Opinion

Anatole Kaletsky

The case against a Chinese financial crisis

Anatole Kaletsky
Feb 24, 2014 17:13 UTC

A severe slowdown in China is viewed as among the greatest risks facing the world economy this year, and Thursday’s dismal news on Chinese manufacturing output exacerbated these fears. But the really important news from Beijing pointed in the opposite direction: Bank lending in China, instead of slowing dramatically as many economists had expected, accelerated in January to its fastest growth in four years.

This means China is unlikely to act as a brake on the global economy in the months ahead — despite the recent weak manufacturing figures. It also suggests that predictions of a credit crunch or financial crisis in China will likely prove wrong — or at least premature.

To welcome stronger bank lending in China is not to deny that credit growing at double the gross domestic product growth is unsustainable and will ultimately have to be curbed. The Chinese authorities themselves clearly believe this. The government and the central bank want to reduce credit growth and to replace the unregulated, opaque “shadow lending” system with properly supervised, well-capitalized modern banks.

The government has two other economic objectives, however, that it sees as equally or more important.

The three priorities were clearly set out at the Communist Party Third Plenum last November. First, the Chinese economy must be restructured away from over-dependence on infrastructure investment and exports, toward private businesses that increase the quantity and quality of consumer goods and services.

Behind the wave of market anxiety

Anatole Kaletsky
Feb 6, 2014 23:33 UTC

What has caused the sudden anxiety attack that overwhelmed financial markets after the New Year? We may find out the answer at 8.30 on Friday morning, Eastern Standard Time.

Almost all agree that the market turmoil has been linked to alarming events in several emerging economies — including Turkey, Thailand, Argentina and Ukraine — that has spilled over into concerns about more important economies, such as China, Russia, South Africa, Indonesia and Brazil.

But why has near-panic hit so many emerging markets at the same time?

There seem to be four broad explanations. Whether this current volatility marks the end of the straight-line ascent in asset prices that started in March 2009, or whether it is just another opportunity to “buy on dips,” will largely depend on the relative importance of each of these factors.

This weekend, China will plot its economic future

Anatole Kaletsky
Nov 6, 2013 20:13 UTC

The ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and for global geopolitics than the budget battles, central bank meetings and elections that attract infinitely more attention in the media and financial markets.

The obvious reason for this meeting’s importance is that China is destined in the long run to become the world’s biggest economy and a political superpower. And the Third Plenum, traditionally held roughly 12 months after the appointment of a new Party leadership, has been used twice before as an occasion for the new leaders to spell out the main strategies they hoped to implement as they consolidated their power. At the Third Plenum in 1978, Deng Xiaoping launched the market reforms that unleashed the power of the profit motive in China, and it was at the corresponding event in 1993 that Jiang Zemin accelerated the process of dismantling state-owned enterprises and integrating China into the world economy that culminated with China’s accession to the World Trade Organization in 2001.

A second, more immediate, reason for the world to pay attention to this weekend’s meeting is that China has recently become not just the strongest engine of growth in the world economy, but also the biggest source of potential economic surprises, both good and bad.

Dalian Man

Anatole Kaletsky
Sep 11, 2013 21:02 UTC

The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.

The biggest surprise at this week’s Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board’s meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed’s easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the “middle-income trap” that has prevented further progress in many developing economies. The trap starts to hobble growth when per capita incomes rise to around $10,000 and many of the obvious opportunities for catching up with Western productivity are exhausted. China’s is $9,160 according to the IMF.

When I travelled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organised by Tsinghua University and the Institute for New Economic Thinking.

Were Bernanke’s comments a fire drill or a false alarm?

Anatole Kaletsky
Jul 11, 2013 14:14 UTC

Whenever Alan Greenspan was praised for delivering a clear message on U.S. monetary policy, he liked to reply something along the lines of: “If you think that, you have misunderstood what I said.” Ben Bernanke prefers the opposite approach. On May 22, he triggered one of biggest financial panics since 2008 by raising the possibility of reducing the Fed’s record-breaking monetary stimulus, while admitting that he had no idea when to start this process. He spent the subsequent six weeks trying to clear up the mess that he had created by explaining in painstaking detail the precise timing and conditions under which “tapering” might or might not take place. In the process he created even greater confusion and financial volatility. It now appears that he would have done much better for the world economy — and for his own reputation — by saving his breath and imitating Greenspan’s obfuscation.

The Fed minutes published on Wednesday revealed so many divergent opinions on the conditions, timing and even direction of any change in monetary policy, that all the recent speeches and press conferences on tapering could reasonably be described as white noise. Which raises the question of why investors reacted so strongly to all this confusion. Recent market behavior around the world suggests an explanation: while Fed tapering was not in itself a very important issue, Bernanke’s comments acted as a financial alarm bell, drawing attention to risks in the world economy that were forgotten or ignored. When we hear a fire alarm we naturally ask ourselves three questions: Is it a false alarm? Is it a fire drill? Or is it a real fire — and if so, where?

Similar questions may shed some light on the tapering scare. For the U.S. stock market, Bernanke’s May comments were clearly a false alarm, since the Fed was nowhere near a decision to tighten monetary policy, as we now know officially from the minutes. It is not surprising, therefore, that U.S. equity prices have rebounded to their pre-Bernanke record highs. But looking beyond the U.S. stock market, tapering speculation seems more like a fire drill than a false alarm.

We’re coming into financial hurricane season

Anatole Kaletsky
Sep 5, 2012 19:57 UTC

The North Atlantic hurricane season runs from mid-August to October, with a strong peak in storm activity around the middle of September. A less familiar but even more destructive pattern of disturbances is the financial hurricane season, which coincides with the meteorological one almost to the day.

Most of the great financial crises of modern history have occurred in the two months from mid-August: the Wall Street crashes of Oct. 22, 1907, Oct. 24, 1929, and Oct. 19, 1987; Britain’s abandonment of the gold standard on Sept. 19, 1931; the postwar sterling devaluation on Sept. 19, 1949; the collapse of the Bretton Woods global monetary system on Aug. 15, 1971; the Mexican default that triggered the Third World debt crisis on Aug. 20, 1982; the breakup of the European exchange-rate mechanism on Sept. 16, 1992; the Russian default on Aug. 17, 1998, the bankruptcy of Lehman Brothers on Sept. 15. 2008 – and this list could go on.

The coincidence between financial and meteorological hurricanes may not be entirely fortuitous. The global economy, like the world’s atmosphere, is a finely balanced complex system. In such systems, small perturbations can accumulate to trigger big effects. And just as the meteorological tipping points tend to occur when autumn air circulation starts to disrupt the humid air accumulated in the summer doldrums, something similar seems to happen to financial markets when trading becalmed by the summer holidays returns to normal. The result can be sudden and violent reaction to events accumulated over the summer that markets had seemed to ignore. The world economy does not, of course, experience hurricanes with the same regularity as the Caribbean. But when big events happen over the summer, financial disturbances become quite probable in the fall. This is probably the reason why September has historically been the worst month of the year for stock market performance. In fact, September is the only month in which Wall Street prices have, on average, declined since the 1920s.

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