Tuesday's Top 10 with NZ Mint: Starving a 'gifting' economy; A call for British socialism; The correlation between Chinese pork prices and gold; The Flight of the Plutocrats; Dilbert

Here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #8 on the rise of the plutocrats, the fall of the nation state and the squeezing of those of middle to low incomes and small businesses.

1. Starving a gifting economy - Junheng Li has a useful piece here at Forbes on how an austerity drive is starving the so-called gifting economy in China, where 'gifts' are given to officials and bosses and anyone else you need to suck up to.

Prime Minister Key will this week be traveling to China with a big business delegation to meet newly appointed leaders Li Keqiang and Xi Jingping. 

This is a bit of a coup, coming so soon after their appointment. 

It's the hottest ticket in New Zealand's corporate and exporting scene.

No doubt there's been plenty of deliberation about the types of gifts being given.

The ones from the government will no doubt be tasteful and local. 10 cans of baby formula would be a bit obvious.

But the business delegation should certainly read this piece to get a feel about the changing climate in China after the change of leadership. Nothing too flashy would be the recommendation. Maybe a couple of Icebreaker T-shirts and a six pack of Moa. 

Going into and throughout the Chinese New Year in 2013, austerity was the new sentiment for the government, as well as the average Chinese consumer. The impact of the austerity measures has been felt acutely across all sectors in China,from upscale restaurants to luxury packaged tours and VIP room traffic in Macau casinos.  While it is impossible to obtain an accurate number on “gifting” as a percentage of the total luxury industry, we estimate that for certain items (such as high-end watches and handbags) 40-60% of purchases are intended as gifts.

Reliable data are hard to get in China overall, and luxury retail poses an extra challenge, since almost 50% of the purchases take place outside of China.  One way to circumvent these obstacles is to monitor the change in online searches for various brands. Whether Chinese travel or buy the items at home, they are likely to research the products and similar brands online first. Our research thus far indicates a drastic slowdown in certain luxury brand inquiries.

2. Winners and losers in China's great Urbanisation drive - Here's a timely feature from Lucy Hornby and Jane Lee at Reuters on China's urbanisation drive and the changes it is unleashing socially in China.

Fascinating to see there is a massive affordable housing problem there too.

Cheap but crowded neighborhoods are being cleared across China as part of a stepped-up "urbanization" campaign by China's new leaders. The country aims to spend an estimated $6 trillion on infrastructure, including housing, as a projected 400 million people become urban residents over the next decade.

But in an ironic twist, the clearance of so-called "villages within cities" removes cheap housing stock for the very people targeted to fuel that migration, without providing sufficient replacement units. The land is sold by municipalities to developers who generally erect expensive apartment towers.

3. The very popular revolt against British banks - We tend to forget in New Zealand that banks are very unpopular in the northern hemisphere.

Here's an example courtesy of Richard Seymour at The Guardian. He really wants a people's bank, not just a state owned bank. He sees this as the start of a complete government takeover of the economy. It's been a while since I've heard these sorts of a calls for a full socialist system.

One response to this, which is quite popular on the left, is to favour a public utility banking system: instead of credit and investment being dependent on secretive organisations operating in a global casino, they should be allocated by a set of nationalised institutions responsive to popular needs. This would certainly be a step forward. It would undermine the institutional basis for a particular form of ruling class power, and it would, in principle, place in the hands of the population the means to undertake massive, but necessary, restructuring, such as the enormous investments needed to create a "green" economy, solve the housing crisis, fix public transport and create a viable pensions system.

such a bank would have to be capable of challenging private capitalist power. Why? Because private investment decisions are not necessarily for the public good. It is not just that corporations externalise costs and maximise profits, with as much disregard for the public good as they can get away with. It is that the very system of competitive accumulation produces irrational outcomes: mass unemployment, overproduction and waste production.

This suggests that we would need to aim to go beyond public utility banking. What we today know as banks would have to become instruments of popular control and democratic planning, and for that we would need to democratise not just the banking system, but the productive base of the economy as such.

4. Alarm bells from China's coastal economies - Here's John Foley at Reuters' Breaking Views reporting on signs of stress in China's banking system.

Credit alarm bells are ringing in China’s east. Earnings from three of the country’s top four lenders show that while the national ratio of bad debts to loans is still falling, stress is building in coastal regions. Problems in an area rich in private sector businesses and manufacturing could be a national concern.

Agricultural Bank of China, China Construction Bank and Bank of China, which collectively account for a third of the country’s bank lending, flagged a 26 percent increase in bad loans for the area around the Yangtze River Delta, which centres around Shanghai, between June and December, while their total loans to that part of China increased just 3 percent.

5. The link between Chinese pork prices and the gold price - FT's BeyondBrics blog reports on research showing a reasonably strong correlation between the gold price and the Chinese Consumer Price Index inflation, which has pork prices as a major component.

Officials have warned that China faces inflationary pressures this year, with central bank governor Zhou Xiaochuan saying this month that China should be on “high alert” against inflation. Inflation for the first two months of this year came in at 3.2 per cent, its highest level in 10 months.

The fear is that inflation could be pushed even higher by rising prices for pork, which is heavily weighted in the consumer price index because it is so widely consumed. As Rahul Jacob noted on beyondbrics, pork prices are expected to rise sharply this year, by as much as 16 per cent according to some estimates. If that happens, it could be good news for gold bugs.

6. The growing tensions between America and China - So far the world has avoided the sort of trade wars that seemed to make the Great Depression even Greater, but there are growing signs that America is beginning to see trade as a strategic issue bound up with concerns about security.

The highest profile example is around telecommunications equipment and fear that Chinese firms will embed snooping technology inside American networks. 

WSJ reports on how US authorities want approval over which equipment is used when Japan's Softbank buys America's Sprint Nextel so as to block the use of Huawei gear.

Our government is using Huawei gear in parts of the Ultra Fast Broadband network and it was used to build the 2Degrees network. So far New Zealand hasn't been forced to choose between trade with China and its relations with America.  But the pressure keeps building. 

Here's WSJ on the issue:

U.S. treatment of those suppliers has inflamed tensions between the U.S. and China, which are already sparring over accusations of computer hacking and trade issues. After the House intelligence committee concluded in October that Huawei and Chinese rival ZTE Corp. pose national-security risks because their equipment could be used for spying, China's Commerce Ministry lashed out, saying the report violated the U.S.'s free-market principles and warning it could undermine cooperation between the countries.

7. How to buy off the US Government - Hedge fund behemoth Steve Cohen at SAC appears to have bought off the US government to stop having to go to jail, reckons John Cassidy at The New Yorker.

The world's greatest democracy is really just the world's biggest plutocracy.

Unless the judge, Victor Marrero, rejects the settlement between the Securities and Exchange Commission and SAC, which was announced a couple of weeks ago, Cohen will be free to go about his business, which has long been clouded by suspicions of insider trading, once he writes a check of six hundred and sixteen million dollars to the Securities and Exchange Commission. There will be no further sanctions and no admission of wrongdoing. And in fact, Cohen already appears to be celebrating. According to a report in the Times, he has just purchased a Picasso painting, “Le Rêve,” for a hundred and fifty-five million dollars, and an ocean-front mansion in East Hampton, for sixty million dollars.

The lack of any admission of wrongdoing on SAC’s part would be astounding if such omissions hadn’t become depressingly common in recent settlements between the government and Wall Street firms. In the aftermath of the financial crisis, Judge Jed S. Rakoff, one of Marrero’s colleagues on the district court, initially rejected S.E.C. settlements with Bank of America and Citigroup over their misconduct. But the government, for whatever reason, persists in allowing Wall Street firms to resolve big cases without admitting the obvious: the reason they are paying large fines is that they did something wrong.

It’s a farce, and it’s not getting any funnier. The SAC settlement marks the first time, to my knowledge, that the S.E.C. has accorded such deference to a hedge fund, and it also raises the question of whether the Justice Department is now ducking bringing criminal charges against Cohen himself. Some folks who know how the system works from the inside think that that’s what it looks like. “I read the Martoma complaint,” Bradley Simon, a prominent white-collar criminal defense attorney and former federal prosecutor, told me. “It seems like there’s evidence there for them to charge Cohen, but they don’t want to do it.”

8. 'Capital is seeking to avoid the burden sharing that makes modern society possible' - Here's Chrystia Freeland at Reuters musing on the Cypriot situation and talking to a senior Turkish official.

For individual plutocrats, taking advantage of globalization is even easier: Move your legal residence – and your money – as the actor Gerard Depardieu or the Facebook co-founder Eduardo Saverin did.

But these lower tax bills come at a cost. As I was told by Kemal Dervis, former minister of economic affairs in Turkey and now vice president of the Brookings Institution, “Capital is seeking to avoid the burden-sharing which makes modern society possible.”

“If every country tries to race towards the lowest rate, then in the end nobody gains,” Dervis said. “If you believe there should be no government at all, then fine. But if you believe some government is good, then you cannot have a system that erodes the tax base in all major countries.”

The big losers, in Dervis’s view, are those who do not have the option of exiting the nation-state: the middle-class citizen and the medium-size business. The Cypriot economy was an extreme product of the age of global business and a weakening nation-state.

9. What a lovely business to own - Here's the latest bleating via Stuff from a power company executive about how power prices will have to rise to justify a higher return on equity and build up the cash required to invest in new capacity.

What other business would have the cheek to assume that prices should rise to improve their return on equity? These power companies pretend they are operating in a competitive market, but all their rhetoric betrays they believe they have the right to make profits every year forever. No wonder demand for the Mighty River float is so strong.

On the eve of Mighty River Power's listing on the share market, he said he sees capital returns from the New Zealand energy sector as too low to attract equity investors, who have "better choice" elsewhere.

According to the firm's full- year results for 2012, Contact's return on equity ratio stood at 4.6 per cent, well below the 15 per cent level that many investors consider to be the benchmark return. The other major power firms are in a similar position.

During the same 12-month period, Mighty River Power's ROE stood at 2.3 per cent, Genesis Energy at 4.9 per cent and Meridian at 1.6 per cent. "The fundamentals are that the current wholesale power prices on average don't fund a new power station, so over time you will have to increase those wholesale prices."

10. Totally North Korean report about life in America - This is hilarious. Americans drink coffee made of snow and all live in tents, according to this translated North Korean video on life in America.

The North Koreans seem obsessed with the idea that Americans drink coffee made of snow. Or there's a translation problem. Whatever. It made me laugh out loud.

"Their houses blow down very easily and they have to live in tents like these. There are no birds in the trees. They are eaten on Tuesday."