1 Market panic shows what happens when stimulants wear off (Larry Elliott in The Guardian) Financial markets have gone cold turkey. For the past seven years, they have been given regular doses of strong and dangerous narcotics. The threat that the drugs will no longer be available has resulted in severe withdrawal symptoms.
Unlike in 2007, the crash could be seen coming. But this is about more than China. Financial markets in the west have been booming for the past six years at a time when the real economy has been struggling. Recovery from the last recession has been patchy and weak by historical standards, but that has not prevented a bull market in equities.
The reason for this is simple: the markets have been pumped full of stimulants in the form of quantitative easing, the money creation programmes adopted by central banks as a response to the last crisis.
On the day that QE was launched in the UK, 9 March 2009, the FTSE 100 stood at 3542 points. Its recent peak on 27 April this year was 7103 points, a gain of 100.5%. There is a similar correlation between the three rounds of QE in the US and the performance of the S&P 500, which was up more than 200% during the same period.
But there were always doubts about what might happen when central banks decided it was time to remove some of the stimulus they have been providing for the past seven years. Now we know. The Federal Reserve and the Bank of England halted their QE programmes and started to muse publicly about the timing of the first increase in interest rates.
At that point, financial markets merely needed a trigger for a big selloff. China has provided that, because the world’s second biggest economy has shown distinct signs of slowing. What was inevitably dubbed “Black Monday” began in east Asia where there was disappointment that Beijing did not provide fresh support for shares in Shanghai overnight.
But, unlike in 2008, interest rates are already zero. Budget deficits mean governments have less scope to cut taxes or raise spending. China’s total debt is four times what it was seven years ago. Central banks have pulled all the conventional policy levers and a few unconventional ones as well. They could shelve plans for interest rate rises and contemplate further rounds of QE, even though that amounts to doubling the dosage for drugs that become less effective every time they are administered.
2 The great fall of China explained (Gulf News) Although China, a major engine of global growth, has been slowing for some time, financial markets have nevertheless tumbled over fears its economic growth will decelerate faster than expected. Here are a series of answers to key questions on the Chinese stock market and the wider economy:
What has China done to try to stop shares falling? China rolled out a range of measures last month after Shanghai stocks slumped more than 30 per cent from their mid-June peak. In the early July moves, the government intervened with a rescue package that included funding the state-backed China Securities Finance Corp (CSF) to buy stocks on behalf of the government. Other measures include barring “big” investors from selling their stakes and cracking down on short-selling — when investors bet prices will go lower.
Where next for China’s stock market and currency? Despite the government’s “national team” having made a major effort to support the market, analysts say shares are likely to go still lower as the plunge in global bourses is blowing back on China in what is effectively a vicious circle. The yuan is widely expected to weaken further against the US dollar, although the central bank is expected to intervene to prevent steep slides.
Why are financial markets so gloomy about the Chinese economy? China’s economy expanded 7.4 per cent last year, its weakest since 1990, and growth has slowed further this year, measuring 7.0 per cent in each of the first two quarters. It is a far faster growth rate than most other major countries, but the yuan move raised suspicions that the state of the economy is worse than officials have revealed.
Why is slowing growth such a problem domestically? Experts say China’s ruling Communist Party needs to deliver improved living standards, lifting more people out of poverty and satisfying the growing middle class, in exchange for acceptance of its rule. The government also needs to maintain a minimum level of economic growth, which some analysts put at seven percent, in order to create jobs for millions of people and prevent social unrest.
Why is slowing growth a problem internationally? With Europe’s economy weak and the US preparing to raise interest rates, the world has looked to China’s thirst for raw materials to keep finances humming. With more than 1.3 billion potential consumers, the country is also a big market for manufactured goods such as cars. Any weakness in demand could be keenly felt by producers.
2 Rival Koreas find a way out of disaster (San Francisco Chronicle) After 40-plus-hours of talks, North and South Korea on Tuesday pulled back from the brink with an accord that allows both sides to save face and, for the moment, avert the bloodshed they’ve been threatening each other with for weeks.
In a carefully crafted, though vague, piece of diplomacy, Pyongyang expressed “regret” that two South Korean soldiers were maimed in a recent land mine blast Seoul blamed on the North. While not an acknowledgement of responsibility, let alone the “definite apology” South Korea’s president had demanded, it allows Seoul to claim some measure of victory in holding the North to account.
South Korea, for its part, agreed to halt anti-Pyongyang propaganda broadcasts on the border, which will let the authoritarian North trumpet to its people a propaganda win over its bitter rival — and put an end to hated loudspeaker messages that outside analysts say could demoralize front-line troops and inspire them to defect.
The agreement marks a good first step in easing animosity that has built since South Korea blamed North Korea for the mine explosion at the border earlier this month and restarted the propaganda broadcasts in retaliation. But, as always on the Korean Peninsula, it’s unclear how long the good mood will continue.
The Koreas also struck an important humanitarian agreement by promising to resume in September the emotional reunions of families separated by the Korean War. They said more reunions would follow, but there were no immediate details.