Asian shares suffer due to developments in China & Falling inflation – is it a reason for concern?

Asian shares struggle under China tightening fears

By: Sameer Nargolkar
Yet another Chinese internal development has had a ripple effect across the Asia Pacific this week. Asian shares gave up early gains, dragged lower by China shares after Chinese premier Li Keqiang signalled a shift towards monetary tightening. As a result, the dollar gained against a basket of Asian currencies.

Australia, Japan, China, India and Hong Kong stock indices have all been affected as they shed points. This happened after Premier Li said in a speech published late on Monday that China needs 7.2 percent economic growth to generate 10 million jobs.

Taiwan’s Taiex index declined 1.1 percent and South Korea’s Kospi index slid 0.6 percent. India’s BSE Sensex index dropped 1 percent. The Philippine Stock Exchange index lost 0.4 percent.

The safe-haven bid pushed up the yen, while the euro continued to languish on rising expectations that the European Central Bank will cut rates further, with a few strategists and investors saying action could come as early as its policy meeting on Thursday.

Adding extra stimulus would be more difficult since printing new money would cause inflation, Li said in the speech. His published remarks came as China’s leaders prepare to meet from November 9- 12 at a key forum that will discuss deepening reforms.

“His comments are different from what people were expecting. He definitely sounds more hawkish now and this is a shift from what he said earlier this year about bottom-line growth,” said Hong Hao, chief strategist, Bank of Communications International.

Chances are these developments in Asia may affect North American markets including the TSX in the coming days given the inter-linked nature of the world markets.

Falling inflation – is it a reason for concern?

By: Puja Ghosh
Well, most people would rejoice at the news of falling inflation because for most of us, this would mean that we can buy goods at cheaper prices than before. But falling inflation does not mean that the price of goods would be lower than before. It means that there will still be increase in the price of goods but the rate of increase would be lesser than the previous year. Although this means that the people would be able to increase their rate of savings from last year as the rate of rise in prices is lesser but this is not necessarily good news for the economy.

In order to maintain an economy where there is price stability, full employment and economic growth, the monetary authority of a country makes changes in the monetary policy by controlling the interest rates and thus, influencing the total spending. The target inflation rate using consumer price index is mostly around 2%. According to the data released by Organization for Economic Co-operation and Development (OECD), the inflation rate of consumer prices has been showing a downward trend for the last two years, and currently, it has reached the lowest level in the last three years. This trend has been observed in almost all of the 34 member countries of OECD. The rate of inflation in the US is 1.2%, down from 2.1% from 2012 and even, in Canada the inflation rate fell from 2.9 % to 1.5% in 2012 and now, it is at a dismal figure of 1.1%. But the shocking figures come from the 17 countries in the Euro zone, where inflation rate fell to 0.7% in October from 2.5% recorded in 2012, which is quite lower than the target inflation rate of 2%.

The risks associated with a falling inflation rate are many. It shows that demand has decreased. People are not willing to spend that much now in the hope that the prices of goods would decrease further in the future. This means that there is a sluggish growth in the economy. Well, what are the implications of a slowly growing economy? It means that companies would have fewer opportunities for expansion, creating fewer job opportunities. As the job market shrinks, unemployment rates increase, wages decrease. The current unemployment rate in France is 10.9% and in Greece is 27.6% and these rates have increased from last year. Even, in the US, the economy is not recovering as fast as expected and the current unemployment rate is at 7.2%. As the unemployment rises, the government has to spend more on unemployment benefits, medical benefits etc but would receive lesser tax revenues. As a result, the government would have lesser funds to allocate for building new infrastructure, which is very crucial for economic growth of a country. Also, the rate of increase in income would slow down, which would make it difficult for people to pay off their debts or mortgage loans.

If the inflation rate continues to fall, there is a high risk that the economy would face deflation. Prolonged deflation would make it difficult for the countries in the Euro zone, especially for countries with large amount of debt like Ireland, Greece, Portugal and Spain, to make a recovery because as prices would fall, the real value of debt would increase. In order to avoid such a situation and to prevent further decrease in inflation rate, central banks and other monetary authorities need to adopt unconventional methods to influence the interest rate to stimulate demand and to increase consumption.