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A floor trader at the New York Stock Exchange at the closing bell on 4 December 2018, the day when the Dow Jones Industrial Average (DJIA) index lost almost 800 points, or 3.1 per cent. Photo: EPA-EFE/JUSTIN LANE
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley

China’s Belt and Road may be the closest the world has to a stimulus plan that can kick some vigour back into the global economy

  • There is nothing for global stock markets to be bullish now, from corporate earnings to the US-China trade war, to Brexit and the next US trade war on Japan
  • China’s Belt and Road Initiative may be the only hope for a global economic stimulus

They seem to keep coming, these stock market mini-meltdowns, and flash crashes, or whatever you like to call them.

The most recent was just over a week ago, when markets from Wall Street to Tokyo plunged briefly, eliciting headlines that a crash was at hand, followed by equally unthinking assurances that all is well.

These “corrections” seem to be occurring more often, since the market slump at the end of last year. They are probably best seen as “blue screen” moments of the kind computers sometimes suffer from: signal that the screen itself or some other vital component of the system is about to crash.

It is true that sudden market plunges could be due to the complexity of modern trading systems such as high-frequency trading, where computers transact a large number of orders in fractions of a second. Also, market makers or “jobbers” who balance supply and demand for stocks are becoming fewer nowadays.

But if stock markets are like casinos, as suggested by the economist John Maynard Keynes, there has to be an underlying game from which they take their cue. That game is the economy within which markets operate.

In this sense, the blue screen analogy seems very appropriate. If we take global production, trade and investment to be analogous to the screen, memory or mother board of a computer, then it is hardly surprising that blue screen episodes are occurring more often.

Stock indexes of China, Hong Kong ended the first quarter with spectacular asurges. Can they repeat the feat next three months?

It is hard to find any part of the global economic system that is functioning well at present. So much market commentary ignores this fact that it is worth flagging it afresh.

Put in the form of a question: what is there for stock markets to be bullish about? Certainly not corporate earning prospects because they are dependent mainly on the macroeconomy.

Trade is a battleground and even if the US-China trade war does stagger toward some kind of conclusion – though it is becoming more like the North Korea stand-off – that will do little more than relieve the immediate pain. It will not be a cure for underlying ills in the system.

Infographics: Anatomy of an iPhone - what’s in it and where the parts from from

The Brexit debacle has highlighted the dangers of messing with global supply chains that make up global manufacturing production nowadays, involving myriad countries and myriad companies.

Japan has very complex supply chains in Britain and Europe which are threatened now with rupture.

The numbers involved increase exponentially if we consider the number of supply chains involved in US-China trade. Just take the iPhone’s assembly as an example. Trade is not going to recover quickly from recent disruptions, especially as the United States is about to declare a trade war on Japan again.

So, if trade is set for stagnation at best in the short term, what about production, consumption and investment? Manufacturing PMIs are weakening generally while corporate capital investment is declining. Personal consumption has been holding up quite well but cannot continue to do so while other indicators head down.

As the OECD said in its recent Interim Economic Outlook: “Uncertainty is weighing on confidence, trade, investment and employment prospects.”

This is hardly encouraging. Monetary stimulus is back on the table but applying it now would be like “pushing on a piece of string,” as Keynes said.

There’s always fiscal stimulus, but with government debt at such high levels – in advanced economies especially – applying it now could be risky. And this is to say nothing of the mountain of corporate debt piled up in advanced and emerging economies alike.

Corporate earning prospects therefore do not seem likely to turn upwards any time soon, without an unlikely jump in productivity or in technological innovation.

Our metaphorical computer appears to have run a virus check on itself and, seeing so many threats, has decided to flash the blue screen.

Where is hope to be found? Even China, which has ridden to the rescue of the global economy in recent times has its problems – besides Trump – with excess debt.

But there could be other (literal and figurative) roads leading to, and from China, which offer hope for global economic stimulus. The Belt and Road Initiative (BRI), which is about to enter continental Europe via Italy is about the only project now that offers any scope for increased international investment and trade.

But stock markets seem too busy watching for a crash in Shanghai to observe a potential renaissance on their own doorsteps.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

This article appeared in the South China Morning Post print edition as: Belt and road plan may offer rare respite for the world’s ills
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