Bloomberg News

China Big Bang Seen Like London in New Regime: Cutting Research

November 08, 2012

China’s new leaders are about to set off a “Big Bang” in financial oversight.

That’s the call of economists at HSBC Holdings Plc (HSBA), whose Nov. 6 report predicts “a swathe of coordinated reforms which we believe will revolutionize the country’s financial system.”

As the Communist Party Congress in Beijing prepares to unveil its next generation of leaders, the economists predict that a financial overhaul will top the policy agenda in coming years. Interest rates will be liberalized, the bond market will be doubled in size and the yuan will become convertible within five years, said Qu Hongbin, Sun Junwei and Ma Xiaoping.

Such changes would boost the private sector by making capital allocation more efficient and providing the middle class with more choice about where to put their money. That would enable households to earn a higher return and therefore spend more, they said.

“This should help rebalance growth from investment to consumption and lift the potential growth rate in coming years,” the HSBC report said.

A bigger, deeper bond market will give banks more incentive to finance small and medium-size enterprises and consumers, it said. Such companies account for eight out of 10 Chinese jobs.

The People’s Bank of China will create a single benchmark interest rate across bond markets in the next three years, while the internationalization of the yuan will take off. The proportion of trade settled in the currency has quadrupled to more than 11 percent from 2009, the report said.

To avoid distortions, China must get the sequence of policy changes right, HSBC said. It must strengthen banks, free interest rates and develop a functioning bond market before allowing full yuan convertibility.

“The term ‘Big Bang’ refers to major reforms introduced in the U.K. in 1986 that transformed the country’s financial services industry from a protected species into a global powerhouse,” the report said. “Now it’s China’s turn.”

* * *

The repeated failure of policy makers to save the euro area cost 282,983 jobs.

That’s the estimate of Bank of America Merrill Lynch economists who studied the fiscal cutbacks of 2010 and 2011. They found that economic growth was 0.1 percentage point lower than it would have been without the policy muddling, based on a comparison of fiscal multipliers before and after the crisis. Multipliers measure ripple effects of budget cuts on an economy.

They then used European Central Bank assumptions for the links between growth and employment to suggest how many of the 555,000 jobs shed during the crisis were due to policy makers’ failing to turn their economies around.

While European national leaders saved their economies from tanking markets, created a rescue fund and began work on a banking union, the process took time, weakened the confidence of households and businesses and front-loaded the fiscal adjustment, London-based economists Laurence Boone and Ruben Segura-Cayuela wrote in the Nov. 2 report.

The 282,983 number is “largely explained by the fact that these countries that expected larger consolidation efforts also had, in general, greater elasticities of employment,” or stronger ties between growth and employment, they said.

Spain, with 187,000 jobs lost, and Greece, with 69,000, have been particularly affected, they said.

* * *

The severity of U.S. unemployment during the Great Depression and the labor market recovery in the years that followed may both have been overstated, according to members of the Federal Reserve Bank of Richmond’s research department.

Data compiled by the late government economist and Wesleyan University professor Stanley Lebergott in his 1964 book “Manpower in Economic Growth: The American Record since 1800,” was much more volatile than official statistics show, Jonathon Lecznar, Jessie Romero, and Pierre-Daniel G. Sarte wrote in an economic brief published this month. The volatility was higher even when data from the Depression era was excluded.

Lecznar and Sarte constructed their own unemployment series using data from other studies, including one by Christina Romer, former head of President Barack Obama’s Council of Economic Advisers. Their data suggests Lebergott’s figures overstated the decline in employment between 1929 and 1933 by about 4.3 million workers, and the increase in employment between 1934 and 1943 by about 4.6 million workers.

Their data showed the unemployment rate rose to 19.2 percent from 5.9 percent between 1929 and 1933, compared with Lebergott’s estimates of a jobless rate of 25.2 percent from 3.2 percent in the same period. Between 1939 and 1943, the rate dropped to 6.4 percent from 15.2 percent, Lecznar and Sarte’s data series showed, compared with Lebergott’s unemployment rate decline to 1.9 percent from 17.2 percent.

“These results by no means imply that the Great Depression was not a severe economic contraction and a time of tremendous hardship for millions of Americans,” the authors said. “But the severity of the Great Depression also makes it a vital period for economic study, especially as the United States continues to feel the effects of the Great Recession. This exercise thus helps recalibrate an understanding of the extent of the changes in, and the flexibility of, the unemployment rate during a critical period of U.S. history.”

* * *

Asian officials can mostly cope with so-called hot money flowing into their markets without hurting their economies because monetary policy transmission in the region tends to rely on short-term domestic interest rates, according to an International Monetary Fund working paper.

While global causes can account for about 40 percent of changes in long-term borrowing costs, they have a smaller impact on output, Sonali Jain-Chandra and D. Filiz Unsal of the IMF wrote in the paper, published Nov. 2.

“Even in the face of large capital inflows, monetary policy in Asia remains effective at macroeconomic stabilization even though the pass-through is lower during such episodes” when hot money enters the economy, they said.

It is important to understand the impact global developments will have on yields and the effectiveness of policy transmission because growing capital and bond markets in Asia will make long-term rates more sensitive to changes outside their economies, the authors said.

“In the face of a surge in capital inflows, policy makers should remain ready to use other policy instruments such as macro-prudential policies as a complement to appropriate macroeconomic policy settings,” they said.

* * *

Jean Pisani-Ferry, director of Brussels-based research group Bruegel, has found an answer to the question often attributed to Henry Kissinger: “Who do I call if I want to call Europe?”

In the case of U.S. Treasury Secretary Timothy F. Geithner, the hotline has been to the European Central Bank, according to Pisani-Ferry’s analysis of Geithner’s telephone log and diary from January 2010 to June 2012.

Geithner spoke with ECB presidents Jean-Claude Trichet and then Mario Draghi 58 times over that period. There were 36 contacts with German Finance Minister Wolfgang Schaeuble and 32 with his French counterparts.

In total, Geithner had 168 meetings or telephone calls with euro-area officials plus 114 with the IMF, Pisani-Ferry found.

“There is little doubt that for the U.S. Treasury, ‘Mr. Euro’ is first and foremost the ECB president,” Pisani-Ferry wrote in a Nov. 4 blog. “The data suggests constant and very active involvement on the part of the Obama administration in the search for solutions to the euro crisis.”

To contact the reporter on this story: Simon Kennedy in London at at skennedy4@bloomberg.net. Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net. Stephanie Phang at sphang@bloomberg.net


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