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.
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