Bungling
Beijing’s Stock Markets
Paul Krugman
AUG. 14, 2015 /
http://www.nytimes.com/2015/08/14/opinion/paul-krugman-bungling-beijings-stock-marketshtml.html
China is ruled by a
party that calls itself Communist, but its economic reality is one of
rapacious crony capitalism. And everyone has been assuming that the
nation’s leaders are in on the joke, that they know better than to
take their occasional socialist rhetoric seriously.
Yet their zigzagging
policies over the past few months have been worrying. Is it possible
that after all these years Beijing still doesn’t get how this
“markets” thing works?
The background:
China’s economy is wildly unbalanced, with a very low share of
gross domestic product devoted to consumption and a very high share
devoted to investment. This was sustainable while the country was
able to maintain extremely rapid growth; but growth is, inevitably,
slowing as China runs out of surplus labor. As a result, returns on
investment are dropping fast.
The solution is to
invest less and consume more. But getting there will take reforms
that distribute the fruits of growth more widely and provide families
with greater security. And while China has taken some steps in that
direction, there’s still a long way to go.
Meanwhile, the
problem is how to sustain spending during the transition. And that’s
where things have gotten weird.
At first, the
Chinese government supported the economy in part through
infrastructure spending, which is the standard remedy for economic
weakness. But it also did so by funneling cheap credit to state-owned
enterprises. The result was a run-up in these enterprises’ debt,
which by last year was high enough to raise worries about financial
stability.
Next, China adopted
an official policy of boosting stock prices, combining a stock-buying
propaganda campaign with relaxed margin requirements, making it
easier to buy stocks with borrowed money. The goal may have been to
help out those state-owned enterprises, which could pay down debt by
selling stock. But the consequence was an obvious bubble, which began
deflating earlier this year.
The response of the
Chinese authorities was remarkable: They pulled out all the stops to
support the market — suspending trading in many stocks, banning
short-selling, pushing large investors to buy, and instructing
graduating economics students to chant “Revive A-shares, benefit
the people.”
All of this has
stabilized the market for the time being. But it is at the cost of
tying China’s credibility to its ability to keep stock prices from
ever falling. And the Chinese economy still needs more support.
So this week China
decided to let the value of its currency decline, which made some
sense: While the renminbi was clearly undervalued five years ago,
it’s significantly overvalued now. But Chinese authorities seem to
have imagined that they could control the renminbi’s descent,
taking it a couple of percent at a time.
They appear to have
been taken completely by surprise by the market’s predictable
reaction; namely, the initial devaluation of the renminbi was “the
first bite of the cherry,” a sign of much bigger declines to come.
Investors began fleeing China, and policy makers abruptly pivoted
from promoting currency devaluation to an all-out effort to support
the renminbi’s value.
The common theme in
these wild policy swings is that China’s leadership keeps imagining
that it can order markets around, telling them what prices to reach.
And that’s not how things work.
I’m not saying
governments should never interfere with markets, or even set limits
on prices. There is, as I’ve written in the past, a strong case for
raising the minimum wage and in general for promoting higher wages
for American workers; there’s an even stronger case for effective
financial regulation.
There’s even a
case for occasional intervention to prop up asset prices. Three years
ago, the European Central Bank’s promise to do “whatever it
takes” to safeguard the euro — generally interpreted as a promise
that it would buy government bonds if necessary — worked wonders.
Back in 1998 the Hong Kong Monetary Authority purchased large amounts
of stock to beat back a hedge fund attack on its currency, and scored
a notable success.
But these were
short-lived actions, taken at times when markets seemed to have lost
their bearings. Staffers at the Federal Reserve used to call these
moves “slap in the face” interventions. That’s very different
from the kind of sustained intervention and political dictation of
prices China seems to imagine it can pull off. Do the country’s
leaders really not understand why that won’t work?
If they really
don’t, that’s a big concern. China is an economic superpower —
not quite as super as the United States or the European Union, yet,
but big enough to matter a lot. And it’s facing tough times. So if
its leadership is really as clueless as it has been looking lately,
that bodes ill, not just for China, but for the world as a whole.
China
Bites The Cherry
Paul Krugman
AUGUST 12, 2015
8:56 AM August 12, 2015 /
http://krugman.blogs.nytimes.com/2015/08/12/china-bites-the-cherry/
Are you staring to
have the feeling that when it comes to economic policy
Xi-who-must-be-obeyed has no idea what he’s doing?
China’s decision
to devalue the renminbi had some economic logic behind it. As David
Beckworth rightly points out, it’s not just about gaining a
competitive advantage. China clearly has a weakening economy,
whatever the official numbers may say, and would like to use monetary
stimulus. But monetary autonomy and a fixed exchange rate don’t go
well together; China’s capital controls give it some leeway, but it
is nonetheless suffering from a lot of capital flight — and it
wants to liberalize the capital account in pursuit of
reserve-currency status. (A foolish goal, but that’s a subject for
another day.)
So it would make
sense on purely economic grounds for China to move to a free float,
and gain the freedom to use monetary policy that, say, Japan has.
But it’s important
to understand how that works. When Japan loosens money, it creates an
incentive to move funds abroad, causing the yen to fall. This process
only stops once the yen has fallen enough that investors consider it
undervalued, and are willing to buy Japanese securities in the
expectation of a future yen rise. Exchange rate overshooting is an
essential part of the story.
China, however, did
not let the renminbi float, nor did it devalue by enough to persuade
investors that any future move was likely to be up. Instead, it only
devalued a little.
This is what Charlie
Kindleberger used to call “taking the first bite of the cherry”.
(Nobody takes just one bite out of a cherry.) China has now
demonstrated that its currency peg is no longer solid; but it has
come nowhere near to devaluing enough to create expectations of
future appreciation. This is a recipe for convincing investors that
the future direction of the currency is down — which means that
capital flight will accelerate (and apparently already has.)
Now what? China
could just let the renminbi float; given the current state of the
Chinese economy, that would surely mean a large depreciation. But
this would greatly increase trade tensions and pose problems for
foreign policy. Maybe that’s a tradeoff worth accepting, but
nothing in events so far suggests that China’s leadership was
prepared to take that step. Instead, they went for a small move that
was sufficient to destabilize expectations while producing trivial
benefits.
A reminder, then, of
the lack of wisdom with which the world is governed.
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