Can Emerging Markets Survive Without Trade Agreements?

Trade kills the American economy. Either America wins (and emerging markets lose), or vice versa.

Right or wrong, that was one key message of Donald Trump’s presidential campaign, and it worked. Though the actual causes of American economic difficulty (especially the fall of the middle classare far more complex and deep-rooted, this simplistic message resonated with many voters, and Trump won the American presidency.

One of his first acts was to cancel the Trans-Pacific Partnership (TPP), an agreement dating back to Obama. Truth be told, Trump’s order was only the nail in the coffin: already, the TPP had faced tough resistance in Congress and from the general public, mainly because of a perception that the TPP’s benefits would accrue only to shareholders, corporations, and foreign governments, rather than American workers. Trump also promised to renegotiate NAFTA, again hammering home the message that American gains from protectionism would equate to emerging market losses. Though it’s supremely inaccurate to say that trade agreements, by nature, are a zero-sum proposition, it’s an easy (and popular) political point for politicians to make.

But is that actually the case? Can emerging markets survive without trade agreements?

The answer, as expected, is somewhat more complicated than you may think.

What are trade agreements?

First, it’s helpful to define what trade agreements are, and how they work. Even though as a whole alphabet soup of terms like NAFTA, TPP, and WTO have entered the common lexicon, people still remain decidedly unclear about what trade agreements actually entail.

At its most basic level, a trade agreement is a pact between two or more nations concerning the terms of trade. These pacts will determine tariffs (taxes and duties) on imports and exports between member nations, and can be between two nations (bilateral) or more (multilateral). As the number of nations involved increases, the complexity also rises accordingly.

NAFTA, the North American Free Trade Agreement, is one multilateral pact (if a small one), whose signatories are the US, Mexico, and Canada. In this particular instance, the trade agreement removes barriers between the nations: this included eliminating tariffs on imports and exports, most favored nation status (non-NAFTA countries couldn’t get better deals), patent protection, easy travel, and a way to mediate trade disputes.

Whatever its intentions, NAFTA still led to a host of unintended advantages and disadvantages. For instance, tax-free zones in Mexico (maquiladoras) did indeed become hotbeds of outsourcing, which led to some job losses in the US; unfortunately, maquiladoras were also home to widespread abuses, crime, and corruption, as well as intense social inequality. Yet at the same time, under NAFTA, goods like groceries and oil became cheaper–and other jobs in the US grew, because even as Mexican production increased, companies still based their design and technical teams in America.

Note that these confusing, subtle effects resulted from one multilateral trade agreement between only three countries. For larger endeavors, there are groups like the World Trade Organization, or WTO, which is essentially an international body (like the United Nations) which operates trade rules, negotiates trade agreements, and settles disputes between members.

Do Emerging Markets Need Trade Agreements?

This brings us to the multi-million dollar (and multilateral) question: can emerging markets survive without trade agreements? After all, the model followed by most emerging markets is to rely on exports as an engine of economic growth, relying on cheap labor costs to attract foreign direct investment–and from that, further develop the nation, its economy, and social and political institutions.

Yet by most estimates, this model isn’t sustainable anymore; prior to the Great Recession, emerging markets were able to rely on exports only because of the unsustainable, credit-fueled consumption from more developed nations. With the Recession, this demand cratered–which also took down the growth rates of many emerging markets. Some nations, like China, rebalanced their economies from industry to services and from exports to domestic markets–perhaps setting an example for others to follow.

Even so, export-driven growth remains a key paradigm for emerging markets. The collapse of agreements like the TPP, which will undoubtedly hurt several emerging markets (for instance, Vietnam, whose companies would have been bound by international labor and environment standards, and which lost a considerable amount of foreign direct investment). In that sense, emerging markets (or at least those without undiversified economies or huge consumer bases) likely do need to rely on trade agreements for continued growth.

But here’s the caveat: just because America is pulling out of trade agreements, doesn’t mean that emerging markets can’t sign with other nations. Put simply, emerging markets do need trade agreements–but such pacts don’t have to be with the United States. In fact, this is already happening with the TPP: negotiators from 11 nations (including Canada, Australia, Malaysia, and Vietnam) are meeting in the Japanese city of Hakone to revive the agreement. Japan, in particular, has emerged as a leader in reviving the TPP, even as it negotiates trade deals of its own with Europe.

Still, this new, revised TPP is likely going to bear some differences, especially when compared to the original text of the contract. Vietnam and Malaysia, at least, are seeking to alter TPP provisions in their favor, relaxing rules on labor, environmental protection, and overall transparency. Many of these conditions, set forth by previous negotiators under the Obama administration, were accepted by nations like Vietnam and Malaysia as a condition for access to large, profitable American markets. With this sort of access off the table, these nations argue, stringent regulations should also be cancelled.

The long and short of it? Yes, trade agreements go very far in helping emerging markets compete by ensuring a steady flow of FDI, cheap exports, and smooth trade. But remember: the world is increasingly a multipolar one, and if protectionist countries don’t step up to the plate, don’t expect emerging markets to simply keel over and die.


Originally published at pingjiangcapitalmanagement.com on July 17, 2017.

What Does the Strong Dollar Mean for Emerging Markets?

The popular perception is that strong/weak currencies are something of a zero-sum proposition. Yet despite the gloomy prophecies of many emerging market specialists from 2016, the strong dollar hasn’t hurt these developing economies. Rather, geopolitical turmoil was more of a factor than currency strength/weakness. Additionally, different markets reacted differently to a strong dollar–and the notion of a one-size-fits-all outlook is false.

What is currency strength–and how does it affect economies?

Currencies are often measured against each other. On one hand, a strong currency leads to increased consumption and international travel: if your dollar is strong, then its purchasing power is higher relative to other currencies. This makes it easier for you to go overseas and visit other countries, or, if you’re an investor, to buy stock in foreign companies, as your money will go further.

The flip side of that is currency flight and decreased exports. Many of these investors will take their money and go overseas, as they can get more bang for their buck. Additionally, foreign investors would likely stay away from American companies; because their purchasing power is more limited than the dollar, their money simply wouldn’t go as far.

In this sense, a weak currency is better for emerging markets: it can attract foreign investors seeking to maximize returns, making it cheaper for them to set up crucial factories and other developments. Devaluing domestic currency to boost foreign direct investment (FDI) was a strategy followed by a number of countries, from Vietnam to India.

Have predictions come true?

In 2016, there were a host of editorials and pundits arguing that, for all their seeming strength, emerging markets were uniquely susceptible to the strong United States dollar. Part of this concern stemmed from an accompanying hike in Federal Reserve interest rates (standard procedure in times of currency strength), but there were other factors in play. Chief among these was melt: in essence, many emerging markets (Turkey, Mexico, and Indonesia among them) hold their debts in American dollars; rising dollar strength means that repaying such debt becomes more expensive as a rapidly growing dollar leaves domestic currencies behind.

Yet these predictions have not come to pass, for the most part; even in cases where an emerging market has slowed, we can likely attribute that more to a complex confluence of geopolitics and domestic events, rather than the strong dollar alone. In South Africa, for instance, political infighting and corruption led to a downgrade of the nation’s credit rating–to junk.

Yet Turkey may provide the most salient example. As I wrote in a previous entry, the nation has been wracked by poor political leadership, regional instability, and the increasingly authoritarian approach of President Recep Tayyip Erdogan. Within the past year alone, Turkey has faced threats in the form of ISIS and Kurdish separatists and undergone a (nearly successful) coup attempt. Erdogan responded by consolidating power and stifling free press and business, pushing out thousands of Turkish citizens (including its richest and most talented), and slowing the once thriving economy.

Clearly, the causes of Turkish economic strife are multifaceted and complex. Yet in Mexico, despite all predictions to the contrary, as well as clear antagonism form the Trump administration (remember the promises of a border wall and tariffs?), the Mexican currency has rallied 10 percent, becoming one of the highest performing currencies worldwide in the Trump era. Despite an initial overreaction, Mexico’s peso strengthened as economic realities cooled hot rhetoric, coupled with a series of embarrassing, high-profile gaffes for the Trump administration.

Further, not all currencies (and economies) remain equal. Those nations with robust, highly-developed domestic markets (such as China, India, and Indonesia) are far less likely to succumb to a stronger dollar. After all, these nations can simply rely on domestic consumers to make up the shortfall. In China, for instance, a massive, fast-growing middle class (along with North American consumers and the elderly in developed countries) is forecasted to generate half the projected growth in consumer spending. Barring anything short of a trade war, it’s hard to see how the dollar can set back a developing nation with a strong internal economy.

Will domestic developments weaken the dollar?

Still, as strong as the dollar may have been, this may not last. Shortly after Trump’s election, the dollar was the strongest it had been since 1986, rising an unprecedented 25% against other currencies since mid-2014. This was due to a confluence of factors, from increasing weakness of the euro, a result of instability in the European Union, as well as slowdowns in other global stock markets and currencies.

Yet this unprecedented strength may soon be ending. Soon after his inauguration, President Donald Trump expressed a desire for a weaker dollar; in essence, Trump’s desired goals (increased competitiveness on the global market and an aim towards attracting investment) are incompatible with a strong dollar. To no one’s surprise, not long after Trump made his comments, the dollar sank drastically, dropping 0.7%.

Even though American presidents traditionally refrained from talking about currency strength (for fear of adverse effects), Trump’s message may not be as consistent as it initially seems. Conflicting signals from the Trump administration (over NAFTA, border taxes, and the like) seem to indicate that rather than weakening the dollar, the US government may yet continue with the strong dollar policy in place for the past several decades. The dollar would certainly continue to rise if global investors take advantage of higher interest rates and bring their assets to the United States.

Ultimately, it’s too simplistic (and inaccurate) to say that a strong dollar will tank emerging markets. The term is simply too broad, encompassing nations in the middle of geopolitical turmoil (Turkey) to those with highly developed internal economies (China). Further, no one is clear whether a weaker dollar is simply political rhetoric–or an indicator of a new economic reality under Trump.


Originally published at pingjiangcapitalmanagement.com on July 6, 2017.

Blockchain and Emerging Markets

From the FDIC, which insures deposits in all US banks, to the Federal Reserve, which governs the American economy, our society is built on a trusted, central authority to regulate, insure, and govern

But what about nations that don’t have reliable governmental institutions?  What about nations where corruption and graft are endemic–which, sadly, is much of the world today?  Where can citizens, visitors, and immigrants turn to for financial services?

What is Blockchain?

As in many other areas of life, technology may provide the answer.  Blockchain, the brainchild of the reclusive genius Satoshi Nakamoto, is a perfect fit for this puzzle, given that it is set up to be a decentralized, autonomous system that relies on peer-to-peer records and not a single, unified authority.

But first, a simple explanation of a complicated process.  Blockchain is essentially a long, ever-growing line of blocks (records of transactions), which is constantly updated by millions of semi-autonomous nodes every time money changes hands or a block is altered.

Take Bitcoin, for example: as the most famous (and notorious) Blockchain-based technology, Bitcoin does not rely on a single organization (like a bank or the Federal Reserve) signing off on a currency trade.  Instead, if one user wishes to pay another, the payer will enter the transaction into the network, and nodes will immediately spring into action.  First, millions of nodes will race against time (and each other) to check established blocks, ensuring that the payer has sufficient funds to carry out the deal.  Afterward, the nodes will once again race to finalize the transaction, creating a new block as a record of this exchange, and adding it to the Blockchain, where it can be verified by other users (and nodes).

Basically, Blockchain-based technologies are like open-source record keeping, with one critical distinction: unlike a wiki, which can be altered by anyone, Blockchains are especially difficult to tamper with, thanks to their reliance on cryptography, as well as the competition between nodes.  Because blocks are constructed as encrypted puzzles that can only be accessed by nodes, would-be hackers have to outrace the combined computing power of millions of nodes.  Given the sheer size of the network, this is something that would be difficult, if not impossible, without a supercomputer.

The need for blockchain in emerging markets

One key distinction: Blockchain is not Bitcoin, but rather, the technology that Bitcoin is based on.  Blockchain has many other applications beyond Bitcoin and its infamous darknet deals, and can even be expanded into areas other than finance.

In fact, Blockchain-based technologies are perfect for emerging markets–often nations with weak governmental institutions presiding over an influx of capital and a rising economy.  Instead of sinking money into moneylenders or corrupt national banks, users in these areas can instead turn to Blockchain startups.

One area that’s particularly relevant is that of money remittances, which are typically sent back by guest workers and immigrants in more developed nations to their families in emerging economies.  In Africa alone, the Overseas Development Institute (ODI) estimates that nearly $41 billion was remitted in 2015–and that remitters lost a whopping 12% in fees for every $200 sent.  Most of it went to the usual culprits: unscrupulous middlemen, corrupt national banks, poor exchange rates, and of course, market domination by Western Union and Moneygram.

How blockchain technology can fill in the gap

Blockchain startups can put an end to all that, allowing hardworking immigrants and their families to hold onto their cash, and freeing them from the grip of a wasteful, corrupt system.  By expanding into emerging markets, Blockchain tech can sidestep weak, haphazard regulation, and instead allow users to take control of their financial destiny.

Take Kenyan remittance startup BitPesa, which recently won $1.1 million in funding. Based off the e-currency M-Pesa, which accounts for 43% of the Kenyan GDP, BitPesa has since expanded into the neighboring African nations of Uganda and Nigeria, and caught the attention of venture capitalist Jalak Jobanputra, who likens Blockchain tech to “the next internet.”

Yet BitPesa is only one of a rapidly growing group of startups that promise to transform remittances in emerging markets.  Already, similar companies have sprung up in the Philippines (which saw $27.5 billion in remittances in 2014), Mexico ($23 billion in 2013), and other emerging economies, like Indonesia.  While using Blockchain to transfer money is not perfect (users still have to convert their cash from local currency into e-currencies like Bitcoin or M-Pesa), it is still a huge step forward.

Blockchain applications outside of finance

One key area for Blockchain applications is what’s being called the Internet of Things (IOT), which is basically connecting things (from smartphones to jet engines) to both the internet and each other for increased efficiency.  For instance, the navigation system of a container ship transporting raw materials to a port could automatically notify harbor control of its arrival, so that the proper cranes and staff are on hand to facilitate transfers.

Critically, IOT applications require both excellent record-keeping and a tamper-proof system. Coincidentally, these are two areas where emerging economies may be weak: for instance, a power plant will require constant monitoring and data, but its efficiency may be slowed by an overworked mainframe, or its weak IT infrastructure may be vulnerable to hacking.

In both cases, Blockchain technologies are extremely useful.  As we explained earlier, such systems are extremely difficult to hack (due to their decentralized nature and reliance on nodes). Without the need for an expensive, central server room, halting one node will not cripple or destroy the entire system–something that is especially important when it comes to critical systems like nuclear power plants or air traffic control.

Blockchain for all

Sir Richard Branson recognized the potential impacts of Blockchain, reportedly hosting a Blockchain summit on his own private island for the past two years.  With its decentralized, autonomous, peer-to-peer system, Blockchain promises to revolutionize the world–but emerging markets in particular, allowing users to sidestep greedy middlemen and corrupt governments to seize their financial destiny on their own terms.

This blog was originally published on PingJiangCapitalManagement.com

Argentina: As Economic Leadership Shifts, So Does Opportunity

Recent developments marked a significant turnaround from the tumult of the Argentinian market. Based on events set in motion at the start of this year, the U.S. Congress passed a 54-16 vote last week to allow President Mauricio Macri to issue a bond and apply part of the funds to pay holdout creditors. Under his leadership, the country is poised for greater financial stability, with a more optimistic financial outlook than the recent past.

In 2013, the Argentine bond market was in a much different place after the country’s multiple defaults on foreign bonds. While not unique to the South-American country, the frequency with which this situation occurred raised eyebrows globally, causing many to question the decisions of its leader, former President Cristina Kirchner. “Argentina is a special case. Its recalcitrance is the stuff of legend and the risk of this default was well telegraphed,” reported Michael Casey, of theWall Street Journal, the week after the default.

This situation was a significant low point amidst other struggles that have led the country further into the downward spiral of a nearly 200-year trajectory of serious defaults, which finally resulted in a 15-year market hiatus. Despite being a country that seems to have everything going for it, as pointed out in Deutsche Welle, it seems to continually ensnare itself financially.

“The country of 43.4 million people has a literacy rate of over 98 percent, enormous natural resources, a vibrant export-oriented agricultural sector and a diversified industrial base.” The article goes on to point out that, these accomplishments aside, the country has defaulted on sovereign debt eight times, resulting in a massive economic depression from 1998 to 2002. Even with significant rebounds, resulting in 72 billion Euros with six years of growth at an average of 8.5%, the country has continued to battle high inflation and extremely concerning deficits.

But the “recalcitrance” The New York Times reports is being addressed. When President Macri was appointed in December of 2015, it came with significant other personnel changes to ensure that “Argentina shifted from being administered by populists with a tendency to nationalize industries, to being governed by bankers looking to make Argentina play by the rules of global markets.” Alfonso Prat-Gay, who formerly ran currency research unit at JP Morgan Chase in London, was appointed finance minister, and Federico Sturzenegger, an economist and former president of Banco Ciudad, was appointed the head of Argentina’s central bank.

Carefully leveraging these new appointees in his government, Macri has ensured swift change. In an effort to regain access to foreign debt markets, President Macri put plans in place for a $4.65bn cash payment for four “holdout” creditors who refused to restructure debt after the country’s 2001 default. Coupled with several other funds, this positioned Argentina to bring in  $15bn in debt funds from foreign creditors, making it the largest bailout since Mexico’s $16bn deal 20 years ago.

Now post vote, the bond is expected to raise at least $12 billion, of which $11.68 billion will be used to pay the holdout creditors, with the extra $3 billion going toward closing out the government’s fiscal gap.

According to an article in CNBC, this vote has been lauded as a huge accomplishment for President Macri, who had to win over former supporters of Kirchner’s, and was the last big challenge he faced before being able to launch the bond.

Current State Of The Energy Industry In China

China is the most populated country in the world. With its advancements in the energy industry and rapid-growing economy, China is poised to be be the largest global energy consumer and producer. Due to its increasing energy needs, especially in recent years, China’s position in the world energy market is profound. China was the second largest net importer of crude oil and petroleum products in 2009, and in 2011, the country was the world’s second largest oil consumer behind the U.S.

China’s demand for increased energy sources has been caused by factors of growth in trade, transportation and sector shifts in technology. With the rate of its not-so-steady growth, China has presented itself as a major player in the consumption and production in the energy sector.

The energy sources that make up China’s consumption come in three forms:

Coal

The majority of China’s total consumption as reported in 2012 was coal by 66%. Due to the causal effect of coal to heavy air pollution, China has attempted to use alternate sustainable energy sources like nuclear in an effort to cap use to 62% by 2020. According to China’s National Energy Agency, coal consumption is successfully decreased to a reported 64.2% in 2014. China’s government has plans to reduce CO2 emissions by 40% or more by 2020.

Oil, Petroleum & Other Liquids

In a January 2015 report by the Oil & Gas Journal (OGJ), China maintains 24.6 billion barrels of proved oil reserves, the highest in Asia and Russia. Its total petroleum and other liquid production is the fourth-largest in the world. In two decades, this production has grown 50%, but the rate of production has still not kept up with the demand. Two years ago, China produced almost 5 million barrels of petroleum and other liquids daily — 92% of which was crude oil. Environment Impact Assessment that this number will see a further increase by 5.7 million by 2040. However, the country has seen an oil consumption decrease since 2010 with China’s increased plans to reduce overconsumption.

Furthermore, The EIA reported that China lapped the United States at the end of 2013 as the world’s largest net importer of petroleum and other liquids, with consumption growth accounting for about 43% of the world’s oil consumption growth in 2014. EIA projects China will account for more than one-fourth of the global oil consumption growth in 2015.

Natural Gas

The use of natural gas has increased considerably in the past 10 years as China has been seeking to raise natural gas importing via liquefied natural gas (NYSEMKT:LNG). China nearly tripled its natural gas production to 3.8 trillion cubic feet in 2012. The country’s natural gas consumption showed a rise of 17% annualized from 2003 to 2013, becoming the third largest LNG importer in 2012. The following year, in 2013, the country imported 870 billion cubic feet (Bcf) of LNG.

With its steady growth and economic advancements, it is no surprise that the EIA forecasts that China’s oil consumption will exceed that of the United States by 2034. With plans to increase natural forms of energy production, China may also show itself to be a powerful contender in sustainable energy sources in the upcoming years.

This post was originally posted on Ping Jiang’s Medium: https://medium.com/@Dr.PingJiang

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Welcome

Dr. Ping Jiang is one of the world’s foremost macro traders, due to his successful track record of investing in emerging markets and undervalued investment vehicles. Dr. Ping currently serves as cofounder and Chief Executive Officer of Ping Capital Management, Ltd. Founded along with his partners in 2008, PING Capital is an investment management firm focused on investing in undervalued macro asset classes, including local and external bonds, currencies, equities, commodities, and derivatives.