Kim summit may occur.
  • Jan. 1: Date that the United States could possibly raise the tariff rate on $200 billion worth of Chinese imports to 25 percent.
  • Jan. 14: First day the United States can hold formal trade deal talks with Japan.
  • January: First round of CPTPP’s tariff cuts will take effect.
  • March: Joint U.S.-South Korean military exercises Foal Eagle, Double Dragon and Key Resolve normally held.
  • May 18: Australia’s Senate elections must be held before this date, with House of Representative elections due by November.
  • June 28-29: A G-20 summit is scheduled to be held in Osaka, Japan.

August: U.S.-South Korean Ulchi Freedom Guardian military exercise normally held.

emerging middle class

Emerging middle class promises bumper payday for asset managers Growth will come from harnessing demand for financial products as demographics shift

Chris Flood DECEMBER 2, 2018

Many asset managers describe their businesses as global because they invest in financial markets across the world. Yet not one has succeeded in building a truly global client base that can rival those of leading technology companies such as Google and Amazon. Building a client base in emerging markets requires international investment managers to confront myriad legal and regulatory obstacles that can pose a threat to expansion plans. Yet the prize for doing so is potentially huge.

The growing size and prosperity of the middle classes across many emerging markets offers a tantalizing reward to those managers that can address the needs of institutional clients and retail investors in these countries. “The investment industry is a natural beneficiary of the growth in wealth and savings among the middle classes in emerging markets,” says Kunal Desai, a portfolio manager with Mobius Capital, a London-based specialist emerging market boutique. “But it tends to get overlooked in favour of sectors that are seen as more obvious winners, such as consumer goods.” Investor assets managed in the Asia-Pacific, Latin America, Middle East and Africa regions will increase from about $16.1 trillion at the end of 2016 to $38.5 trillion by 2025, according to PricewaterhouseCoopers (PwC), a professional services provider.

Olwyn Alexander, a partner at PwC, says profiting from this rise requires cultural change. “Historically, there has been a lack of an investment culture in many emerging markets,” she says. “But even a small shift can present significant opportunities given the magnitude of the populations in some of these countries.” $420 billion New money expected to flow into the fund industry in India over the next decade Asset managers need to ensure they can cater to younger investors, Ms. Alexander says. “Asset managers will need technology capabilities to process large numbers of small dollar value transactions from mobile devices,” she adds. Among the fastest-growing managers in Asia, local and international, two common traits stand out. All are making big bets on China and have invested in new digital services to attract the growing middle class’s rising wealth.

A successful marriage between technology and asset management is exemplified by Yu’E Bao, a fund created as a repository for leftover cash from consumers’ online spending accounts by the Chinese company Ant Financial in 2013. Yu’E Bao has grown into the world’s largest money market fund with more than 400 million users. “The big fin techs are aiding China’s shift to a cashless society,” says Jacob Dahl, a senior partner at McKinsey, based in Hong Kong. “How asset managers position themselves to serve these digital platforms will be critical, not only in China but also in other Asian markets where fin techs are gaining ground.” China, which is on course to replace Europe as the world’s second-largest fund market behind the US, provides the single largest growth opportunity for global asset managers over the next decade. The country’s mutual fund assets could multiply five-fold to reach $7.5 trillion by 2025, creating a fee pool worth $42 billion a year, according to UBS. “But it all depends on the progression of reform and deregulation,” says Kelvin Chu, an analyst with UBS.

In India, a decade of consistently strong economic growth has helped to accelerate the rise of the middle class. The National Council of Applied Economic Research, a Delhi-based think-tank, has forecast that this group will number 547 million people by 2026, from 267 million in 2016.

Indias middle class.jpg

India’s middle class is expected to double to 550 million by 2026 © Alamy

India’s government has implemented a series of reforms that have significantly boosted inflows into fund management. “We estimate that around $420 billion in new money from domestic investors will flow into the fund industry in India over the next decade,” Mr. Desai says. “This compared with around $180 billion from both domestic and international sources over the past 10 years.”

Managers should be careful not to overlook Indonesia, Malaysia and Thailand, Mr. Dahl says. “We expect assets under management in these markets to nearly double over the next five years from a collective $600 billion today,” he says.

Across Asia as a whole, close to 90 per cent of financial assets sit outside the control of asset managers, with the industry overseeing a far lower share than in Europe or the US, according to McKinsey.

However, rising numbers of billionaires in Asian countries, the further growth of large government-sponsored sovereign wealth funds and the development of private pension systems to meet the needs of rising numbers of savers should all provide new sources of growth. “The Asia asset management revenue [fee] pool stands at around $66 billion today and we expect this to [reach] $112 billion by 2022,” says Mr. Dahl.

88% emering middle class.jpg

China Economic Update

eric wong

By Eric Wong
Managing Director, Canada Wood China

October 31, 2018

China to Reduce Wood Import Tariffs November 1

2018 Q3 highlights:

  • China’s GDP hit the lowest growth in September (6.5%) since the first quarter of 2009 during the global financial crisis and missed market consensus of 6.6%.i
  • China Economic growth slowed down in the third quarter due to:
    • to a decrease in infrastructure investment
    • a negative spillover from financial deleveraging
    • the impact of previous economic reforms
    • a cooling housing market.
  • However, export growth continued to grow strongly in Q3 in spite of trade tension with the U.S.ii
  • A recent government announcement effective November 1st, 2018 states that China will cut import tariffs on more than 1,500 products to lower the average import tariff to around 7.8%. Import tariffs on wood and paper products will be decreased to 5.4% from 6.6% which will help wood-based panels and other related imports to grow in China.iii

PMI (Caixin) index in September (50.0) dropped to a 16-month low and missed market consensus of 50.5 which was also the lowest point of the continuously descending trend started from May (51.1).iv China Exports achieved a 14.5% gain year-on-year to USD 226.7 million in September which was the fastest growth in outbound shipments since this February and also beat market consensus of 8.9%.v

china economy exports and manufacturing.jpg

China Consumer Price Index (CPI) started to go up from May (101.8) to September (102.5) which achieved the second highest month only after February (102.9).vi Similar to Q2, USD/CNY had also been on the rise in Q3, increased from 6.62 (July 1st) to 6.81 (August 1st) to 6.83 on September 1st;vii CAD/CNY kept the similar upward trend, went from 5.04 (July 1st) to 5.23 (August 1st) and hit 5.24 on September 1st.viii


Building material prices

Cement price increased slightly from RMB 435.67 to RMB 456.00 per metric ton (up 4.67%) over September 2018.ix Rebar steel price also went up slightly by 2.63% from RMB 4,415.38 per metric ton on September 1st 2018 to RMB 4,531.54 per metric ton on September 30th 2018.x The log price index in September 2018 was 1,096.96 points which decreased 0.26% less than August 2019 and reduced 0.84% compared to the same period year-on-year; the lumber price index in September 2018 was 771.05 points which went up slightly by 0.02% month-on-month and increased 0.36% year-on-year.xi

China-US Trade Dispute Update xii

The trade war between China and United States continues to impact markets.
During the first half of 2018 U.S. wood products made up:

  • 13% of China’s softwood log imports; was 54% in 2017
  • 2% of China’s softwood lumber imports; was 38% in 2017
  • 7% of China’s hardwood log imports;
  • 21% of China’s hardwood lumber imports.

China Wood Imports xiii

Russian softwood lumber imports have been rising steadily since this February when imports hit the highest in May (1,590,000 m3) and maintained at the level of 1,500,000 m3 in August; Canadian softwood lumber imports on the other hand maintained 350,000 m3 each month from June to August but decreased 29% in August to (327,000 m3) compared to the same month last year.

Logs and lumber inventory at Taicang, Wanfang and Meijing ports hit a new low in August (802,000 m3) which decreased consistently since this March, but winter and Chinese

New Year inventory volume at all ports will be on the rise based on previous trends. Import volumes of total logs and lumber fluctuated at reasonable curves and achieved 8,814,000 m3 in August, the second highest month so far in 2018.

China softwood lumber

china softwood lumber imports.jpg

china demand for wood total imports

Trading Economics (October 20th, 2018). China GDP Annual Growth Rate
ii Focus Economics (October 16th, 2018). China Economic Outlook
iii Wood Markets/FEA (October 2018). China Bulletin
iv Trading Economics (October 20th, 2018). China Caixin Manufacturing PMI
Trading Economics (October 20th, 2018). China Exports
vi Trading Economics (October 20th, 2018). China Consumer Price Index (CPI)
vii XE Currency Charts: USD to CNY
viii XE Currency Charts: CAD to CNY
ix Sunsirs (October 2018). Spot Price for Cement
Sunsirs (October 2018). Spot Price for Rebar Steel
xi BOABC (October 2018). China Wood and Its Products Market Monthly Report
xii Wood Markets/FEA (October 2018). China Bulletin
xiii Wood Markets/FEA (October 2018). China Bulletin

Who will benefit from the American timber tariff?

dora Xue

By Dora Xue

October 31, 2018

China announced a 25% tariff on U.S. imports, on a value of $16 billion from August 23rd. The taxed products include $1.83 billion of wood products and logs.

A large range of wood products are listed in the tariff list, including oak logs, birch logs, OSB, spruce, larch, teak, wooden window frames, shelves, furniture etc.

China is the biggest importer for American wood products. The United States exported 6.14 million m3 logs to China, accounting for 53.9% of U.S. logs, and 3.27 m3 lumber, accounting for 38% of U.S. sawn timber exports, according to the U.S Bureau of Statistics. The China market represents half of total U.S. log exports, and one third of its sawn timber exports.

The U.S. tariffs will increase the cost of U.S. wood imports, which will make America timber gradually lose its competitiveness and market position in China.
As forecasted by China Timber Website, Chinese buyers may turn to other countries such as Russia and Europe as the properties of timber from those countries are very similar to that of the U.S.

china US trade war.jpg

Korean Technical Mission Ends in Success

Tai Jeong.jpg

By Tai Jeong

Technical Director, Canada Wood Korea

October 31, 2018

Posted in: Korea

Canada Wood Korea has successfully completed its annual Technical Mission, visiting Canada and Japan from September 26 to October 7 with participation of 13 WFC industry leaders including renowned architects, structural engineers and prefab manufacturers and 1 media reporter.
Mission participants attended technical seminars both at FPInnovations and Canada Wood Japan office to learn about technical aspects and commercialization of the Midply Shearwall system, industrialization plants and various buildings sites both in Canada (British Columbia and Alberta provinces) and Japan to learn about innovative industrialized WFC systems including pre-fabrication, modular homes and tall wood mass timber construction.
All participants said It was a wonderful opportunity to experience actual applications of wood along with technical seminars. Especially, Mr. Je Yu Park, President-elect of the Korean Institute of Architects (KIA) who participated in the mission, agreed to sign an MOU with Canada Wood for technical cooperation and jointly hold the WFC Seismic Workshop for member architects in conjunction with the Forest Sector Mission to Korea led by the Minister Doug Donaldson this coming December 2018. Mr. Park also promised to establish a Wood Structure Design Advisory Committee Division at KIA after his inauguration next year.

Korean tour 1Korean tour 2

Korean tour 3

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Korean tour 5

Canada Wood Korea signs agreement with Korean Institute of Architects

JOC News Service December 17, 2018

korean institute MOU.jpg

VANCOUVER — Canada Wood Korea and the Korean Institute of Architects have signed a memorandum of understanding (MOU) to help Korean architects work better with Canadian wood.

The technical co-operation agreement was signed on Dec. 7 by senior forest industry representatives on the Forestry Asia Trade Mission, which consisted of a group of more than 40 delegates including industry, research, labour, First Nations and government.

The group also visited the Gapyeong Canada Village Project on Dec. 8., which uses wood products from B.C. and other parts of Canada. The village is the result of a 2013 MOU signed by Canada Wood Korea, the Gyeonggi Urban Innovation Corporation and Dreamsite Korea.

Gapyeong Canada Village Project



“South Koreans’ interest in wood construction is growing because they recognize that wood construction fares better than other materials in the event of earthquakes. By promoting the benefits of wood and sharing technical expertise, we can open up new opportunities in Korea for our province’s high-quality wood products. This, in turn, supports forestry jobs in B.C.,” said B.C. Minister of Forests, Lands, Natural Resource Operations and Rural Development Doug Donaldson in a statement.

The MOU is intended to raise the skill and knowledge levels of Korean architects and designers so they are better equipped to work with wood. The Institute will benchmark Canadian best practices for wood-frame residential housing, wood interior walls and Super-E/Net-Zero housing design, a standard designed by Natural Resources Canada where a home produces all needed energy from renewable sources and releases no carbon from the burning of fossil fuels.

South Korea is B.C.’s fifth-largest market for wood products, with softwood lumber exports totaling over $73 million in 2017.

Korea – Economic forecast summary (November 2018)

READ full country note (PDF)

Economic growth is projected to remain close to 3% through 2020, as fiscal stimulus offsets sluggish employment growth, which reflects double-digit hikes in the minimum wage in 2018-19 and restructuring in the manufacturing sector. Measures to stabilize the housing market have led to a decline in construction orders for residential property. Inflation is expected to edge up from 1½ per cent toward the 2% target, while the current account surplus will remain above 5% of GDP.

Hikes in the minimum wage should be moderated to avoid negative effects on employment. The “income-led growth” strategy, driven by minimum wage increases and higher public employment and social spending, needs to be supported by reforms to narrow productivity gaps between manufacturing and services, and between large and small firms. Short-term fiscal stimulus should be accompanied by a long-term framework to cope with population ageing, which will be the fastest in the OECD. With inflation below target, the withdrawal of monetary accommodation should be gradual.


korean economic stats.jpg 

Korea Demand Output.jpg

Supportive macroeconomic policies should be accompanied by structural reforms The government is responding to weaker domestic demand with fiscal stimulus. Spending is to increase by 9.7% in 2019, the highest since 2009 in the wake of the global recession. Social welfare spending is the priority, along with outlays for job creation, which are set to rise by 22%. In addition, the government aims to boost public employment by 34% over 2017-22. Despite increased spending, the general government budget will remain in surplus at around 2% of GDP in 2019, while government debt is low at just under 45% of GDP. The policy interest rate has remained at 1.5% since late 2017. With consumer price inflation below 2%, the normalization of monetary policy should be gradual. Monetary policy also needs to consider potential risks to financial stability, including capital flows and household debt, which rose at an 8% pace in the first half of 2018. At 186% of net disposable household income in 2017, household debt remains a headwind to private consumption. Raising labour productivity, which is 46% below that in the top half of OECD countries, is increasingly important for growth as the working-age population peaked in 2017. The priority is regulatory reform, focusing on services, where labour productivity is less than half of that in Korean manufacturing. Policies to promote entrepreneurship and raise productivity in SMEs are also needed to promote inclusive growth. Increasing female employment and reducing the gender wage gap, which is the highest in the OECD at 37%, is another priority. Growth is projected to be stable Output growth is projected to remain close to 3%, despite sluggish employment growth in 2019, partly as a result of a hike in the minimum wage by a further 10.9%. Further large increases, as part of the government’s commitment to a sharp increase in the minimum wage, would damp employment and output growth. The improved relationship with North Korea is a landmark event that may also have positive economic implications. Moreover, progress with structural reforms to raise productivity in lagging sectors would boost output growth. However, trade protectionism remains a concern: with intermediate goods accounting for four-fifths of Korea’s exports to China, its largest trading partner, Korea is vulnerable to higher import barriers on Chinese exports to the United States.

Taiwan exports end 24-month rise

U.S.-China trade war played part in sudden drop: MOF

By Matthew Strong,Taiwan News, Staff Writer

2018/12/07 17:29

taiwan exports.jpg

Taiwan’s exports end 24 consecutive monthly increases. (By Central News Agency)

TAIPEI (Taiwan News) – Taiwan’s exports ended 24 consecutive months of increases by recording a drop of 3.4 percent for November, the government announced Friday.

The Ministry of Finance (MOF) identified lower-than-expected sales of high-end smartphones, a weakening of overseas investment needs, and the impact of the trade war between the United States and China as the three reasons why exports fell in November compared to the same period last year, the Apple Daily reported.

The value of exports for November totaled US$27.81 billion (NT$858.78 billion), a drop of 3.4 percent compared to November 2017 and of 5.9 percent compared to October 2018, according to MOF data.

However, for the period from January to November 2018, exports still rose from the same period last year to reach a total of US$307.46 billion (NT$9.49 trillion), the MOF stated Friday.

100 days under Pakatan

Economy faces mounting risksPrime Minister Mahathir Mohamad.jpg

Prime Minister Mahathir Mohamad said his government had realized over a third of its 60 election promises “to unshackle Malaysia from the issue of corruption and ensure good governance” .PHOTO: EPA-EFE


AUG 18, 2018, 5:00 AM SGT

KUALA LUMPUR • Malaysian Prime Minister Mahathir Mohamad marked his 100 days in office yesterday with risks mounting against the economy.

Gross domestic product in the second quarter grew at 4.5 per cent, its slowest pace in over a year, the current-account surplus narrowed sharply and the currency is facing pressure as an emerging-market rout worsens.

After a shock election win in May, Tun Dr Mahathir has moved quickly to deliver on promises to  a speech broadcast nationwide yesterday, Dr Mahathir said his government had realized over a third of its 60 election promises “to unshackle Malaysia from the issue of corruption and ensure good governance”. These measures included policies on declaring assets, bolstering anti-corruption institutions and protecting media freedom.

The political transition had an impact on the economy last quarter, with public sector investment contracting 9.8 per cent from last year.

Noting in his speech that the national debt was RM 1 trillion (S$334 billion), Dr Mahathir listed infrastructure projects that have been put on hold, including the Singapore-Kuala Lumpur High-Speed Rail, the third phase of the Mass Rapid Transit and the China-backed East Coast Rail Link.

Domestic demand remained strong and was buoyed by the scrapping of a 6 per cent goods and services tax in June, another election pledge.

singapore rally.jpg

Related Story

100 days under Pakatan: Mahathir, the strongman reformist?

Related Story

100 days under Pakatan: Malay, Islamic issues still dominate politics

Private consumption climbed 8 per cent last quarter from a year ago, while investment surged 6.1 per cent.

“The bigger picture we see going forward, private consumption will be modest as many Malaysians probably front-loaded their purchases ahead of the sales tax coming in September, so it’s hard to see how that’s sustained,” said Mr. Brian Tan, an economist at Nomura Holdings in Singapore.

Central bank governor Nor Shamsiah Mohd Yunus said the economy will probably expand about 5 per cent this year, lower than the previous government’s projection of 5.5 per cent to 6 per cent.


A version of this article appeared in the print edition of The Straits Times on August 18, 2018, with the headline ‘Economy faces mounting risks’. Print Edition | Subscribe

Destitute dotage

Vietnam is getting old before it gets rich

That makes caring for the elderly hard to afford

vietnamese wpmen.jpg

Print edition | Asia

Nov 8th 2018| HANOI

As dawn breaks in Hanoi the botanical gardens start to fill up. Hundreds of old people come every morning to exercise before the tropical heat makes sport unbearable. Groups of fitness enthusiasts proliferate. Elderly ladies in floral silks do tai chi in a courtyard. In the shade of a tall tree, dozens of ballroom dancers sway to samba music. Others work up a sweat on an outdoor exercise-machine. Tho, an 83-year-old with a neat white moustache, says he comes to walk round the lake every day, rain or shine.

In the next few decades the gardens will become busier still. Vietnam has a median age of only 26. But it is greying fast. Over-60s make up 12% of the population, a share that is forecast to jump to 21% by 2040, one of the quickest increases in the world (see chart). That is partly because life expectancy has increased from 60 years in 1970 to 76 today, thanks to rising incomes. Growing prosperity has also helped bring down the fertility rate in the same period from about seven children per woman to less than two. In the 1980s the ruling Communist Party started to enforce a one-child policy. Though less strict than China’s, it has hastened the decline.

Demography is changing in similar ways in many Asian countries. But in Vietnam it is happening while the country is still poor. When the share of the population of working age climbed to its highest in South Korea and Japan, annual GDP per person (in real terms, adjusted for purchasing power) stood at $32,585 and $31,718 respectively. Even China managed to reach $9,526. In Vietnam, which hit the same peak in 2013, incomes averaged a mere $5,024. Indonesia and the Philippines are expected to reach the turning-point in the next few decades, with an income level several times higher than Vietnam’s.

old before its time

This shift brings headaches. First, will the government be able to support millions more Vietnamese in old age? Only the extremely poor and people over 80 (together around 30% of the elderly) get a state pension, which can be as little as a few dollars a week. The most recent survey of the old, in 2011, found that 90% of them had no savings worth the name. Debt was common. Supporting them will become ever more expensive. The IMF predicts that pension costs, at the present rate, could raise government spending as a share of GDP by eight percentage points by 2050. That is faster than in any of the other 12 Asian countries it examined.

The problem is worse in the countryside, where most old folk live. Previously the young cared for their parents in old age. Today they tend to abandon village life to seek their fortune in the city. Surveys suggest that the share of old people living alone is rising, especially in villages. Many work until they die. Around 40% of rural men are still toiling at 75, twice the rate of city-dwellers. In Britain that figure is 3%. Often they do gruelling manual jobs, such as rice farming or fishing.

Providing health care for millions more old people is another worry. Alzheimer’s, heart disease and age-related disability are growing. In the botanical garden Toau, a 78-year-old in a white sports t-shirt, says he is there on doctor’s orders, before taking a pill for his bad heart and joining an exercise group. About a third of over-60s do not have health insurance, which is costly. Many provinces still have no proper geriatric departments in hospitals. Informal health-insurance groups have popped up to fill the gaps. For a fee, members get exercise classes and free check-ups. But few doctors are trained or equipped to treat more serious conditions.

The government is starting to implement policies to reduce the fiscal burden and improve the lot of the elderly. Last year it relaxed the one-child policy. In May it said it would increase the retirement age from 55 to 60 for men and 60 to 62 for women, and reform the pension scheme to provide wider coverage. Next year it plans to begin revamping the health-insurance and social-assistance systems.

But none of that will change the structure of the economy. Usually as countries climb the income ladder, they shift from farming to more productive sectors, like services. By this yardstick, Vietnam is lagging its neighbors. When the working-age population peaked in 2013, agriculture accounted for 18% of the economy. At the same juncture in China, agriculture was just 10% of GDP. Worse, farmers’ output tends to decline with age, unlike, say, that of managers. This over-reliance on agriculture partly explains why three-quarters of Vietnam’s workers are in jobs where they become less productive as they get older. In Malaysia that is the case for only about half the labour force.

Boosting productivity will be tricky. The government is still wedded to “statism”. State-owned enterprises dominate many industries. Most university students, meanwhile, waste at least a year learning Marxist and Leninist theory. Many countries in Asia are ageing fast. But growing old before it becomes rich makes Vietnam’s problems all the greater.

Economists fret over trade tensions, shave forecast for Singapore growth in 2019

WED, DEC 12, 2018 – 12:00 PM


singapore growth

For 2018, Singapore’s economy is expected to grow by 3.3 per cent, a tad up from September’s forecast of 3.2 per cent.

PRIVATE economists unanimously fingered higher US-China trade tensions as a downside risk to Singapore’s growth, as they dialed down their forecast for 2019 in a recent industry poll.

Economists expect Singapore’s gross domestic product (GDP) growth to ease to 2.6 per cent in 2019, from an estimated 3.3 per cent in 2018, according to results out on Wednesday from a quarterly survey by the Monetary Authority of Singapore (MAS).

They had previously projected in September’s poll that the national GDP would notch 3.2 per cent growth in 2018 and 2.7 per cent in 2019.

The subdued showing is expected to come on the back of a marked slowdown in manufacturing growth – from an estimated 7.4 per cent in 2018, to just 3 per cent in 2019 – and cooling growth in the finance and insurance sector, from 6.9 per cent in 2018 to 5.4 per cent in 2019.

The weakness is expected to extend to the accommodation and food services sector, where growth could ease from 3.4 per cent in 2018 to 2.8 per cent in 2019.

SEE ALSO: Singapore retail sales inch up by 0.1% in October as growth tapers off

Such declines would offset the anticipated improvement in wholesale and retail trade – with growth expected to pick up from 1.3 per cent in 2018 to 1.7 per cent in 2019 – and a turnaround in the construction sector, which could go from a year-on-year contraction of 3.5 per cent in 2018 to an expansion of 1.5 per cent in 2019.

Growth in non-oil domestic exports is expected to fall by more than half, from 6.2 per cent in 2018 to 2.9 per cent in 2019.

Headline inflation was predicted to come in at 0.5 per cent for 2018, in line with official estimates, as private economists moved their forecast down from September’s 0.7 per cent.

They also trimmed their expectations for 2019’s headline inflation numbers, to a forecast of 1.3 per cent, from the 1.5 per cent that was anticipated in September.

The downgrade came on the back of an expected moderation in private consumption, from 3.4 per cent growth in 2018 to 3.1 per cent in 2019.

Estimates for core inflation – an MAS indicator that strips out private transport and housing costs – were kept intact at 1.7 per cent for 2018 and 1.8 per cent for 2019.

Meanwhile, trade protectionism was seen as the top risk to the economy by far – picked by all of the survey’s respondents, against 89 per cent of them in September – even as the share of watchers concerned by rising interest rates and a slowdown in China also edged up to 41 per cent of respondents, from 37 per cent in the previous survey.

“A growing number of respondents flagged slower growth in China as a downside risk, on the back of tightening credit conditions,” said the MAS in its summary of the survey results.

“Faster than expected US interest rate hikes, which could trigger financial market turbulence, also continue to be a downside risk for a number of respondents.”

But, on the bright side, cooling trade tensions could lift the growth outlook, said 47 per cent of respondents, up from 37 per cent in September.

Slower-than-expected monetary tightening in the US, as well as potential benefits from the diversion of trade and investment out of China and into the region, also appeared on the list of top three upside possibilities – both cited by 29 per cent of respondents.

The central bank’s December survey, which was sent out on Nov 22, netted replies from 23 economists who track the Singapore economy. It does not represent the MAS’s views or forecasts.

Philippines Q3 GDP growth slows, misses forecast

THU, NOV 08, 2018 – 11:00


[MANILA] The Philippines’ economic growth slowed in the third quarter due to weaker household consumption and exports, the statistics agency said on Thursday.

Gross domestic product grew 6.1 per cent in the third quarter from a year earlier, below the 6.3 per cent median forecast in a Reuters poll and slower than the previous quarter’s upwardly revised 6.2 per cent growth.

Details on quarterly growth are due to be released later.


Thailand Needs More Skilled Foreign Workers

Thailand needs to attract skilled foreign workers, especially in the industrial technology sector

The minimum monthly income for highly-skilled experts Smart Visa has been changed to 100,000 baht and to 50,000 baht for experts in startups and retired experts

By Olivier Languepin On Dec 5, 2018

Thai skilled labor.jpg

Samut Sakhon One Stop Service

A Thai academic says the nation needs to attract skilled foreign workers to work in the country, especially in the industrial technology sector, to overcome a shortage of skilled-workers.

In a seminar held by the Institute for Population and Social Research of Mahidol University, a university researcher, Ms. Sureeporn Phanpueng , revealed that Thailand needs around 2.3 million more skilled employees to work in innovative and technological industries, robotics, and the health and food industries.

The event was attended by academics and those from related fields. Ms. Sureeporn proposed that the government solve the problem by offering work visas to skilled foreign workers who take up positions in Thailand and by creating an attractive living environment for them.

She also wants the government to promote the transfer of technological know-how between foreign experts and Thai workers, as well as international education in Thailand.


Southeast Asia Internet economy to be worth $240bn by 2025

Nov 23, 2018

Thailand’s Smart Visa Requirements Made Easier

Nov 20, 2018

The government is now accepting four-year visa-free grants and free work permits under the “Smart Visa” programme which is targeting industry experts and foreign technology investors.

Thailand’s Smart Visa Requirements Made Easier

The Thai government has improved requirements and conditions for the Smart Visa in order to provide greater convenience for foreign investors and experts

For example, the government has changed the income condition for highly-skilled experts and senior executives from a monthly salary of no less than 200,000 baht to a monthly income that also covers bonuses and other incomes.

The minimum monthly income for highly-skilled experts has also been changed to 100,000 baht and to 50,000 baht for experts in startups and retired experts. The adjustments are aimed at increasing the country’s competitiveness and ability to attract more specialists.

Similarly, the government has improved various conditions in increasing access to capital for startups and strengthening venture capitalists. For example, investments can now be made through venture capital companies.

For the Thailand 4.0 policy to effectively push for digital transformation, Thai manufacturers will need to first improve the skills of their workforce,” said Karel Eloot, senior partner of McKinsey & Company, during an exclusive interview with The Nation.

The Thailand 4.0 policy is intended to modernize the Thai economy by promoting technologically driven industries. The development of the EEC region is a materialization of the Thailand 4.0 policy where the government aims to turn the three provinces of Chon Buri, Chachoengsao and Rayong into special economic zones.

“Re-skilling will be needed for the existing workers. We have identified up to 7 million employees in Thailand who will need to be reskilled for companies to digitally transform,” he said.

The re-skilling is needed because digital transformation will mean new roles and jobs will be created while old ones will be made obsolete, Eloot explained.

Australia’s economy is still booming, but politics is a cause for concern

Political infighting could harm the economy, says Edward McBride


Print edition | Special report

Oct 27th 2018

The last time Australia suffered a recession, the Soviet Union still existed and the world wide web did not. An American-led force had just liberated Kuwait, and almost half the world’s current population had not yet been born. Unlike most of its region, Australia was left unscathed by the Asian crash of 1997. Unlike most of the developed world, it shrugged off the global financial crisis, and unlike most commodity-exporting countries, it weathered the resources bust, too. No other rich country has ever managed to grow so steadily for so long (see chart 1). By that measure, at least, Australia boasts the world’s most successful economy.

inRead invented by Teads

Admittedly, as Guy Debelle of the Reserve Bank of Australia (RBA, the central bank) points out, this title rests on the statistical definition of a recession as two consecutive quarters of decline. Had the 0.5% shrinkage of the fourth quarter of 2008 been spread across half a year, he notes, there would be no record. Yet by other measures, Australia’s economic performance is more remarkable still. Whereas many other rich countries have seen wages stagnate for decades, Australia’s have grown strongly, albeit less steadily in recent years (see chart 2). In other words, a problem that has agitated policymakers—and voters—around the world, and has been blamed for all manner of political upheaval, from European populism to the election of Donald Trump, scarcely exists in Australia.

And that is not the only way in which Australia stands out from its peers. At a time when governments around the world are souring on immigration, and even seeking to send some foreigners home, Australia has been admitting as many as 190,000 newcomers a year—nearly three times as many, relative to population, as America. Over 28% of the population was born in another country, far more than in other rich countries. Half of all living Australians were born abroad or are the child of someone who was.

In part, this tolerance for outsiders may be a reflection of another remarkable feature of Australian society: the solvency of its welfare state. Complaints about foreign spongers are rare. Public debt amounts to just 41% of GDP (see chart 3)—one of the lowest levels in the rich world. That, in turn, is a function not just of Australia’s enviable record in terms of growth, but also of a history of shrewd policy making. Nearly 30 years ago, the government of the day overhauled the pension system. Since then workers have been obliged to save for their retirement through private investment funds. The modest public pension covers only those without adequate savings.


Australia’s health-care system is also a public-private hybrid. The government provides coverage for all, by paying clinics and hospitals a set fee for every procedure they perform. Those who want more than the most basic service must pay a premium. The government encourages people to take out insurance to cover the gap between the reimbursement it provides practitioners and the rates most of them charge the public. As with pensions, everyone gets looked after, but the government bears only a relatively small proportion of the cost—an arrangement that remains a distant dream in most rich countries.

Not all is perfect, of course. A common concern is that the economy relies too heavily on China, which is the biggest buyer of Australian minerals, the biggest source of tourists and foreign students, even the biggest consumer of Australian wine. People worry that if the Chinese economy falters, it will drag Australia’s down with it. Another fear, somewhat at odds with the first, is that China might try to use its economic power to blackmail Australia into weakening its alliance with America.

australia pop growth by state

There are glaring domestic problems, too. The appalling circumstances of many Aboriginals are a national embarrassment, and the failure to answer their political grievances compounds the rancor. Even more alarmingly, global warming is making an already grueling climate harsher. Rainfall, never reliable, is scarcer and more erratic in many farming regions. Over the past two years unusually hot water has killed a third of the coral on the Great Barrier Reef, one of the country’s greatest natural treasures.

In theory both the governing Liberal-National coalition (which is right-of-centre) and the main opposition, the left-leaning Labor Party, are committed to cutting emissions of greenhouse gases. But in practice climate change has been the subject of a never-ending political knife-fight, in which any government that attempts to enact meaningful curbs is so pilloried that it either loses the next election or is toppled by a rebellion among its own Members of Parliament (mps).

Some see the failure to settle on a coherent climate policy as a symptom of a deeper political malaise. Australia used to have long-lived governments. Between 1983 and 2007, just three prime ministers (pm) held office (Bob Hawke and Paul Keating of Labor, and John Howard of the Liberals). Yet, since then, the job has changed hands six times. A full term is only three years, but the last time a prime minister survived in office for a whole one was 2004-07. The assassins are usually not voters, but fellow mps who dispatch their leader in hope of a boost in the polls. As part of the research for this special report, your correspondent interviewed Malcolm Turnbull, the prime minister at the time, who insisted his position was secure. He had been sacked by his fellow Liberals before the interview could be written up.

The changes of pm have come so often that Madame Tussauds, a wax museum, has officially given up trying to make statues of the incumbent, who will inevitably have left office before a likeness is ready. The constant revolution is not just fodder for comedians; it also makes consistent policy making much harder. For those who consider Australia’s unequaled economic performance the result, at least in part, of far-sighted decisions made 30 years ago, the current choppy politics seem like a harbinger of decline.

This special report will try to explain Australia’s enviable record, and ask how long its good fortune can last. Is it adopting the reforms needed to keep the economy bounding ahead? Will it have to choose between China and America? Is the current generation of politicians up to the job? Is Australia, in short, as lucky a country as its nickname suggests, or is its current streak coming to an end?




Third Quarter 2018 Economic and Wood Product News


Economist Intelligence Unit global forecast – Global growth braced for impact

Since the start of 2018 trade policy has become the biggest risk to The Economist Intelligence Unit’s central forecast for global economic growth. The US president, Donald Trump, is shifting his country’s previous qualified support for free trade in a protectionist direction. Trade tensions escalated when the US government threatened China with tariffs on imports worth about US$50 billion a year in April. China responded with its own equivalent list. Discussions between the two countries have thus far failed to solve the dispute. The third round of negotiations on June 2nd‑3rd revealed the divisions in the US trade team, with conflicting messages on the team’s priority—China’s approach to intellectual property and technology transfer or the reduction of the US’s trade deficit with China. On June 15th the US confirmed that US$34 billion‑worth of China’s goods would be subject to additional tariffs of 25%, with the possibility that another US$16 billion‑worth of goods would also be targeted after an extended period of public comment. China responded in kind. On their own, these tariffs are unlikely to be sufficient to trigger a major slowdown in growth. However, we note the risk of neither the US nor China achieving their aims through this round of tariffs and the possibility of the dispute escalating to further rounds of non-tariff barriers of the sort that harm business confidence, investment decisions, diplomatic ties and, ultimately, the performance of the global economy.

Furthermore, on trade, the Trump administration continues to challenge the multilateral system. Initially, when the US announced import tariffs on steel and aluminium in March, Canada, Mexico and the EU were given temporary exemptions. The exemptions were removed by the Trump administration on June 1st, sparking a round of retaliatory tariffs from these traditional US allies. Reaffirming his intentions, Mr Trump deepened divisions in the G7 on June 8th‑9th when he failed to agree to the joint communique in support of a rules-based trading system. Following the withdrawals from the Paris climate accord, the Iran nuclear deal and the Trans-Pacific Partnership, the outcome of the G7 meeting and related trade tensions with key US allies again demonstrate that Mr Trump’s “America First” policies do not align with a multilateral system of global governance.

Some emerging markets are susceptible to higher US interest rates

Emerging markets will also come under some pressure from higher US interest rates and the strength that these provide to the dollar. For example, since April Turkey, Brazil and Argentina have experienced sharp currency depreciation. As global interest rates gradually rise from ultra-low levels, investors are becoming less forgiving of countries with financial, macroeconomic or political vulnerabilities. Turkey is illustrative here, given its structural current-account deficit, necessitating large external financing needs, and the high levels of foreign-currency denominated debt held by the private sector—steep policy rate increases by the central bank were required to stem capital outflows. For its part, the Federal Reserve (Fed, the US central bank) has helped to minimize the disruption by outlining how it will reduce the value of its balance sheet and over what time period. Despite this, we expect further short-lived periods of volatility as global markets adjust to the gradual shift away from easy money. In this environment, we expect the number of countries seeing their currencies come under pressure to rise over the next two years.

Geopolitical risks foreshadow greater volatility

We also note the economic risks posed by the complex and deepening tensions in the Middle East. Various proxy conflicts between Iran and Saudi Arabia have the potential to further destabilize the region. Mr. Trump’s decision to withdraw the country from the Iran nuclear deal is another signal that the US is inclined to offer stronger support to its traditional allies in the region, Israel and Saudi Arabia, in the coming years. We expect regional security in the Middle East to deteriorate following the US withdrawal. The move gives hardliners in Iran the upper hand over their moderate counterparts, which is likely to lead to a more confrontational foreign policy. Most worryingly, a proxy conflict between Israel and Iran in southern Syria has a significant chance of escalating.

Heightened geopolitical risk in the Middle East increases the likelihood of volatility in global energy markets. The re-balancing of the oil market pursued by OPEC over the past 18 months means that geopolitical developments now have a more pronounced effect on prices. News of the US’s withdrawal from the Iran deal sent prices above US$75/barrel for the first time since 2014. We expect prices to settle at around US$74/b, on the assumption that Iran’s oil exports fall by around 400,000 barrels/day (b/d), relative to its average sales of about 2.5m b/d in the period when the US remained within the nuclear deal. We expect oil prices to become more volatile over the next two years as geopolitical tensions rise.

The global economy will remain healthy, although vulnerable to shocks

Although the global economy is more vulnerable to shocks, our central forecast is that the underlying fundamentals are strong enough to maintain a healthy growth rate for 2018‑19. Global growth accelerated markedly in 2017 to 3%, its fastest rate since 2011, and we expect the same rate of growth in 2018‑19. The global economy will continue to follow the trends in the world’s two largest economies, China and the US. We expect the Chinese economy to start to slow at a steady rate. The government has a long-held target of doubling real GDP between 2010 and 2020. To achieve this, it requires annual average GDP growth of 6.3% in 2018‑20. We expect it to continue to stimulate the economy to reach this rate. After that, the leadership will have greater latitude to move away from GDP targeting. This is ideologically consistent with the call by the president, Xi Jinping, at the Chinese Communist Party’s national congress in late 2017, for more inclusive growth. It is likely, therefore, that the economy will be allowed to slow more quickly in the second half of the forecast period, with growth standing at 5.3% in 2022.

We continue to expect a business-cycle downturn in the US in 2020. Capacity constraints will emerge in the economy in the second half of 2019, pushing up inflation and forcing the Fed to signal a faster pace of interest-rate increases. This acceleration will be sufficient to trigger a short-lived decline in private consumption and investment in early 2020. Our core forecast is that the dip will be shallow and the rebound relatively rapid, owing to the Fed cutting interest rates aggressively in response. These movements in the world’s two largest economies mean that global growth will moderate to 2.3% in that year. As the US recovers, the global economy will receive some support in 2021‑22, enabling an acceleration to annual average growth of 2.8%.

Global monetary conditions will tighten

Among developed markets we expect falling unemployment and slowly building inflation to push central banks towards monetary tightening. In the US, the Fed, having first raised rates in December 2015 following the global financial crisis, will increase rates three times this year and four times in 2019. The European Central Bank, responding to the entrenched economic growth in the EU, is set to end the tapering of its quantitative easing (QE) programme in 2018. The Bank of Japan (the central bank) will also begin to wean itself off QE in 2019. By the second half of that year the shift to tighter monetary policy will begin to dampen private consumption growth in many developed markets, as borrowing will become more expensive. Consequently, the period between mid‑2017 and mid‑2018—where growth has been strong, inflation benign and monetary policy still loose—may feel like the sweetest spot for the global economy in the current business cycle.

As the global economy picks up, inflation is oddly quiescent –But central banks are beginning to raise interest rates anyway

inflating world

Print edition | Finance and economics

Oct 4th 2018

A FEW years ago, the news about the euro-zone economy was uniformly bad to the point of tedium. These days, it is the humdrum diet of benign data that prompts a yawn. Figures this week show that GDP rose by 0.6% in the three months to the end of September (an annualized rate of 2.4%). The European Commission’s economic-sentiment index rose to its highest level in almost 17 years. Yet when the European Central Bank’s (ECB) governing council gathered on October 26th, it decided to keep interest rates unchanged, at close to zero, and to extend its bond-buying program (known as quantitative easing, or Quantitative Easing “QE”) for a further nine months.

The central bank said it would slow down the pace of bond purchases each month, to €30 billion ($35 billion) from January. But Mario Draghi, the bank’s boss, declined to set an end-date for QE. A hefty dose of easy money will be necessary, he argued, until inflation durably converges on the ECB’s target of just below 2%. It shows few signs of doing so, despite the economy’s strength. Underlying, or core, inflation, which excludes the volatile prices of food and energy, fell from 1.1% to 0.9% in October, according to data published a few days after the ECB meeting. The euro zone’s miseries of 2010-12 were unique. But in its present, happier state of vigorous activity, low inflation and easy monetary policy, it is like many other big economies (see chart).

After a decade of interest rates at record lows, those central banks that are inclined to tighten policy naturally attract attention. The Bank of England’s monetary-policy committee raised its benchmark interest rate from 0.25% to 0.5% on November 2nd, the first increase since 2007. On the same day, the Czech National Bank raised interest rates for the second time this year. The Federal Reserve kept interest rates unchanged this week, having raised them in March and June, but a further increase is expected in December.

In Turkey, perhaps the only big economy that is obviously overheating, the central bank—which has been browbeaten by the president, Recep Tayyip Erdogan, who believes high interest rates cause inflation—opted on October 26th to keep interest rates on hold. Yet in most biggish economies, underlying inflation is below target (see chart) and monetary policy is being relaxed. Brazil’s central bank cut interest rates on October 25th from 8.25% to 7.5%. Two days later, Russia’s central bank trimmed its main interest rate, to 8.25%. This week the Bank of Japan voted to keep rates unchanged and to continue buying assets at a pace of around ¥80 trillion ($700 billion) a year. These economies are gathering strength. It is a puzzle that, in such circumstances, global inflation is stubbornly low.

Core Values

To figure out why, consider the model that modern central banks use to explain inflation. It has three elements: the price of imports; the public’s expectations; and capacity pressures (or “slack”) in the domestic economy. Start with imported inflation, which is determined by the balance of supply and demand in globally traded goods, such as commodities, as well as shifts in exchange rates. Commodity prices have picked up smartly from their nadir in early 2016. The oil price, which fell below $30 a barrel then, has risen above $60.

This has put upward pressure on headline inflation: in the euro zone it is 1.4%, half a percentage point higher than the core rate. Where inflation is noticeably high, it is generally in countries, such as Argentina (where it is 24%) or Egypt (32%), that have withdrawn costly price subsidies and whose currencies have fallen sharply in value, making imported goods dearer. In Britain, rising import prices linked to a weaker pound have added around 0.75 percentage points to inflation, which is 3%.

A second influence on inflation is the public’s expectations. Businesses will be more inclined to push up their prices and employees to bid for fatter pay packets if they believe inflation will rise. How these expectations are formed is not well understood. The measures that are available are broadly consistent with the central bank’s inflation target in most rich economies. Japan is something of an outlier. It has struggled to meet its 2% inflation target in large part because firms and employees have become conditioned to expect a lower rate of inflation. Japan’s prime minister, Shinzo Abe, recently called for companies to raise wages by 3% in next spring’s wage round to kick-start inflation.

Leave aside the transient effects of import prices, and inflation becomes a tug-of-war between expectations and a third big influence, the amount of slack in the economy. The unemployment rate, a measure of labour-market slack, is the most-used gauge. As the economy approaches full employment, the scarcity of workers ought to put upward pressure on wages, which companies then pass on in higher prices. On some measures, Japan’s labour market is as tight as it has been since the 1970s. America’s jobless rate, at 4.2%, is the lowest for over 16 years. Inflation has nevertheless been surprisingly weak.

In other words, the trade-off between unemployment and inflation, known as the Phillips curve, has become less steep. A paper last year by Olivier Blanchard, of the Peterson Institute for International Economics, found that a drop in the unemployment rate in America has less than a third as much power to raise inflation as it did in the mid-1970s.

The central banks that see a need for tighter monetary policy are worried about diminishing slack. There are tentative signs of stronger pay pressures in Britain and America, and firm evidence of them in the Czech Republic, where wage growth is above 7%. Even so, with inflation expectations so steady, the flatter Phillips curve suggests that the cost for central banks in higher inflation of delaying interest-rate rises is rather low. The ECB is quite a way from such considerations. The unemployment rate is falling quickly, but remains high, at 8.9%. There is still room for the euro-zone economy to grow quickly without stoking inflation. The dull routine of good news is likely to continue.

US China trade war

US-China spat could affect fast-growing trade in Asia, but it’s also an opportunity for some economies

  • Trade within Asia has gone up. The region had the fastest trade volume growth in the world in 2017 for both exports and imports — 6.7 percent and 9.6 percent, respectively, the World Trade Organization said.
  • However, the ongoing trade spat between the U.S. and China may soon have an impact on Asia, especially emerging markets, experts say.
  • But it could also be a good thing for certain markets in Asia, as companies look for alternative supply sources beyond the U.S.

Weizhen Tan | @weizent

Published 12:35 AM ET Mon, 2 July 2018


Belt and Road Initiative Quarterly: Q3 2018

In this edition of the Belt and Road Initiative (BRI) Quarterly, we highlight a number of projects, both planned and under construction, which are facing delay, suspension, cancellation or other challenges in BRI countries. Although Chinese policymakers will continue to promote economic and trade links under the BRI, against the backdrop of the US-China trade war, the initiative will continue to face international pressures—potentially feeding domestic push back, too.

In our previous BRI quarterly we noted that overseas direct investment (ODI) and merchandise trade links between China and the 65 countries we define as belonging to the BRI were stable in the first quarter of 2018. In the period since April 2018, however, several BRI projects have encountered challenges, ranging from delay and suspension to outright cancellation, due to skepticism and push back against the project, as well as changes of government in some countries. These developments have in turn raised questions within China over the economic and diplomatic feasibility of the BRI, which has been the subject of criticism in the past for its international largess at a time when China still faces developmental challenges of its own.

Trade, investment and lending

Merchandise trade along the BRI remained strong in the second quarter of 2018, growing by 17.3% year on year to US$319 billion, according to the Ministry of Commerce. However, this was down slightly from the 19.4% growth recorded in January-March. Within that figure, exports rose by 11.7% to US$183.3 billion, while imports rose by 25.9% to US$135.6 billion. China’s trade surplus with BRI countries increased to US$47.7 billion in April-June, accounting for 52.7% of China’s global trade surplus in that period.

Chinas merchantile trade with BRI

China’s top ten BRI trade partners accounted for 66.7% and 53.4% of total two-way exports and imports respectively in the second quarter of the year. This illustrates the degree to which China’s trade connections remain underdeveloped under the initiative. In addition, exports to Malaysia and Turkey, two of China’s largest BRI trade partners, shrank in the second quarter in year-on-year terms, due to a significant slowdown in shipments of machinery exports and textile products, which may be tied to a stalling of BRI projects in Malaysia and the deteriorating economy of Turkey.

In addition, imports from Vietnam—another major Chinese trade partner within the BRI—deteriorated in the second quarter, owing to a slowdown in shipments of electrical equipment and components. Regional shipments of these types of intermediate goods will continue to face headwinds, due to supply chain disruptions caused by China’s trade conflict with the US.

Other indicators point to slowing Chinese business activity in BRI countries. Non-financial ODI flows to BRI countries grew by only 5.6% year on year to US$3.8 billion in April-June, slowing from 20% growth in January-March. This represented only 12% of China’s total non-financial ODI flows in the second quarter. Meanwhile, the value of newly signed construction contracts by Chinese firms in BRI countries contracted by 44.7% year on year in April-June, following a 7.3% decline in the first quarter.

China’s lending to BRI countries is not transparent, but balance-of-payments (BoP) data can shed some light. The most recent detailed figures show that China-resident entities provided overseas loans (defined in the BoP capital and financial account data as assets) worth US$54 billion in January-March 2018, marking the strongest quarterly disbursement on record. However, this came after a period of restrained overseas lending in 2017. The BoP measure is not restricted to BRI countries and covers a variety of commercial lending, including to overseas Chinese entities, but it can be seen as indicative of trend.

overseas loans

Policy updates

In the second quarter of 2018 the Chinese government released a number of policies to strengthen the regulatory framework around the BRI. In April 2018 several central-government agencies released guiding opinions aimed at standardizing funding sources, enhancing general risk-management and better guiding financing channels for Chinese overseas projects. In July China established two international courts to specifically handle disputes under the BRI framework, based in Shenzhen (for disputes on the BRI’s maritime “road”) and Xi’an (for disputes within the BRI’s overland “belt”).

Chinese policy banks that are backing the BRI, including the China Development Bank (CDB) and the Export-Import Bank of China (China EXIM), have become more active in co‑operating with international lenders. In July the policy banks announced plans to work with international financing institutions to improve financial governance and to manage debt and investment risk. A UK-based newspaper, the Financial Times, has reported that both CDB and China EXIM are in discussions with the European Bank for Reconstruction and Development regarding co-financing projects under international lending standards, while CDB is in discussion with the French Development Agency on a joint project.

In July the US, Japan and Australia announced a joint investment fund to support infrastructure investment in the Indo-Pacific, in a move seen as a response to the BRI. The announcement was coupled with a commitment by the US to provide US$113 million in funding for regional development projects.

Project updates

The focus on enhancing international co‑operation in the financing and management of BRI projects has coincided with a number of reports regarding challenges facing BRI projects, both planned and under way.

A BRI flagship project, the China-Pakistan Economic Corridor (CPEC), has come under increasing economic pressure as Pakistan navigates a potential BoP crisis, which was brought on partially as a result of Chinese financing of CPEC projects (thereby depleting Pakistan’s foreign-exchange reserves, due to debt-repayment obligations). In May the Chinese government approved the extension of an existing bilateral currency swap with Pakistan to three years, doubling the total amount covered to Rmb 20 billion (US$3 billion).

In July China authorized a fresh US$1bn loan to Pakistan—upgraded to US$2 billion in August—to boost its foreign-exchange reserves, on top of an existing US$4 billion in Chinese loans delivered to Pakistan in the year to June 2018. While we expect China to remain the major international financier for the country, there is a chance that Pakistani authorities could appeal to the IMF for a bail-out. However, the US government has opposed this idea, worried that these funds would be used to repay Chinese creditors without precipitating economic reform.

Despite these financial troubles, the newly elected government in Pakistan has indicated that economic ties with China, including CPEC, will remain important. In July China announced that it would host 1,000 Pakistani students on a Chinese government-backed scholarship as part of a training programme covering solar power, hydro power engineering, space and high-speed railways. In the same month a Chinese telecommunications giant, Huawei, began the operation of a US$ 4 million fibre-optic cable within CPEC, which is planned to extend to Gwadar Port (another CPEC project).

Not all projects have proceeded smoothly, however. In August Myanmar announced that it would scale down the scope of the Chinese-backed Kyaukpyu port project to US$1.3 billion, from US$7.3 billion initially. The project is meant to support existing energy pipelines stretching from Myanmar’s Rakhine state to China’s south-western Yunnan province.

Meanwhile, the freshly elected prime minister of Malaysia, Mahathir Mohamad, announced in May that the country would re-assess a number of BRI projects to determine their feasibility. In July Malaysia suspended work on US$23 billion worth of Chinese projects, including the East Coast Rail Link (ECRL), over financing concerns. Following a state visit to China in August, Dr Mahathir confirmed that these projects—including the ECRL and a natural gas pipeline—would be cancelled until further notice.

Pushback in BRI nations has not been uniform, however. Although Sri Lanka has struggled under its debt burden to China, handing over its Hambantota port to China for 99 years in December 2017, as part of a US$1.1 billion debt repayment, the country has shown little sign of resisting future investment. In May China lent Sri Lanka another US$1bn to repay other loans that had matured earlier, and approved another US$1bn loan from CDB to finance a road project in that country. In July China issued another Rmb 2 billion in flexible loans to Sri Lanka. Loans to other fragile states—including a US$5 billion loan to Venezuela for oil development, as well as US$20 billion in loans for oil and gas development in Syria and Yemen—indicate that China’s risk-management and debt-scrutiny mechanisms remain underdeveloped, or at least secondary to political or strategic objectives.

China’s Exports Are Homeward Bound

Mainland businesses hit by Trump’s tariffs hope domestic consumers will pick up the slack.

By Daniela Wei and Bruce Einhorn

August 9, 2018, 2:00 PM MDT

chinese millenials

Chinese millennials are eating more seafood.


On July 11, Zhuo Peihui learned the profit margins on the wooden furniture he’s been selling to the U.S. for 13 years were about to evaporate. That’s because the dresser drawers and dining tables made by the more than 100 workers at his factory in the Chinese province of Guangdong had landed on Donald Trump’s latest tariff hit list.

Trump is betting that punishing penalties on Chinese industry will force Beijing to end trade practices his administration says are unfair. But China has at least one powerful strategy for limiting the fallout of the levies: getting the nation’s 1.4 billion people, especially its swelling ranks of middle-class shoppers, to spend more like Americans.

China furniture exporters sold $29.2 billion in goods to the U.S. last year. The $200 billion round of tariff proposals will have the biggest impact on their industry, according to Deutsche Bank AG. They face levies of 10 percent or even 25 percent. That’s spurred Zhuo and other furniture makers to seek sales closer to home. “Although the domestic market is new to us and competition is very fierce, at least the demand is here,” he says. “The market is huge, and customers are paying more for good products.”

With trade tensions between the U.S. and China seeming to worsen by the day, mainland companies selling everything from handbags to fresh food to Christmas lights are boosting their attempts to cultivate local demand. Take Taizhou Tianhe Aquatic Products Co. From its base in Zhejiang province in eastern China, more than 1,000 workers process 10,000 tons a year of freshwater crayfish, frozen squid, dory fillets, and other seafood for sale to the U.S., Europe, and Australia.

share of china GDP

Many of those products are facing new levies in the U.S.; the almost 200-page list of targeted items includes dozens of varieties of seafood, with the penalties due to take effect after public consultations end on Sept. 6. Luckily for Tianhe Aquatic, Chinese millennials are having a crustacean fixation. Demand from urbanites in their 20s and 30s helped the economic value of the crayfish industry climb 83 percent last year even as U.S. exports dropped, according to a June government report.

“Consumers in China care more about the quality of food and consider eating food that is popular in the U.S. and Europe to be fashionable,” says sales representative Doris Chen. Tianhe can’t keep up with local demand, even though it’s charging more and boosting profit margins, she says. “We can drop the U.S. market if we want.”

At the more than 3,000 supermarkets run by state-backed China Resources Holdings Co., shoppers have pushed up sales of jumbo Argentine red shrimp 20 percent in the first six months of this year. That’s because local demand is rising and Chinese middlemen who imported the shrimp with plans to sell them to the U.S. are selling them to the local grocery chain instead, according to the company.

Even before the escalation of trade tensions, the growing spending power of Chinese consumers was attracting greater interest from local producers who’d traditionally sold their goods overseas. Household consumption accounted for more than 39 percent of China’s gross domestic product in 2016 and 2017. That was the highest since 2005. “The trade war will highlight the change,” says Iris Pang, an economist with ING Bank NV in Hong Kong.

Chinese shoppers are still vastly under performing as engines of growth compared with their counterparts in the U.S., where personal consumption accounted for about 70 percent of GDP last year. Addressing that imbalance is an important part of President Xi Jinping’s plan to restructure the world’s second-biggest economy.

It’s not always easy to get mainland customers to mimic America’s consumerist habits. SDIC Zhonglu Fruit Juice Co. accounted for about 20 percent of China’s 654,000 tons of apple juice concentrate exports last year. Customers include Coca-ColaNestlé, and Kraft Heinz, and most of its output is exported to the U.S. and other developed markets. The Trump administration’s latest tariff list includes all types of juice.

So SDIC Zhonglu is trying to win over Chinese parents, who traditionally haven’t given the drink to kids. “We are studying and launching new products to create more juice demand among Chinese consumers,” the company said in a statement. “The China-U.S. trade war is speeding up our shift in market structure and product structure.”

Another big challenge for mainland manufacturers: Many Chinese associate local brands with poor quality. But businesses that have traditionally sold their wares to the U.S. have an advantage, says Fielding Chen, China economist for Bloomberg. “If you can export to the U.S., that means your quality is good,” he says. “This will be very good for them in developing the domestic market.”

Zhuo, the furniture maker, says he hopes that’s the case. While he already sells domestically through an online storefront and is building a physical store, local sales account for only 20 percent of his business so far. “This market gives hope and opportunity for manufacturers to gain big profits.” —With Dong Lyu

BOTTOM LINE – The trade war is forcing Chinese businesses that had focused on exporting to the U.S. to court consumers at home. That could remake the mainland economy in the long term.

Strafor Worldview Situation Report

Oct. 8 2018

What Happened: China’s central bank has announced a cut in reserve requirement ratios that is expected to free up as much as $105 billion worth of liquidity, Caixin reported Oct. 7.

Why It Matters: The central bank’s decision is Beijing’s latest step toward a pro-growth fiscal and monetary policy designed to mitigate the effects of a slowing economy and the ongoing trade war with the United States.

Background: Beijing has now moved to cut reserve requirement ratios three times in the past six months to weather the trade war. President Donald Trump has announced tariffs on nearly all Chinese imports into the United States; China has responded with similar tariffs on U.S. goods.

Read More:

Pei Xin

Pei Xin | Xinhua | Getty Images

Trade volume and activities have been going up within Asia, but that could soon change depending on which way trade tensions between the U.S. and China swing.

In the past year, growth in Asian trade corridors has increased, according to data derived from Citi’s support of clients’ trading activities.

The bank’s client business between South Korea and India went up by 55 percent between April 2017 and March 2018. Between China and the ASEAN (Association of Southeast Asian Nations) region, it shot up by 66 percent in the same period. Overall, its growth in Asia has gone up by 26 percent year on year, the bank said.

Increasingly, Asia “is relying more on Asia” as consumption goes up, Munir Nanji, Citi Global Subsidiaries Group’s head for Asia Pacific, told CNBC.

According to statistics from the World Trade Organization, world trade volume for goods went up by 4.7 percent in 2017, the highest since 2011 and a leap from the 1.8 percent growth in 2016. The 2017 increase was driven by rising import demand from Asia, as well as increased investment and consumption expenditure. In fact, Asia had the fastest trade volume growth of any region in 2017 for both exports and imports — 6.7 percent and 9.6 percent, respectively, the WTO said.

However, the ongoing trade spat between the U.S. and China may soon start to have an impact on Asia, especially emerging markets, experts say.

The WTO acknowledged that risk in its outlook for 2018 and 2019: “Balanced against these broadly positive signs is a rising tide of anti-trade sentiment and the increased willingness of governments to employ restrictive trade measures.”

But it could also be a good thing for certain markets in Asia, as companies look for alternative supply sources beyond the U.S.

What’s driving trade flows within Asia?

Trade-related growth between China and the ASEAN region is fueled mainly by infrastructure needs, while between South Korea and India, automotive and electronic goods are flourishing, according to Nanji.

A common theme is technology: Firms in China and South Korea are increasingly bringing their investments and tech into other parts of Asia.

“Generally, Asians are buying more from Asian companies. Both demand and supply is coming from Asia,” said Nanji, who noted that it used to be American and European companies providing the supply.

For instance, the components of most smartphones are mostly manufactured in Asia, he said.

Various countries’ initiatives are also helping to drive growth. That includes the Make in India initiative, which encourages companies to manufacture their goods in India, and the Shanghai Free-Trade Zone.

Trade spat could shift the movements of goods

In recent weeks, both China and the U.S. have threatened to impose tariffs on each other’s products.

J.P. Morgan analysts wrote in a note that there would be knock-on effects for the rest of Asia if the various tariffs suggested by U.S. President Donald Trump were to come into effect and result in a fall in Chinese exports to the U.S.

Indirect links propagate shocks into the region, and could impact trade and growth … the product categories encompass mainly high-tech products, which would include electronics,” the note said.

“By its very nature, such products are highly reliant on tightly integrated supply chains. To that extent, this would propagate any trade shock into the region.”

The impact would be felt most in countries such as South Korea and Taiwan, the analysts said.

But it might spell good news for some markets. India, for example, would likely benefit from the spat — in the area of cotton exports.

The U.S., the world’s biggest exporter of the fiber, had cornered the bulk of Chinese demand. But China’s move to impose a 25 percent import tax on American farm commodities, including cotton, in retaliation for tariffs enacted by the U.S., may allow India to grab a bigger share of the Chinese market, according to a Reuters report.

In fact, India has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in rare advance deals, officials said.

“If China decides not to buy agricultural products from the U.S., that could move to different parts of Asia to buy, to source it. The U.S., on the other hand, needs to export that somewhere else, so it would find another corridor,” Citi’s Nanji said.

“So when you have a trade war, the countries involved would have to go somewhere else. So other countries would benefit. Some of them could be in Asia, or Latin America. There will be shifts in trade corridors … the question is, where it shifts.”

— Reuters contributed to this report.

weizan Weizhen Tan Markets Editor, CNBC Asia markets



China Set for Record Defaults, and Downgrades Tip More Pain

Bloomberg News

‎July‎ ‎2nd , ‎2018‎ ‎3‎:‎00‎ ‎PM

  • Total so far this year is approaching full tally for 2016
  • Regulators still seen intervening in case of systemic risk

Bloomberg’s Lianting Tu reports on China’s corporate bond defaults.

China is zooming to a record year of corporate-bond defaults.

Chinese companies have reneged on about 16.5 billion yuan ($2.5 billion) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen 2016, according to data compiled by Bloomberg. Strains are set to get worse if the downgrading trends of credit-rating companies are anything to go by . Dagong Global Rating Co. have been downgrading firms by an unprecedented margin.

Drastic Turn for The Worse

Chinese local bond issuers face the worst rating trend this year

Source: Dagong Global Credit Rating

downgrade uprade ratio

“Corporate profits have deteriorated this year and are unlikely to improve against the backdrop of an economic slowdown,” Li Shi, general manager of the rating and bond-research department at China Chengxin International Credit Rating Co. “Refinancing will continue to be tough as long as the crackdown on shadow banking continues.”

The domestic corporate-debt market is almost exclusively a domestic issue. Foreign investors normally gravitate to government-linked securities as China has boosted access to government bonds in recent years. The worsening in credit quality offers little incentive to dip in now, though in time analysts see a more disciplined credit market offering diversification opportunities.

In the meantime, rising yields are set to make the refinancing of maturing debt all the tougher for private companies that lack the access to the state-dominated banking system that national behemoths enjoy. With the People’s Bank of China making only limited steps to support credit to private companies, borrowing costs show no sign of dropping.

unlucky seven

Borrowers have missed payments on at least 20 domestic bonds so far this year, according to data compiled by Bloomberg. There was about 66.3 billion yuan of defaulted notes outstanding at the end of May, or 0.39 percent of corporate bonds outstanding, PBOC data show. While still small, that share may be poised to rise.

Dagong has reported 13 credit-rating downgrades compared with 10 upgrades so far this year, the highest such ratio on record, according to Bloomberg-compiled data. Results from Dagong peers such as China Chengxin International Credit Rating Co. and China Lianhe Credit Rating Co. show similar trends.

The silver lining is that the defaults show Chinese regulators are increasingly comfortable with allowing struggling companies to fend for themselves without official rescues. Bond defaults are good for the long-term development of Chinese markets, Pan Gongsheng, director for State Administration of Foreign Exchange, said in Hong Kong Tuesday.

‘Necessary’ Defaults“They are necessary for better credit-risk pricing and will create a healthier bond market in the long term,” Christopher Lee, managing director of corporate ratings at S&P Global ratings in Hong Kong said of defaults. “It is unlikely there will be a wave of large-scale defaults or concentration of defaults — any such developments will be quickly contained to prevent systemic risks from emerging.”

With rising trade tensions with the U.S. threatening to hurt corporate cash flows, the temptation to shore up credit provision may rise. Data over the weekend showed that a gauge of export orders tumbled into contraction in June.

An escalation of the trade conflict could add to defaults in China’s financial system, said Jing Ulrich, JPMorgan Chase & Co.’s vice chairman for Asia Pacific. Consumer demand and the wider economy are likely to weaken and that “may translate into worse credit quality down the road,” she said in a Friday interview in Hong Kong.

“The volume of bond defaults will most likely surpass 2016 and hit a record this year,” said Lv Pin, an analyst in Beijing at CITIC Securities. While most failures in 2016 were from state-owned firms in industries with excess capacity, the majority of defaulters this year have been private-sector firms. With a variety of industries represented, the data show the breadth of the deterioration, he said.

Read more on China’s credit markets:

— With assistance by Lianting Tu, Jing Zhao, Yuling Yang, Ling Zeng, and Alfred Liu

China’s housing market marks policy anniversary in doldrums

Financial Times October 30, 2018

FTCR China Real Estate index

Two years ago this month, the Chinese government called time on a burst of housing market speculation unleashed by its recourse to stimulus in the wake of the economic turmoil of 2015. Local governments were compelled to bring red hot housing markets under control as part of a policy drive hinged on the official line that “houses are for living in, not for speculation”.

house price expectations cool

Since then, the market has speculated on just when the central authorities would once again relax their stance and allow local governments en mass to ease restrictions on home purchases.

The speculation has recently intensified on signs that broader economic growth is suffering from the government’s deleveraging campaign — the historical record shows how effective pumping up the housing market can be in boosting economic growth. Although our consumer surveys show that nearly a third of urban households already own two or more properties, a traditional belief in the sanctity of bricks-and-mortar, combined with an absence of reliable investment alternatives, mean underlying demand for property remains strong.


The latest FTCR China Real Estate Index shows the impact that two years of tight policy have had on the housing market. The headline index, based on a survey of 300 developer sales offices around the country, fell to 41.5 in October, its lowest level since the start of 2017. Sales across all city tiers fell for a fourth straight month as nearly 60 per cent of developers said even first-time buyers were having to pay above benchmark rates to secure a mortgage — up from just 6.6 per cent in October 2016.

Developers indicated that prices rose again in October — marking the fourth straight year that they have done so — even if at their weakest pace since February 2015. Our separate survey of urban consumers showed that price expectations weakened further in October, though the fact that more than 60 per cent of respondents still expect gains in the coming six months suggests the government’s tough policy line is only slowly getting through to buyers.


Officials are easing credit policy in response to signs of financial strains caused by the deleveraging campaign, and by the hit to sentiment from US president Donald Trump’s trade war. However, property policy remains off limits because the government in large part blames housing market speculation for China’s debt problems.

At least some of the extra funding added to the system this year is likely to wind up in the property market, if only because it usually does. For now, however, the central government looks likely to continue trying to use targeted relief measures, aimed predominantly at small, private companies, to shore up growth. If the government were to relax its housing market restrictions in the coming months, this would be a sign that the leadership has again put vigilance on debt to one side and upgraded its economic threat level.

FTCR China Home sals Index by City Tier

Housing sales fell across all city tiers under coverage for a fourth straight month, with the weakest activity again seen in third-tier cities. Our Home Sales Index fell 3.2 points to 39.1.

FTCR Home Sales Index

First-time buyers were once again the biggest source of demand (43.9 per cent of total buyers) while upgraders accounted for 39.3 per cent. Additional homebuyers made up 16.8 per cent of purchasers.

FTCR China Home Price Index

House price inflation cooled for a fifth straight month, with our price index falling 0.4 points to 52.5. Among respondents to our survey, 70.7 per cent said that prices were unchanged relative to September. The index has been above 50, pointing to rising prices overall, since September 2014.

Among developers, 52.1 per cent said they offered discounts last month. Nearly 80 per cent were offering discounts just over two years ago, when purchase restrictions were loosened to prop up economic growth.

FTCR New Home

The supply of new units to the market fell across all city tiers for a fourth straight month. Our New Home Supply Index fell 2.5 points to an eight-month low of 45.

Our Home Sales Outlook Index fell another 6 points to 44.6, its lowest reading in almost two years. Price expectations were less bullish for a sixth straight month, with our Home Price Outlook Index down 3.8 points at 52.6, the lowest reading since February 2015.


The proportion of developers reporting that first-time buyers were having to pay above the benchmark mortgage rate rose to 56.4 per cent from 55.7 per cent in September. In May, a record 63.6 per cent of first-time buyers were paying above the benchmark.

Our Home Sales Index for first-tier cities fell 4.7 points to 40.9; in second-tier cities it fell 5.3 points to 40.2, while in third-tier cities it rose 1.5 points to 36.4. Our first-tier city house price sub-index fell 2.1 points to 52.3, while the second-tier city sub-index fell 1.7 points to 54.8. The third-tier city index rose 2.7 points to 48.4. The FTCR China Real Estate survey is based on interviews with 300 developers in 40 cities. For further details click here. This report contains the headline figures from the latest Real Estate survey; the full results are available from FT  Database.

flatter from both sides

For all the ink spilled about a U.S.-China trade war — with the Federal Reserve eyeing the economic fallout and the like — the move suggests that the conflict is not at all conducive to a bull steepener. (That’s where the yield gap widens as two-year rates fall by more than their 10-year counterparts, as traders reduce Fed hike expectations.) Also backing that idea are the central bank’s dot plot and its  assessment of the economic outlook. Put simply, the Fed’s concern about the ramifications of an onslaught of tariffs is dwarfed by its optimism on the U.S expansion.

The minutes from the July meeting showed that four officials saw the risks to growth as tilted to the upside (up from two in March), while a lone wolf continued to see things the opposite way. None viewed the risks to core inflation as biased to the downside. Add it all up, and it looks like Larry Kudlow’s wish might not come true.

But Brian Reynolds at Canaccord Genuity sees another way in which trade tensions have had an impact. “Banks were buying more Treasuries as they put on the ‘carry trade,’ buying longer-term bonds utilizing shorter-term funding,” he writes about the second quarter — suggesting the activity was driven by “trade-war worries.”

US commercial bank Assets

Meantime, nobody told break evens that trade wars were inflationary, or would foster a steepening in the inflation-risk premium. It’s possible that break evens could be distorted by a flight to safe and liquid assets thanks to deteriorating ties between the world’s two largest economies. But since these concerns about trade ratcheted higher in mid-June, market-based measures of inflation compensation actually drifted marginally lower — until Wednesday, at least.

inflation back on menu

Breakevens did perk up materially that day, particularly the two-year tenor, which extended their advance after the Fed minutes referenced “supply constraints” on three occasions. As Bespoke Investment Group macro strategist George Pearkes observes, that’s the first time the phrase has appeared more than once in this communique in at least a decade. The Fed is bullish on growth and shifting to inflation-prevention mode under the presumption it’s the best way to sustain the expansion for as long as possible. Others might see continued Fed tightening as bringing the end of the cycle all the nearer.

Which in turn leads to an astute quip from Family Management Corp. CIO David Schawel on Twitter: “If you believe the yield curve flattening, and think we eventually go back into a recession with the Fed cutting, then the 5-10y part of the curve isn’t as unattractive as many think.

A Reprieve from IGnominy

It’s just three sessions into the third quarter (if you’re in the U.S.). But after blue-chip corporate debt was the worst-performing U.S. asset in the first half, it’ll take any stretch of out performance it can get:

top grade for IG

A recent Citigroup survey shows just how unloved investment grade U.S. debt is: hedge funds have pared their holdings in the most aggressive fashion since early 2016, with allocations at the lowest level since 2008. Bloomberg’s Sid Verma notes that this may actually be a contrarian bullish signal, because it means funds have more room to add to the asset class going forward.

But any time in the sun may prove fleeting should long-term yields trend back to their 2018 highs.

“IG has become more of a duration product as well in the past few years, so if intermediate rates stay range-bound in Q3 (as we expect) and issuance remains subdued (given the summer low-issuance period ahead), then this might be the one quarter of 2018 where IG catches a bid,” writes George Goncalves, head of Americas fixed-income strategy at Nomura, who warned that the soft-supply dynamic wouldn’t last forever.

“We would use any tightening of spreads to lighten up on IG, as duration-based products are likely to suffer in the coming quarters and we anticipate that the higher-rates theme will eventually become a credit story, where HY and IG are both hit,” Goncalves says.

To his point on rate sensitivity, mid-April saw bond managers’ allocation to corporate debt as a share of assets deteriorate as the 10-year Treasury yield made its push through 3 percent for the first time since 2014. It’s a picture of what happens when duration risk and the competition for capital collide.

less need to reach for yield

Buyout activity could change the supply picture materially for IG, to boot. Bloomberg Intelligence estimates more than $1 trillion in pending deals, and strategists warn of a flood companies coming to tap the market, raising questions about whether that’s already priced in. That’s the major wild card for high grade — and to a certain extent for the Russell 2000 Index as well, as many potential acquisition targets in the health care space have gone on tears this year.

The Chinese Road More Traveled

 “Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

-Robert Frost, The Road Not Taken

Chinese policy makers either haven’t read Robert Frost, or they don’t agree with him when it comes to economic policy. Their tendencies have been clear, and repeated. When Beijing senses that any trade-off between growth and deleveraging poses a significant threat to the former, its policy stance shifts to prioritize current activity. No wonder Chinese debt topped the second-quarter leader board for Asian EM local-currency performance. in anticipation of an accommodative response by the People’s Bank of China to the  brewing battles over commerce.

bond scorecard.jpg

The pseudo-monetary stimulus that’s ensued also has one Chinese hedge fund calling for a bottom in the nation’s embattled equities.

Meanwhile, PBOC adviser Ma Jun hinted that the deleveraging campaign won’t take a “one-size-fits-all” approach. Unsurprisingly, more than a whiff of moral hazard (along with the smog) lingers in the air. The head of financing at state-owned Qinghai Provincial told Bloomberg he doesn’t expect the government to let the issuer, considered to be a local government financing vehicle in some quarters, default on its obligations. Drawbacks aside, the China model of targeted curbs may be preferable to the West’s reliance on the blunt tool of interest-rate adjustments as a moderating force for the modulations of the business cycle.

The big question is: how is China going to keep its currency stable and run broadly accommodative monetary policy while shrinking leverage in the midst of a Fed tightening cycle? Possible ways to square this circle include further targeted cuts to banks’ required-reserve ratios, additional lending to policy banks and capital controls.

Chinas offical debt.jpg

Plan to Dismount

You have to feel sorry for the Fed. The pressure on its policy target isn’t the Fed’s making, but it’s the only entity that might be willing and able to offer a solution. Massive debt issuance by the Treasury is propelling short-term bill rates higher, and demand hasn’t been that hot recently, either. This deluge, which has pressured a variety of short-term rates higher, is prompting would-be lenders in the federal funds market to engage in more profitable opportunities elsewhere.

As a result, there’s a dearth of liquidity in that corner of the market, and that has helped push the effective fed funds rate up towards the top of policy makers’ target range.

testing feds control.jpg

U.S. fiscal policy is therefore the prime culprit for why the Fed is encountering problems with plumbing of monetary policy. Regulatory confusion is somewhat to blame for banks’ hoarding of reserves, too.

At the same time, the Fed is destroying reserves via its unwinding of asset purchases, potentially exacerbating the issue. Since that’s the primary lever the Fed can use to alleviate upward pressure as it proceeds with hiking rates, analysts are beginning to suspect Chairman Jerome Powell and his team will pull it. That entails pausing, slowing or ending the shrinkage of the Fed’s bond portfolio.

In the minutes, a few participants suggested that “before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen recently.”

Some might find it peculiar that balance-sheet normalization has been on an explicit preset course despite the Fed having taken care to stress that its trajectory for rates wasn’t on any such divined trajectory through the tightening cycle. So perhaps this ahead-of-schedule incident may have a silver lining: it’s a reminder that the balance sheet is, and likely will be, an active tool for major central banks for the foreseeable future — regardless of any protestations otherwise.

Meanwhile, here is a central bank whose control over the market is something to marvel at.

bond snoozefest.jpg

‘Bout That Basis

It’s been a while since the ISDA basis graced these pages. This is an oversight. As a refresher, this refers to the difference in pricing for credit-default swaps that include currency re-denomination as an event of default versus ones that do not. Even as Italian sovereign yields have retraced a sizable portion of their rise, the ISDA basis has blown out and remained near record highs.

Italeave risk

The ECB certainly doesn’t seem shaken by Italian politics. Instead, some policy makers are said to be concerned that markets don’t see a rate hike until the end of 2019, because the lift-off could come sooner. That revelation weighed on sovereign debt in the currency bloc on Wednesday. Perhaps there’s some merit to downplaying the effect of the political drama on economic activity — particularly since Italian officials are far from dead-set on withdrawing from the currency union.

“Nobody wants to leave the euro, but if we don’t fix it, things risk getting worse,” said Italian Finance Minister Giovanni Tria. But in a show of defiance to financial markets, the new government is putting tax cuts and a universal basic income in its first budget. At the same time, it’s asking the European Commission to extend a state loan-guarantee program that’s helped bad bank assets find good homes.

Contrast Italy’s situation with the early whispers out of Andres Manuel Lopez Obrador’s purportedly leftist, populist government in Mexico. His chief of staff said AMLO wouldn’t use his legislative might to roll back the oil reform of 2013, stressing the need to avoid “hurting private investment.” To adapt Obi-Wan Kenobi, these are not the populists you’re looking for. For the time being, at least. Accordingly, the peso is stronger and two-year yields are lower since his victory.

no market discipline

In fact, it’s the best performing currency among the expanded majors tracked by Bloomberg. It seems the election was a case of “buy the rumor, sell the news” for dollar-peso.

China Economic Update

By Eric Wong

Managing Director, Canada Wood China

July 26, 2018

Posted in: China

2018 Q2 highlights:

  • China has posted its Q2 GDP growth of 6.7%, slightly lower than 6.8 percent in Q1 of 2018. Tighter financial conditions (such as authorities continue to demolish on shadow banking and back up financial deleveraging) led to a moderated economic growth in first half of 2018, while manufacturing output moved slower but high-tech related activities remained solid growth; resilient domestic demand helped China maintain strong growth this year even though recent data show its economy is making slower paces. Focus Economics experts forecasted a 6.5% economy growth nationwide in 2018 and 6.3% in 2019.i
  • Property sales went down for the first time in six months due to continued speculation restrictions and rising mortgage rates both led by the government. However, new starts of real-estate construction in Q2 grew 11.3% compared 2017Q2 to 1.46 billion m2.

PMI (Caixin) indexes remained steady in Q2, both hit 51.1 in April and May and slightly decreased to 51.0 in June.ii Followed by a 12.6% year-on-year growth in May, China Exports achieved a 11.3% gain compared with the same period of last year to USD 216.7 million in June which surpassed the 10% growth forecast previously.iii

China exports and manufacturing

China Consumer Price Index (CPI) kept unchanged in April and May (101.8) and slightly raised to 101.9 in June.iv USD/CNY had been on the rise in Q2, increased from 6.34 (May 1st) to 6.42 (June 1st) and hit 6.62 on July 1st;v CAD/CNY kept the similar upward trend, went from 4.93 (May 1st) to 4.95 (June 1st) and hit 5.04 on July

Wood import data ceased to renew since March 2018

A notification was distributed from China Customs that all wood import data ceased to renew since March 2018 for now. BOABC, our regular data vendor informed Canada Wood China that all data renewal work will be back on track soon, China Economic Update will analyze data starting from April in detail at the end of Q3 2018.

Building material prices

Cement price dropped slightly from RMB 447.50 to RMB 441.67 per metric ton (down 1.30%) over June 2018.vii On the other hand rebar steel price went up lightly by 0.35% from RMB 4,007.86 per metric ton on June 1st 2018 to RMB 4,022.00 per metric ton on June 30th 2018.viii The log price index in March 2018 was 1,115.91 points which decreased 0.48% less than February 2019 and grew 2.22% compared to the same period year-on-year; the lumber price index in March 2018 was 1,123.99 which went down slightly of 0.33% month-on-month and decreased 0.56% year-on-year.ix

Wood import of Chinax

China softwood lumber imports reached 2.05 million m3, dropped 1.43% year-on-year and increased 63.43% month-on-month which fits the trend each year that the import volume always rises after Chinese New Year. From January to March 2018 the total volume of softwood lumber imports hit 5.37 million m3 with 0.28% growth year-on-year; of which the imports of Fir & Spruce and Radiata pine was 2.12 million m3 (down 0.1% year-on-year, accounts for 39.5% of total softwood lumber imports) and 0.27 million m3 (up 2.2% year-on-year, constitutes 5% of total softwood lumber imports) respectively.

In March China softwood lumber imports from Russia, Canada and Finland achieved 1.16 million, 0.34 million and 0.13 million m3 respectively. From January to March 2018 the above-mentioned three countries represented 57.36% (up 5.38% year-on-year), 16.56% (down 21.71% year-on-year) and 7.21% (up 4.68% year-on-year) of total softwood lumber imports.

demand for wood