Saturday, January 9, 2016
World could face months of China aftershocks; A dire need to raise wages of ordinary workers; China should celebrate market plunge
1 World could face months of China aftershocks (Khaleej Times) The latest trigger was currency jitters, but the latest plunge in Chinese stocks was just one in a series of aftershocks from last year's boom and bust that could shake markets for months to come.
Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.
On Thursday, trading halted for the day after a stock index fell seven per cent a half-hour into the trading day. It was this week's second daylong suspension after a plunge in prices on Monday tripped the same 'circuit breakers' that were introduced January 1.
Wild price swings could continue through the first half of this year, according to financial analysts. Even after the latest declines, the Shanghai index is up 36 per cent from October 2014. The turmoil in China triggered a sell-off in Asian and Western stocks. Beijing keeps its markets sealed off from global capital flows, but due to the vast size of China's economy, foreign investors watch them closely and react to volatility.
Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.
Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently. After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and canceled initial public offerings.
2 A dire need to raise wages of ordinary workers (Josh Bivens in The Observer/The Guardian) The US economy ended 2015 with improvement in the labour market. Jobs grew by 284,000 each month on average in the last quarter and if you squint pretty hard at the data you can see a mild acceleration in the pace of nominal wage growth.
There will be plenty who will claim this justifies the Federal Reserve’s decisions to raise short-term interest rates for the first time since 2007, and who will argue further that the economic concerns raised by the great recession and its aftermath can now be reshelved. They would then conclude that the focus can return to policy perennials like the need to reduce deficits and ensure that wage and price inflation do not spiral out of control.
In simple terms, what has caused the present chronic demand shortfall? There are plenty of answers, but prominent among them is the rising inequality that strangles demand growth. Basically, in the last generation we have shovelled lots of money up to the households at the top of the income distribution, which tend to save a much larger share of it than other households.
Today, wage and price inflation is worryingly low, not high. The biggest wage problem in the US economy in recent decades is not they’re always surging ahead, it’s that it’s quite hard to make them rise. Interest-rate tightening can wait until actual inflation is seen in the data.
Policymakers need to resist putting deficit reduction above all other goals. Budget deficits do no damage when run during times of slack demand. When the economy is at the zero lower bound – when the interest rate is at or near zero – they boost demand in a system positively starved for it.
Finally, we circle back to the rise in inequality that is a root cause of the chronic demand shortfall. The main reason to try to check or even reverse the rise of inequality is simply that it’s the most reliable way to boost the living standards of low- and moderate-income households. But it also turns out that if we reverse this rise in inequality, we may well go a long way to reversing the problem of chronic demand shortfalls.
A real reversal will occur only if there is a sustained, durable shift of economic power to low- and moderate wage workers. This in turn will happen only with policy levers across a wide range being pulled: expansionary macroeconomic policy to keep jobs markets tight, labour policy to set wage-floors and other protections for workers and to police violations.
3 Why China should celebrate market plunge (Joe Zhang in Straits Times) China should celebrate the collapse of its stock market. That was not the instinct of officials last summer when the Shanghai Composite Index lost close to one-third of its value in four short weeks.
Back then, Beijing launched investigations into what it called "malicious short selling" and spent $200 billion to prop up falling equity prices. But give the Communist Party its due. When one trick stops working, officials are not shy to admit it.
The Shanghai Composite fell 7 per cent on Monday; further falls are likely. Yet we are unlikely to see more of the heavy-handed intervention that officials resorted to in 2015. This is because officials have come to believe it desirable for high stock market valuations to be unwound. Large sections of the public are beginning to agree with them.
The most salutary moments in Chinese politics often involve such sharp reversals. It was, after all, the realisation that four decades of central planning had produced only backwardness and starvation that led Beijing to abandon Soviet-style governance in the 1980s.
Since then, the country has pursued an industrial policy that has transformed China from an impoverished agrarian backwater into a manufacturing powerhouse. It is a formidable turnaround - even if it has consumed vast resources, polluted the environment and yielded less of an improvement in living standards than might have been expected.
President Xi Jinping is again changing course and has begun touting the virtues of supply-side reform. This looks like a sure sign that Beijing has had its fill of stock market tinkering and is turning instead to a watered-down version of Reaganomics.
The new policy has two major elements. The first involves making it easier for business to operate by eliminating tedious bureaucracy. The second entails giving the private sector a bigger role in public works projects. Taxcuts and privatisation should also be on the agenda. Still, as the Chinese have discovered on their long journey to prosperity, when you are hungry, half a loaf is better than none.