A collection of links and quotes from the last couple of weeks:
Jeffrey Frankel: China Confronts the Market
some important developments that foreigners decry as the result of government intervention are in fact the opposite. Exhibit A is the August 11 devaluation of the renminbi against the dollar – a move that invoked for US politicians the old adage, “Be careful what you wish for.” The devaluation – by a mere 3%, it should be noted – reflected a change in PBOC policy intended to give the market more influence over the exchange rate. Previously, the PBOC allowed the renminbi’s value to fluctuate each day within a 2% band, but did not routinely allow the movements to cumulate from one day to the next. Now, each day’s closing exchange rate will influence the following day’s rate, implying adjustment toward market levels.
... what many commentators fail to note is that China’s regulatory authorities took action to try to dampen prices over the last six months of the run-up. They tightened margin requirements in January, and again in April, when they also facilitated short-selling by expanding the number of eligible stocks. The event that ultimately seems to have pricked the bubble was the China Securities Regulatory Commission’s June 12 announcement of plans to limit the amount that brokerages could lend for stock trading.
This is precisely the kind of counter-cyclical macroprudential policy that economists often recommend. But, whereas advanced economies rarely implement this advice, China and many other developing countries do tend to adjust regulation, including reserve requirements for banks and ceilings on homebuyers’ borrowing, counter-cyclically.
Shang-Jin Wei: A False Alarm About China
The volatility in equity prices in recent months has more to do with the peculiarities of China’s stock markets than with the country’s underlying economic fundamentals. In more developed economies, such as the United States and Europe, many institutional investors – who tend to be focused on long-term fundamentals – help stabilize stock markets. By contrast, the Chinese markets are dominated by retail investors, who are more likely to pursue short-term gains and engage in momentum trading, thereby exacerbating volatility and creating a greater disconnect between equity prices and real economic growth.
Moreover, the firms listed on China’s stock exchanges are not representative of the country’s companies. Majority state-owned firms account for two-thirds of the market value of the country’s exchanges, for example, though they are responsible for no more than one-third of Chinese GDP and an even smaller share of employment.
James Surowiecki: Drop in the bucket
In the past decade, its boom has created a voracious appetite for commodities of all kinds, from iron ore and copper to oil. As growth there has slowed, the price of these commodities has fallen, and the price of oil has been pushed down further by a production glut. This has been bad for energy and mining stocks, and it’s been very hard on developing economies, like those in Latin America, which relied on commodity exports to China. But for the U.S. economy cheaper commodities are a good thing, putting more money in consumers’ pockets and lowering production costs for American firms.
Joe Hockey, treasurer for an economy that is intimately tied to China, Australia, says market reactions have been overblown. “We’re confident about our understanding of the Chinese economy and we see over time huge opportunities for growth,” Mr. Hockey told the Journal.
Rather than regressing to policies of old, China’s government has actually been showing signs of moving ahead with market reforms ...
Martin Wolf: China risks an economic discontinuity
There are at least three reasons why China’s growth might suffer a discontinuity: the current pattern is unsustainable; the debt overhang is large; and dealing with these challenges creates the risks of a sharp collapse in demand.
While it appears to have convinced some investors to stop selling shares, it may also have convinced people not to buy.
Volumes on the Shanghai Composite Index .SSEC are down more than 40 percent following Monday's announcement of the circuit breaker plan, and on Tuesday they were at their lowest since February, a month in which trade typically dives due to the Lunar New Year holiday week.
Traders suspect much of the remaining business comes from the government's so-called "national team" of investors who sweep in to push indexes up near the end of a day, resulting in sudden rises by the close that are hard to explain otherwise.
Stephen Roach: The outpouring of concern over the likelihood of a Chinese recession is vastly overblown, in my view. Yes, China is struggling with a number of complex problems — the downside of a major equity bubble, excesses in its property market, deleveraging from a debt-intensive growth spurt in the aftermath of the Great Crisis of 2008-2009, and a decline in exports stemming mainly from sluggish growth in its major trading partners in the developed world.
Robert Zoellick: China will stumble if Xi stalls on reform
Stephen Roach: China’s Complexity Problem
Services are also the ingredient that makes China’s urbanization strategy so effective. Today, approximately 55% of China’s population lives in cities, compared to less than 20% in 1978. And the share should rise to 65-70% over the next 15 years. New and expanding cities sustain growth through services-based employment, which in turn boosts consumer purchasing power by trebling per capita income relative to that earned in the countryside.
So, despite all the handwringing over a Chinese crash, the rapid shift toward a services-based economy is tempering downside pressures in the old manufacturing-based economy. The International Monetary Fund stressed the same conclusion in its recent Article IV consultation with China, noting that labor income is now expanding as a share of GDP, and that consumption contributed slightly more than investment to GDP growth in 2014.