Friday21 February 2020 ★ FINANCIAL TIMES 9

Opinion

F

or years, big technology com-

panies have acted as though

they were above the law. More

people useMicrosoft, Face-

bookorAmazonthan the pop-

ulations of most countries. Their profits

exceed the budgets of many states.

Tech and social media companies

have become powerful global actors and

their corporate governance decisions

already affect the rights and freedoms of

billions of people. But, tech companies

are now going a step further, by posi-

tioning themselves as governments.

Last month, Microsoft announced it

would open a “representation to the

UN”, while at the same time recruiting a

diplomat to run its European public

affairs office.Alibabahas proposed a

cross-border, online free trade plat-

form. When Facebook’s suggestion of a

“supreme court” to revisit controversial

content moderation decisions was criti-

cised, it relabelled the initiative an

“oversight board”. It seems tech execu-

tives are literally trying to take seats at

the table that has thus far been shared

by heads of state.

At the annual security conference in

Munich, presidents, prime ministers

and politicians usually share the sought-

after stage to engage in conversations

about conflict in the Middle East, the

future of the EU, or transatlantic rela-

tions. This year, executives of Alphabet,

Facebook and Microsoft were added to

the speakers list.

Facebook bossMark Zuckerberg

went on from Munich to Brussels to

meet with EU commissioners about a

package of regulatory initiatives n arti-o

ficial intelligence, data and digital serv-

ices. Commissioner Thierry Breton pro-

vided the apt reminder that companies

must follow EU regulations — not the

other way around. But making sure EU

lawmakers stay in the driver’s seat will

require significant catching up.

Tech executives ho initially resistedw

regulation nowcall it desirable. As long

as regulations serve their interests,

companies support them. Large tech

companies have found regulations can

help consolidating their market posi-

tion, while smaller enterprises struggle.

Apple supports global privacy regula-

tions, Microsoftpushes restrictions ni

the use of facial recognition technolo-

gies, and Facebook looks to govern-

ments to regulate content online.

But self-serving proposals should be

distinguished from laws to ensure

democracy is not disrupted. It is impor-

tant not to take the words of Silicon Val-

ley leaders at face value.

For one, the suggestion that regula-

tions are the main drivers of corporate

governance is misleading. It distracts

from the power tech companies have in

setting norms and standards them-

selves. Through their business models

and innovations, they develop rules on

speech, access to information and com-

petition.

If tech executives want change, there

is no need to wait for government regu-

lation to guide them in the right direc-

tion. They can start in their own “repub-

lics” today. As regulators of the domains

they govern, nothing stops them proac-

tively aligning their terms of use with

human rights, democratic principles

and the rule of law. When they deploy

authoritarian models of governing, they

should be called out.

Instead of playing government, they

should take responsibility for their own

territories. This means anchoring terms

of use and standards in the rule of law

and democratic principles and allowing

independent scrutiny from researchers,

regulators and democratic representa-

tives alike. Credible accountability is

always independent. It is time to ensure

such oversight is proportionate to the

power of tech giants.

Companies seeking to democratise

would also have to give their employees

and customers more of a say, as prime

“constituents”. If leaders are serious

about their state-like powers, they must

walk the walk and treat consumers as

citizens. Until then, calls for regulations

will be seen as opportunistic, and corpo-

rations unfit to lead.

The writer is international policy director

at Stanford’s Cyber Policy Center

Technology

companies

want to act like

governments

If executives are serious

about their state-like

powers, they must treat

consumers as citizens

in such criticisms. French presidents

have a habit of breaking crockery. Ms

Merkel’s responses, though, offered

nothing in the way of engagement.

Instead of presenting its own plans, Ber-

lin shuffled and stalled. Those listening

carefully to Mr Steinmeier’s Munich

speech would perhaps have detected a

hint of sympathy for Mr Macron.

Maybe the chancellor did want to pre-

serve EU unity. More cynically, she was

anxious to avoid anything that might

destabilise her domestic position. The

irony is that she now looks weaker than

ever, with no guarantee she will survive

in office beyond this year.

Only last month Ms Merkel, in an

interview in the Financial Times,

described the EU as Germany’s “life

insurance”. Her answer to US disengage-

ment? “We in Europe, and especially in

Germany, need to take on more respon-

sibility.” This is what she could have

done in 2018. The moment has passed.

The hesitation — the absence of leader-

ship — will now define her legacy.

[email protected]

Think back to the spring of 2018. The

two leaders had political space and capi-

tal. Mr Macron was still in the first flush

of his 2017 presidential victory. After a

difficult period, Ms Merkel had assem-

bled a coalition tounderwrite her fourth

term. She had long complained of the

absence of a “serious” partner. Now she

had one. Both had seen enough of Mr

Trump to know that Europe had to take

charge of its own affairs. The EU needed

to start building an economic union to

underwrite the euro and to develop its

own foreign and security policies as the

US stepped back — all the while manag-

ing the combustible Mr Trump.

Nothing happened. Mr Macron

launched his initiatives. Ms Merkel bur-

ied them in the sand, occasionally con-

ceding a tiny step forward when the

pressure became embarrassing. Mr

Macron was dressing up French projects

in European clothes, her officials would

snipe. There was too much hot air, and

not enough gritty policy detail. Paris

was careless of smaller EU states. Ger-

man voters did not want grand schemes.

There may well have been some truth

resided in a shared effort to overcome

entrenched disagreements. No longer.

The clash came to a head in November

at a dinner hosted by the German Presi-

dent Frank-Walter Steinmeier. The

angry exchanges,first reported by the

New York Times, were, by the account

of witnesses, extraordinary.

Ms Merkel complained bitterly that

she spent all her time gluing back

together crockery broken by the presi-

dent’s pursuit of his grandiose projects.

Mr Macron’s equally sharp response was

that each effort he had made to raise

Europe’s sights to the global challenges

was met with silence or obstructionism.

They had had a precious opportunity to

work together. Now, Mr Macron saw lit-

tle purpose in engaging someone who

had run out of political road at home.

elevate their sovereignty above taking

instruction from Washington. At least

Mr Trump, I found myself thinking

while listening to this shallow bombast,

is honest in his bigotry.

US senators and members of the

House of Representatives turned out in

force — the Democrats scarcely hiding

fears that their party may hand Mr

Trump a second term by choosing a can-

didate who cannot win; internationally-

minded Republicans half-apologising

for US foreign policy. Unless I misheard

him, Lindsey Graham, the senator for

South Carolina often seen on our televi-

sion screens defending Mr Trump,

heaped praise on the distinctly

unTrumpian notion of multilateralism.

If Europe’s differences with the White

House are routinely played out in pub-

lic, the relationship that has really

soured is that between Paris and Berlin.

Age and temperament have always mili-

tated against the idea of Ms Merkel and

France’s Emmanuel Macron as soul-

mates. They could have been partners.

Instead, the relationship has broken

down. Mr Macron, taking to the stage in

Munich, showed impatience and frus-

tration with the inertia that nowadays

passes as Germany’s foreign policy. Ms

Merkel was at once physically absent

and omnipresent — her precarious hold

on power the subject of excited gossip in

every conference corner. Politically

beleaguered, she exudes contempt for

Mr Macron’s supposed grandstanding.

German and French leaders rarely

start with the same worldview — the

strength of the fabled axis has always

H

istory is alert to sins of

commission — big choices

with bad consequences

that leaders come bitterly

to regret. Think of the Iraq

war. Sometimes, though, the mistake

takes the form of a hesitation — a deci-

sion deferred, a choice put aside. These

sins of omission are harder to spot, but

often every bit as wrecking in their

impact. Germany’s chancellor Angela

Merkel has something to think about in

this respect.

This month’sMunich Security Con-

ference, the annual gathering of inter-

national security elites, focused on the

pervasive sense of drift and fragmenta-

tion in western democracies. “Westless-

ness”, the organisers called it. Think of

the accretion of bad news represented

by US president Donald Trump’s bellig-

erent unilateralism, European power-

lessness in the face of chaos in the Mid-

dle East, Brexit and rising political

extremism in Europe’s democracies

The transatlantic divide was on full

display. Mike Pompeo, the US secretary

of state,delivered a paean to America-

first nationalism. Winning for the west

was all about safeguarding national sov-

ereignty. No one else, however, must

Merkel and

Macron’s fatal

hesitation

German and French

leaders rarely start with

the same worldview, but

this was a missed chance

GLOBAL POLITICS

Philip

Stephens

T

his week US President

Donald Trump has been

crowing about equity

prices. “Highest Stock Mar-

ket in History, By Far!” he

tweeted on Wednesday, after the S&P

500 hit a new record.

That is little surprise, perhaps: the

recent performance of American stocks

does indeed look remarkable, particu-

larly given the coronavirus epidemic in

China and elsewhere. However, if Mr

Trump (or anyone else) wants to get

another perspective, take a look at a

monthly survey that the University of

Michigan conducts to assess consumer

sentiment in stocks.

Its February release suggests that 66

per cent of respondents expect equity

prices to keep rising this year, well

above the 56 per cent reading recorded

in arly 2019e , or 51 per cent in early

2016, ahead of the last election. Indeed,

the current level of bullishness tops

even the optimism seen in early 2007.

This sounds like good news. But there

is a catch: each of the last four times that

optimism levels have exceeded 60 per

cent, equity prices have fallen soon

after, with the decline ranging from 10

per cent in 2018 to 47 per cent in 2008.

“Our indicators tell us, we’re very close

to a Lehman-like drawdown,” argues

Larry McDonald, a former strategist at

Société Générale who now runsThe

Bear Trapsreport newsletter, referring

to the share price fall that followed the

collapse of Lehman Brothers in 2008.

Mr Trump would undoubtedly brush

off such historical determinism. But the

survey is not the only sobering indica-

tor. Take the ratio of equity prices to

forward corporate earnings in the S&P

500: this recentlytopped 19 times, its

highest level since the dotcom boom.

Or consider the cyclically-adjusted

P/E ratio, known as the Shiller P/E ratio:

this is currently 31.9, lower than in the

dotcom boom, but well above 2007 lev-

els. More striking still is the ratio of

equity prices to corporate sales in the

S&P 500: this stands at .3 times 2 , even

higher than anything seen last decade.

Of course, such numbers might —

almost — make sense if American busi-

ness is set to boom. And until recently,

most analysts did assume that 2020

would deliver good earnings growth,

after a feeble 2019. But while recent cor-

porate results have been encouraging,

the coronavirus is now causing analysts

to downgrade their 2020 earnings

expectations. “The impact of the coro-

navirus on earnings may well be under-

estimated in current stock prices,” Peter

Oppenheimer, analyst at Goldman

Sachs,warned in a client note this week.

However, there is another crucial

m a r ke t m e t r i c w h i c h m u s t b e

considered since it makes better sense

of current equity levels: relative yields.

Until the 2008 crisis, investors tended to

assume that the dividend yield — divi-

dends as a percentage of the share price

— on equities should be below bond

yields.

However, the yield on 10-year treas-

uries is currently running at a mere 1.

per cent, due to recent US Federal

Reserve rate cuts. That is below the cur-

rent dividend yield on S&P 500 equities

of1.7 per cent. It is dwarfed by the total

earnings yield on equities, which is

around 5 per cent, according to calcula-

tions by Ed Campbell, a strategist at

PGIM asset managers.

This gulf makes it hard for asset man-

agers to stay out of equities, even at sky-

high prices, particularly since many

companies are taking advantage of low

interest rates to issue debt and use the

money to buy back stock. “On most

metrics the equity markets look expen-

sive,” notes Greg Peters, another PGIM

strategist. “The one metric where it is

not true is relative yield.”

To put it another way, if you want to

make sense of American stocks, look at

the behaviour of central banks, not just

the companies themselves. In this con-

text, insofar as the coronavirus out-

break is perceived to be threatening

global growth, it has also made investors

more confident that the low-rate envi-

ronment will last. That’s why “bad”

news on the epidemic has seemed good

for bond and equity prices alike.

Might anything derail this? The major

central banks seem unlikely to change

course anytime soon, given the lack of

any serious inflationary pressure. And

while Mr Trump’s antics have periodi-

cally alarmed investors, causing stock

markets to gyrate, his sabre-rattling is

likely to die down this year. After all, the

president wants to fight the November

election with a soaring stock market

and strong economic data. Hence the

current truce in the US-China trade war.

Amid all the White House trium-

phalism, the key point is this: if you

think that stocks can keep defying his-

torical precedent in 2020, you must also

believe that something fundamental

has changed in the political economy

that will enable central banks to keep

rates ultra low, almost indefinitely.

Maybe this is a reasonable bet; but it is

also very bold. Either way, it needs to be

recognised by investors of all stripes.

[email protected]

The gulf between yields on

stocks and bonds makes it

hard for asset managers to

stay out of equities

Share prices look sky high amid coronavirus fears

FINANCE

Gillian

Tett

Marietje

Schaake

T

he Chinese government is

taking forceful prevention

and control measures in

response to the recent out-

break of the novel coronavi-

rus, known as Covid-19. The contagion

has exerted some downward pressure

on China’s economy, but it will not last

long. Supported by a resilient economy

and ample room for policy adjustments,

the People’s Bank of China expects a

quick recovery after the outbreak is

contained.

Growth is slowing down in the short

run due to the epidemic. Transporta-

tion, tourism and offline shopping have

borne the brunt. Medical care, online

shopping and the internet sectors are

more resilient. Consumption of non-

essential goods will drop temporarily,

but the long-term trend of increased

and upgraded spending remains well on

course. Some small and medium-sized

enterprises are running at partial capac-

ity but have continued paying wages

and other expenses. They face cash flow

pressures at the moment.

Although the financial markets expe-

rienced large-scale corrections when

they reopened after the Spring Festival

holiday, they have rebounded and

stabilised. The sound fundamentals of

China’s economy in the medium and

long term remain unchanged. China has

strong endogenous growth momentum

that is supported by the growing service

sector and by innovation-driven indus-

trial upgrading. These underpinnings of

high-quality growth will not reverse due

to the epidemic.

Meanwhile, China has sufficient pol-

icy space to support steady economic

growth. China is one of the few major

economies in the world that have main-

tained normal monetary policy.

Equipped with a rich policy toolkit,

China is capable of coping with various

uncertainties. Our experience with the

2003 Sars outbreak is very telling.

Thanks to well-targeted provision of

credit to epidemic control and other

measures, China’s economy rebounded

quickly after the virus was brought

under control.

This time, the Chinese government

responded quickly to the outbreak of

the coronavirus epidemic and intro-

duced supportive policies, including fis-

cal and financial measures, which have

helped contain the impact of the out-

break and stabilise economic growth.

The PBoC has strengthened counter-

cyclical adjustments of monetary policy

throughopen market operations. This

has ensured reasonable and adequate

levels of liquidity and helped to boost

market confidence. The PBoC, with

other financial regulators, rolled out 30

policy measures to support enterprises

heavily affected by the epidemic, partic-

ularly small and micro ones, private

enterprises and manufacturing.

The central bank also provided

Rmb300bn in special central bank lend-

ing tolarge banks and selected local

banks in Hubei and other severely-hit

provinces. It provides credit support at

preferential interest rates to manufac-

turers of essential medical supplies and

daily necessities. These policies have

proved significantly effective.

Many SMEs seriously affected by the

epidemic were given access to new bank

loans. Preferential loans to a rapidly-

identified list of eligible enterprises are

receiving fast-track approval. Financial

regulators have also ensured the stable

functioning of markets by ensuring the

uninterrupted operation of financial

infrastructure.

In general, the impact of the coronavi-

rus outbreak on the Chinese economy

will mainly be in the short run. With

strong and effective measures taken by

the Chinese government, the PBoC

expects that the epidemic will gradually

be brought under control, and economic

growth will rebound to its potential out-

put level. As the postponed consump-

tion and investment activities resume,

the economy is expected to experience a

compensatory recovery. The Chinese

economy is expected to recover rapidly

as it is supported by a restart of factories

and inventory replenishment; the most

likely scenario is a V-shaped curve,

which means a decline in economic

activities followed by a rapid recovery,

with the total economic impact rela-

tively contained.

The PBoC will continue to implement

the financial policies designed to sup-

port epidemic prevention and control

efforts, including strengthening coun-

tercyclical adjustment of monetary pol-

icy, adopting structural monetary pol-

icy instruments when necessary, and

ensuring stable functioning of the finan-

cial markets, which we believe will pro-

vide necessary conditions for a post-epi-

demic economic recovery.

The writer is the deputy governor of the

People’s Bank of China

Despite the epidemic,

the country’s sound

fundamentals

remain unchanged

China’s central bank will help the economy rebound quickly

Chen

Yulu

FEBRUARY 21 2020 Section:Features Time: 2/202020/ - 18:15 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA , 9, 1