Pay attention to the fears of the financial markets. It is the title of an editorial recently published in the Financial Times by Lawrence summers. In fact, many are worried about what is happening to finance in what, statistically, is the worst start to a year ever for global markets.
But the admonition raised by Professor Summers is more striking than any other. Precisely because it comes from one of the greatest and most lucid living macroeconomists, recognizing the importance of market opinion has the flavor of a historic revenge, of an epochal retaliation. Finance matters. Not only because, as Professor Summers argues in his fine article, today it is the markets that are asking more than others the right questions about some underlying macroeconomic imbalances that await an answer.
Let's try to go one step further. The time is over when paul samuelson he observed that markets had predicted nine of the last five recessions. Whether or not they are farsighted, whether they take us more or less than economists in formulating forecasts, today the markets matter because, given the dimensions they have assumed, their pervasiveness and their interconnections, today it is finance itself that plays the full role of "fundamental" of the scenario. Neither more nor less than demography, energy issues, imbalances between savings and investments, rules and policies.
Like other fundamentals, the finance it contributes to determining the change even before anticipating or following it. Understanding this centrality is important. Also to be able to best decline policy actions. With just under a quadrillion dollars of finance circulating around the world for less than 100 trillion of product, the opinions of the markets matter even when they may appear somewhat simplified or partial. This applies to developed countries as well as so-called emerging economies. Indeed, it is above all for the latter that the centrality of the financial question deserves adequate attention. It is the case of China.
For almost six months, Chinese issues have been under the spotlight of the markets on a daily basis. Economists and policy makers continue to discuss the issue of the economic slowdown of the main manufacturing economy on the planet. A great structural challenge, full of understandable difficulties: the transition to an economy with more consumption, more services and less centralization than the development model established over the last thirty years. The point is that the story of the economic slowdown alone does not appear sufficient to account for the persistent turbulence in the Chinese scenario and the systemic repercussions for the entire global markets.
Alongside the slowdown of the economy, what should be fully appreciated is the data of the accelerated expansion of finance that China has achieved over the last few years. An expansion of finance that today should be read together with the interpretation given to the slowdown of the economy. Because in China as in the USA or in Europe, economy and finance are two sides of the same coin. A few numbers, based on simple calculations on the excellent databases of the Bank for International Settlements. In China, total claims on the non-financial sector grew from $2008 trillion to over $2015 trillion between mid-5 and mid-21.
In the same period i corporate debts and American households have gone from $25 trillion to about $27 trillion. While post-subprime America concentrated on containing private debt, the Chinese locomotive accompanied its march of economic growth with a major expansion of finance. Twenty years ago the debt of the Chinese private sector was roughly that of the Italians. In 2008 it had reached the debt of the Germans. Today it has a size that, as an order of magnitude, is closer to that of the Americans. For those who prefer to think in terms of GDP, today the debt of the Chinese private sector is equal to 200 per cent of the product, double the figure recorded three decades ago when Beijing entered the WTO and eighty points above the figure recorded today in Italy. It's not just public debts that matter, which we worry so much about in Europe.
Behind the uncertain start of 2016 for the world economy and its stock exchanges there is not only little growth, but also a lot of finance. The markets, more than others, are aware of this.
