The Economist - UK (2019-06-01)

12 Leaders The EconomistJune 1st 2019

1

2 with newly created money, is a source of tension between euro-

zone countries, helping make the ecb’s leadership race even

more political than usual.

Given these pressures, central bankers’ caution should hardly

be surprising. They surely fear that overhauling their targets and

tools could lead to a free-for-all in which stability and indepen-

dence give way to populist interference or even economic quack-

ery. But that is not a sufficient reason to hold back. A worse dan-

ger is that the world faces a downturn it cannot adequately fight

(see United States section). Central banks need to prepare for

what is coming, by looking afresh at their targets and their tools,

even as they strive to keep their independence.

Unfortunately, the outcome of the review is likely to be just a

tweak to the Fed’s target or its communications policy and a deci-

sion not to change to its tools. The Fed may pledge to redefine its

inflation goal, of 2%, so that this applies on average over the eco-

nomic cycle. Overshoots during booms would make up for short-

falls during busts. The theory is that this might help deal with in-

terest rates stuck near zero, by boosting inflation expectations in

a downturn. That would mean real rates were lower, giving the

economy a boost.

However that is likely to prove too modest. Start with targets.

Inflation has undershot the Fed’s target 85% of the time since it

was announced in 2012. Financial markets expect these short-

falls to continue for years. Investors may well ignore any new

pledges from central bankers to get inflation above the target.

And even if they believed the Fed, the cut in real interest rates

would be too small to offset a bad bust. In the dark days of 2009

one rule of thumb for monetary policy suggested that nominal

interest rates needed to be almost minus 4%.

The tools are equally in need of an overhaul. Most central

banks have three unconventional policies to stimulate de-

pressed economies: qe, forward guidance (trying to talk down

bond yields) and negative interest rates. Debate rages over the ef-

fectiveness of qe—some see it as little more than forward guid-

ance in disguise. Yet forward guidance is not always credible,

whether it is disguised or not. And deeply negative interest rates

require reforms to prevent people from hoarding cash or from

causing instability at banks, which will struggle to get people to

pay them for taking deposits.

The federal preserve

If the reforms are inadequate, the result could be a long and ruin-

ous slump. Avoiding that fate is worth the risks. Central banks

should thus swap their inflation targets for something bet-

ter—we favour a target for nominal gdp, a measure that is more

closely tied to the fortunes of debtors and investors—and they

should search for new sources of monetary ammunition.

Politicians will inevitably play a part in the choice of such in-

novations—and rightly so, because they set the framework for

the technocrats. What is more, the necessary work will take sus-

tained effort, not a single meeting. The bankers should not be

cowed by the threat of politicisation. Their work is too urgent

and too important for that. 7

I

f you want to understand how cooling relations between

America and China are changing global business, a good place

to look is Alibaba, an internet giant. It is China’s most admired

and valuable firm, worth a cool $400bn. For the past five years it

has also been a hybrid that straddles the superpowers, because

its shares are listed only in America. Now it is considering a

$20bn flotation in Hong Kong, according to Bloomberg. The

backdrop is a rising risk of American moves against Chinese in-

terests and the growing clout of Hong Kong’s

capital markets. A listing there would be a sign

that Chinese firms are taking out insurance to

lower their dependence on Western finance.

The world looked very different back in 2014,

when Alibaba first went public. Although based

in Hangzhou and with 91% of its sales in main-

land China, it chose to list its shares in New

York, home to the world’s deepest capital mar-

kets, which also permitted its complex voting structure. Wall

Street banks underwrote the offering. Alibaba’s boss, Jack Ma, al-

ready a star in China, was toasted in Manhattan high society as

the kind of freewheeling capitalist Americans could do business

with. He was not alone: 174 other Chinese firms have their main

listing in America today, with a total market value of $394bn, in-

cluding tech stars like Baidu and jd.com. A recent notable arrival

is Luckin Coffee, a Starbucks wannabe, which floated for $4bn in

May (see Finance section).

As Alibaba has found, however, America has become less hos-

pitable. The firm’s profits have soared and investors have made

hay. But in January 2018 Ant Financial, its payments affiliate, was

blocked from acquiring MoneyGram, an American rival, on na-

tional-security grounds. In November Mr Ma’s halo in America

slipped when it was revealed he was a Communist Party member,

like many Chinese tycoons (he is due to retire from Alibaba this

year). Silicon Valley’s chiefs whisper that Alibaba’s global cloud

business is a threat to American interests. If Ali-

baba invests in startups it could fall foul of a new

law, known as firrma, that requires foreign

purchases of “critical technology” to be vetted.

The firm is not yet under attack, unlike its com-

patriot, Huawei, but the mood is tense.

The trade war between America and China

has already spread from tariffs to encompass le-

gal extradition, venture capital and the global

dollar-payments system. It is easy to see how an American list-

ing could become a vulnerability. If, for example, China were to

boycott Apple (see Schumpeter) or Boeing, America could re-

spond by suspending the trading of Chinese firms’ shares and

stopping them raising capital.

Mainland China’s vast but immature capital markets are not a

substitute for Wall Street. Hong Kong, China’s offshore hub, is far

from perfect, not least because China appears intent on gradual-

ly undermining the rule of law there. Still, it has become a plausi-

One thousand and one sleepless nights

Alibaba’s experience shows how relations between America and China have soured

The trade war and big tech