China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org

Great insight from Alicia García-Herrero:

….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..

The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.

Japan had zombie banks, looks like China could end up with a zombie stock market.

Read more at China's stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org.

The Grave Evil of Unemployment, Bryan Caplan | EconLog | Library of Economics and Liberty

Bryan Caplan makes the case for a fresh approach from free-market economists:

At the level of high theory, free-market economists love market-clearing models. If there’s surplus wheat, the price of wheat will fall to clear the market. If there’s surplus labor, similarly, the wage will fall to eliminate unemployment. What about nominal wage rigidity? Most free-market economists concede that nominal wage rigidity exists to some degree, but think the problem is mild and short-lived……..The high theory’s wrong: Nominal wage rigidity is both strong and durable.

Rather than treat unemployment as a necessary but temporary affliction, Caplan suggests that free-market economists should be attacking the “vast array of employment-destroying regulations” imposed by government — and tight monetary policy by central banks, where they should be advocating nominal GDP targeting as an alternative.

Read more at The Grave Evil of Unemployment, Bryan Caplan | EconLog | Library of Economics and Liberty.