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Moody's Investor's Service downgrades China's credit rating to A1 from Aa3. Moody's predicts a slowdown in growth for China. GDP growth for 1st quarter 2017 was 6.9%. Total debt has grown from 149% of gross domestic product in 2008, to 213% in 2013, and is now 253%, according to JP Morgan. The problem is that ever higher levels of credit have supported growth and more of this is coming from the shadow banking sector. Higher levels of debt in future years from the already high levels will weigh heavily on growth, leading to an eventual slowdown in the economy's growth rate.

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Dilution of the Volcker Rule by defining "hedging" as covering bank risk on a "portfolio basis," "including aggregate risk of one or more trading desks." The new wording is in a 174 page draft proposal for the rule released by regulatory agencies. The Federal Reserve, the FDIC, the CFTC, the SEC, and the Treasury Department are putting together the final wording. This opens the door for banks to engage in proprietary trading on their own account. Experts say this makes it possible for financial firms to make all kinds of bets on the market, by defining the risk of its portfolio broadly, such as a U.S. recession. Additional changes are the deleting of the requirement that chief executives pledge their firms are not engaging in proprietary trading. Another change that is being debated is whether to require banks to report all trading to a single repository so that regulators can see if there is systemic risk. The result of this would be a watering down of the original Volcker Rule provision in the Dodd-Frank legislation, that banned proprietary trading after the 2008 financial collapse on Wall Street....

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In a program of gradual change the new leadership under premier Li Keqiang steers China's economy in the new direction set by the DRC Report: China 2030 and the Third Plenum in Nov. 2013. New priorities listed under major Tasks in the annual work report by Li Keqiang place setting up deposit insurance at the top of the list. Policy changes include allowing cities to issue bonds directly to increase transparency in construction spending and control burgeoning debt.

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Ian Thompson takes over as the new Chief Credit Officer at S&P. He replaces Mark Adelson, who will remain as a senior fellow at S&P. He was hired by the previous CEO, Deven Sharma. Deven Sarma was replaced by former Citigroup excutive, Doug Peterson, in September 2011, weeks after the downgrading of the U.S. sovereign credit rating. Ian Thompson reported to Mr. Adelson, as the head of the Asia-Pacific region. Adelson joined in 2008 with the task of making it difficult to earn the highest credit rating for issuers following the subprime mortgage crisis, in which credit rating firms gave top ratings to lower quality mortgage securities. Mr. Jacob, the structured finance chief, will also be leaving S&P. The frequent management changes are viewed as making it harder for S&P to win back credibility in its ratings.

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Von Mark Schieritz of Germany's Zeit Online describes the changes underway following the election campaigns in the U.S., and France, and the Brexit vote in Britain, all signalling the discontent of people left behind by the tech, capitalism, trade and globalization changes of the last two decades. The appeal of one time fringe politicians using racist slogans and divisive rhetoric to appeal to those left behind, appealing to people lacking intergenerational mobility, and without much hope for a better future, is a serious concern. People who are gullible enough, lack college education, or racially isolated so that they are not likely to look carefully at what is being offered in terms of programs and change of competing parties, and likely to overlook the hard and difficult road for corrective course of action, because of anger and pentup fears. Schieritz cites as part of this change the unanimously approved conclusion in its final declaration at the G-20 meeting in Chengdu, China- "The benefits of growth need to be shared more broadly within and among countries to promote inclusiveness." Yet this can be a sort of "too little, too late."  Bankers who are cited in an email going around Wall Street lack credibility with groups on Main Street, to people adversely affected by tech, trade and globalization changes that have been persistently ignored for over a decade, close to two decades. More convincing is the tone of Theresa May, the British prime minister's first statement outside 10 Downing Street- who spoke of the "burning injustices" and her determination to make this a top priority of her government. Still more convincing are the programs to invest $275 billion over 10 years in infrastructure put forward by the leading candidate in the U.S. presidential election of 2016, to provide easier access to public universities and colleges to those left behind, as a sure way to create new jobs and address intergenerational mobility. In fact every leading candidate had made the loss of upward mobility their central plank already in 2015, long before Trump and Sanders started their campaign. The real hope lies in western leaders Merkel, May, and Clinton, all keenly aware students of changes, all women by the way who have sensed the injustice and have the ability to come up with something new and promising for the future, after learning the lessons of the past. ...

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BJP led by prime minister Narendra Modi wins a huge majority of 325 seats out of 405 in India's largest state Uttar Pradesh for the state assembly elections. The national opposition party Congress wins only 7 seats in what was once the main source of Congress support during the period of Jawaharlal Nehru and Indira Gandhi. This will enable the BJP to push forward with the modernization program for infrastructure and roads, and other development. Opposition in the upper house Rajya Sabha and lack of support from states will not be a major hurdle in development now that BJP has won in states such as Orissa, Maharashtra, Uttar Pradesh, and Uttarkhand in recent state elections after its win in the 2014 national parliamentary election. This also gives credibility to the government's other efforts such as demonetisation to fight corruption in real estate and other areas. India's GDP is a fraction of China's and it is smaller than that of countries such as Indonesia, because of the poor administration and lack of development in India's 2 largest states of Uttar Pradesh and Bihar in the northern Hindi speaking region. To double the GDP from its current level will require doubling the GDP of Uttar Pradesh and Bihar. Bihar's state government is run by a former BJP leader, who has also pushed for improving standards of living and economic growth.  ...

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FactSet Research Systems shows that of 13,339 ratings of U.S. listed companies 96% were buy, hold or overweight. Only 4% were sell or underweight. Mike Mayo describes the difficulties he faced giving true ratings of banks that reflected loan and other problems- in over 2 decades as a bank analyst- in his book "Exile on Wall Street." A significant culture change is required, says Mayo, for the hundreds of analysts who do the ratings to perform their function of providing proper scrutiny of companies. The clout of banks in the American capitalism of today also works to the severe detriment of the economc system to perform the way it should. He says the U.S. should look to the Financial Services Authority in Britain for the kind of actions that are needed for the financial sector supervisory officials. He points out that the FSA fired many of its existing staff and looked for new talent, at the same time increasing the salaries and benefits so that regulatory supervisors were not looking for opportunities in the private sector....

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The legacy of extremely low interest rates near zero left by Italian banker Mario Draghi has he leaves the European Central Bank to be succeeded by French head of the IMF Christine Lagarde. There is considerable division in the ECB as Draghi launches yet one more program of bond buying called QE for quantitative easing- in effect reducing the interest rate of the ECB to minus 0.5%. All this is being done to address problems of economic growth in the eurozone which originate from other causes such as poor banking practices, overborrowing by member states and lack of transparency in countries such as Greece, the lack of investment in infrastructure, increase in part time workers in economic uncertainty generated from poor banking, essentially a lost decade. The ECB's monetary policy committee staff oppose the move and so do 7 of 25 members in the governing council.  Instead of tackling root causes this had the adverse effect of hurting savers in Europe and the U.S. leading to higher inequality and wearing out of social safety nets.   ...

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Municipal yields are back up. The Center on Budget and Policy Priorities says states in the USA will have to close budget gaps of $140 billion in fiscal year 2012, ending in June, down from $160 billion this year. But real shortfalls will increase because federal stimulus funds that helped state and local governments will fall from $59 billion this year to $6 billion next year. Local governments depend on states for one third of their revenue, according to a Congressional Budget Office report, which makes them vulnerable. Property taxes account for a quarter of local government revenue and this too will be declining with declining assessed values. The Federal Reserve Act limits open-market purchases of munis to ones with maturities of less than 6 months, which reduces the scope for help from the Fed.

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Problems facing India as it searches for a way to modernize the country, build infrastructure, and create strong jobs growth. Glaring weaknesses are evident in a number of areas which have not been addressed: a weak public education system, food poverty for people at the lower end worsening with today's 10% food inflation, child malnutrition, weak infrastructure building capabilities, growth in services but not enough in manufacturing to create jobs, a growing black economy, and a general acceptance of illegal behaviour that has increased with the increase in opportunities for corruption and bribes in a growing economy. The political governance is weak. The dependence on smaller regional parties in ruling coalition governments weakens initiative at the federal government level. The general lack of new political leadership, and the failure to develop new leaders in the Congress party because of the six decades long presence of the Nehru family. Some striking facts- the role of the black or underground economy has actually increased over the years. Arun Kumar, chairman of the Center for Economc Studies and Planning at Jawaharlal Nehru University in New Delhi, says his estimates show it was 40% of GDP by 1996, and 50% by 2006. This means more business activity evades direct taxes, and less money is available for investments in education, infrastructure and healthcare. It also indicates a widespread tolerance of illegal activity and corruption. The other striking facts are that the calorie consumption by the bottom of the 50% of the population has been declining since 1987, according to a 2009-10 economic survey by India's Ministry of Finance. The modernization of the country appears not to be following the path taken in East Asia- by Japan, S. Korea and now China- where people moved in large migrations from farms and rural areas to cities and manufacturing jobs, resulting in gradual urbanization. Manufacturing in India is only 16% of GDP in 2009, the same as in 1991, according to the World Bank. Certain regions are doing better than others- Gujarat and the Punjab in the north, Tamilnadu, Karnataka in the south- with large population areas in Uttar Pradesh and Bihar lagging behind badly. ...

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Russia's leading business paper Vedemosti summed up the situation on Dec. 17, 2014, in its editorial- "This is a very dangerous situation; we are separated from a fully fledged run on the banks by just a few days..If the currency market is not reassured right now, the banking system will require large external support." Warning signs were evident at a banking conference in Moscow in October 2014 when the Economy minister, the central bank head Nabiullina, and the head of the largest bank Sberbank, German Gref, expressed skepticism about the economic policies and the risks involved. Not until Dec. 17, was a decisive response evident and the risks of a collapsing ruble openly addressed with economic actions by the Putin administration. A collapsing ruble would have repercussions on the global financial markets and slowing global economy, increasing potential geopolitical risk, and adding to risk of contagion for other emerging markets, which was reflected in the nervousness of global financial markets on Dec 15-16, 2014....

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India's crude oil imports were sharply higher in 2011 and 2012. India's imports of crude oil for the first 11 months of the 2012 fiscal year ending March 31, show a 40% increase over the same period in 2011 fiscal year. India's import bill was $128 billion for crude oil imports for the 11 months of fiscal year 2012. Indian subsidies to lower prices for fuel are $30 billion annually. The higher prices for crude create inflationary presssures in India and restrict economic growth.

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A 2011 survey by Universum shows technology firms such as Google, Apple and Facebook as the most preferred choice of university graduates during campus recruiting. Financial firms lag far behind, with J.P. Morgan Chase ranking 41st in that list. At Harvard Business School only 17% of the class went into investment banking and finance. Students from the University of Texas at Austin to Yale, say they want to build something tangible or follow their dream project.

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Amol Sharma and Paul Beckett of the WSJ interview Finance Minister Chidambaram about the Indian government's decisions to open up the insurance, retail and airline sectors to foreign investment, and bring the deficit down to close to 5.3% in 2013. Faced with slowing growth and the risk of credit ratings agencies lowering India's credit ratings the government of prime minister Manmohan Singh has decided to take some decisive steps, including a shift in coalition partners to maintain parliamentary support for these steps. When asked about what influenced the government's resolve to take these decisions, Chidambaram says credit ratings was one factor, another was the difficulty Indian companies were having raising capital inside the Indian market and overseas. In addition he says growth could not be sustained at earlier levels without new capital, and new foreign investment was needed for sustained growth. The Kelkar committee report provided a sense of urgency to the government by providing an independent view and showing the worst case scenario if the government maintained the status quo. Chidambaram says subsidies will now be transferred in the form of cash directly to beneficiaries and reduce costs by cutting leakage in the system.The government will use the list of LPG cooking gas households to transfer the subsidy for 6 gas cylinders directly to beneficiary accounts. The plan is to do the same for the Rural Employment Guarantee Program and subsidized foodgrains to cut the leakage that stems from duplication and falsification. The Indian government's ongoing program to use information technology to have computerized records of the the entire population and linking to the financial system, incuding a large rural population, now makes it possible to take these steps. On the Kelkar committee's recommendation to increase prices of basic commodities cooking gas, kerosene and food to reduce government subsidies, Chidambaram says this is ambitious and the government has to consider the political context even though it agrees that this has to be done over time....