sexta-feira, 29 de janeiro de 2016

Federal Reserve: Credibility on the line

As Janet Yellen, chair of the Federal Reserve, was preparing last month for the first increase in US interest rates for a decade, protesters in New York’s financial district were holding a candlelight vigil bemoaning the end of near-zero monetary policy.

In the crowd bearing illuminated signs saying “what recovery?” and “wage growth is good” was Mauricio Jimenez, a 44-year-old construction worker from Queens, who warned against the move as he stood outside the New York Fed.

“It was a mistake,” he said this week, arguing the central bank should have paid more attention to working families and minorities who had seen paltry wage growth, and that the Fed should reverse course. “We are the people most affected.”

Complaints about the prospect of higher rates had long been levelled by left-of-centre groups such as Fed Up, which arranged the protest, as well as Democratic politicians including Bernie Sanders, the presidential challenger, as a way to highlight the stagnating fortunes of millions of Americans.

This month, however, fears of a global slowdown and the crash in commodity prices have prompted a flurry of criticisms from a different constituency. Stung by brutal declines in the S&P 500 index, some Wall Street investors are accusing the Fed of failing to appreciate the dangers brewing overseas.

Instead of soothing the markets, US policymakers are accused of fraying nerves and exacerbating outflows from emerging markets by purportedly clinging to a strategy that envisages further increases this year.

“The market views tightening as a mistake now,” says Jordi Visser, chief investment officer at Weiss Multi-Strategy Advisers. “I don’t think 25 basis points matters much but the market clearly does. We’re now closer to a recession than we all realise.”

Having its policy decisions second-guessed is an occupational hazard for the Fed, and a failure to lift rates in December would have triggered no less irate criticisms from America’s political right, not to mention poorly positioned hedge fund managers.

The torrid opening to 2016, however, has thrown Ms Yellen and colleagues on to the defensive, coming so soon after they gambled on the rate increase. In its policy meeting on Wednesday, Fed officials said they were closely watching the gyrations in global markets.

A host of central banks, including the European Central Bank, the Bank of Japan and the Swedish Riksbank, have tightened policy only to reverse the decision. The BoJ on Friday adopted negative interest rates. It would be a painful blow to the Fed’s credibility if it turned out that it lifted rates on the cusp of a slowdown and was forced to backtrack.

Ms Yellen was initially praised for her handling of the rate rise, which came without a single voice of dissent in her policy committee. Yet the move was controversial even within the central bank.

Lael Brainard, a Fed governor, argued before the decision that the risks of tightening may be higher than sticking with near-zero rates because there would be little scope to stimulate the economy with further monetary easing if policymakers had to reverse course.

The question is whether these doubts will be confirmed by events. Perhaps sensing blood, senior investors, including bond manager Jeff Gundlach of DoubleLine Capital and Ray Dalio, the head of the world’s biggest hedge fund, Bridgewater Associates, have renewed criticism of the Fed, urging it to abandon the notion of raising rates any time soon.

Market expectations that rates could rise again as early as March have sunk, with September now seen as the earliest date.

Adam Posen, the president of the Peterson Institute for International Economics, says raising rates has been a mistake and that none of the developments in juddering global markets or China had changed the picture. Looking ahead, he says his gut instinct is that “they hold, they postpone, but they don’t reverse”.

Several factors have stoked worries about the merits of tighter policy, many driven by deteriorating global conditions at a time when other central banks continue to ease. The fall in demand for commodities that drove oil below $30 a barrel in mid-January is seen by some as an indicator of a worsening global downturn led by China, rather than simply a reflection of buoyant supply.

The US has turned out to be vulnerable to the fall in crude prices. The boost from cheap energy to consumer spending has not met expectations while the associated drop in investment in the sector hurts growth. Jim O’Sullivan of High Frequency Economics describes the oil price decline as “a wash” for the US economy instead of the lift that many had hoped to see.

Confirming concerns about the impact of the high dollar and oil price plunge on US industry, the first reading for fourth-quarter US gross domestic product yesterday showed a slowdown in growth to an annualised pace of 0.7 per cent, compared with an expansion of 2 per cent in the previous three months.

As growth in the US economy slows, inflation has stuck below the Fed target of 2 per cent. Narayana Kocherlakota, who was president of the Minneapolis Fed until December, is calling for a “hard U-turn” in monetary policy. He thinks the central bank is underestimating the risks of sinking inflation expectations and says the credibility of its target is under threat.

The dovish former policymaker says the world faces a “global demand shortfall” and tighter US monetary policy could exacerbate uncertainties outside the country.

“It is hard to know how much feedback from international weakness there will be to the US economy; as the Fed tightens, that tightens economic conditions throughout the world,” Mr Kocherlakota says.

That steep drop in inflation expectations is being watched by Fed policymakers, as is the effect of market volatility on corporate borrowing costs. Inflation has been lower than the Fed target for more than three years, and the pressures on the oil price and surge in the dollar could force the bank to again push back its forecasts for when price growth returns to its target.

Despite such challenges, some economists argue that those complaining about the Fed’s quarter-point increase have lost perspective, not least given how supportive policy remains after that increase.

Charles Plosser, who was president of the Philadelphia Fed until last year, dismisses arguments that the central bank has been partly responsible for the volatility in global markets, adding that it is much too soon to judge whether the December increase was merited.

The Fed needed to “disabuse” the markets of the notion that it would rush to investors’ aid whenever prices slid, he argues. As for the US economy, Mr Plosser says: “The data has come in mixed. There has been some volatility but if you look beyond the energy sector and beyond the financial markets, the economy is not doing too badly”.

The main reason for optimism is the labour market. In the face of chatter among analysts about the risk of a US recession, job growth has exceeded expectations, with payrolls growing by nearly 300,000 in December.

Ms Yellen placed the employment trend — which has seen 13.2m jobs added over 67 straight months — at the heart of her case for raising rates, arguing that it would be unwise to wait too long before responding to the erosion of spare capacity.

The central bank is not rushing to judgment about global developments. The Fed on Wednesday noted the jitters surrounding China, as well as the low rate of inflation and slower US growth in the fourth quarter. Its message was that even if there are risks ahead, it was too soon to decide the implications for future rate decisions. To many analysts, that circumspect approach is sensible.

An overly downbeat statement this week would have triggered a greater panic in markets. If investors calm down, the damage to the US economy could turn out to be minimal, as it was after the last China-induced bout of turbulence in August.

Tim Duy, a professor at the University of Oregon and close Fed watcher, says that December’s rise was not of the magnitude to “make or break the economy” and that talk in markets of a policy mistake was unhelpful.

He says the important aim now was for the Fed to avoid sending signals that it was hell-bent on tightening policy further. That meant downplaying last month’s forecasts from policymakers suggesting that there will be four rate increases in 2016, a bullish outlook that traders now see as divorced from reality.

The Fed has insisted it will be guided by the data and has made no commitment to tighten. Ms Yellen will give further clues in February when she addresses Congress in testimony on Capitol Hill.

A few weeks after the Fed lifted rates in a flurry of optimism, the ground has shifted beneath the feet of Ms Yellen and her policy committee. Whether or not their gamble on higher rates ends up being vindicated will depend heavily on global developments, many of them well beyond America’s control.

Fonte: FT

quinta-feira, 28 de janeiro de 2016

Hard-headed humanity can save Angela Merkel

Angela Merkel wants to save Europe. She must first save herself. The German chancellor’s lodestar is unity within the EU. This is an admirable ambition, but one that has landed her in serious political trouble at home. The leaders of Poland, Hungary and Slovakia will never share her generosity towards refugees who also happen to be Muslims. Ms Merkel’s search for consensus is a recipe for paralysis.

Historians will scratch their heads as to how the arrival of 1m people in such a rich, large continent became an existential threat. The newcomers account for just 0.2 per cent of the EU’s population. A sudden influx was always going to be destabilising, but tear apart half a century of integration among some of the world’s most advanced democracies?

For some, panic has become a default. When Mark Rutte, Dutch prime minister, and his French counterpart, Manuel Valls, issue chilling warnings of permanent fracture in the union they invite the obvious question as to what they are doing to forestall it. Not much. Matteo Renzi, Italy’s prime minister, is busy settling old scores with Ms Merkel. Britain’s David Cameron has a referendum to win so wants no truck with what he crassly calls “a bunch of migrants”.

To say there is no easy answer to the refugee question does not mean there are no useful responses. Above all else, European leaders need to demonstrate that they have regained command of events. Voters worry about the numbers, certainly, but what hardens concern into anger and intolerance is the role of their leaders as hapless bystanders. Refugees and Islamist terrorism are becoming fused in the public mind.

Changing this dynamic requires action on three fronts: diplomacy, money and bureaucracy. Much of this is about doing more of the same, but with urgent resolve instead of hand-wringing and, in Ms Merkel’s case, a willingness to leave behind those swept up by Islamophobia.

Diplomacy should challenge the fatalism about the future of Syria. A comprehensive settlement is beyond the plausible but the chances of a ceasefire have improved. The conflict has been sustained by the manoeuvrings of outside powers. Now there may be a convergence on interest in favour of a truce.

With the nuclear deal with Iran secure, the US can focus its energies on Syria. Diminished it may be, but Washington still carries more clout than anyone else. Europe has every incentive to lend support. All can agree that the EU must strengthen its external borders, and fast. But those who have fled Syria also need some hope of returning home.

Russia, hurting badly from a collapsing oil price, has nothing to gain and much to lose from ever deeper military entanglement with Syria’s Bashar al-
Assad. A ceasefire could safeguard Moscow’s interests. With a measure of compromise, these outside powers should be able to corral the regional players — Iran, Saudi Arabia and Turkey. The self-styled Islamic State has helped by adding Russia and Turkey to its target list.

As for money, whether it is a Marshall or a Merkel plan, aid on a scale so far unimagined is needed. The €3bn promised to Turkey can be no more than a small down payment. When the refugee camps in the region ran short of food last year, governments ignored the warnings. Incredibly, some EU states are still not paying their share.

For years, the EU has flirted with halfhearted plans to stabilise its Mediterranean neighbourhood. Hundreds of thousands of migrants from the Maghreb are now swelling the refugee influx from Syria, Iraq and Afghanistan. Europe really does need a serious regional development strategy.

A failure of bureaucracy may seem a trivial thing. In this case, it is anything but. Politicians have failed dismally to cope with the arrivals: to separate legitimate refugees from economic migrants, to secure the external border in Greece, to ensure that their own local communities are handsomely rewarded for settling refugees, and to counter criminality such as that seen in the German city of Cologne on New Year’s Eve.

Winston Churchill once observed that the public mood in regard to the treatment of criminals is among the “unfailing tests of the civilisation of any country”. Today one could substitute migrants for criminals. Europe will always have its Islamophobes and anti-Semites, but by and large its democracies are rooted in humanity.

If Ms Merkel is to shake off the challenges to her leadership, generosity towards the migrants must be coupled with the assurance of security. The chaotic response so far has given oxygen to those proclaiming every Muslim a potential criminal or terrorist. Setting numerical targets solves nothing. But Berlin must instil confidence that it has a grip on the numbers and can process and separate out genuine refugees.

In the German chancellor’s ideal, the 28 EU nations would stick together. In reality, the choice facing the Schengen open borders system is between orderly suspension and disorderly collapse. Ms Merkel should opt for the former.

What is needed is a coalition of the willing — states ready to pool resources and share the burdens of the crisis. The future of the union is one of overlapping circles. This new grouping would be the basis for a reconfiguration of open frontiers. If much of eastern Europe stayed outside, it would be by those nations’ choice. Ms Merkel no longer has time to wait for them.

Philip Stephens

Fonte: FT

quarta-feira, 27 de janeiro de 2016

US naval history offers clues to China’s intent

The news from China so far this year has been all about tumbling equity markets and a wobbly currency. But there is another, less well-covered story emanating from Beijing that threatens to have just as much impact on the rest of the world as the shredding of the Shanghai stock index or the plummeting renminbi: the country has quietly changed its guiding military doctrine.

The state-owned Global Times newspaper offered a pithy summary of this new stance this month: “Our military strength has to be demonstrated to the world,” it said. “With a strong army, China can be more politically appealing, influential and persuasive, and will make it easier to network.” Such hawkishness effectively signals the death knell for the policy of “taoguang Yonghui”, or “hiding one’s brilliance and biding one’s time”, that has defined China’s foreign policy since the late 1970s.

This shift in fact began several years ago, but a series of statements issued since the start of the year by the People’s Liberation Army have crystallised the new doctrine encapsulated in the notion of “active defence”. In one little-noticed announcement posted on the ministry of defence’s website this month, a top naval planner revealed plans for China’s first homegrown aircraft carrier to protect “waterways along the 21st century maritime silk road”.

According to Beijing’s official definition, the latter includes everything between China’s eastern seaboard and Venice, and strategic points along the way. By any measure this marks an extraordinary expansion of China’s naval defence doctrine, which was previously focused on protecting only its territorial waters.

China clearly does not yet have the capability to dominate any of those waterways. The PLA navy and air force are currently not able to stop US or Japanese ships and aircraft operating in territory in the South and East China Seas that Beijing claims as its own. But China’s desire to expand its military reach is unmistakable. It is also logical, given the increasingly global nature of Chinese economic activity.

How this will be greeted in Washington is arguably the most significant foreign policy question in the world today. President Xi Jinping himself has warned of the “Thucydides Trap”, in which an established power’s fear of an emerging rival escalates into war, as in the case of Sparta challenged by the rise of Athens in Greek antiquity.

It is critical, therefore, that US and other western policymakers properly understand Beijing’s intentions and its likely next moves. Unfortunately, thanks to a combination of Chinese opacity and western ignorance, very few people outside the policymaking elite in Beijing have a decent grasp of what China wants and how it plans to get it.

One of the most misleading assertions you will hear about China — whether from party officials in Beijing or visiting western politicians and bankers — is that it has never been an expansionist power. A quick glance at some historical maps will show how China’s borders have waxed and waned through millennia of bloody conquest. Qin Shihuang, the first emperor to unify the country in 221 BC, did not achieve that feat through friendly overtures and cultural attraction but through slaughter, book-burning and burying scholars alive.

The more foreign observers repeat such fantasies of a benign and pacific China, the more threatening its rise will become. Rather than listen to the rhetoric coming out of Beijing, western policymakers should pay attention to what China actually does. They need to develop a much deeper understanding of the forces shaping modern Chinese culture and politics.

The history of other rising powers is instructive. Like China today, the US once explicitly rejected the notion of imperialism and expansionism. The age of American global dominance began as most other empires have begun — with the need to protect merchants and citizens far from its own shores. At the beginning of the 19th century, the fledgling US government established its first formal navy specifically to fight pirates off the coast of north Africa. As a result, the oldest war memorial in the US is the Tripoli Monument, in the grounds of the US Naval Academy in Annapolis and honours the heroes of the First Barbary War (1801-1805).

In China’s case, the first time it sent naval ships on a mission beyond its territorial waters in over 600 years was in 2008. The mission? To fight Somali pirates off the coast of Africa.

Jamil Anderlini

Fonte: FT

terça-feira, 26 de janeiro de 2016

The economic losers are in revolt against the elites

Losers have votes, too. That is what democracy means — and rightly so. If they feel sufficiently cheated and humiliated, they will vote for Donald Trump, a candidate for the Republican party’s presidential nomination in the US, Marine Le Pen of the National Front in France or Nigel Farage of the UK Independence party. There are those, particularly the native working class, who are seduced by the siren song of politicians who combine the nativism of the hard right, the statism of the hard left and the authoritarianism of both.
Above all, they reject the elites that dominate the economic and cultural lives of their countries: those assembled last week in Davos for the World Economic Forum. The potential consequences are frightening. Elites need to work out intelligent responses. It might already be too late to do so.

    The projects of the rightwing elite have long been low marginal tax rates, liberal immigration, globalisation, curbs on costly “entitlement programmes”, deregulated labour markets and maximisation of shareholder value. The projects of the leftwing elite have been liberal immigration (again), multiculturalism, secularism, diversity, choice on abortion, and racial and gender equality. Libertarians embrace the causes of the elites of both sides; that is why they are a tiny minority.
    In the process, elites have become detached from domestic loyalties and concerns, forming instead a global super-elite. It is not hard to see why ordinary people, notably native-born men, are alienated. They are losers, at least relatively; they do not share equally in the gains. They feel used and abused. After the financial crisis and slow recovery in standards of living, they see elites as incompetent and predatory. The surprise is not that many are angry but that so many are not.
    Branko Milanovic, formerly of the World Bank, has shown that only two parts of the global income distribution enjoyed virtually no gains in real incomes between 1988 and 2008: the poorest five percentiles and those between the 75th and the 90th percentile. The latter includes the bulk of the population of high-income countries.
    Similarly, a study by the Economic Policy Institute in Washington shows that the compensation of ordinary workers has lagged significantly behind the rise in productivity since the mid-1970s. The explanations are a complex mixture of technological innovation, liberal trade, changes in corporate governance and financial liberalisation. But the fact is unquestionable. In the US — but also, to a smaller extent, in other high-income countries — the fruits of growth are concentrated at the top.
    Finally, the share of immigrants in populations has jumped sharply. It is hard to argue that this has brought large economic, social and cultural benefits to the mass of the population. But it has unquestionably benefited those at the top, including business.
    Despite offering its support for welfare benefits one might think very valuable to the native working classes, the respectable left has increasingly lost their support. This seems to be particularly true in the US, where racial and cultural factors have been particularly important.
    The “southern strategy” of Richard Nixon, a former Republican US president, aimed at attracting the support of southern whites, has generated political results. But the core strategy of his party’s elite — exploiting middle-class (especially male) rage over racial, gender and cultural change — is bearing bitter fruit. The focus on tax cuts and deregulation offers little comfort to the great majority of the party’s base.
    Mr Trump, Republican ideologues complain, is not a true conservative. That is indeed the point. He is a populist. Like the other leading candidates, he proposes unaffordable tax cuts. Indeed, the notion that Republicans object to fiscal deficits looks absurd. But, crucially, Mr Trump is protectionist on trade and hostile on immigration. These positions appeal to his supporters because they understand they have one valuable asset: their citizenship. They do not want to share this with countless outsiders. The same is true for supporters of Ms le Pen or Mr Farage.
    Nativist populists must not win. We know that story: it ends very badly. In the case of the US, the outcome would have grave global significance. America was the founder and remains guarantor of our global liberal order. The world desperately needs well-informed US leadership. Mr Trump cannot provide this. The results could be catastrophic.
    Yet, even if such an outcome is avoided this year, elites have been warned. Those of the right take big risks in cultivating popular rage as a way to secure lower taxes, increased immigration and weaker regulation. Elites of the left are also taking risks if they are seen to sacrifice the interests and values of a struggling mass of citizens to cultural relativism and lax control of borders.
    Western countries are democracies. These states still provide the legal and institutional underpinnings of the global economic order. If western elites despise the concerns of the many, the latter will withdraw their consent for the elite’s projects. In the US, elites of the right, having sown the wind, are reaping the whirlwind. But this has happened only because elites of the left have lost the allegiance of swaths of the native middle classes.
    Not least, democracy means government by all citizens. If rights of abode, still more of citizenship, are not protected, this dangerous resentment will grow. Indeed, it already has in too many places.

    Martin Wolf

    Fonte: FT

    segunda-feira, 25 de janeiro de 2016

    Pay attention to long-term debt cycle

    I have a controversial view that is based on my alternative economic template, and I feel a responsibility to share at this precarious time.

    In brief, the Federal Reserve’s template, and that of most economists and market participants, reflects the business cycle.

    Based on it, tightening should occur when a) the rate of growth in demand is greater than the rate of growth in capacity and b) the usage of capacity (as measured by indicators such as the GDP gap and the unemployment rate) is becoming high.

    As a result, tightening now makes sense.

    However, as I see it, there are two important cycles to pay attention to — the business cycle, or short-term debt cycle, and the debt supercycle, or long-term debt cycle.

    We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.

    It is because of the long-term debt cycle dynamics that we are seeing global weakness and deflationary pressures that warrant global easing rather than tightening.

    Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.

    Since the long-term debt cycle issue is the biggest issue that separates my view from others, I’d like to briefly focus on its mechanics.

    What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed “pushing on a string”.

    This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing be effective.

    Since we commonly understand why lowering interest rates stimulates debt and economic growth, and less commonly understand how QE works, I’d like to explain it.

    QE works because those “risk premia” — which are the spreads between the expected return on cash and the expected returns on other assets such as bonds, stocks, real estate and private equity — draw the buying of investors who sell their bonds to the central banks during QE.

    You see, our whole capital allocation system — banking and investing — is driven by spreads so that when they are large, QE works better than when they are small.

    When there are good spreads — in other words a large risk premia — and those who sold their bonds take their newly acquired cash to buy those assets that offer attractive spreads, bidding up their prices and driving down those expected return spreads (ie risk premia) of those assets.

    That is where things now stand across the world’s reserve currencies, where the expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash.

    As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.

    When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

    At such times the risks are asymmetric on the downside and it behoves central banks to err on the side of waiting until they see the whites of the eyes of inflation before tightening.

    That, in my opinion, is now the case.

    Ray Dalio is the founder and head of hedge fund group Bridgewater

    Fonte: FT

    terça-feira, 19 de janeiro de 2016

    Compromisso do BC e com a meta de inflação...

    Férias no verão paulistano com cara de verão londrino é um convite a leitura de um dos livros  da pilha que não para de crescer. Não fosse pelo kindle, ela seria mais alta. Romances, politica internacional, filosofia, teologia, ..., Compro com  a desculpa que um dia encontroarei tempo pra ler alguns deles, sabendo que a maioria, infelizmente, ficara relegada a estante, fruto de um desejo incontrolável pela posse de um objeto de desejo. Compra de impulso. No caso da maioria dos bens, compro somente depois de um longo namoro, com direito a noivado e inumeras dúvidas: compro! não compro! Nos livros, a paixão fulminante leva ao seu acumulo  pelos comodos da minha casa. Ainda não é a bibliocasa do saudoso poeta Haroldo de Campos, mas ainda chego lá.

    Leio é claro, nas férias, o valor econômico, financial times e assisto ao Quest na CNN. Inevitável, nesta era de midia sociail, ignorar os debates e controversias na comunidade de economia. O ultimo artigo do Samuel Pessoa, por ex, me lembrou, os ultimos do Beluzzo e do seu lugar-tenente. Hoje encontrei, por acaso, mais uma obra prima: " A quem serve o Banco Central? Li, reli. Tentei mais uma vez. Incrivel, a sindrome de teoria conspiratoria que acomete o tempo todo a esquerda do grande bananão. É claro que existem grupos de interesses, pressões, etc, sobre o BC em um país democratico. É parte do jogo e por isto mesmo ele deveria ter autonomia operacional, como é  o caso em outros países.  Lembro que o foco do BC deve ser a inflação e para faze-la convergir a meta  é dificil deixar de lado o mais poderoso instrumento a sua disposição: a taxa de juros.  Elevar a selic é o que recomenda a velha e boa teoria econômica. Pode  não agradar a todos, mas o BC não esta participando de concurso de miss simpatia ou algo que valha. Seu único compromisso e lutar contra o dragão da inflação que não esta mais cochilando.

    sexta-feira, 15 de janeiro de 2016

    A welcome drop in the global price of crude oil

    The financial markets’ downbeat, if not downright grisly, start to the year continued this week as stocks in several countries and the global oil price fell sharply.

    That they are dropping together, though, does not mean they are sending the same signal. The evidence suggests that the slide in the oil price, this week dipping below $30 a barrel for the first time in more than a decade, reflects a welcome increase in supply rather than a worrying fall in demand.

    While there are undoubtedly some losers from the fall in the price of crude, notably oil-exporting countries and banks exposed to the energy sector, the boost to real incomes in the rest of the world should outweigh them.

    Given the focus on China at the moment, it is tempting to assume that the price falls in the financial and oil markets reflect serious concerns about weakening in the Chinese economy. This analysis is too simplistic. Although it is a big consumer of commodities, China buys only about a tenth of the global supply of crude.

    There is not much sign of sharply slowing economic growth, and hence demand, from the US and Europe which between them make up around 40 per cent of worldwide oil consumption. A much more likely reason for falling prices has been the buoyancy of supply owing to US shale and also the decision by Saudi Arabia and other producers to keep pumping out crude rather than restricting output.

    That may not be good for the prospects of reducing carbon emissions in the near term, but it is certainly of significant net benefit for the global economy and employment. Broadly speaking, a fall in the oil price transfers income from economies more likely to save it to those more likely to spend it, and from capital-intensive industries to ones that are labour intensive.

    Certainly there are some risks. The beneficial effects of the fall in the oil price that began in 2014 seem to have been slower to come through than have the negative impacts. Given that inflation is very low in economies like the eurozone and Japan, there is always the chance that the one-off effect on consumer prices will feed through into inflation expectations, increasing the chance of a slide into the malign sort of deflation.

    Overall, however, the boost to real incomes for most people and companies from cheaper oil is welcome.

    The impact of lower oil prices on the financial sector, on the other hand, is considerably more negative. In theory, the hit to banks that have lent to energy producers should be offset by those lending to energy consumers. In practice, however, the concentrated nature of the former, through the threat of bankruptcy, may create an asymmetry which means the financial sector as a whole loses.

    So be it. There is no reason that regulators should rush to help out banks which have exposed themselves unduly to a notorious volatile sector and taken a hit accordingly. Central bankers, though, need to keep a close eye on the functioning of the credit channel and the effect on inflation expectations. In this context, the US Federal Reserve’s decision to raise interest rates last month looks even more premature than it did at the time. At the very least, the Fed should signal that the next move is as likely to be down as it is up.

    It says something about the uncertainties of the global economy and the threat of deflation that a fall in the oil price provokes fear as well as rejoicing. Undoubtedly there are downsides from violent swings in the price of a key commodity. But in the main, cheaper crude is a development to be welcomed.

    Editorial do FT

    quarta-feira, 13 de janeiro de 2016

    Cologne and the immigration sex-ratio dilemma

    There were so many of them: weary young men, some barely teenagers, trekking across Europe to reach the promised German land. I remember wondering a few months back, during the peak of the Syrian migration wave, why the women had been left behind.
    There were reasons men sought refuge first: the arduous journeys, the pressing need for work before applying for family reunification and, above all, escape from recruitment by the army or militias. It is not unusual in war for parents to send their boys away.
    Yet the impact of this gender imbalance was a largely overlooked aspect of the migration crisis. In Angela Merkel’s remarkable drive to show compassion for a people the world had tried so hard to ignore, some risks were understated. It seemed insensitive and politically disadvantageous, in the face of opposition to the migration surge, for supporters of the German chancellor’s humanitarian policy to dwell on the consequences.
    After the ghastly New Year’s Eve in Cologne, however, questions that should have been raised and vigorously debated in public are finally being voiced. The details of that night are murky but we know enough — and the scale of the attacks is shocking. The number of complaints filed by women has been gathering pace, 40 per cent of them related to sex attacks.
    How many asylum seekers, whether from Syria, Afghanistan or Iraq, were involved has yet to be established. But they may have been recruited by north African gangs responsible for many robberies in the city in recent years.
    Scholars who have studied mass migration of young men and discovered a correlation with a rise of crime and attacks on women are unsurprised by this turn of events.
    Much has been made of the demeaning attitude towards women that some of Europe’s newest Muslim migrants may have grown up with. But Valerie Hudson, a professor of political science at Texas A&M University who has researched migrant issues in Asia, says the sex ratio is far more important than different interpretations of female modesty.
    “The literature I’ve contributed to shows a pattern: the higher the sex ratio, the higher the crime rate and crimes against women,” she tells me. “When you get a surplus of young men in a society — and they are marginalised, disadvantaged, and they live together and socialise together — you have the beginnings of collective activity in which they take what society has denied them. And they are, collectively, willing to take risks.”
    Such fears about sex ratios in cases of mass migration extend beyond the immediate consequences. Many young male migrants are minors, which facilitates their asylum applications but could have a longer lasting impact on the sex ratio in the host country.
    Andrea Den Boer, an expert on gender imbalance in Asian internal migration from the UK’s University of Kent, says there are already measures preventing asylum seekers who arrive as unaccompanied minors from bringing their families over at a later stage — which in turn further inflates the proportion of young men in the population. Some work has been done on the potential long-term impact in Sweden but there are no official statistics on the ages of the refugees to Germany. Ms Den Boer’s rough estimate is that 72 per cent of refugees last year were male, but no one knows how many were young adults. “Nobody has thought about the sex-ratio implications,” she says.
    The one country that has taken gender into account is Canada, where the government said last year that it would take only Syrian women, children and families. The policy was probably prompted by concerns over terrorism — and it drew its share of critics who warned that young men faced the greatest risk in Syria.
    There are no easy answers to the mass migration dilemma, particularly where horrific crimes are being perpetrated on an innocent population as in Syria. But taking into account the long-term implications for the host society should be an integral part of any policy. As Prof Hudson says: “A normal sex ratio is a public good.”

    Roula Khalaf

    Fonte: FT

    segunda-feira, 11 de janeiro de 2016

    Mass migration into Europe is unstoppable

    In the 18th and 19th centuries, Europeans populated the world. Now the world is populating Europe. Beyond the furore about the impact of the 1m-plus refugees who arrived in Germany in 2015 lie big demographic trends. The current migration crisis is driven by wars in the Middle East. But there are also larger forces at play that will ensure immigration into Europe remains a vexed issue long after the war in Syria is over.

    Europe is a wealthy, ageing continent whose population is stagnant. By contrast the populations of Africa, the Middle East and South Asia are younger, poorer and rising fast. At the height of the imperial age, in 1900, European countries represented about 25 per cent of the world’s population.

    Today, the EU’s roughly 500m people account for about 7 per cent of the world’s population. By contrast, there are now more than 1bn people in Africa and, according to the UN, there will be almost 2.5bn by 2050.

    The population of Egypt has doubled since 1975 to more than 80m today. Nigeria’s population in 1960 was 50m. It is now more than 180m and likely to be more than 400m by 2050.

    The migration of Africans, Arabs and Asians to Europe represents the reversal of a historic trend. In the colonial era Europe practised a sort of demographic imperialism, with white Europeans emigrating to the four corners of the world. In North America and Australasia, indigenous populations were subdued and often killed — and whole continents were turned into offshoots of Europe. European countries also established colonies all over the world and settled them with immigrants, while at the same time several millions were forcibly migrated from Africa to the New World as slaves.

    When Europeans were populating the world, they often did so through “chain migration”. A family member would settle in a new country like Argentina or the US; news and money would be sent home and, before long, others would follow.

    Now the chains go in the other direction: from Syria to Germany, from Morocco to the Netherlands, from Pakistan to Britain. But these days it is not a question of a letter home followed by a long sea voyage. In the era of Facebook and the smartphone, Europe feels close even if you are in Karachi or Lagos.

    Countries such as Britain, France and the Netherlands have become much more multiracial in the past 40 years. Governments that promise to restrict immigration, such as the current British administration, have found it very hard to deliver on their promises.

    The EU position is that, while refugees can apply for asylum in Europe, illegal “economic migrants” must return home. But this policy is unlikely to stem the population flows for several reasons.

    First, the number of countries that are afflicted by war or state failure may actually increase; worries about the stability of Algeria are rising, for example.

    Second, most of those who are deemed “economic migrants” never actually leave Europe. In Germany only about 30 per cent of rejected asylum seekers leave the country voluntarily or are deported.

    Third, once large immigrant populations are established, the right of “family reunion” will ensure a continued flow. So Europe is likely to remain an attractive and attainable destination for poor and ambitious people all over the world.

    One possible reaction for Europe is to accept that migration from the rest of the world is inevitable — and embrace it wholeheartedly. Europe’s debt-ridden economies need an injection of youth and dynamism. Who will staff their old-age homes and building sites if not immigrants from the rest of the world?

    But even those Europeans who make the case for immigration tend to argue that, of course, newcomers to the continent must all accept “European values”. That may be unrealistic, partly because many of these values are of relatively recent vintage.

    In recent decades, feminism has made great strides in Europe and attitudes to gay rights have been transformed. Many immigrants from the Middle East and Africa bring much more conservative and sexist attitudes with them. It will take more than a few civics classes to change that.

    Europeans are profoundly confused about how to respond to these new challenges. In the age of imperialism, they justified settling foreign lands with the confident belief that they were bringing the benefits of civilisation to more backward parts of the world.

    But post-imperial, post-Holocaust Europe is much more wary of asserting the superiority of its culture. It has replaced a belief in its civilising mission and the Bible with an emphasis on universal values, individual rights and international treaties.

    The big question in the coming decades is how Europe’s faith in universal liberal values will withstand the impact of mass immigration. A battle between nativists and liberals is beginning to shape politics.

    In the long run I expect the nativists to lose, not because their demands are unpopular but because they are unenforceable. It may be possible for island nations surrounded by the Pacific Ocean, such as Japan or Australia, to maintain strict controls on immigration. It will be all but impossible for an EU that is part of a Eurasian landmass and is separated from Africa only by narrow stretches of the Mediterranean.

    Gideon Rachman

    Fonte: FT

    sexta-feira, 8 de janeiro de 2016

    How the Republicans reinvented Ronald Reagan

    The Republican contenders for the position of US president have something in common: each of them is the most similar to Ronald Reagan.

    At a debate sponsored by CNN last September, the candidates invoked Reagan’s name no less than 38 times. God followed with 10 mentions. Of course, the event was held on sacred ground, the Ronald Reagan Presidential Library in California.

    It is not hard to understand why Reagan has become the chief icon of the American right. His landslide victory over Jimmy Carter 35 years ago ended the era of liberal dominance that started with the New Deal and began the modern conservative era. Reagan is the most successful postwar president and the most beloved Republican other than Abraham Lincoln. His ideas about cutting taxes, reducing government and maintaining strong defences remain that unassailable core of contemporary conservative ideology. What’s more, he taught his party how to win — by subordinating its internal disagreements and uniting around an effective leader.

    But do the candidates who stand a chance of winning the Republican nomination have anything in common with their idol? One might argue that Donald Trump represents the culmination of the merger of celebrity and politics that began when Reagan gave up movies and ran for governor of California in 1966. Mr Trump, too, is a professional entertainer whom few took seriously as a politician until it became impossible not to.

    On Mr Trump’s signature issue of immigration, however, his views are diametrically opposed to those of Reagan. “I believe in the idea of amnesty for those who have put down roots and lived here, even though sometime back they may have entered illegally,” Reagan said in a 1984 debate. His most famous speech called for tearing down a wall, not building one, as Mr Trump wishes to do. As a resident of southern California, Reagan tended to view a porous border with Mexico as an economic necessity. In terms of personality, he couldn’t have been less like Mr Trump, a boastful, sarcastic bully. Reagan was modest, had genuine wit and radiated kindness.

    The candidate running behind Mr Trump in national polls, Ted Cruz, Texas senator, invokes Reagan’s name more than any other. And here one can see a facile comparison: Mr Cruz styles himself a man of unbending conservative principle, particularly when it comes to shrinking government. A couple of years ago, he staged a 21-hour filibuster to protest against funding President Barack Obama’s healthcare law.

    But Mr Cruz’s approach of making enemies even in his own party to prove his ideological integrity is the opposite of his hero’s. Reagan was a pragmatist who befriended political antagonists such as Tip O’Neill, the Democratic speaker of the House of Representatives, and was always prepared to compromise to advance his agenda. “Anytime I can get 70 per cent of what I’m asking for out of a hostile legislative body, I’ll take it,” he once told an aide. Mr Cruz likes to accuse colleagues in his own party of appeasement and cowardice. Reagan popularised the “11th commandment”: Thou Shalt Not Attack a Fellow Republican.

    For a candidate who displays something of Reagan’s pragmatism and flexibility, one might think about Jeb Bush, who is stuck near the back of the Republican pack. Here there is less of a gap in views, reminding us that Reagan would be something of a moderate, if not too far left, for today’s party. But Mr Bush, too, seems entirely unlike Reagan in temperament. He has nothing of the 40th president’s infectious faith in the future. Like his father, Jeb Bush likes the substantive work of governing, but is barely able to disguise his grimace at the numbing rituals of campaigning. For Reagan, by contrast, there was little difference between running and governing. Both were about selling his ideas, something he always took pleasure in.

    The only Republican who seems to share an element of Reagan’s style is Marco Rubio, whose optimism seems less forced, and would prove perhaps the most electable against Hillary Clinton. Where he falls short of Reagan’s example is in the difficulty he has had getting away with flip-flops and contradictory stances on issues such as immigration and education standards. Reagan used his more advanced age and avuncular fogginess to good effect, leaving the messy details to others. At 44, Mr Rubio cannot get away with that.

    Of course, Reagan himself was hardly the Reagan of Republican mythology. He pushed a big tax cut through Congress in 1981 — but raised taxes nearly every other year to mitigate the deficits he unleashed. His role in the peaceful conclusion of the cold war probably owed more to his desire for dialogue with the Soviets and his second-term embrace of nuclear disarmament than the military build-up and hawkish policies of his first term. After nearly dying from an assassin’s bullet, he supported handgun control, another anathema to the contemporary rightwing. Today’s Republican party ignores Reagan the pragmatist and improviser, preferring the image of an unbending conservative ideologue who never really existed.

    Jacob Weisberg is chairman of the Slate Group and author of ‘Ronald Reagan’

    Fonte: FT

    quinta-feira, 7 de janeiro de 2016

    China-related worries test global asset prices Mohamed El-Erian

    If viewed on a standalone basis, recent developments in China strictly do not warrant the massive global stock market sell-off and financial dislocations that have followed.

    Such a narrow assessment, however, ignores the cumulative impact of longer-term distortions that have taken root in the financial system, both inside and outside China. A major adjustment of policies is needed if these distortions are to be resolved in an orderly fashion. Otherwise, market forces could well force a reconciliation that will be a lot more disruptive to the financial system and the global economy.

    China is in the midst of a structural economic transformation that is recasting its growth engines, away from external markets and towards greater reliance on internal demand. With that comes an almost inevitable slowdown in growth, compounding concerns about pockets of credit excess within the economy.

    Slower growth places a question mark on the government’s prior efforts to widen stock market ownership within China. Deemed as having society-wide merit, that of giving an increasing number of Chinese citizens an even more direct stake in the success of the transition to a market economy, these efforts inadvertently pushed asset prices too far. This is similar to what occurred in the US when it pursued greater home ownership.

    The spillover effects on the global economy have been amplified by four factors.

    First, in an attempt to counter slower growth, the government has guided the currency down in the onshore market; and it has done so in a manner that has also eroded its stabilising influence on the offshore market for the renminbi.

    Second, China has been inconsistent in its direct market interventions, including announcing on Thursday a U-turn on the use of circuit breakers that halt trading on its stock market.

    Third, the impact of international spillovers has been accentuated by pockets of market illiquidity reflecting limited appetite among broker-dealers for taking on countercyclical risk.

    Finally, to make things even more uncertain, geopolitical risk has risen in the Middle East and Asia.

    All this said, the reactions of global financial markets have gone beyond what would be warranted by a narrow interpretation of what is going on in China. After all, the authorities there have many measures available to soft-land their economy. They still run a controlled system that can avoid a forced deleveraging of the type that occurred in the West in 2008 to 2009; and they have ample financial resources to cover policy mis-steps.

    But this would be too narrow an analytical perspective. For quite a few years now, asset prices have decoupled from fundamentals as too many countries around the world have relied excessively on experimental monetary policies. And the more central banks were successful in repressing financial volatility through unconventional measures, the greater the amount of risk that investors took on — this in sharp contrast to risk-averse companies where, despite massive cash holdings, investment in new productive activities has been rather muted.

    With central banks now on divergent policy paths, it has become even more urgent to close the gap between high asset prices and sluggish fundamentals. The best way to do so is through a more comprehensive policy approach that unleashes the productive potential of the global economy, addresses deficient aggregate demand issues, and deals with chronic areas of over-indebtedness.

    This, however, requires political systems to step up to their economic governance responsibilities. In the absence of such a policy pivot, financial market volatility will continue to increase, causing bouts of price overshoots and contagion that could also harm the real economy.

    While triggered in the short term by China-related concerns, what we are seeing this week on financial markets is, in fact, a broader phenomenon. It speaks to the gradual ending of a world in which central banks have been both able and willing to suppress financial volatility. The longer it takes for other policymaking entities to step in, the higher the risk of even greater financial instability and economic insecurity down the road.

    Mohamed El-Erian is chief economic adviser to Allianz, chair of President Obama’s Global Development Council, and author of the forthcoming book “The Only Game in Town”

    Fonte: FT

    quarta-feira, 6 de janeiro de 2016

    Concern for China’s economy as currency sinks near 5-year low

    The pace of China’s falling currency, now at its lowest level in nearly five years, has raised the prospect of renewed intervention by the central bank as Beijing seeks to control its fragile exchange rate policy.

    The sharp decline in the renminbi has put investors on notice that the Chinese economy, an engine of global growth, may be slowing at a faster pace than previously forecast.

    Investors around the world are worried that an unexpectedly fast depreciation will further destabilise China’s economy. Some also fear it could trigger a wave of competitive devaluations across the region.

    “During our investor meetings in December, the most significant risk that investors were worried about was a substantial devaluation of the renminbi,” wrote Timothy Moe, Goldman Sachs’ chief Asia-Pacific equity strategist, in a research note on Wednesday.

    Traders are selling the renminbi in the open market, and this week’s drop of 2 per cent has intensified pressure on other emerging market currencies, particularly in Asia. It has also spurred significant selling of US and European stocks.

    The People’s Bank of China believes its overvalued currency is hurting its competitiveness and is trying to boost its slowing economy via a weaker currency.

    The central bank set a substantially weaker trading band for the domestic currency on Wednesday but it is mindful of avoiding a repeat of the global market turmoil that was triggered in August when the renminbi weakened sharply.

    China won reserve currency status in late November from the International Monetary Fund. The widening gap between the onshore and offshore rates suggests, however, that the renminbi is in fact not “freely usable”, as the IMF requires

    Traders outside China are pricing in further weakness for the currency, testing the resolve of the central bank and its desire for an orderly depreciation.

    Commerzbank’s EM strategist Peter Kinsella said this week’s renminbi weakness had been anything but orderly and could force the central bank to intervene. “Let’s be blunt: the central bank can intervene very aggressively if and when they choose,” he said.

    Aidan Yao, Asian economist at AXA Investment Managers, said: “If wider market contagion is provoked by further FX depreciation, official intervention could resume, in our view.”

    Signs of the PBoC seeking to reassert control emerged after foreign banks were suspended last month from trading foreign exchange in China.

    Several of the biggest foreign banks in the renminbi market had been suspended, two people familiar with the situation said. They said this appeared to be an attempt by Beijing authorities to close the gap that has widened in recent weeks between the price of the onshore and offshore rates to a record level.

    China wanted to stop banks from arbitraging the spread between the two markets for its currency, one of the people said. “This is not the way we do things in the UK, but it is understandable when you think about how China is trying to bring its currency under control,” said one of the people.

    Since New Year’s day, the onshore-traded renminbi has already fallen 1 per cent, after dropping 2.6 per cent in the last two months of 2015.

    It fell 0.5 per cent on Wednesday, its lowest level since March 2011, while the offshore-traded rate at one point dropped 1.1 per cent to break through Rmb6.70 to the dollar for the first time since it was created in 2010.

    Analysts said the central bank was caught between its instinct to intervene in the foreign exchange market and its promise of a more flexible exchange rate policy.

    It made the promise as part of its successfully campaign last year for reserve currency status from the IMF.

    “They are increasing the flexibility [in the exchange rate], and trying to make it look like any other fully traded currency,” said Sacha Tihanyi, an EM strategist at investment bank TD Securities.

    “But that’s an extremely difficult transition to maintain. You have a currency that is either controlled or fully floated. The transition is going to be one with a lot of friction and difficulty.”

    Fonte: FT

    terça-feira, 5 de janeiro de 2016

    Fears mount over rise of sovereign-backed corporate debt

    More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research.

    The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015.

    The growing use of such bonds suggests that developing countries are increasingly transferring debt obligations to third parties that have taken advantage of historically low interest rates to load up with cheap debt.

    Emerging markets are already under strain as the US dollar strengthens against the renminbi and other emerging market currencies, making the cost of servicing debt denominated in dollars harder to bear.

    Although official debt-to-GDP levels of countries such as India, Russia and China remain low by global standards, the growth of less visible debt which they might still have to guarantee in a crisis underlines the potential scale of their liabilities.

    “This has been a source of worry for some time, in part because it does not always appear on government balance sheets.” said Lee Buchheit, a partner at Cleary Gottlieb and expert on sovereign debt default.

    “Emerging markets have benefited from interest rates at historic low levels and commodity prices at historic highs,” he said: “In the last year both of these have begun to unwind. If the resulting strains on a country compel a sovereign debt rearrangement of some kind, these contingent liabilities of the sovereign will need to be addressed.”

    New figures from JPMorgan and Bond Radar show that issuance of quasi-sovereign bonds outpaced that of sovereign bonds in emerging markets last year, raising the stock of such debt from $710bn in 2014 to a record $839bn by the end of 2015.

    By comparison, the stock of all external emerging market sovereign debt stood at $750bn at the end of last year, according to JPMorgan.

    The cost of selling bonds with either an explicit or implicit guarantee of the government is lower than other corporate bonds.

    Quasi-sovereign borrowers include 100 per cent state-owned entities such as Mexico’s Pemex, local governments in countries such as China, and entities in which the government owns more than 50 per cent of the equity or has more than 50 per cent of the voting rights — a description that encompasses Brazil’sPetrobras.

    However, the treatment of such debt is not uniform. Bonds issued by Pemex are included in debt-to-GDP calculations for Mexico, but this is unusual, and only 19 of the 181 quasi-sovereign bonds tracked by JPMorgan carry an explicit sovereign guarantee.

    In 2009, investors were shocked when Dubai refused to guarantee the debts of Dubai World, a state-owned holding company with $59bn in liabilities, saying it had never offered a sovereign guarantee.

    Neighbouring Abu Dhabi later provided a $10bn bailout.

    Emerging markets’ quasi-sovereign bonds are now suffering from the same diminishing capital flows and rising borrowing costs plaguing the developing world, thanks to the strengthening US dollar, weakening commodity prices and fears of slowing Chinese growth.

    Poor performance has already hurt the credit ratings of countries that back them. Last year, Standard & Poor’s and Fitch, two of the world’s three big credit rating agencies, cut Brazil’s rating to junk in part because of the growing risks associated with Petrobras.

    “What can really break the dam is the quasi-sovereign element in EM external debt,” says Gary Kleiman of Kleiman International, an emerging market investment consultant. “People have always assumed there is an implicit backing, but that capacity has not been called into question explicitly.”

    During previous emerging market debt crises, governments from Mexico to Russia to South Korea stepped in to save indebted quasi-sovereigns.

    “Today, the scale of the problem is much greater and the fiscal power of emerging governments is much less,” Mr Kleiman said. He pointed to Petrobras, the crisis-stricken Brazilian oil group with $104bn of net debt; PDVSA, its Venezuelan counterpart; and Eskom, the South African electrical utility, as sources of particular concern.

    “A company like Petrobras getting into deeper trouble would represent a workout problem more complex than a sovereign workout because of the multiple jurisdictions involved,” he said.

    Analysts say that the problem extends beyond that of dollar-denominated debt. Emerging market companies had issued an estimated $23.7tn in bonds by the middle of last year, according to the Bank for International Settlements, including dollar and local currency debt, up from about $5tn a decade earlier. Many such issuers are quasi-sovereigns. About $16.7tn had been issued by companies in China, according to the BIS, almost all of which carry an implicit or explicit state backing.

    Fonte: FT

    segunda-feira, 4 de janeiro de 2016

    Deflate stock market and allow China’s fortunes to swell

    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 $200bn 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 to which officials resorted in 2015. This is not because Beijing does not have the means to prop up the index, but rather 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 that is one of the world’s largest economies. It is a formidable turnround — even if it has consumed vast resources, polluted the environment and yielded less of an improvement in living standards than might have been expected.

    In recent years that strategy, too, became untenable, as corporate debts piled up and financial returns diminished. In the meantime, a growing number of local governments were troubled by unsustainable debts.

    Things came to a head in 2014 when, with none of the theoretical spinning that usually accompanies a major change of policy in Beijing, officials began to see what they could do to pump up the stock market. The idea was to stimulate the economy without the huge burden of public spending that would come attached to a programme of fiscal stimulus.

    The trouble with this approach is that the public foots the bill, not via the tax system, but through the more insidious form of redistribution that occurs when an investor buys shares at a price that has temporarily been inflated by official action. From the beginning, this policy was on questionable moral ground. It was becoming increasingly perilous, too, because the faster the stocks rose, the harder they could fall.

    Even after yesterday’s sharp fall, the Shanghai stock market index is more than 40 per cent higher than it was for two years before prices began to take off in late 2014. Shares are likely to fall further. That will be painful for investors. But, outside the financial markets at least, it need not lead to drama.

    Realising this, 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, which in the past have been dominated by notoriously corrupt state-controlled firms.

    These are good ideas as far as they go. But the government is showing no sense of urgency, and even if it did, such limited measures are not nearly enough. Tax cuts 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.

    Joe Zhang is author of “Party Man, Company Man: Is China’s State Sector Doomed?”

    Fonte: FT