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”