Rob Johnson of the Institute for New Economic Thinking says the People’s Bank of China is behind the market plunge – July 9, 2015
The Chinese stock market is dithers, and we’re going to be discussing this with Robert Johnson. He serves as the executive director of the Institute for New Economic Thinking, INET, and he’s the senior fellow and director of the Global Finance Project for the Franklin and Eleanor Roosevelt Institute in New York.Thank you for joining us again, Robert.ROB JOHNSON, DIRECTOR, GLOBAL FINANCE PROJECT, FRANKLIN AND ELEANOR ROOSEVELT INSTITUTE, NEW YORK: My pleasure.PERIES: So give us a sense of exactly what’s happening in China that’s causing these fluctuations in the market.JOHNSON: Well, I tend to think about the old roadrunner cartoon where the person chasing the roadrunner, the animal called Wile E. Coyote runs after the roadrunner and then runs out over the cliff, stops, takes a pause and looks down, realizes nothing under him, and he starts to fall.Come back to the Chinese economy, what’s going on is with the problems in developed country, slow growth, tepid growth, slow recovery even since 2008. Exports are not vital. They have been substituting for export-led growth with construction-led growth, developing urban real estate and infrastructure.PERIES: And that’s because the demand for the, for their exports have gone down because of the economic crisis in the West.JOHNSON: They–that’s right. They’ve slowed down or decelerated, and it’s not the engine of growth that it used to be.Second dimension, as I mentioned, is the construction spending has now reached a point where they got a whole lot of buildings. A whole lot of empty buildings. What you might call over capacity. So that’s not the engine of growth. And the middle-class consumer, moving out of the, what they call the middle-income trap and moving up. That hasn’t really gotten out of the starting gate yet.So what happened was the People’s Bank of China, the central bank, like our Federal Reserve, started to cut rates. Cut interest rates and provide liquidity to soften the downturn. What that did was set off a rampage in stock speculation. Going back to last fall, in say September, to the present, that market exploded on the upside. Just was hyperbolic. But like Wile E. Coyote, they got out under the cliff, and underpinning it is not a strong, broad-based, recovering economy. And with the anxiety in Greece and the anxiety in other places around the world, and what you might call the narrowness of that stock market and the effort of so many companies to do what they call initial public offerings, IPOs, to issue stock, they just became overwhelmed. And what was an upturn turned into the falling off a cliff downturn.And how did I say–they’re not able to arrest that easily. They’re not able to stop it. The market’s down about 50 percent from its peak, I believe.PERIES: Now Rob, when this happened in the 2007-2008 crisis, the Fed stepped in and did the same thing, lowered the interest rates. Why did it work here and not there?JOHNSON: Because that wasn’t really an equity-based collapse. That was more a credit-based collapse related to the housing markets. And we also did very substantial fiscal stimulus in the Obama recovery and reinvestment act that followed on. So starting in 2009 you had a combination of plentiful liquidity, not a crazily valued stock market, and the fiscal stimulus digging us out of the hole. And the stock market started what has been a multi-year long trend up.In China right now they are not investing in a great deal of what you might call new fiscal program. That fiscal program was the infrastructure and real estate development I just mentioned. So nobody sees an endgame for a soft landing or support right now. Unless, as I said, the Chinese consumer starts to be much better paid, and therefore a much bigger part of the engine of growth domestically within that country.PERIES: Now, the financial press is reporting that attempts by Beijing to, as you said, soften the blow or control the situation doesn’t seem to be working. Why is that?JOHNSON: Well, there’s an old saying in monetary policy. You can only push on a string so far. If there’s not an uptake in terms of confidence and real investment and hiring and other things, you don’t get the follow-through. And I think what we have is a slowdown with lots of liquidity. The momentum trade where people were buying stocks because they were on the escalator, not because being on the escalator was supported by fundamental underpinnings of prosperity.So I think it was kind of a, what you might call a false alarm boom in the stock market. It’s a little bit kind of dreamy, like the optimism that prevailed at the time of the dot com bubble. There were lots of new companies. But whether they would have earnings back in ’98, ’99, 2000, was a real question. And when they didn’t have earnings that stock market declined, and the Federal Reserve wasn’t able to arrest a 3,000 point decline in the NASDAQ, which was the [over the counter] index that had many of the tech stocks in it.PERIES: And what could Beijing be doing in order to stabilize it from your point of view, having managed these kinds of situations, and dealing with hotbed economies?JOHNSON: I don’t think right now anything in terms of what you might call gimmick-type controls can make a lot of sense. But I think a broadening of the base of the economy, meaning wages, reduction of inequality, wage growth, higher living standards in a 5-10 year time frame can leave China, how did I say, in a very good place, on an upward trajectory. But that hasn’t been the custom.China built a lot of their energy on attracting foreign direct investment. And as a result they suppressed wages, they suppressed energy costs, which led to abuse of the environment, and they didn’t put in what you might call environmental protections. So a lot of companies fled there because it was the lowest cost environment for them. There are an awful lot of people in China who are very unsettled with the politics in their country. They feel like their land and their human rights, not so much like human rights we talk about, but the labor conditions, were suppressed in order to make wealthy people and a few of what they call the princelings very wealthy.And there’s a lot of, there’s a lot of dissent underneath the surface in China right now that can only be alleviated by treating people better, getting them better educated, treating the environment better, and building what you might call sober growth based on productivity.PERIES: Narrowing the gap and addressing inequality seems to be the answer for many of the issues that the economy is facing worldwide. Rob Johnson, thank you so much for joining us today.