Market plunge makes Beijing’s exit harder
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
The Chinese leaders have a dream. The banks pump trillions of yuan into the market, which props up asset prices, creates new demand, and gets the economic engine roaring again. Then, just before inflation starts to surge, the money is drained out of the system.
Others, from U.S. Federal Reserve Chairman Ben Bernanke to Bank of England Governor Mervyn King, share the dream but the Chinese economy, still largely driven by the state, should make it easier to realise. Unfortunately, investors in Shanghai’s stock market have their own ideas — the mere suggestion of credit tightening caused the index to plunge 20 percent in just two weeks to Wednesday’s close before bouncing slightly.
The Chinese policymakers are left between a rock and hard place. At some stage, they must stop pumping money into the system, and prepare to mop it up instead, but timing this to avoid another stock market slump looks close to impossible.
Investors can remember what happened the last time. The central bank’s resumption of sales of one-year bills in July looks similar to the tightening action which began in May 2003. That prompted a six-month fall in stock prices.
That time, Beijing was slow to show it meant business. A couple of reserve rate hikes were largely symbolic, and it was not until late 2004 that interest rates were raised, 18 months after the first move. The market had lost half its value about a year later.
Beijing might not be very effective at controlling wild swings in the market, but it is effective at jump-starting the economy. While Japan had to pump free liquidity into the system for seven years before economic growth returned, it’s taken just half a year for China’s astonishing GDP growth to resume.
Japan: The mother of all miserable recoveries
(James Saft is a Reuters columnist. The opinions expressed are his own)
Investors met the news that Japan’s economy has emerged from a bone-breaking recession calmly and rationally: they sold shares quickly and in large amounts and made bets that consumer prices are going to be falling for years to come.
That’s because Japan’s recovery, coming as it does after a global bubble in the production of what I call, for lack of a more technical term, “stuff,” is really not sustainable.
The fact that the consumer portion of the recovery is only a reflection of income transfers from government to individuals isn’t very encouraging either.
More importantly, given that hopes for Japan were low anyway, the vulnerability of its recovery point to some important challenges the nascent rebounds in the U.S. and Europe now face.
Japan grew at a 3.7 percent seasonally adjusted annual rate in the second quarter, in data reported on Monday, quite a contrast with the almost 12 percent annual rate of contraction in the three months before.
The recovery was heavily dependent on consumer spending, goosed by government subsidies for buying hybrid cars and green appliances, as well as a heavy public works spending.
You swirl around the real point but don’t say it explicitly: business can’t re-invest in itself because it has to de-leverage first. A lot. It’s I suppose a similar theme to the public-at-large, too much debt that must be paid down before we feel comfortable buying the new car or house or big-screen TV. No stimulus or gov’t intervention can possibly change this, only delay it or slow the rate of it. Bottom-line, we need to accept the tme of de-leveraging and hope it goes as quickly as possible. As for businesses trying to gussy-up their balance sheet by slashing costs (which works out to our jobs, not bonuses for those #$&*^%#&), it’s ultimately self-defeating and will make the inevitable even more painful. Great depression move over, you’ve got company!
Despite all this blahblah, China is still a second-rate economy that is doctored up by their government (since it is essentially run entirely by their government.) Moreover, China is overly dependent on exports – by design from America as a means of control, though most would see the opposite as being true – and they are at the mercy of ‘the West’. They need us a helluva lot more than ‘the West’ needs their investment dollars. In the community of nations it’s hard to respect someone that needs you more than you need them and so, I would argue, China is not yet worthy of respect.