As markets from New York to Tokyo brace for chaos, all eyes are on the lessons from meltdowns past – how policymakers stemmed the financial bedlam, picked up the pieces and bounced back.
Cue the usual suspects: Wall Street’s 1929, 1987 and 2008, Japan’s 1990, East Asia’s 1997, Russia’s 1998, Silicon Valley’s 2001, Europe’s 2010. Yet Shanghai’s reckoning in 2015 may be particularly instructive, particularly since the fallout is still undermining the world’s second-biggest economy.
Granted, the headlines don’t bear that out. Beijing’s roughly 6.7% growth seems a boon for President Xi Jinping’s “China Dream” aspirations, on triumphant display at October’s National Party Congress extravaganza.
But below the surface, evidence is mounting that China’s real bull market is in inequality. And it is accelerating, thanks to 2015 crisis management.
Amid the chest-thumping, China’s Gini coefficient, a vital barometer of inequality, rose to 0.467 in 2017. Anything above 0.4 is generally seen as a statistical warning sign, a level that could foment social instability. The good news: China’s level is below the 4.491 recorded in 2008. The bad: there’s been a 0.005 deterioration since 2015. Not massive, but China is moving in the wrong direction and it’s no coincidence.
In the summer of 2015, remember, China had a stock-market collapse on its hands. Eye-popping losses in Shanghai shook global markets as investors feared a broader unraveling. Beijing pulled out all the stops: boosting leverage limits; easing margin-trading regulations; suspending initial public offerings; letting individuals put up homes as collateral; playing the patriotism card to get mainlanders to buy shares; tidal waves of central-bank liquidity; lower requirements for home loans.
It’s these last two steps that arguably led to backsliding on the egalitarianism front. Mainland disposable capital income rose 7.3% in real terms in 2017. A Nikkei exposé on the topic digs deeper, reporting that the wealthiest Chinese enjoyed a 9.1% jump in income, compared with 7.1% among the lower middle class. The disconnect: those who owned real estate in 2015, and bought more properties since, and stocks, are flush; those who own neither are benefiting far less from China’s gross domestic product gains.
What worries Shetty is that the formula that once translated rapid GDP into greater prosperity for broader populations is losing potency
China isn’t alone. Since late 2012, Japan’s Shinzo Abe has done his own bit for the 1%. Abenomics talked a great game of structural change, but it mostly tried to make trickle-down economics great again by ginning up asset prices. That’s why the longest Japanese expansion in nearly 30 years is boosting land and share prices, not average wages. Abenomics is widening Japan’s inequality.
So will Donald Trump’s titanic tax cut, one skewed toward the 0.01%. Taken together, all this means the world’s three biggest economies are pursuing policies aimed more at the plutocrat class than middle-class households. This is not a great comment on where the global economy is headed three to five years from now.
But developing Asia is a particular worry, as it’s home to so many of the globe’s most promising economies and markets. Income inequality “is high or rising in most countries,” the World Bank said in a November report. One factoid worth mentioning: at the same time as 250 million East Asians live in slums, the ranks of billionaires are soaring – by 30% between 2002 and 2014 alone.
The more oligarched the economy, the bigger the problem. World Bank economist Sudhir Shetty points out that China and Indonesia bear particular attention. What worries Shetty, though, is that the formula that once translated rapid GDP into greater prosperity for broader populations is losing potency.
One explanation: investments in education and training haven’t kept pace with the rapid shift from manufacturing jobs to services and innovation. Another: success in reducing corruption has been more superficial than governments like, say, Xi’s, admit.
But in the last two and half years, Xi’s team hasn’t done itself any favors by aiming post-crisis recovery efforts at the top of the economic food chain. Or by treating the symptoms of the chaos instead of the underlying causes. In 2018, Beijing appears to be reaping what it sowed.