Archive for July 2015 | Monthly archive page

At a time of slowing economic growth and massive corporate debts, a deflationary spiral would be China’s worst nightmare. In addition, the risk is mounting. The producer price index (PPI) has been in negative territory for 39 consecutive months, since February 2012.

The growth of China’s consumer price index (CPI), though still positive, has also been falling steadily, from 6.5 percent in July 2011 to 1.2 percent in May 2015. If experience is any indication, China’s CPI will turn negative very soon.

In China’s last protracted bout of deflation, from 1998 to 2002, persistent declines in prices were the result of monetary and fiscal tightening that began in 1993, compounded by the lack of exit mechanisms for failed enterprises. After peaking at 24 percent in 1994, inflation began to decline in 1995. However, GDP growth soon began deteriorating rapidly. In an effort to revive growth in a difficult global environment and buffer exports against the impact of the Asian financial crisis, the Chinese government loosened monetary and fiscal policy beginning in November 1997.

However, it was too little, too late. By 1998, when CPI inflation began to fall, producer prices had already been declining for eight months, and remained negative for a total of 51 months, with CPI growth beginning to recover after 39 months.

An obvious lesson is that the government should have switched to loosening earlier, and more forcefully. However, this experience also underscores the impotence of monetary policy in a deflationary environment, owing to the unwillingness of banks to lend and of enterprises to borrow. The fact that loss-making enterprises were allowed to churn out cheap products, eroding the profitability of high-quality enterprises (and thus their incentive to invest), prolonged the deflation.

Nonetheless, China eventually managed to rid itself of deflation and return to rapid economic growth. For starters, a decline in investment during the deflationary period — together with firm closures, mergers, and acquisitions — reduced overcapacity, clearing the way for investment to rebound strongly in 2002. At the same time, expansionary fiscal policy increased effective demand, while the government, backed by its strong public-finance position, was able to tackle nonperforming loans effectively, thereby increasing commercial banks’ willingness to lend, and firms’ ability to borrow.

Moreover, housing market reforms and the development of a mortgage-loan market in the late 1990s fuelled rapid growth in real estate investment, which reached an annual rate of over 20 percent in 2000. As a result, real estate development became the most important contributor to economic growth, even as exports boomed following China’s accession to the WTO.

The problem with the emergence of these new growth engines is that it enabled China’s leaders to delay important structural reforms. As a result, China now faces many of the same challenges it faced in the late 1990s — beginning with overcapacity.

After 15 years of rapid growth in real estate development, this is not surprising. But that does not make it any less risky. In fact, allowing overcapacity to continue putting downward pressure on prices, China’s economic growth will not stabilise at a rate consistent with its potential. Instead, the economy will end up in a vicious spiral of debt deflation.

At this point, the authorities could eliminate overcapacity through firm closures, mergers and acquisitions, and other structural measures. They could also seek to eliminate excess capacity by using expansionary monetary and fiscal policies to stimulate effective demand. In theory, the long-term solution would be to pursue structural adjustments that would improve the allocation of resources. However, that would be painful and slow. Striking a balance between the short- and long-term approaches will prove to be a major challenge for China’s leadership.

Complicating this effort is the fact that, unlike in 1997–2002, China cannot absorb overcapacity by stimulating real estate investment and exports. And no one knows whether the much-discussed ‘innovative industries’ can have the impact that real estate investment and exports did — not least because there is so much excess capacity in the traditional industries.

China must do whatever it takes to avoid falling into the debt-deflation trap. Fortunately, China still has room to invest in growth-enhancing infrastructure and innovative industries. Policies to expand social security and improve the provision of public goods could support these efforts, boosting domestic consumption by allowing households to reduce their precautionary savings.

Nevertheless, at the same time China’s leadership must continue to pursue its agenda of structural reform and adjustment, even if it may have an adverse impact on growth in the short run. China simply cannot afford to continue to kick the reform can down the road.

Mark Twain once purportedly said, ‘History doesn’t repeat itself, but it does rhyme’. China should brace itself for a period of deflation, which may be even more protracted than the last one. However, with the right approach — and a bit of good luck — China can make sure that, this time, it recovers more sustainably than in the past.

Australian companies will soon be publishing financial results, as well as information about sustainability efforts.

Corporate social responsibility of the big four banks – Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac is a continuing topic of debate following recent scandals and reports of unsustainable activities.

Yet according to ANZ chairman, David Gonski, Australians ought to “stop bashing the banks” for being large and profitable.

This comment should put civil society on guard.

A recent study by the Centre for Corporate Governance at the University of Technology Sydney, part of the UNEP Inquiry into the Design of a Sustainable Financial System, examined self-regulatory and voluntary sustainability efforts of the world’s largest banks, in partnership with Catalyst Australia which scrutinised the efforts of the big four Australian banks.

Sustainable finance

The “four pillars” of the Australian banking system are a dominant part of the Australian economy: the four banks are featured in the top five of the ASX 200 and hold A$522 billion of Australian household deposits, equal to one-third of Australia’s gross domestic product.

In the words of David Murray, former CBA boss and chair of the Financial System Inquiry: “banks fund most of the assets in the economy – whether it’s businesses, governments themselves, homes or projects, whatever else.”

This market dominance results in great power and great responsibility. As banks provide the majority of external finance to companies and governments, they can influence practices: bank lending potentially has more impact on sustainable enterprise than investment and divestment on the stock market.

Banks can thus wield their enormous market power to support sustainable activities, while their actions can likewise contribute to detrimental behaviour.

Conflicting images

The examination of the sustainability efforts of Australian and international banks reveals a schism between symbolic and substantive sustainability efforts.

At the 2014 World Economic Forum, Westpac was named the most sustainable company in the world. ANZ has been named as a leader in the global banking sector by the Dow Jones Sustainability Index, a major reference point for sustainable investors, six times in the last seven years, while NAB and the CBA have likewise been recognised for their sustainability performance.

Yet despite being lauded for their sustainability efforts, the public image of big Australian banks have suffered in the wake of dodgy financial advice scandals, disputed fees, and allegations of rate-fixing and insider trading.

Banks have drawn the ire of environmental activists by extensively funding the fossil fuel industry, coal mining along the great barrier reef, and nuclear arms manufacturing. Oxfam Australia claims the Big Four are also backing agricultural and timber companies accused of land grabbing in developing countries.

As a result, public confidence in banks is low: according to a national survey, part of the research by Catalyst Australia, 76% of respondents believe that banks put profits before their social and environmental responsibilities.


Regulation and Supervision

In 2005, the Government launched an Inquiry into Corporate Responsibility and Triple Bottom Line reporting. It examined the extent to which the Australian legal framework encourages or discourages company directors from considering interests of stakeholders other than shareholders, the suitability of voluntary sustainability measures, and the appropriateness of reporting requirements.

The Committee found that legal amendments were undesirable, as it deemed it “not appropriate to mandate the consideration of stakeholder interests into directors’ duties”.

Furthermore, the Committee recommended that sustainability reporting should remain voluntary, fearing that “mandatory reporting would lead to a ‘tick-the-box’ culture of compliance”.

In the aftermath of the global financial crisis, financial sector regulators were pushed to exercise more supervision and be less trusting of self-regulatory efforts. Consequently, in 2013 the Government launched the Financial System Inquiry. Regrettably, the terms of reference did not address social and environmental sustainability and risks in the financial sector.

The readiness to increase supervision to avoid financial risks is not matched by a similar willingness to supervise and regulate the social and environmental risks caused by the financial sector. This emphasis on voluntary efforts is problematic, as the study by Catalyst Australia shows that only 26% of the Australian public believe banks will behave ethically and responsibly if they self-regulate.


Bridging the governance gap

While many Australian and overseas banks have successfully shaped sustainable corporate imagery, the research by the Centre for Corporate Governance and Catalyst Australia finds that self-regulation permits facts to be obscured and leaves social and environmental matters peripheral to business strategies.

The assurance that banking activities are based on sustainable principles requires public monitoring of compliance and performance – as US litigater Louis D. Brandeis famously said:

“Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

In order to accomplish this, directors’ duties ought to be reformulated to include social and environmental responsibilities, sustainability reporting requirements should be redefined and further embedded in corporate governance systems, and social and environmental risk assessments should apply the precautionary principle, shifting the burden of proof to actors that potentially cause harm.

Robust governance, regulation and supervision should not be seen as measures that restrain innovation or entrepreneurship, but rather as instruments that can help to restore trust, and ensure that banking activities are conducted openly, fairly and sustainably

THE Australian dollar is higher amid upbeat sentiment on global markets after the European Central Bank boosted its cash lifeline to Greece.

At 0630 AEST on Friday, the local currency was trading at 74.03 US cents, up from 73.81 cents on Thursday.


The ECB will tip an additional 900 million euros into the financial assistance that has kept Greek banks afloat, a move that comes after Athens passed a tough reform package demanded by creditors.


One Australian dollar buys:

* 74.03 US cents, from 73.81 cents on Thursday

* 91.88 Japanese yen, from 91.39 yen

* 68.05 euro cents, from 67.52 euro cents

(*Currency closes taken at 1700 AEST previous local session)

Source: IRESS

The Islamic Republic of Iran boasts the world’s fourth-largest oil reserves, second-largest gas reserves and the 29th-biggest economy, estimated at US$415.3 billion in 2014. Its gross domestic product is growing about 3% a year despite the crippling impact of decades-old sanctions.

Not surprisingly, then, potential economic gains are prevailing over military, terrorism and human rights concerns in shaping responses to the historic deal agreed to this week between Iran and six major world powers (P5+1).

While Iran trails Saudi Arabia as the biggest economy in the region thanks to the latter’s energy dominance, it has many advantages over its rival that are sure to become more pronounced as sanctions are lifted. Iran’s economy is more diversified and includes a robust manufacturing sector that supplies domestic and Asian markets with chemicals, plastics, automobiles and household electronics.

Iran is also set to get a boost from about $100 billion in assets currently frozen by US and UN sanctions once the International Atomic Energy Agency (IAEA) certifies that Tehran is fulfilling its part of the deal, probably by the end of the year.

As sanctions fall away, Iran should rise swiftly back into the major leagues, propelled by larger energy exports that could top $100 billion a year, the release of hitherto frozen funds and a highly educated and motivated workforce.

Iran, for its part, has been stressing the economic and stability benefits of the agreement. President Hassan Rouhani emphasized to his nation: “We are on the brink of a new era in the international community.”

Ever the cautious international bureaucrat, IAEA director general Yukiya Amano simply endorsed the Vienna accord as a “significant step forward.” But then, the IAEA has no fiscal stake in the plan’s success or failure.

Most nations, however, do, and are counting on Iran becoming a major market for their goods and services, signaling why money is trumping other concerns when it comes to reactions to the accord. And for those that remain opposed, their rivalry with Iran meant they didn’t expect to gain anything in the first place.

Here’s a look at how 20 countries with a variety of ties to Iran reacted to news of the accord, and how economic interests were the dominant factor.

Russia and China await big benefits

Russia is one superpower whose stance is as clear as that of many developing countries. President Vladimir Putin has declared that relations with Iran “will receive a new impetus and will no longer be influenced by external factors.”

Foremost in fiscal terms will be high-tech weapons sales and atomic reactors for civilian energy generation. Russia expects to benefit despite knowing a flood of Iranian oil and gas on the market will lower energy prices, hurting its own main source of income.

China is another superpower that warmly welcomed the deal as a “historic day.” China, like Russia, plans to sell civilian nuclear plants to Iran and is in talks to invest in gas, oil and rare earth mineral mines in Iran. Beijing, which imports more than 500,000 barrels of Iranian crude a day despite the sanctions, also hopes to have fewer problems fueling its economy.

US, Canada, Australia and UK reactions more mixed

In the US and Canada – which have little need for Iranian oil or other exports but whose companies hope to strike lucrative deals selling technology, energy infrastructure and consumer goods – the political reaction has understandably been more mixed.

Reflecting the divisions within the US about Iran’s potential martial threat, Republican presidential hopefuls such as Jeb Bush denounced the agreement as “dangerous, deeply flawed, and shortsighted.”

Democratic candidate Hillary Clinton, however, is less fearful of this threat and more focused on pitching economic welfare to American voters. She described it as “an important step” — one that she helped set the groundwork for as secretary of state.

Canada, which severed diplomatic relations in 2012 over Iran’s nuclear and human rights violations, said it needed to examine the deal further before taking any specific action, even as pressure mounts to embrace the fiscal benefits of reestablishing ties.

Australia greeted the deal by stressing “caution at least as much as the welcome,” but its exports, largely grains, to Iran are small at $222 million.

The UK, which also participated in the negotiations, has increased its trade over the past year by 36% to $109 million. London hopes to gradually restore calm to a relationship that broke off in 2011.

Israel, the GCC and the Sunni–Shiite struggle

Israel lives under the verbal threat of annihilation by Tehran and naturally does not expect to have any commercial dealings directly or indirectly with the Ayatollah’s regime.

Freed from economic considerations, Prime Minister Netanyahu called the deal “a bad mistake of historic proportions.”

Certainly, seen from Jerusalem, the anti-Semitic leaders of the Islamic Republic could deploy vast portions of their newfound funds to strike terror via Hezbollah and Hamas. Consequently, antipathy and fear of Iran had brought Israel closer to erstwhile Arab foes in opposing Iran.

Saudi Arabia, for example, which is locked in a sectarian struggle against Iran for dominance in Iraq, Syria, Yemen and the Gulf, had its diplomats speak confidentially about “extremely dangerous” Persian expansionism in the wake of the nuclear deal.

Fellow Gulf Cooperation Council (GCC) members Kuwait, Bahrain and Qatar, also part of this Sunni–Shiite struggle, were much more nuanced in their reaction.

All three Gulf monarchies know full well that the deal provides both economic benefits and costs. Iranian cash soon to be heading their way will boost real estate, luxury goods and consulting services. At the same time, higher Iranian oil and gas exports will eat into their established energy-based income streams. Iran’s oil minister is already planning to boost exports by 500,000 barrels per day within six months and top out at 2.5 million barrels per day within a couple of years. This will be a particularly major blow to the Saudis, whose crude oil will become far less vital to the global energy market.

Two other GCC member states, the United Arab Emirates (UAE) and Oman, are taking a more positive approach, regarding Iran’s economic and strategic reemergence as inevitable. The UAE, which has been rebuilding non-energy trade with Iran that’s now worth $17 billion, extended “congratulations” coupled with hope that the agreement will contribute to “strengthening regional security and stability.”

Oman, which helped sow the seeds of this agreement by opening up communication channels between Iran and the US, went even further, hailing the agreement as a “historic win–win.”

Oman has longstanding commercial ties with Iran in addition to a confessionally mixed population of Ibadi, Sunni and Shiite Muslims. So it cannot afford to foment intrafaith tensions that would rip apart its society and doom its emerging status as a diplomatic and mercantile hub.

Iran’s allies praise deal

Iraq’s Shiite government is allied with Iran confessionally and dependent upon it both commercially and in the battle against the Islamic State. Accordingly, Iraq sees the deal as a “catalyst for regional stability.”

Indeed, long after the US is gone from its soil, Iraq’s Shiite majority knows that maintaining not just political but economic clout over its restive Sunni population north of Baghdad will depend on Tehran’s largess via militias and cross-border trade.

Then there is dysfunctional Syria, where the tottering regime is a client beholden fiscally, commercially and militarily to Tehran.

Having just accepted a $1 billion line of credit from Iran, Bashar al-Assad could hardly do anything but praise the agreement as “a great victory” and “a fundamental turning point.” Presumably, Assad hopes that if he can just hang on to Damascus a little longer, Iran will be more empowered in convincing the US and EU that the Alawite ruling class can still secure Syria against the Islamic State.

Neighbors see gains from trade, oil flows

Istanbul, despite being a regional rival of Tehran on the political stage, declared that “the nuclear deal is great news for the Turkish economy,” will lead to investment and help reduce the price of oil.

Indeed, Turkey’s economy, presently Iran’s third-largest trading partner, will benefit both from larger flows of cheap Iranian gas and oil to its own consumers and from tariffs on energy that passes through its borders to European countries.

Likewise, the entire Turkish supply chain – from corporations to individuals – stands to reap windfalls from goods flowing through its borders to Europe and beyond.

Pakistan and India, similarly, hardly feel threatened by Iran even despite Tehran’s influence on Afghanistan, due to their own nuclear capabilities. Thus, each welcomed the deal and its economic impacts.

Pakistan expects “economic growth along with an increase in trade” especially through the Iran-Pakistan pipeline. Iranian gasoline, smuggled across the border of Baluchistan and Makran provinces, has long kept the Pakistani economy afloat. But those supply lines provide no tax revenues. Now, as energy imports can take place freely and overtly, the central government in Islamabad stands to benefit.

India also expressed delight at additional “energy cooperation and connectivity” plus a reaffirmation of each country’s “right to peaceful uses of nuclear energy.” India has an ever-rising demand for fuel, and Iran is positioned a short distance away to deliver a steady supply.

Kazakhstan’s officials hailed the accord as they expect swift gains from a recently inaugurated trans-national railway. The Central Asian nation also plans to work with Iran toward enhanced cooperation in the energy-rich Caspian Sea.

Jockeying for position

China is currently Iran’s largest trading partner, with non-fuel trade expected to rise from $13 billion in 2014 to at least $80 billion by the end of this year. Rounding out the top five are the UAE, Turkey, the European Union and South Korea. Seoul also quickly joined Iran’s other top trading partners in welcoming the nuclear deal.

As the end of sanctions bolsters Iran’s economy, these 20 and many other countries will be competing over the coming months and years to enjoy the benefits that will accompany the nuclear accord taking effect.

Clearly it’s no surprise that money is dominating reactions, rather than ideals or even fear. For better or worse, global and regional responses are being shaped by fiscal calculations. Even security and strategic interests are being seen in commercial rather than military terms. It’s the economy, stupid.

Germany demanded unconditional surrender from Greece and got what it wanted.


The result is that severe punishment in the form of austerity will continue, along with the humiliation of the Greek people. Democracy in the eurozone has been severely strained.


While the six-month battle between Greece’s anti-austerity Syriza government and its German and other creditors resulted in a deal this weekend that prevents a Grexit for now, this much is clear: there will be no end to Europe’s economic malaise, of which Greece is only the most extreme case.


Rather, the gradual dismantling of the euro – a project of integration that began in 1999 and brought 19 countries together under a single currency – will continue as long as its biggest member refuses to ease up on the austerity and other policies that are suffocating Europe’s economy.


The Greeks themselves, of course, cannot be pardoned from their fair share of blame for their predicament, as I’ve noted many times.


But Germany as Europe’s powerhouse is the one running the show. And based on my experience and research, it bears a large share of the blame both for creating many of the conditions that led us here and by showing little to no flexibility in resurrecting Greece’s economy.


Another dose of austerity


The sad truth is that Germany’s finance minister – who has pushed austerity on all its neighbors including Greece at any cost, despite the often abysmal results – remains firmly in charge of economic policy and is determined to impose more of the same folly.


The eurozone remains stuck in a process of competitive internal devaluations – in which members suppress wages to boost their competitiveness – that suffocate domestic demand. This leaves the currency block extraordinarily vulnerable.


Continuing to freeload on external demand through euro depreciation, thereby also undermining the global recovery, excessive thrift (via austerity) rather than investment leaves the land of the euro destined for socioeconomic stagnation.


And if it can be believed, another especially high dosage of that austerity has been reserved for Greece, even though it is already suffering a humanitarian crisis.


What happened to political integration


Matters are even worse politically. The idea of European integration as a means to secure peace and prosperity was founded on solidarity, tolerance and compromise – a supposed union of equal partners, ending Europe’s long history of conflict and domination.


The euro in particular was meant to end Germany’s monetary hegemony over the continent that characterized the previous currency arrangement: the European Monetary System.


The plan backfired badly. By undermining everyone else’s competitiveness through persistent wage repression, Germany has maneuvered itself into a hegemonic creditor position that has secured the country even more leverage over the economic policies of its “partners.”


In other words, low labor costs at home have made it easier for German manufacturers to undercut its competitors’ prices, leading to a massive trade surplus relative to most countries in the euro. The corresponding deficits have left Germany’s euro partners in their vulnerable debtor positions.


Greece merely provides the most clear-cut case: offered the choice between Grexit and the de facto replacement of its sovereignty with external control over financial and other policies, Greece, for the time being at least, is opting for the status of a vassal state.


Greece’s blame, Germany’s forgiveness


Greece is neither flawless nor blameless. Compared with its peers, it suffers from more than its fair share of corruption. It fudged its numbers and broke the euro’s fiscal rules by a wider margin and for more years than Germany itself.


But if Germany at least in part believes that Greece must be punished for its sins, it should look to its past and the magnanimity with which it was dealt after World War II: with the Marshall Plan and London Debt Agreement, which resulted in the forgiveness of 60% of German foreign debt, according to Thomas Piketty.


Why is Greece’s case so much different, and by what kind of moral, political or economic standards can the deal be justified?


France, a counterweight no more


France has often been a counterweight to Germany in these matters, and at times, including this past weekend, tried to fight in Greece’s corner. But in the face of German rigidity, it was able to achieve only a deal that provided the Greeks with a draconian choice: Grexit or vassal.


For not even France, pressured to restore its competitiveness vis-à-vis Germany and embrace austerity more fully, is more than a junior partner these days.


This outcome is clearly unsustainable. A plan such as the one I suggested earlier this year that would create a European treasury – in a move toward a closer union – could help solve the economic and fiscal problems that plague Europe and spur much-needed investment. Unfortunately, Germany stays on this destructive course.


As a German, I am simply dismayed by the unrelenting conduct of my government, which reached a new climax this weekend when it dug its heels in further than ever before.


But there is no way around it: this weekend has pushed European integration firmly into reverse, and the pessimist in me has to admit that at some point “Germexit,” a German exit from the euro, would probably be the least terrible outcome for Europe.

Don’t bet more than you can afford. Don’t borrow to play. Don’t chase your losses. Quit while you’re ahead.


If only Chinese stock market investors had followed these basic gambling rules. Seduced by dreams of getting rich quick, millions of inexperienced Chinese investors have lately been treating China’s stock market like a casino. With the help of social media, the optimistic sentiment spread quickly, pulling more in. The index for the main board of the Shanghai Stock Exchange almost doubled in the past year. The index of small cap stocks has tripled or better. It became a classic asset bubble. Then it all came crashing down.


The role of the Chinese government


The government-engineered bull market was meant to help resolve China’s real estate bubble and over-leveraged local governments, incentivise innovation and facilitate reform of state-owned enterprises. Instead, it was hijacked by highly-leveraged greedy individual investors. As the government became concerned and began to deleverage margin trading, it set off a stampede, with everyone rushing to the blocked exit doors because of the 10% price limit trading rule. Over the past three weeks the market dropped by 30%. Even after this correction, many small cap stocks remained over-valued.


In an effort to calm the market, the government has taken measures to buoy the prices of blue chip stocks, temporarily halted IPOs and lifted insider trading rules to make it easier for company directors to buy back their own shares. It has also imposed a one year stock sale ban on anyone owning 5% or more of shares in a company. When the government began focusing support on blue chips, at least 1,439 Chinese listed companies — 50% of overall listings — applied for a temporary trading halt in order to protect themselves. This also contributed to the panic.


Even Chinese companies listed in other markets were affected by the crisis. The hashtag #ChinaMeltdown began to spread on international social media. US investors began selling off stocks in Chinese companies listed there even though they are not affected by the liquidity crisis in the Chinese stock market.


Just before the Chinese market plunged, there had been a surge in US-listed Chinese companies planning to go private hoping to chase the higher valuations in the Chinese market with an eventual Chinese IPO. Many will have to delay these plans.


China’s economy at ‘new normal’


The Chinese market crisis is a reflection of the over-valuation and over-leveraging of small-cap stocks, and is not comparable to what happened in the US in 1929, which reflected a fundamental crisis in the US economy. The Chinese economy has already moved to a “new normal” stage in anticipation of a slower rate of growth as it transitions from manufacturing to consumption. China’s GDP growth rate is still 7%.


Investors in emerging markets tend to overestimate growth which leads to overvaluation. In China 85% of investors are individuals, unlike in developed markets where they are institutions. The turnover rate of these Chinese investors is more than 900%, the highest in the world. The account balance of 84.1% of these investors is less than 100,000 RMB, and 10.39% have a balance between 100,000 and 500,000 RMB. Only 6% have a college degree.


Chinese investors also understand that the priority of the government is social stability; the government will step in when anything threatens that objective. This recent bull market can also be seen as a typical example of investors hijacking this sentiment.


The government knows it must rebuild investor confidence or the pessimistic sentiment could spill over into the banking sector. Some insiders believe that a significant portion of the capital that was used for margin trading actually came from the asset management products that were issued by the banks. If the banking sector is impacted, then the negative sentiment could spill over to consumers’ willingness to spend, which would then impact the overall economy. There have also been reports that some entrepreneurs have speculated in the stock market using their company’s operating capital.


A lesson in market risk


Any stock market is built on confidence and the expected value of future cash flow. The objective of the government should be to mitigate the systemic risk rather than managing the stock index. The government is over-protecting retail investors. The function of the capital market is to charge different prices or risk premium on firms relative to their risk levels. Everyone should understand the rule of the market: higher returns mean higher risk.


At the end of last week, as the market realised how determined the government was to handle the problem, some experienced investors began returning in a hunt for bargain stocks. I expect the market will gradually bounce back, though with some short-term volatility because small-cap stocks are still mostly overvalued and some investors are still highly leveraged.


The bull market spirit is still here, but hopefully both the government and retail investors will learn a valuable lesson from this crisis. The market is designed for long-term financing, not short-term speculation. Investors should respect the power of the market.

Europe has offered Greece a new $96 billion bailout after its government agreed to enact deep economic reforms under close supervision by its creditors.

The rescue — Greece’s third since 2010 – should secure its place in the euro, for now. The country’s potential exit from the currency union would have shaken Europe to its core.


Greece agreed to significant economic reforms: Pension cuts and higher taxes, as well as the sale of some government assets. The key to the deal: Proof that Greece will follow through.

“Eurozone leaders have agreed in principle that they are ready to start negotiations on a [new bailout],” said Donald Tusk, who chaired an emergency summit of all 19 nations that use the euro.


Greece’s Parliament must approve these measures by Wednesday. In addition, Europe will assign monitors to ensure that Greece will also have to give up control of the proceeds from government sales, with the bulk being earmarked for debt payments.

Greece had been pushing for some of its massive debt load to be canceled. Europe rejected that, but said it would consider easing the terms with longer grace periods.

Still, the deal is just a proposal, and it does not mark an immediate end to the crisis. It could face resistance in Greece’s Parliament.

And Greece desperately needs the European Central Bank to restart money flows to re-open up its shuttered banks. The ECB however said Monday that it was not ready to do so yet.

The leaders hammered out the agreement at the marathon overnight meeting in Brussels, after weeks of frantic diplomacy sparked by Greece walking away from a previous bailout program.

That decision left it without the cash to make a payment to the International Monetary Fund, triggered the closure of its banks, and sent the economy into free fall.

Fast running out of money, Greece faced an awful choice: Accept the conditions demanded by the only people willing to lend it money, or leave the euro.

Speculation about the currency should now fade, but it’s not clear how soon the money the country desperately needs will flow, and when its banks will reopen.

Related: Read the full deal document

Finance officials will reconvene later Monday to talk about how to support Greece while the details of the bailout are being negotiated. That process could take weeks.


The conditions are particularly tough for two main reasons.

First, the economy has deteriorated sharply in recent weeks, damaging Greece’s already fragile finances still further.

Second, there was a complete breakdown in trust between Greek Prime Minister Alexis Tsipras and other European leaders. That was largely because of a series of U-turns he performed, and his decision to call a referendum to reject reforms he then signed up to days later.

That made for hard talking this weekend. The summit ran for 17 hours, and that was after finance officials had spent 14 hours preparing the ground.

Under pressure from skeptical voters, some European leaders wanted ironclad guarantees that they wouldn’t be throwing good money after bad. Europe and the IMF have already lent Greece about 233 billion euros since 2010.

Monday’s deal requires Greece to give access to bailout monitors on the ground in Athens — including officials from the IMF, a point Tsipras resisted to the last.

He was elected on promises to reverse austerity and end intrusive monitoring, and the agreement will raise questions about whether he can continue in his post.

Related: Inside Greece’s health care crisis

But without a new bailout, Tsipras knew Greece’s descent into economic chaos would accelerate, bringing the country ever close to exit from the euro.

Greece’s banks have been shut for two weeks, and cash withdrawals are capped. The vital tourism industry is suffering. People are spending less, some public services have stopped charging, and the healthcare system is running out of imported medicines.

Greece needs to pay pensions and wages this week, and make a big debt repayment to the European Central Bank next week. Without an injection of funds fast, it would have to issue IOUs, a first step to printing its own currency.

Finance officials from the 19 countries that use the euro have begun discussing Greece’s request for about $80 billion in new loans it needs to avoid bankruptcy and keep the currency.


European leaders gave Greek Prime Minister Alexis Tsipras an ultimatum earlier this week: Convince us you’re serious about putting Greek finances in order, or you’re out of the eurozone.

Officials arriving for a weekend of crisis talks in Brussels said the Greek proposals were a positive step, but it was still far from certain whether formal negotiations on a new rescue package could begin.

Greece has not yet said how much money it wants in its third bailout since 2010.

Austria’s finance minister Hans Joerg Schelling told reporters the loans would total about 72 billion euros ($80 billion), including a contribution from the International Monetary Fund, over three years.

Greece has already received about 233 billion euros from Europe and the IMF in the past five years.

Related: Inside Greece’s health care crisis

The package of reforms Greece is proposing includes spending cuts, tax hikes, and plans to phase out tax discounts on some islands, among many other things. Greece is also proposing changes to public pensions, such as raising the retirement age, and steps to improve tax collection.

They’re very similar to ideas put forward by the country’s creditors in late June before Tsipras walked out of talks, triggering the collapse of the last bailout and forcing the closure of Greece’s banks.

But on their own they don’t go far enough. Germany’s finance minister, Wolfgang Schaeuble, said Saturday’s crunch talks would be “extraordinarily difficult.”


Here are several obstacles to a deal:

Greece will need to accept even tougher reforms and fiscal targets to take account of the rapid deterioration in its finances and economic outlook caused by the closure of its banks and the introduction of capital controls. Belief in the Greek government’s commitment to reforms, and its ability to implement them, has been shattered by the series of U-turns seen in the past couple of weeks. Opinion in some other countries that use the euro, including Germany, is running very high against another rescue for Greece. Taxpayers don’t want to put more public money at risk. A new bailout would need to be ratified by parliament in Germany, and a handful of other countries. Greece wants creditors to restructure its debt. Europe could give it even more time to pay back loans, and cut already very low rates of interest, but that may not be enough. Some eurozone countries insist they can’t go further and cancel Greek debt outright. That in turn could kill a deal. Some eurozone countries say they’ll only back a third bailout if the IMF takes part. The IMF has made clear that it will only participate if the Europeans agree to restructure Greece’s debt.

So the pressure is on. If talks fail this weekend, all 28 heads of government in the European Union are on standby to fly to Brussels for an emergency summit late Sunday.

That meeting would discuss how to cope with the unpredictable fallout of a Greek exit from the euro

China’s stock market plunge is keeping economists awake at night.

Fifty percent of economists surveyed by CNNMoney said that stock market turmoil is now a major risk to China’s economy. This is the first time that markets have been singled out as a concern, marking a shift from earlier surveys, which showed economists were most worried about the property sector.

China stocks have been on a wild roller-coaster in recent weeks, wiping away more than $3 trillion in market value. The benchmark Shanghai Composite, for example, has dropped more than 30% from its June 12 peak. Things are so bad that roughly half of China’s 2,800 listed companies have suspended trading.

Pair extreme market volatility with sluggish economic growth — China is now facing its slowest expansion since the financial crisis — and it’s clear why experts are worried.

“We had always considered the risk of a financial crisis in China as high,” wrote David Cui, an equity strategist at Bank of America Merrill Lynch. “What has happened in the stock market has likely increased the risks considerably.”

The Chinese government has pulled out all the stops to try to stem the stock market decline — the central bank has cut interest rates to a record low, brokerages have committed to buy billions worth of stocks, and regulators have announced a de facto suspension of new IPOs.

But still, markets remain extremely volatile. All of the economists surveyed expect the central government to continue taking action to fight the slump.

In the long run, experts say they’re most concerned about the retail investors — think teenagers, electricians and cab drivers — who make up the bulk of China’s stock markets. They’re expected to take the biggest hit as markets continue their tumble.

The worry is that some households — especially in the middle class — could see their savings wiped out. As a result, consumption will likely suffer down the road, experts said. That’s bad news for China, which after decades of breakneck expansion led by exports, is now trying to shift to consumer-driven growth.

Related: Over half of China’s stocks have stopped trading

A steep market decline also limits an important financing lifeline for the corporate sector, and could dampen investment growth, according to Nomura.

Still, here’s some important context: Despite the recent stock rout, the benchmark Shanghai Composite is up roughly 9% so far this year, while the smaller Shenzhen Composite has gained 33%.

Plus, while stock investment was on the rise, only about 12% of household wealth is in the markets, according to HSBC. Foreign investors have little exposure to Chinese stocks, owning just 1.5% of total shares, according to Capital Economics.

“Impacts on the global economy will be more modest, because direct financial linkages are weaker,” said Brian Jackson, an economist with IHS.


Backed by Greek voters and opposition leaders, Prime Minister Alex Tsipras meets Tuesday with other eurozone leaders to see it they can resurrect debt relief negotiations.

Following Sunday’s referendum in which 61% of voters rejected stringent bailout terms set by Greece’s international creditors, Tsipras hoped to go to the meeting in Brussels with a strenghtened hand. On

Banks have been closed for a week, with strict limits on daily ATM withdrawals, and are expected to stay shut at least through mid-week.

Monday, Greek party leaders rallied around his call for new talks.  However, the lenders gave no immediate indication they were ready to compromise on new loans to keep Greece afloat.

German Chancellor Angela Merkel, who on Monday talked with Tsipras and met with French President Francois Hollande in Paris, stressed that Greece needs to take “responsibility” for reforming its economy. Hollande said Europe needs to show “solidarity” with Greece. The two leaders run the eurozone’s largest economies.

Both leaders also said they respect the referendum results, and the door remains open to negotiations to find a way to keep Greece in the 19-country eurozone.

As the outlook for the talks remain unclear, the European Central Bank decided Monday to leave the level of emergency credit to Greek banks unchanged to prevent their collapse. But it raised its collateral requirements.

In one concession to the creditors, Tsipras replaced his outspoken finance minister, Yanis Varoufakis, who had alienated eurozone leaders by assailing the onerous terms they demanded for new loans.”I shall wear the creditors’ loathing with pride,” Varoufakis said in a defiant but characteristically colorful announcement about his resignation on his blog.

He said he was resigning because Tsipras believed his departure might help pave the way for Greece to “achieve a deal.”

The Greek government later named lower-keyed economist Euclid Tsakalotos, 55, as the new finance minister. He was the prime minister’s lead bailout negotiator in talks that halted last month before Tsipras called the referendum.

IMF chief Christine Lagarde said Monday that the fund is “ready to assist Greece if requested to do so. “We are monitoring the situation closely,” she said, without offering further details.

In a statement Monday, European Commission Vice President Valdis Dombrovskis said: “The ‘no’ result unfortunately widens the gap between Greece and other eurozone countries. There is no easy way out of this crisis. Too much time and too many opportunities have been lost.”

He said the commission is ready to work with Greece but cannot negotiate a new program without a mandate from eurozone finance ministers.

Major stock benchmarks in Asia, Europe and on Wall Street all moved lower Monday.