Global Significance of Chinese Investments. My Deliberations in Mumbai (04/03/2018)

Legends:

What are fitted values in statistics?

The values for an output variable that have been predicted by a model fitted to a set of data. a statistical is generally an equation, the graph of which includes or approximates a majority of data points in a given data set. Fitted values are generated by extending the model of past known data points in order to predict unknown values. These are also called predicted values.

What are outliers in statistics?

These are observation points that are distant from other observations and may arise due to variability in the measurement  or it may indicate experimental errors. These may also arise due to heavy tailed distribution.

What is LBS (Locational Banking statistics)?

The locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty, and by nationality of reporting banks. Both domestically-owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. This is consistent with the residency principle of national accounts, balance of payments and external debt statistics.

What is CEIC?

Census and Economic Information Centre

What are spillover effects?

These refer to the impact that seemingly unrelated events in one nation can have on the economies of other nations. since 2009, China has emerged a major source of spillover effects. This is because Chinese manufacturers have driven much of the global commodity demand growth since 2000. With China now being the second largest economy in the world, the number of countries that experience spillover effects from a Chinese slowdown is significant. China slowing down has a palpable impact on worldwide trade in metals, energy, grains and other commodities.

How does China deal with its Non-Performing Assets?

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China adopted a four-point strategy to address the problems. The first was to reduce risks by strengthening banks and spearheading reforms of the state-owned enterprises (SOEs) by reducing their level of debt. The Chinese ensured that the nationalized banks were strengthened by raising disclosure standards across the board.

The second important measure was enacting laws that allowed the creation of asset management companies, equity participation and most importantly, asset-based securitization. The “securitization” approach is being taken by the Chinese to handle even their current NPA issue and is reportedly being piloted by a handful of large banks with specific emphasis on domestic investors. According to the International Monetary Fund (IMF), this is a prudent and preferred strategy since it gets assets off the balance sheets quickly and allows banks to receive cash which could be used for lending.

The third key measure that the Chinese took was to ensure that the government had the financial loss of debt “discounted” and debt equity swaps were allowed in case a growth opportunity existed. The term “debt-equity swap” (or “debt-equity conversion”) means the conversion of a heavily indebted or financially distressed company’s debt into equity or the acquisition by a company’s creditors of shares in that company paid for by the value of their loans to the company. Or, to put it more simply, debt-equity swaps transfer bank loans from the liabilities section of company balance sheets to common stock or additional paid-in capital in the shareholders’ equity section.

Let us imagine a company, as on the left-hand side of the below figure, with assets of 500, bank loans of 300, miscellaneous debt of 200, common stock of 50 and a carry-forward loss of 50. By converting 100 of its debt into equity (transferring 50 to common stock and 50 to additional paid-in capital), thereby improving the balance sheet position and depleting additional paid-in capital (or using the net income from the following year), as on the right-hand side of the figure, the company escapes insolvency. The former creditors become shareholders, suddenly acquiring 50% of the voting shares and control of the company.

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The first benefit that results from this is the improvement in the company’s finances produced by the reduction in debt. The second benefit (from the change in control) is that the creditors become committed to reorganizing the company, and the scope for moral hazard by the management is limited. Another benefit is one peculiar to equity: a return (i.e., repayment) in the form of an increase in enterprise value in the future. In other words, the fact that the creditors stand to make a return on their original investment if the reorganization is successful and the value of the business rises means that, like the debtor company, they have more to gain from this than from simply writing off their loans. If the reorganization is not successful, the equity may, of course, prove worthless.

The fourth measure they took was producing incentives like tax breaks, exemption from administrative fees and transparent evaluations norms. These strategic measures ensured the Chinese were on top of the NPA issue in the early 2000s, when it was far larger than it is today. The noteworthy thing is that they were indeed successful in reducing NPAs. How is this relevant to India and how can we address the NPA issue more effectively?

For now, capital controls and the paying down of foreign currency loans imply that there are few channels through which a foreign-induced debt sell-off could trigger a collapse in asset prices. Despite concerns in 2016 over capital outflow, China’s foreign exchange reserves have stabilised.

But there is a long-term cost. China is now more vulnerable to capital outflow. Errors and omissions on its national accounts remain large, suggesting persistent unrecorded capital outflows. This loss of capital should act as a salutary reminder to those who believe that China can take the lead on globalisation or provide the investment or currency business to fuel things like a post-Brexit economy.

The Chinese government’s focus on debt management will mean tighter controls on speculative international investments. It will also provide a stern test of China’s centrally planned financial system for the foreseeable future.

Global Significance of Chinese investments

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Industrial Semiosis. Note Quote.

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The concept of Industrial Semiosis categorizes the product life-cycle processes along three semiotic levels of meaning emergence: 1) the ontogenic level that deals with the life history data and future expectations about a single occurrence of a product; 2) the typogenic level that holds the processes related to a product type or generation; and 3) the phylogenic level that embraces the meaning-affecting processes common to all of the past and current types and occurrences of a product. The three levels naturally differ by the characteristic durational times of the grouped semiosis processes: as one moves from the lowest, ontogenic level to the higher levels, the objects become larger and more complicated and have slower dynamics in both original interpretation and meaning change. The semantics of industrial semiosis in industry investigates the relationships that hold between the syntactical elements — the signs in language, models, data — and the objects that matter in industry, such as customers, suppliers, work-pieces, products, processes, resources, tools, time, space, investments, costs, etc. The pragmatics of industrial semiosis deals with the expression and appeal functions of all kinds of languages, data and models and their interpretations in the setting of any possible enterprise context, as part of the enterprise realising its mission by enterprising, engineering, manufacturing, servicing, re-engineering, competing, etc. The relevance of the presented definitions for infor- mation systems engineering is still limited and vague: the definitions are very general and hardly reflect any knowledge about the industrial domain and its objects, nor do they reflect knowledge about the ubiquitous information infrastructure and the sign systems it accommodates.

A product (as concept) starts its development with initially coinciding onto-, typo-, and phylogenesis processes but distinct and pre-existing semiotic levels of interpretation. The concept is evolved, and typogenesis works to reorganize the relationships between the onto- and phylogenesis processes, as the variety of objects involved in product development increases. Product types and their interactions mediate – filter and buffer – between the levels above and below: not all variety of distinctions remains available for re-organization as phylos, nor every lowest-level object have a material relevance there. The phylogenic level is buffered against variations at the ontogenic level by the stabilizing mediations at the typogenic level.

The dynamics of the interactions between the semiotic levels can well be described in terms of the basic processes of variation and selection. In complex system evolution, variation stands for the generation of a variety of simultaneously present, distinct entities (synchronic variety), or of subsequent, distinct states of the same entity (diachronic variety). Variation makes variety increase and produces more distinctions. Selection means, in essence, the elimination of certain distinct entities and/or states, and it reduces the number of remaining entities and/or states.

From a semiotic point of view, the variety of a product intended to operate in an environment is determined by the devised product structure (i.e. the relations established between product parts – its synchronic variety) and the possible relations between the product and the anticipated environment (i.e. the product feasible states – its potential diachronic variety), which together aggregate the product possible configurations. The variety is defined on the ontogenic level that includes elements for description of both the structure and environment. The ontogenesis is driven by variation that goes through different configurations of the product and eventually discovers (by distinction selection at every stage of the product life cycle) configurations, which are stable on one or another time-scale. A constraint on the configurations is then imposed, resulting in the selective retention – emergence of a new meaning for a (not necessarily new) sign – at the typogenic level. The latter decreases the variety but specializes the ontogenic level so that only those distinctions ultimately remain, which fit to the environment (i.e. only dynamically stable relation patterns are preserved). Analogously but at a slower time- scale, the typogenesis results in the emergence of a new meaning on the phylogenic level that consecutively specializes the lower levels. Thus, the main semiotic principle of product development is such that the dynamics of the meaning-making processes always seeks to decrease the number of possible relations between the product and its environment and hence, the semiosis of product life cycle is naturally simplified. At the same time, however, the ‘natural’ dynamics is such that augments the evolutive potential of the product concept for increasing its organizational richness: the emergence of new signs (that may lead to the emergence of new levels of interpretation) requires a new kind of information and new descriptive categories must be given to deal with the still same product.