Just as the global economy remains sluggish and the Chinese economy is facing challenges, the People’s Bank of China (PBoC) announced a series of monetary easing measures on 24 September 2024. Their objectives are to stimulate the overall economy, prevent deflation, and proactively address mushrooming challenges in the international market. Specifically, the main initiatives include reducing banks’ reserve requirement ratio, policy interest rates, and interest rates for existing mortgages. Additionally, two policy tools are targeted to support the stock market. One is a swap programme that allows non-bank financial institutions and insurance fund brokers to obtain liquidity from the central bank for stock purchases. The other tool is a special re-lending facility created to help listed companies to secure buybacks and increase their shareholdings.

Evidently, apart from further stimulating investment and consumption, the package primarily aims to inject colossal liquidity into the Mainland market. This will help to break investors’ expectations of a prolonged stock market downturn and to induce economic boom by revitalizing the capital market. Pan Gongsheng, Governor of the PBoC, has disclosed that more monetary easing measures will be introduced.

Nevertheless, in stark contrast to the sluggish economy, the recent stock market boom inevitably causes thrilled investors and entrepreneurs to sober up and contemplate the following questions: What are the impacts of the policies? Will there be a spillover effect beyond the financial market on the real economy, boosting consumption and enhancing investor confidence? Is the current bull market simply a flash in the pan triggered by policy intervention, or does it truly reflect a full recovery of market confidence in policy and economic growth? Will the new measures serve as a phase-in strategy to facilitate long-term development of the national economy?

Monetary policy pivot

First of all, we should realize that the soaring stock market driven by this round of monetary easing measures still offers no viable solution to the predicament of the real economy. As shown by the National Bureau of Statistics data released on 27 September 2024, the total profits of industrial enterprises above the designated size in August declined by about 17% year-on-year, back to the lowest level since May 2023. Since a brief rally at the beginning of 2024, the Consumer Confidence Index has continued to trend downwards, hitting a level slightly lower than during the peak of the COVID-19 pandemic in early 2022. Even the pumped-up stock market reflects investors’ doubts about the sustainability of the “profit-making effect”, as evidenced by the massive buying and selling and ongoing shock therapy for the market following the National Day holidays.

The stock market can be an economic barometer. Generally speaking, despite the market’s instantaneous reactions, short-term fluctuations cannot accurately reflect the economic situation. However, it is undeniable that, over time, the stock market’s long-term performance can illustrate changes in economic fundamentals. Hence, its stable development cannot do without a solid economic entity, or the market will merely be a castle in the air. Understanding this fundamental logic of the interaction between the stock market and the real economy is conducive to strategizing for future economic development.

Laying a sound economic foundation to consolidate the fundamentals is critical to fostering national economic growth. This is the only way to facilitate mutual prospects between the economy and the stock market, thereby rolling out a roadmap for a steadfast path forward. Amidst the constraints in international trade, the promotion of economic development can be broadly approached by boosting both investment and consumption. As a long-standing powerhouse of manufacturing, China has historically advocated for investment expansion through its stimulus policies to safeguard employment and people’s livelihoods. However, given the present surplus in production capacity, persistently weak consumption has long been a critical bottleneck to economic growth. Hence, it is necessary to shift the focus from “investment over consumption” to substantially enhancing consumption, thereby expanding investment through demand, with economic growth as the ultimate goal. The question is, how can the impact of monetary and fiscal policies be extended beyond the financial market to permeate the consumption market?

The key to policy outcome

In the wake of the coronavirus pandemic, the Central Government has introduced an array of consumption-stimulating policy measures to step up domestic demand. Over the past year these efforts have further intensified, ranging from abolition of taxes and tariffs, subsidies on vehicle purchases, to removal of property purchase restrictions and lowering of mortgage rates. Despite these initiatives, consumption has to recover as expected. The underlying reason is probably that the measures are not strong enough to stimulate consumption, or that it is too challenging to fundamentally boost consumer confidence and dispel their worries about the future.

Take the recent National Day “golden week” holidays, for example, when Shanghai, Sichuan, and Guangdong handed out consumption vouchers to stimulate growth. Nonetheless, due to the first-come-first-served basis and the preset consumption threshold levels, many consumers―particularly the low-income and the elderly―have been unable to benefit from the official largesse, thus greatly compromising the expected effect. In addition, lowering mortgage rates for first-home purchases and existing properties may lower mortgage payments and raise people’s disposable incomes. That being said, whether the consumption potential thus released can be translated into actual demand largely depends on consumer expectations and their confidence in the economic future. In the face of the slowdown in the national economy and spiralling unemployment rates, even if the new measures launched by the authorities can help to decrease consumers’ expenditures to release consumption potential, this might merely end up as additional bank deposits for consumers.

Economic growth hinges on public well-being

The effective approach to boosting consumption is to start with beefing up consumer confidence and willingness, elevating the consumption market from a relatively static state  to a fairly active environment. Following the monetary policy announced on 24 September, the fiscal policy for countercyclical adjustment proposed on 12 October not only indicates active support for debt resolution and stabilization of the real estate market but also emphasizes the urgent need to protect people’s livelihoods and promote domestic demand. Compared with past consumption stimulus packages, economic recovery through domestic demand calls for stronger policy initiatives and a twofold strategy encompassing short-term stimulus and long-term confidence boost.

First, short-term stimulus acts as a consumption-inducing pacemaker. A rise in short-term demand is conducive to increasing corporate productivity and business revenue, and to a certain extent, safeguarding employment and raising labour income. During the recent National Day holidays, despite the limited effect of consumption vouchers burdened by the complexities of execution, consumers generally showed a significantly greater willingness to spend. As such, it is necessary for the upcoming short-term stimulus to further expand the coverage of the consumption vouchers and to scrap the consumption thresholds and limits on product categories. This will help to drum up all types of consumption expenses stimulated through the vouchers.

On the other hand, a wide-ranging debate should take place to determine whether it is necessary to replace the consumption vouchers with direct cash subsidies. In my opinion, while both can bring about a crowding out effect, cash handouts could cause consumers to save the money in the bank rather than spend it. This would of course offset the consumption stimulus effect. For certain consumption groups, e.g. the student group included in the aforementioned fiscal policy, differentiated subsidies can maximize the release of effective demand. While specific measures remain to be introduced, it is worth keeping an eye out for follow-up arrangements.

Second, to achieve a comprehensive solution to stagnant consumption and sustain soaring domestic demand, it is pivotal to fundamentally dispel consumers’ worries about the future, so they are not only willing but also emboldened to spend. This psychological bedrock depends on efforts to strengthen consumers’ confidence in future economic development and employment prospects, as well as on establishing a more reliable social security system. The new fiscal policy also indicates a greater financial effort to protect people’s livelihoods and employees’ wages, in addition to maintaining government operations, ultimately giving the general public peace of mind. In the long run, further improvement should be made to basic social security systems, such as health insurance and old age pensions, along with wider coverage of unemployment protection and better minimum livelihood protection nationwide. Only by providing consumers with the greatest sense of security from the most basic level of the systems can consumption demand be fully unleashed.

The curtain has now been raised on a powerful economic impetus. While applauding and celebrating the long-awaited stock market revival, investors must take special care to stay calm. It is by grasping the core driving efforts behind the current economic momentum that we can seize this opportunity to break free from the doldrums and to chart a new course for national growth.

Dr. Jing LI
Senior Lecturer in Economics
BBA (IBGM) Deputy Programme Director and Admissions Tutor

Dr Yifei Zhang

23 October 2024

The rapid rise in Environmental, Social, and Governance (ESG) investment in recent years has become a hot topic in the international financial market. Born of increasing public concern over climate change, social inequality, and corporate governance issues, ESG investing emerged with the aim of achieving sustainable development by integrating environmental protection, social responsibility, and corporate governance into investment decisions. This approach not only places emphasis on financial return but also focuses on the long-term impact on the environment and society, striving to create a social and environmental win-win situation while pursuing economic benefits.

Despite its appeal as an investment concept and the support from many investors and enterprises, ESG has been plagued by objections and challenges. So who are the opponents to ESG investment and what are their reasons for opposition? Underlying this chorus of opposition are not just suspicions about the existing rating systems and their transparency but also apprehensions about conflicts between short-term market gains and long-term goals. Getting a grasp from multiple perspectives of the opposing voices is conducive to enabling various stakeholders to have a better understanding of the complexities and obstacles facing ESG investing.

Waves of resistance on American soil

The anti-ESG movement in the US has been receiving growing attention in recent years. While ESG investing has garnered significant support and development worldwide, it faces considerable resistance and challenges within the country. First, in terms of the federal government’s view, the Donald Trump administration took an expressly anti-ESG investment stance, arguing that over-intervention in market freedom might undermine the competitiveness of American enterprises. During Trump’s presidency, the Department of Labour (DoL) and the Securities and Exchange Commission launched a series of measures to limit the integration of ESG factors into pension plans and other investment funds. In 2020, for example, the DoL released the Financial Factors in Selecting Plan Investments rule, which requires the Employee Retirement Income Security Act of 1974 fiduciaries to put first the economic interests of the plan in providing financial returns, thus restricting the application of ESG factors in investment decisions.

Apart from policy changes at the federal level, some state governments have also actively participated in the wave of resistance to ESG. For instance, conservative states such as Texas and Florida are strongly opposed to ESG investing. The governments of these states believe that ESG investment could jeopardize the future prospects of the energy sector, particularly oil and natural gas companies. Consequently, anti-ESG laws and policies have been introduced in these states to curtail investment by state government pension funds and other public funds in ESG products and projects. A case in point is the Senate Bill 13, passed in Texas in 2021, to prohibit state government agencies from investing in financial institutions that limit commercial relations or refuse to do business with fossil fuel companies. The bill aims to protect the oil and natural gas sectors in Texas and prevent investment drain caused by ESG-related policies.

Apprehensions of investors

Besides the governments, fierce opposition to ESG investing comes from the energy sector, especially oil and natural gas companies. The reason behind this is that such investments will increase their operational costs and hamper their business development. As one of the largest oil companies in the world, Exxon Mobil Corporation has been an openly opposing voice against ESG investing. In the opinion of its senior management, overemphasizing environmental and social factors could threaten the company’s profitability and returns for its investors. Chevron, another major oil company that takes a similar stance, has repeatedly expressed its concerns about ESG investing at its annual general meetings, in the belief that the related criteria may harm its core business.

While ESG criteria are gaining more recognition and broader implementation, opposition still exists in regions dependent on conventional energy and resource-intensive industries. Much of the opposition from traditional sectors boils down to the following aspects: stringent ESG criteria might negatively impact the economy and employment, or they could incur additional compliance costs, thereby compromising corporate profitability.

In general, financial investors are concerned that ESG criteria may limit their investment options and could affect their long-term returns. There is conflict between short-term pressures of the market and long-term ESG investing goals. More often than not, the capital market concentrates on quarterly financial returns and short-term performance, while ESG investing targets long-term sustainable development. This conflict leads some investors to doubt the true results of ESG investing, leaving them with the impression that it cannot satisfy short-term market demands.

Another issue constantly raised by ESG opponents is the controversy over the ESG rating system. Among the many rating systems available today, standards and methodologies vary significantly. The starkly different ratings under various systems for the same company inevitably cause puzzlement and doubts in the minds of investors. For example, Tesla scores a relatively high ESG rating in the electric vehicles category from MSCI, mainly for its contributions to innovation and sustainability. However, the company receives a rather low rating from Sustainalytics due to its problems with governance and social responsibility—working conditions and supply chains, to name just a few.

Since ESG ratings rely on information and data voluntarily disclosed by companies, there may be issues with information quality and transparency. Although Walmart has published detailed ESG reports, investors cannot help but question the accuracy and reliability of the data because of the lack of independent verification. Some companies may selectively disclose their ESG-related information, leaving out the unfavourable bits. When it comes to the transparency and independence of the rating system, some investors query the fairness of the ratings given the potential conflict of interest among the rating agencies.

Policy guidance as the first step

In the face of continuous waves of resistance against ESG, governments looking to advocate for ESG practices should take various measures to address and resolve related problems. First, incentives for good ESG practices should be provided for enterprises. To encourage corporate participation, tax concessions and other economic incentives can be offered to those with outstanding performance in relevant areas. ESG awards and certification programmes can also be set up to recognize enterprises that have made valuable contributions to sustainability and social responsibility. Furthermore, governments should strive to drive the development and promotion of green financial products, such as green bonds and sustainable development funds, to lend financing support to ESG top performers.

Second, to overcome scepticism about information and transparency, it is pivotal for governments to step up efforts in terms of disclosure and regulation. The authorities concerned can cooperate with international organizations and industry experts to establish unified ESG assessment standards so that inconsistencies in ratings can be minimized. In addition, governments should encourage enterprises, particularly unlisted companies, to disclose more ESG-related data to raise the transparency and reliability of information. To ensure the truthfulness and accuracy of information, regulators can require corporate ESG reports to be audited by independent third-party providers.

All in all, paying attention and providing feedback to opposing stakeholders are equally indispensable. It is suggested that governments should organize public forums and sharing sessions to solicit views and proposals regarding ESG standards from all sectors concerned  in order to reach a consensus. Policy-making departments should also conduct extensive studies to identify concrete reasons for opposition and doubts, and to make improvements and adjustments accordingly.

Just as the global economy remains sluggish and the Chinese economy is facing challenges, the People’s Bank of China (PBoC) announced a series of monetary easing measures on 24 September 2024. Their objectives are to stimulate the overall economy, prevent deflation, and proactively address mushrooming challenges in the international market. Specifically, the main initiatives include reducing banks’ reserve requirement ratio, policy interest rates, and interest rates for existing mortgages. Additionally, two policy tools are targeted to support the stock market. One is a swap programme that allows non-bank financial institutions and insurance fund brokers to obtain liquidity from the central bank for stock purchases. The other tool is a special re-lending facility created to help listed companies to secure buybacks and increase their shareholdings.

Evidently, apart from further stimulating investment and consumption, the package primarily aims to inject colossal liquidity into the Mainland market. This will help to break investors’ expectations of a prolonged stock market downturn and to induce economic boom by revitalizing the capital market. Pan Gongsheng, Governor of the PBoC, has disclosed that more monetary easing measures will be introduced.

Nevertheless, in stark contrast to the sluggish economy, the recent stock market boom inevitably causes thrilled investors and entrepreneurs to sober up and contemplate the following questions: What are the impacts of the policies? Will there be a spillover effect beyond the financial market on the real economy, boosting consumption and enhancing investor confidence? Is the current bull market simply a flash in the pan triggered by policy intervention, or does it truly reflect a full recovery of market confidence in policy and economic growth? Will the new measures serve as a phase-in strategy to facilitate long-term development of the national economy?

Monetary policy pivot

First of all, we should realize that the soaring stock market driven by this round of monetary easing measures still offers no viable solution to the predicament of the real economy. As shown by the National Bureau of Statistics data released on 27 September 2024, the total profits of industrial enterprises above the designated size in August declined by about 17% year-on-year, back to the lowest level since May 2023. Since a brief rally at the beginning of 2024, the Consumer Confidence Index has continued to trend downwards, hitting a level slightly lower than during the peak of the COVID-19 pandemic in early 2022. Even the pumped-up stock market reflects investors’ doubts about the sustainability of the “profit-making effect”, as evidenced by the massive buying and selling and ongoing shock therapy for the market following the National Day holidays.

The stock market can be an economic barometer. Generally speaking, despite the market’s instantaneous reactions, short-term fluctuations cannot accurately reflect the economic situation. However, it is undeniable that, over time, the stock market’s long-term performance can illustrate changes in economic fundamentals. Hence, its stable development cannot do without a solid economic entity, or the market will merely be a castle in the air. Understanding this fundamental logic of the interaction between the stock market and the real economy is conducive to strategizing for future economic development.

Laying a sound economic foundation to consolidate the fundamentals is critical to fostering national economic growth. This is the only way to facilitate mutual prospects between the economy and the stock market, thereby rolling out a roadmap for a steadfast path forward. Amidst the constraints in international trade, the promotion of economic development can be broadly approached by boosting both investment and consumption. As a long-standing powerhouse of manufacturing, China has historically advocated for investment expansion through its stimulus policies to safeguard employment and people’s livelihoods. However, given the present surplus in production capacity, persistently weak consumption has long been a critical bottleneck to economic growth. Hence, it is necessary to shift the focus from “investment over consumption” to substantially enhancing consumption, thereby expanding investment through demand, with economic growth as the ultimate goal. The question is, how can the impact of monetary and fiscal policies be extended beyond the financial market to permeate the consumption market?

The key to policy outcome

In the wake of the coronavirus pandemic, the Central Government has introduced an array of consumption-stimulating policy measures to step up domestic demand. Over the past year these efforts have further intensified, ranging from abolition of taxes and tariffs, subsidies on vehicle purchases, to removal of property purchase restrictions and lowering of mortgage rates. Despite these initiatives, consumption has to recover as expected. The underlying reason is probably that the measures are not strong enough to stimulate consumption, or that it is too challenging to fundamentally boost consumer confidence and dispel their worries about the future.

Take the recent National Day “golden week” holidays, for example, when Shanghai, Sichuan, and Guangdong handed out consumption vouchers to stimulate growth. Nonetheless, due to the first-come-first-served basis and the preset consumption threshold levels, many consumers―particularly the low-income and the elderly―have been unable to benefit from the official largesse, thus greatly compromising the expected effect. In addition, lowering mortgage rates for first-home purchases and existing properties may lower mortgage payments and raise people’s disposable incomes. That being said, whether the consumption potential thus released can be translated into actual demand largely depends on consumer expectations and their confidence in the economic future. In the face of the slowdown in the national economy and spiralling unemployment rates, even if the new measures launched by the authorities can help to decrease consumers’ expenditures to release consumption potential, this might merely end up as additional bank deposits for consumers.

Economic growth hinges on public well-being

The effective approach to boosting consumption is to start with beefing up consumer confidence and willingness, elevating the consumption market from a relatively static state  to a fairly active environment. Following the monetary policy announced on 24 September, the fiscal policy for countercyclical adjustment proposed on 12 October not only indicates active support for debt resolution and stabilization of the real estate market but also emphasizes the urgent need to protect people’s livelihoods and promote domestic demand. Compared with past consumption stimulus packages, economic recovery through domestic demand calls for stronger policy initiatives and a twofold strategy encompassing short-term stimulus and long-term confidence boost.

First, short-term stimulus acts as a consumption-inducing pacemaker. A rise in short-term demand is conducive to increasing corporate productivity and business revenue, and to a certain extent, safeguarding employment and raising labour income. During the recent National Day holidays, despite the limited effect of consumption vouchers burdened by the complexities of execution, consumers generally showed a significantly greater willingness to spend. As such, it is necessary for the upcoming short-term stimulus to further expand the coverage of the consumption vouchers and to scrap the consumption thresholds and limits on product categories. This will help to drum up all types of consumption expenses stimulated through the vouchers.

On the other hand, a wide-ranging debate should take place to determine whether it is necessary to replace the consumption vouchers with direct cash subsidies. In my opinion, while both can bring about a crowding out effect, cash handouts could cause consumers to save the money in the bank rather than spend it. This would of course offset the consumption stimulus effect. For certain consumption groups, e.g. the student group included in the aforementioned fiscal policy, differentiated subsidies can maximize the release of effective demand. While specific measures remain to be introduced, it is worth keeping an eye out for follow-up arrangements.

Second, to achieve a comprehensive solution to stagnant consumption and sustain soaring domestic demand, it is pivotal to fundamentally dispel consumers’ worries about the future, so they are not only willing but also emboldened to spend. This psychological bedrock depends on efforts to strengthen consumers’ confidence in future economic development and employment prospects, as well as on establishing a more reliable social security system. The new fiscal policy also indicates a greater financial effort to protect people’s livelihoods and employees’ wages, in addition to maintaining government operations, ultimately giving the general public peace of mind. In the long run, further improvement should be made to basic social security systems, such as health insurance and old age pensions, along with wider coverage of unemployment protection and better minimum livelihood protection nationwide. Only by providing consumers with the greatest sense of security from the most basic level of the systems can consumption demand be fully unleashed.

The curtain has now been raised on a powerful economic impetus. While applauding and celebrating the long-awaited stock market revival, investors must take special care to stay calm. It is by grasping the core driving efforts behind the current economic momentum that we can seize this opportunity to break free from the doldrums and to chart a new course for national growth.

Dr. Jing LI
Senior Lecturer in Economics
BBA (IBGM) Deputy Programme Director and Admissions Tutor

The artificial intelligence (AI) arms race, triggered by the rise of ChatGPT two years ago, has been escalating. State-of-the-art technology is poised to force irrevocable change across industries. In the midst of national governments and businesses investing heavily in AI, Japan’s SoftBank Group announced its plan to invest US$500 million in OpenAI at the end of last month.

In the research report published in July 2024, Jim Covello, head of stock research at Goldman Sachs, argues that an AI investment bubble is forming. While the bubble is unlikely to burst any time soon, the performance of all related products launched so far has been less than desirable. For example, there have been insufficient cost-saving measures for AI coding and customer services, and there are times when AI search capabilities of AI are not ideal. Despite the staggering amounts spent by large tech companies, the apparent yields produced by these new products are poor. Although generative AI can perform computer programming, its constant mistakes require users to step in with corrections from time to time. Its capability to solve complex problems is therefore questionable.

Tracing the origin of market bubbles

When speculators inflate the valuations of tech companies, a tech bubble may emerge, triggering drastic adjustments in the market. This could cause investors to suffer massive losses and even exert a widespread influence on the economy. It is advisable for investors, policymakers, and industry stakeholders to understand the psychological, economic, and structural factors leading to a market bubble.

Looking back at the collapse of the hi-tech bubble in the late 1990s, even though the business models of many dot-com companies were untested, capital kept flooding in. While AI was not yet the apple of investors’ eyes, there was already similar speculation among companies developing AI technology at the time. The bursting of the dot-com bubble drove these companies out of business one by one, and the NASDAQ Composite Index crashed after peaking, resulting in colossal bankruptcies and losses.

The resurgence of AI technology between 2015 and 2018 ushered in a new wave of investments, with start-ups attracting investments worth billions of US dollars. Companies incorporating AI into their business models―often overvalued―lacked clear profit-making strategies even if they managed to create some technologically revolutionary impact. Add to that the emergence of cryptocurrencies and blockchain technology, 2017 witnessed the short-lived ascent and collapse of cryptocurrencies, marking a clear case of the high volatility and risks associated with digital assets. The COVID-19 pandemic accelerated the adoption of technology, leading to the overvaluation of software-as-a-service businesses as well as radical market adjustments.

Suppose generative AI could subvert all industries in the next five to 10 years. However, if its development remains static, these tech companies, despite their ability to secure enormous funds, will not contribute to boosting corporate productivity and profits. An asset bubble formed over time is bound to burst eventually. While leading AI companies such as Meta, Google, and Microsoft have clear paths to profitability, AI start-ups in private markets may be valued at near-bubble levels. This naturally poses a key question in Wall Street: When will these companies be able to generate profits from AI? Ultimately, investors’ concerns boil down to this: is all this really worth it?

Rational market assessment

As pointed out by Covello in the research report, most technology transformations in history, revolutionary ones in particular, have involved the replacement of high-cost solutions with low-cost solutions. Expected to total US$1 trillion in the next several years, the investment in AI infrastructure build-out is not cost-effective at all as existing technologies will be replaced at exorbitant costs. In view of the investments in AI amounting to hundreds of billions of US dollars, if such input fails to improve productivity and profitability, all stocks that have skyrocketed due to pumped-up forecasts for AI will inevitably take a dire plunge.

While generative AI is still in its infancy, its adoption by companies is also at an embryonic stage. Core suppliers such as Taiwan Semiconductor Manufacturing Company may see potential for stupendous profits, but they need to maintain sustainable development in all aspects of the value chain to realize relevant revenue and impact for enterprises.

An article in the July issue of The Economist cites US statistical data as evidence of investors’ worries about an AI bubble. While the use of chatbots, for example ChatGPT, has become quite common, the rate of AI adoption by enterprises is very low. According to the survey results reported in the article, fewer than 5% of the company respondents have used AI in the past couple of weeks while below 7% intend to use AI in the following six months. This goes to show that the utilization of AI in the business sector is minimal. A study by the Adecco Group finds that among 2,000-plus senior executives from nine countries across four continents, up to 57% lack confidence in their company management’s AI skills and knowledge.

As for companies benefiting from AI, e.g. Walmart, they see no significant rise in their stock prices. Companies that really benefit from the technology are probably those on the core supply side, e.g. Nvidia, rather than those on the demand side. Despite burgeoning AI development in recent years, no nation has experienced significant growth in productivity, including developed countries such as the US.

Clarifying investment psychology

As a matter of fact, investors’ psychology can also lead to a market bubble. For instance, the Fear of Missing Out (FOMO) can cause irrational buying behaviour and push up stock prices. Carpet-bomb media coverage is conducive to fuelling the hype around emerging technologies. Low interest rates and a capital-flush environment will stimulate risk investment, causing technology stock prices to surge. While technological breakthroughs can attract capital, profit-making takes time. Numerous psychological factors can distort the decision-making process, paving the way for tech bubbles. When dealing with market fluctuations, understanding these adverse factors can give investors a better idea of their own biases, enabling them to make rational investments.

Apart from making poor judgments because of FOMO, investors may also overestimate self-ability to predict market trends, making them more prone to taking risks and thereby contributing to the gradual development of bubbles. In addition, bias can convince them to keep investing in the belief that prices will continue to rise, oblivious even to objective warning signals. Blinded by their faith in never-ending high growth based on past prices and trends, they are unable to recognize when a speculative bubble is forming.

As predicted by Meta, “We don’t expect our gen AI products to be a meaningful driver of revenue in 2024. But we do expect that they’re going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment.” However, long accustomed to the practice of quarterly sales and profits, many investors may underestimate the long-term impact of generative AI while overestimating its short-term potential. Gil Luria, analyst at D.A. Davidson, said, “If you are going to invest now and get returns in 10 to 15 years, that’s a venture investment. That’s not a public company investment. For public companies, we expect to get return on investment in much shorter time frames. So that’s causing discomfort, because we’re not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now.”

Getting a grasp on market trends

After leading the market on an upward trend in the second quarter of this year, the largest AI company dragged the market down in the third quarter. As a result, many investors have shifted from large-cap tech stocks to value stocks. The Figure shows that the Morningstar Global Artificial Intelligence Index plunged from a market high on 16 July 2024 to a new market low on 5 August 2024, representing a fall of 18.56%, which is double that of the Morningstar US Market Index at 9.21%. Despite having recovered some of the lost ground, AI stocks have been bringing market returns down in the past couple of months. Since 16 July, the 12 stocks in the Morningstar US Market Index that have driven down market returns are all tech stocks closely related to AI.

Past experience with the formation and bursting of tech bubbles demonstrates the cyclical nature of technology investment. While the initial overinvestment could lead to overvaluation, after the market has adapted to reality, major stock price adjustments will follow. In light of the continuous development of AI and its integration into various industries, understanding the law of market cycles is clearly a top priority for investors and policymakers.

References

Will A.I. Be a Bust? A Wall Street Skeptic Rings the Alarm. Jim Covello

“What happened to the artificial-intelligence revolution? So far the technology has had almost no economic impact”, The Economist, 2 July 2024

https://discover.adeccogroup.com/Business-Leaders-2024_Global-Report

Mr Clive Ho

The artificial intelligence (AI) arms race, triggered by the rise of ChatGPT two years ago, has been escalating. State-of-the-art technology is poised to force irrevocable change across industries. In the midst of national governments and businesses investing heavily in AI, Japan’s SoftBank Group announced its plan to invest US$500 million in OpenAI at the end of last month.

In the research report published in July 2024, Jim Covello, head of stock research at Goldman Sachs, argues that an AI investment bubble is forming. While the bubble is unlikely to burst any time soon, the performance of all related products launched so far has been less than desirable. For example, there have been insufficient cost-saving measures for AI coding and customer services, and there are times when AI search capabilities of AI are not ideal. Despite the staggering amounts spent by large tech companies, the apparent yields produced by these new products are poor. Although generative AI can perform computer programming, its constant mistakes require users to step in with corrections from time to time. Its capability to solve complex problems is therefore questionable.

Tracing the origin of market bubbles

When speculators inflate the valuations of tech companies, a tech bubble may emerge, triggering drastic adjustments in the market. This could cause investors to suffer massive losses and even exert a widespread influence on the economy. It is advisable for investors, policymakers, and industry stakeholders to understand the psychological, economic, and structural factors leading to a market bubble.

Looking back at the collapse of the hi-tech bubble in the late 1990s, even though the business models of many dot-com companies were untested, capital kept flooding in. While AI was not yet the apple of investors’ eyes, there was already similar speculation among companies developing AI technology at the time. The bursting of the dot-com bubble drove these companies out of business one by one, and the NASDAQ Composite Index crashed after peaking, resulting in colossal bankruptcies and losses.

The resurgence of AI technology between 2015 and 2018 ushered in a new wave of investments, with start-ups attracting investments worth billions of US dollars. Companies incorporating AI into their business models―often overvalued―lacked clear profit-making strategies even if they managed to create some technologically revolutionary impact. Add to that the emergence of cryptocurrencies and blockchain technology, 2017 witnessed the short-lived ascent and collapse of cryptocurrencies, marking a clear case of the high volatility and risks associated with digital assets. The COVID-19 pandemic accelerated the adoption of technology, leading to the overvaluation of software-as-a-service businesses as well as radical market adjustments.

Suppose generative AI could subvert all industries in the next five to 10 years. However, if its development remains static, these tech companies, despite their ability to secure enormous funds, will not contribute to boosting corporate productivity and profits. An asset bubble formed over time is bound to burst eventually. While leading AI companies such as Meta, Google, and Microsoft have clear paths to profitability, AI start-ups in private markets may be valued at near-bubble levels. This naturally poses a key question in Wall Street: When will these companies be able to generate profits from AI? Ultimately, investors’ concerns boil down to this: is all this really worth it?

Rational market assessment

As pointed out by Covello in the research report, most technology transformations in history, revolutionary ones in particular, have involved the replacement of high-cost solutions with low-cost solutions. Expected to total US$1 trillion in the next several years, the investment in AI infrastructure build-out is not cost-effective at all as existing technologies will be replaced at exorbitant costs. In view of the investments in AI amounting to hundreds of billions of US dollars, if such input fails to improve productivity and profitability, all stocks that have skyrocketed due to pumped-up forecasts for AI will inevitably take a dire plunge.

While generative AI is still in its infancy, its adoption by companies is also at an embryonic stage. Core suppliers such as Taiwan Semiconductor Manufacturing Company may see potential for stupendous profits, but they need to maintain sustainable development in all aspects of the value chain to realize relevant revenue and impact for enterprises.

An article in the July issue of The Economist cites US statistical data as evidence of investors’ worries about an AI bubble. While the use of chatbots, for example ChatGPT, has become quite common, the rate of AI adoption by enterprises is very low. According to the survey results reported in the article, fewer than 5% of the company respondents have used AI in the past couple of weeks while below 7% intend to use AI in the following six months. This goes to show that the utilization of AI in the business sector is minimal. A study by the Adecco Group finds that among 2,000-plus senior executives from nine countries across four continents, up to 57% lack confidence in their company management’s AI skills and knowledge.

As for companies benefiting from AI, e.g. Walmart, they see no significant rise in their stock prices. Companies that really benefit from the technology are probably those on the core supply side, e.g. Nvidia, rather than those on the demand side. Despite burgeoning AI development in recent years, no nation has experienced significant growth in productivity, including developed countries such as the US.

Clarifying investment psychology

As a matter of fact, investors’ psychology can also lead to a market bubble. For instance, the Fear of Missing Out (FOMO) can cause irrational buying behaviour and push up stock prices. Carpet-bomb media coverage is conducive to fuelling the hype around emerging technologies. Low interest rates and a capital-flush environment will stimulate risk investment, causing technology stock prices to surge. While technological breakthroughs can attract capital, profit-making takes time. Numerous psychological factors can distort the decision-making process, paving the way for tech bubbles. When dealing with market fluctuations, understanding these adverse factors can give investors a better idea of their own biases, enabling them to make rational investments.

Apart from making poor judgments because of FOMO, investors may also overestimate self-ability to predict market trends, making them more prone to taking risks and thereby contributing to the gradual development of bubbles. In addition, bias can convince them to keep investing in the belief that prices will continue to rise, oblivious even to objective warning signals. Blinded by their faith in never-ending high growth based on past prices and trends, they are unable to recognize when a speculative bubble is forming.

As predicted by Meta, “We don’t expect our gen AI products to be a meaningful driver of revenue in 2024. But we do expect that they’re going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment.” However, long accustomed to the practice of quarterly sales and profits, many investors may underestimate the long-term impact of generative AI while overestimating its short-term potential. Gil Luria, analyst at D.A. Davidson, said, “If you are going to invest now and get returns in 10 to 15 years, that’s a venture investment. That’s not a public company investment. For public companies, we expect to get return on investment in much shorter time frames. So that’s causing discomfort, because we’re not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now.”

Getting a grasp on market trends

After leading the market on an upward trend in the second quarter of this year, the largest AI company dragged the market down in the third quarter. As a result, many investors have shifted from large-cap tech stocks to value stocks. The Figure shows that the Morningstar Global Artificial Intelligence Index plunged from a market high on 16 July 2024 to a new market low on 5 August 2024, representing a fall of 18.56%, which is double that of the Morningstar US Market Index at 9.21%. Despite having recovered some of the lost ground, AI stocks have been bringing market returns down in the past couple of months. Since 16 July, the 12 stocks in the Morningstar US Market Index that have driven down market returns are all tech stocks closely related to AI.

Past experience with the formation and bursting of tech bubbles demonstrates the cyclical nature of technology investment. While the initial overinvestment could lead to overvaluation, after the market has adapted to reality, major stock price adjustments will follow. In light of the continuous development of AI and its integration into various industries, understanding the law of market cycles is clearly a top priority for investors and policymakers.

References

Will A.I. Be a Bust? A Wall Street Skeptic Rings the Alarm. Jim Covello

“What happened to the artificial-intelligence revolution? So far the technology has had almost no economic impact”, The Economist, 2 July 2024

https://discover.adeccogroup.com/Business-Leaders-2024_Global-Report

Mr Clive Ho

Sparked off by Donald Trump’s refusal to accept the result of the presidential election defeat, the riot at the US Capitol in early 2021 is still fresh in memory. Now that the world is faced with treacherous geopolitics, the next US presidential election is fast approaching. The imminent election is of particular historical significance as there may be the first-ever woman and ethnic-minority president or the first former president to stage a comeback in many years. More importantly, with both American society and the international situation becoming dangerously volatile, even more crises loom in the years ahead.

Top issues in the eyes of 81% of voters

Within the short span of the past few years, not only have the Russia-Ukraine war and the Israel-Hamas conflict broken out, but Europe and America have also been battling record-high inflation in 40 years. Additionally the US has been waging a high-pressure technology war on China and AI technology has been advancing in leaps and bounds. All these developments have prompted various strategies and alliances. Who in the White House will lead America and what policies it will take could well change the course of history. Other national leaders are probably also contemplating how to mitigate the risks of the upcoming US presidential election.

Policies that matter to American voters centre around the economy, healthcare, immigrants, abortion, gun control, diplomacy, etc., with different concerns among Republican and Democratic supporters. Generally speaking, the economy is the primary consideration. According to the survey report published by the Pew Research Centre early last month (see Note), the economy tops the list of issues for voters, with 81% ranking it as very important, far ahead of healthcare in second place (65%). As for climate change, it receives little attention overall, largely due to the lukewarm attitude of Trump’s base.

The US economic performance has always been a deciding factor in election outcomes. A clear case in point dates back to 1992, when Bill Clinton popularized the campaign slogan “It is the economy, stupid”. Looking back over a century of American election history, if there was no economic recession two years prior to the election, the incumbent always got re-elected. There have been 12 such cases, including Bill Clinton, George W. Bush, and Barack Obama. If there was an economic downturn two years before, the incumbent invariably failed to get re-elected. Using this as a criterion, Joe Biden would have stood a fairly good chance of winning. Now that he has been replaced by Kamala Harris as the contestant against Trump, it remains to be seen in five weeks whether history will repeat itself for the presidential candidate from the same political party.

At present, the US macroeconomic situation indicates that inflation has abated and is gradually approaching the Federal Reserve’s 2% target. With the unemployment rate standing at approximately 4%, which is historically low, all appears to be well on the surface. Some still worry that a recession is brewing: the Federal Reserve started the interest-rate reduction cycle just two weeks ago with a 0.5% cut, higher than general market expectations and perhaps reflecting a faster-than-expected economic slowdown. Nevertheless, it is hard for Americans to grasp the economic outlook and use it as a reference for their vote. Most people would probably base their judgement on their own experiences, possibly to the disadvantage of Harris.

Voters have more confidence in Trump

Biden’s tenure as president coincided with the highest US inflation rate – peaking at 8% – over the past four decades. The Federal Reserve Economic Data show that the real median income of full-time employees dipped by 0.8% between the first quarter of 2021 and the second quarter of 2024. In other words, the rise in prices during the period was virtually offset by that in wages. Despite this, voters would still be unhappy because most of them believe that they deserve a pay rise for their hard work while price growth is seen as a result of policy failure. Now that inflation has more or less stabilized, so long as it stays positive, average prices will not come down. Few voters would recall whether there has been a pay rise when they see higher prices after Biden assumed office.

Just how much of these sentiments will be projected onto Harris is unclear. Given that she has not been involved in setting economic policy, voters may not blame her for the inflation. On the other hand, the fact that she lacks any accomplishments in economic affairs is her Achilles heel. In the Pew Research Centre study, more voters believe Trump has better economic policies, with a 55% to 45% ratio compared to Harris. This marks a particularly significant “advantage” for Trump among various policy issues.

As for foreign economic and trade activities, based on Trump’s campaign rhetoric, it is only natural to expect that he will continue the unilateral policies from his previous tenure a few years ago. Focusing solely on American interests, he will reduce or withdraw from multilateral economic cooperation agreements. His main weapon being tariffs, he insists that the burden of punishment should be borne by the countries targeted. He has also expressly said that, if re-elected, apart from imposing a 60% tariff on Chinese imports and a 10% tariff on imports from other countries, he would bring back the jobs “stolen” by foreign workers and reduce Americans’ income tax using the tariff revenues.

The toll of tariff hikes on Americans

Upon entering the White House in early 2017, Trump succeeded in passing the Tax Cuts and Jobs Act (TCJA) at the end of the year, but some income tax cuts would be effective only until 2025. He was looking to maintain lower tax rates in the long term and to offset reductions in income taxes with revenues from tariffs. This was obviously meant to hoax and coax American voters into believing income tax cuts were to their advantage without realizing tariff hikes would push up the prices they pay for imports. Trump has recently upped the ante by saying that it is possible to raise import tariffs on other countries from 10% to 20% and impose a 100% tariff on nations in pursuit of de-dollarization (naturally including China).

After conducting data analysis of Trump’s plans, the renowned US think tank Peterson Institute for International Economics (PIIE) finds that revenues from the tariffs can hardly cover even a portion of the income tax reductions. At its peak in 2022, these tariff revenues made up only 1.2% of the federal government’s total tax revenue, and China was already the largest source of America’s imports. Considering the average tariff rate for imports from other regions is lower than that for Chinese imports, the tariff revenue will not be substantial. In 2023, the total revenue from tariffs accounted for only 2% of the federal government’s total tax revenue while individual income tax revenue constituted 49%. Even if Trump succeeds in implementing steeper tariffs, they will not be sufficient to compensate for revenue reductions in individual income tax or corporate profit tax.

The PIIE analysis also covers Trump’s proposal to maintain the TCJA’s lower individual income taxes while imposing a 60% tariff on Chinese imports and a 20% tariff on all other imports. This would mean ordinary American families would continue to pay lower income taxes but would end up paying higher prices for foreign products. A family with a median income would suffer a net loss of US$2,600 each year. Only the top 1% of earners, who qualify for higher income tax exemptions, would benefit from Trump’s plans.

Simply put, Trump’s trade and tariff proposals would not only be loss-inducing for most but would also deteriorate income distribution.

Harris expected to follow in her predecessors’ footsteps

As a result of the trade war that started in 2018, the US has imposed tariffs of up to 25% on Chinese imports. While retaliating in kind, China still sought to leave room for negotiation and dispute management. Following rounds of high-level government negotiations, the Phase One Economic and Trade Agreement was signed by the two nations in January 2020. However, in the wake of the COVID-19 pandemic, which disrupted international trade, more heavy-handed measures were introduced by Biden after his assumption of office to suppress China. The room for China-US economic cooperation has thus become even narrower. Should the US impose tariffs of up to 60% or even 100% on all Chinese imports, China is bound to retaliate with a vengeance and the likelihood of a full economic decoupling between the two countries will become greater. Besides, since they are the world’s two largest trading nations, with various supply chains involving multiple third-party economies, costs in global trade and commerce will surge due to a reshuffling of the deck among trading nations.

The foreign economic and trade policies Harris will come up with remain to be seen given that they are not her department. It is estimated that she will not deviate from the policies of Biden or of the previous Obama administration in the short run. If that is the case, she would continue to rally European and Asian allies against China and Russia. But considering the Global South’s economic growth and the weak European economy, America may have the will but not the power to do so. For example, despite strong efforts from Biden, both the Indo-Pacific Economic Framework for Prosperity targeted at China and attempts to mobilize support from Africa and Latin America have been to no avail.

Without new ideas on the horizon, Harris may focus on existing platforms to rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), initiated by the Obama administration. First, the Asia-Pacific remains the fastest-growing and most promising region in the world. Despite being located outside the region and having yet to reach any major trade agreement post-Brexit, the UK has become a CPTPP member. Second, through the CPTPP platform, the US can reshape its economic leadership role worldwide, demonstrating a willingness to actively cooperate with other countries to enlist support from its allies and the Global South economies. Third, this can also help to balance out China’s economic influence within the region. America’s participation in the CPTPP may attract more countries to join, thereby rivalling the Regional Comprehensive Economic Partnership. In fact, China has applied to enter the CPTPP. If the US becomes a member first, it will have yet another platform to restrain China.

The US presidency is won by electoral votes rather than the popular vote and so the swing states play a decisive role in the election. According to the economic growth rates for the second quarter of 2024 released by the US Bureau of Economic Analysis several days ago, quite a few swing states, especially Michigan and Wisconsin, perform better than the national average. If this short-term economic performance can be translated into election votes, Harris’ path to the White House will be plain sailing.

Note: https://www.pewresearch.org/politics/2024/09/09/issues-and-the-2024-election/

Dr. Y. F. LUK
Honorary Associate Professor in Economics

Sparked off by Donald Trump’s refusal to accept the result of the presidential election defeat, the riot at the US Capitol in early 2021 is still fresh in memory. Now that the world is faced with treacherous geopolitics, the next US presidential election is fast approaching. The imminent election is of particular historical significance as there may be the first-ever woman and ethnic-minority president or the first former president to stage a comeback in many years. More importantly, with both American society and the international situation becoming dangerously volatile, even more crises loom in the years ahead.

Top issues in the eyes of 81% of voters

Within the short span of the past few years, not only have the Russia-Ukraine war and the Israel-Hamas conflict broken out, but Europe and America have also been battling record-high inflation in 40 years. Additionally the US has been waging a high-pressure technology war on China and AI technology has been advancing in leaps and bounds. All these developments have prompted various strategies and alliances. Who in the White House will lead America and what policies it will take could well change the course of history. Other national leaders are probably also contemplating how to mitigate the risks of the upcoming US presidential election.

Policies that matter to American voters centre around the economy, healthcare, immigrants, abortion, gun control, diplomacy, etc., with different concerns among Republican and Democratic supporters. Generally speaking, the economy is the primary consideration. According to the survey report published by the Pew Research Centre early last month (see Note), the economy tops the list of issues for voters, with 81% ranking it as very important, far ahead of healthcare in second place (65%). As for climate change, it receives little attention overall, largely due to the lukewarm attitude of Trump’s base.

The US economic performance has always been a deciding factor in election outcomes. A clear case in point dates back to 1992, when Bill Clinton popularized the campaign slogan “It is the economy, stupid”. Looking back over a century of American election history, if there was no economic recession two years prior to the election, the incumbent always got re-elected. There have been 12 such cases, including Bill Clinton, George W. Bush, and Barack Obama. If there was an economic downturn two years before, the incumbent invariably failed to get re-elected. Using this as a criterion, Joe Biden would have stood a fairly good chance of winning. Now that he has been replaced by Kamala Harris as the contestant against Trump, it remains to be seen in five weeks whether history will repeat itself for the presidential candidate from the same political party.

At present, the US macroeconomic situation indicates that inflation has abated and is gradually approaching the Federal Reserve’s 2% target. With the unemployment rate standing at approximately 4%, which is historically low, all appears to be well on the surface. Some still worry that a recession is brewing: the Federal Reserve started the interest-rate reduction cycle just two weeks ago with a 0.5% cut, higher than general market expectations and perhaps reflecting a faster-than-expected economic slowdown. Nevertheless, it is hard for Americans to grasp the economic outlook and use it as a reference for their vote. Most people would probably base their judgement on their own experiences, possibly to the disadvantage of Harris.

Voters have more confidence in Trump

Biden’s tenure as president coincided with the highest US inflation rate – peaking at 8% – over the past four decades. The Federal Reserve Economic Data show that the real median income of full-time employees dipped by 0.8% between the first quarter of 2021 and the second quarter of 2024. In other words, the rise in prices during the period was virtually offset by that in wages. Despite this, voters would still be unhappy because most of them believe that they deserve a pay rise for their hard work while price growth is seen as a result of policy failure. Now that inflation has more or less stabilized, so long as it stays positive, average prices will not come down. Few voters would recall whether there has been a pay rise when they see higher prices after Biden assumed office.

Just how much of these sentiments will be projected onto Harris is unclear. Given that she has not been involved in setting economic policy, voters may not blame her for the inflation. On the other hand, the fact that she lacks any accomplishments in economic affairs is her Achilles heel. In the Pew Research Centre study, more voters believe Trump has better economic policies, with a 55% to 45% ratio compared to Harris. This marks a particularly significant “advantage” for Trump among various policy issues.

As for foreign economic and trade activities, based on Trump’s campaign rhetoric, it is only natural to expect that he will continue the unilateral policies from his previous tenure a few years ago. Focusing solely on American interests, he will reduce or withdraw from multilateral economic cooperation agreements. His main weapon being tariffs, he insists that the burden of punishment should be borne by the countries targeted. He has also expressly said that, if re-elected, apart from imposing a 60% tariff on Chinese imports and a 10% tariff on imports from other countries, he would bring back the jobs “stolen” by foreign workers and reduce Americans’ income tax using the tariff revenues.

The toll of tariff hikes on Americans

Upon entering the White House in early 2017, Trump succeeded in passing the Tax Cuts and Jobs Act (TCJA) at the end of the year, but some income tax cuts would be effective only until 2025. He was looking to maintain lower tax rates in the long term and to offset reductions in income taxes with revenues from tariffs. This was obviously meant to hoax and coax American voters into believing income tax cuts were to their advantage without realizing tariff hikes would push up the prices they pay for imports. Trump has recently upped the ante by saying that it is possible to raise import tariffs on other countries from 10% to 20% and impose a 100% tariff on nations in pursuit of de-dollarization (naturally including China).

After conducting data analysis of Trump’s plans, the renowned US think tank Peterson Institute for International Economics (PIIE) finds that revenues from the tariffs can hardly cover even a portion of the income tax reductions. At its peak in 2022, these tariff revenues made up only 1.2% of the federal government’s total tax revenue, and China was already the largest source of America’s imports. Considering the average tariff rate for imports from other regions is lower than that for Chinese imports, the tariff revenue will not be substantial. In 2023, the total revenue from tariffs accounted for only 2% of the federal government’s total tax revenue while individual income tax revenue constituted 49%. Even if Trump succeeds in implementing steeper tariffs, they will not be sufficient to compensate for revenue reductions in individual income tax or corporate profit tax.

The PIIE analysis also covers Trump’s proposal to maintain the TCJA’s lower individual income taxes while imposing a 60% tariff on Chinese imports and a 20% tariff on all other imports. This would mean ordinary American families would continue to pay lower income taxes but would end up paying higher prices for foreign products. A family with a median income would suffer a net loss of US$2,600 each year. Only the top 1% of earners, who qualify for higher income tax exemptions, would benefit from Trump’s plans.

Simply put, Trump’s trade and tariff proposals would not only be loss-inducing for most but would also deteriorate income distribution.

Harris expected to follow in her predecessors’ footsteps

As a result of the trade war that started in 2018, the US has imposed tariffs of up to 25% on Chinese imports. While retaliating in kind, China still sought to leave room for negotiation and dispute management. Following rounds of high-level government negotiations, the Phase One Economic and Trade Agreement was signed by the two nations in January 2020. However, in the wake of the COVID-19 pandemic, which disrupted international trade, more heavy-handed measures were introduced by Biden after his assumption of office to suppress China. The room for China-US economic cooperation has thus become even narrower. Should the US impose tariffs of up to 60% or even 100% on all Chinese imports, China is bound to retaliate with a vengeance and the likelihood of a full economic decoupling between the two countries will become greater. Besides, since they are the world’s two largest trading nations, with various supply chains involving multiple third-party economies, costs in global trade and commerce will surge due to a reshuffling of the deck among trading nations.

The foreign economic and trade policies Harris will come up with remain to be seen given that they are not her department. It is estimated that she will not deviate from the policies of Biden or of the previous Obama administration in the short run. If that is the case, she would continue to rally European and Asian allies against China and Russia. But considering the Global South’s economic growth and the weak European economy, America may have the will but not the power to do so. For example, despite strong efforts from Biden, both the Indo-Pacific Economic Framework for Prosperity targeted at China and attempts to mobilize support from Africa and Latin America have been to no avail.

Without new ideas on the horizon, Harris may focus on existing platforms to rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), initiated by the Obama administration. First, the Asia-Pacific remains the fastest-growing and most promising region in the world. Despite being located outside the region and having yet to reach any major trade agreement post-Brexit, the UK has become a CPTPP member. Second, through the CPTPP platform, the US can reshape its economic leadership role worldwide, demonstrating a willingness to actively cooperate with other countries to enlist support from its allies and the Global South economies. Third, this can also help to balance out China’s economic influence within the region. America’s participation in the CPTPP may attract more countries to join, thereby rivalling the Regional Comprehensive Economic Partnership. In fact, China has applied to enter the CPTPP. If the US becomes a member first, it will have yet another platform to restrain China.

The US presidency is won by electoral votes rather than the popular vote and so the swing states play a decisive role in the election. According to the economic growth rates for the second quarter of 2024 released by the US Bureau of Economic Analysis several days ago, quite a few swing states, especially Michigan and Wisconsin, perform better than the national average. If this short-term economic performance can be translated into election votes, Harris’ path to the White House will be plain sailing.

Note: https://www.pewresearch.org/politics/2024/09/09/issues-and-the-2024-election/

Dr. Y. F. LUK
Honorary Associate Professor in Economics

Professor Heiwai Tang, Mr Benson Lam, and Mr Cyrus Cheung

25 September 2024

Now that the gig economy has become a global trend, striking a delicate balance among labour rights, business interests, and technological advancements is a focal point for policymakers around the world. According to Statista data, gig workers are estimated to make up 51% of the American workforce by 2027. In Hong Kong, as more and more people take on short-term contract and freelance jobs, there is room for improvement in the conventional labour protection system.

The interactions of labour rights, commercial interests, and technology are so complex that policymakers and industry leaders must walk a fine line to find the right balance. On the one hand, technological advancements and low costs of gig work provide the conditions for the take-off of the platform economy, which, in turn, has created a great variety of flexible, autonomous jobs as alternative sources of income beyond traditional employment. On the other hand, the market dominance of platform companies has drastically weakened the bargaining power of gig workers, who find themselves at the mercy of the companies.

Against this backdrop, this article aims to give an overview of changes in labour laws in Mainland China, the US, the UK, and Singapore, in an effort to spark further policy discussions on the gig economy. Admittedly, local situation varies across countries while policy outcome remains to be seen. While referencing experiences from overseas, it is essential to consider the local situation so as to balance business innovation and development against the need to protect gig workers’ interests by setting a sustainable development framework.

Taking a page from the Mainland, the US, the UK, and Singapore

The gig economy is thriving in the Mainland. In a recent internal letter, Meituan CEO Wang Xing reportedly disclosed that in 2023, a total of 7.45 million food delivery riders received remuneration exceeding RMB80 billion from the Meituan platform. Apart from these riders, gig jobs like ride-hailing drivers or content creators are also very common in the Mainland.  The general public is increasingly concerned about the social responsibility of big platform honchos regarding the protection of gig workers’ rights. Under the guidance of departments such as the All-China Federation of Trade Unions, the online food delivery platform Ele.me signed the industry’s first collective contract covering its entire service network with more than three million riders in July 2023. This action was taken in response to riders’ concerns about protecting workers’ rights, insurance benefits, grievance redress channels, etc. Ele.me has now established a dispute arbitration centre in Shanghai to optimize its internal dispute resolution mechanism.

In the face of the expanding gig economy, the Chinese government has come to play a prominent role in protecting labour rights and benefits. In 2024, the Ministry of Human Resources and Social Security issued a series of documents, including the Guidelines for Guaranteeing the Rest and Labour Remuneration Rights and Interests of Workers in New Forms of Employment and the Service Guidelines for Safeguarding the Rights and Interests of Workers in New Forms of Employment. These guidelines define the rights of “workers under new employment arrangements” in three areas — wage standards, rest time, and channels for rights protection. The government policy stipulates that salaries of workers in new forms of employment should match local minimum wages per hour. If workers are required to work on statutory holidays, they should receive higher wages than for normal working hours. To ensure that workers have necessary rest time, the regulations mandate that once a worker’s hours reach the specified limit, platforms must immediately stop sending them orders for a certain time. If their labour rights are compromised, these workers can seek protection through the company’s internal dispute resolution process or through rights protection services provided by trade unions, relevant departments, and agencies.

In the US, innovation and technology enable companies to leverage digital platforms to develop their markets while the government’s role lies in ensuring fair labour practices. Generally speaking, only “employees” are protected by federal and state labour laws. However, some better-developed states have put in place their own legislation to protect gig workers’ rights. For example, New York passed the rule in 2023 to significantly adjust the minimum pay rate of delivery workers from US$7.09 to US$17.96. Unfortunately, the city’s decision drew ire from the industry: Platform companies such as Uber Eats, DoorDash, and Grubhub have filed lawsuits with US courts. Meanwhile, the companies are transferring the costs of raised wages to restaurants and consumers. With the rise in delivery fees, consumers have started to order less through food delivery platforms, leading to livelihood difficulties for delivery riders.

Labour relations in the UK encompass three types of employment classification: employees, workers, and the self-employed. In 2016, Uber drivers took their employer to court, claiming that they should receive such benefits as paid annual leave and minimum wage protection. After six years of litigation, the UK Supreme Court ruled that the drivers were workers rather than self-employed persons. Uber nevertheless still insists that the ruling only applied to drivers using its app in 2016, not all its current drivers. The Labour Party, which recently came to power, had put forward progressive proposals during the election in Labour’s Plan to Make Work Pay: Delivering a New Deal for Working People. The party pledged to ban exploitative zero hours contracts and require employers to provide staff with contracts that state predictable hours, based on a 12-week reference period. Nonetheless, some gig workers may prefer to retain the flexibility of being classified as “workers” rather than “employees”. Whether the intermediate employment classification, i.e. “workers”, should be abolished remains a debatable issue.

Singapore is well known for its business-friendly environment and its entrepreneurship. It places great importance on technological advancement, laying the foundation for the platform economy. To safeguard labour rights, the country recently passed the Platform Workers Bill to provide protections for its approximately 70,000 platform workers. Similar to the UK, the Bill classifies “platform workers” as a separate legal category that falls between employees and the self-employed to ensure their Central Provident Fund contribution rate will rise to match that of current employees and employers. Platform operators are required to provide their platform workers with work injury compensation insurance at the same level of coverage as employees. In addition, the Bill stipulates the formation of Platform Work Associations to ensure collective bargaining rights, including negotiations with platform operators and the signing of legally-binding collective agreements. Reportedly, Singapore may eventually consider extending the scope of the Bill to cover other freelancers.

While China, the US, the UK, and Singapore have attempted to introduce policy measures to protect the rights of gig workers, differences exist among the regulations. In comparison, the policies of China and Singapore involve more negotiations between employers and employees, whereas those of the US and the UK do not. This may be due to the fact that gig worker protection policies are a more contentious issue in the US and the UK. In any event, policy measures to protect the rights of gig workers have yet to fully mature and the outcomes of their implementation remain uncertain.

Flexible regulatory framework essential to robust growth  

How to regulate the platform economy is another major issue. According to Peking University’s Institute of Digital Finance, regulation should aim to strengthen the platform economy and to facilitate its healthy growth, rather than hindering its future growth. It is therefore necessary to establish a comprehensive governance mechanism for the platform economy. This should include the formulation of specialized and systematic regulations as well as a clear demarcation of departmental responsibilities so as to avoid the phenomena of “campaign-style regulation” and “regulatory competition”. Moreover, to prevent over-intervention in normal market operations, it is advisable to distinguish between “regulation of the platform economy” and “antitrust” — the former being a proper function for maintaining market order and the latter being a non-normal measure for restoring market efficiency.

The success of the platform economy hinges on the creation of reasonable income for companies and gig workers while consumers benefit from highly efficient platform services, altogether delivering a triple-win. Given the dominant position of platform operators, the government must play an active role in ensuring a balance among labour rights, business interests, and technological applications. That being said, the flexibility of the regulatory framework is crucial since over-regulation may compromise the effectiveness of platforms in managing supply and demand, producing a triple-lose outcome for operators, gig workers, and consumers. Finding balance on a seesaw is no easy task. How to build a sustainable development framework for the gig economy remains an issue in urgent need of further deliberation.

References

黃益平、鄧峰、沈艷、汪浩（2022）〈超越「強監管」──對平台經濟治理政策的反思〉，北京大學數字金融研究中心

Professor Heiwai Tang, Mr Benson Lam, and Mr Cyrus Cheung

25 September 2024

Now that the gig economy has become a global trend, striking a delicate balance among labour rights, business interests, and technological advancements is a focal point for policymakers around the world. According to Statista data, gig workers are estimated to make up 51% of the American workforce by 2027. In Hong Kong, as more and more people take on short-term contract and freelance jobs, there is room for improvement in the conventional labour protection system.

The interactions of labour rights, commercial interests, and technology are so complex that policymakers and industry leaders must walk a fine line to find the right balance. On the one hand, technological advancements and low costs of gig work provide the conditions for the take-off of the platform economy, which, in turn, has created a great variety of flexible, autonomous jobs as alternative sources of income beyond traditional employment. On the other hand, the market dominance of platform companies has drastically weakened the bargaining power of gig workers, who find themselves at the mercy of the companies.

Against this backdrop, this article aims to give an overview of changes in labour laws in Mainland China, the US, the UK, and Singapore, in an effort to spark further policy discussions on the gig economy. Admittedly, local situation varies across countries while policy outcome remains to be seen. While referencing experiences from overseas, it is essential to consider the local situation so as to balance business innovation and development against the need to protect gig workers’ interests by setting a sustainable development framework.

Taking a page from the Mainland, the US, the UK, and Singapore

The gig economy is thriving in the Mainland. In a recent internal letter, Meituan CEO Wang Xing reportedly disclosed that in 2023, a total of 7.45 million food delivery riders received remuneration exceeding RMB80 billion from the Meituan platform. Apart from these riders, gig jobs like ride-hailing drivers or content creators are also very common in the Mainland.  The general public is increasingly concerned about the social responsibility of big platform honchos regarding the protection of gig workers’ rights. Under the guidance of departments such as the All-China Federation of Trade Unions, the online food delivery platform Ele.me signed the industry’s first collective contract covering its entire service network with more than three million riders in July 2023. This action was taken in response to riders’ concerns about protecting workers’ rights, insurance benefits, grievance redress channels, etc. Ele.me has now established a dispute arbitration centre in Shanghai to optimize its internal dispute resolution mechanism.

In the face of the expanding gig economy, the Chinese government has come to play a prominent role in protecting labour rights and benefits. In 2024, the Ministry of Human Resources and Social Security issued a series of documents, including the Guidelines for Guaranteeing the Rest and Labour Remuneration Rights and Interests of Workers in New Forms of Employment and the Service Guidelines for Safeguarding the Rights and Interests of Workers in New Forms of Employment. These guidelines define the rights of “workers under new employment arrangements” in three areas — wage standards, rest time, and channels for rights protection. The government policy stipulates that salaries of workers in new forms of employment should match local minimum wages per hour. If workers are required to work on statutory holidays, they should receive higher wages than for normal working hours. To ensure that workers have necessary rest time, the regulations mandate that once a worker’s hours reach the specified limit, platforms must immediately stop sending them orders for a certain time. If their labour rights are compromised, these workers can seek protection through the company’s internal dispute resolution process or through rights protection services provided by trade unions, relevant departments, and agencies.

In the US, innovation and technology enable companies to leverage digital platforms to develop their markets while the government’s role lies in ensuring fair labour practices. Generally speaking, only “employees” are protected by federal and state labour laws. However, some better-developed states have put in place their own legislation to protect gig workers’ rights. For example, New York passed the rule in 2023 to significantly adjust the minimum pay rate of delivery workers from US$7.09 to US$17.96. Unfortunately, the city’s decision drew ire from the industry: Platform companies such as Uber Eats, DoorDash, and Grubhub have filed lawsuits with US courts. Meanwhile, the companies are transferring the costs of raised wages to restaurants and consumers. With the rise in delivery fees, consumers have started to order less through food delivery platforms, leading to livelihood difficulties for delivery riders.

Labour relations in the UK encompass three types of employment classification: employees, workers, and the self-employed. In 2016, Uber drivers took their employer to court, claiming that they should receive such benefits as paid annual leave and minimum wage protection. After six years of litigation, the UK Supreme Court ruled that the drivers were workers rather than self-employed persons. Uber nevertheless still insists that the ruling only applied to drivers using its app in 2016, not all its current drivers. The Labour Party, which recently came to power, had put forward progressive proposals during the election in Labour’s Plan to Make Work Pay: Delivering a New Deal for Working People. The party pledged to ban exploitative zero hours contracts and require employers to provide staff with contracts that state predictable hours, based on a 12-week reference period. Nonetheless, some gig workers may prefer to retain the flexibility of being classified as “workers” rather than “employees”. Whether the intermediate employment classification, i.e. “workers”, should be abolished remains a debatable issue.

Singapore is well known for its business-friendly environment and its entrepreneurship. It places great importance on technological advancement, laying the foundation for the platform economy. To safeguard labour rights, the country recently passed the Platform Workers Bill to provide protections for its approximately 70,000 platform workers. Similar to the UK, the Bill classifies “platform workers” as a separate legal category that falls between employees and the self-employed to ensure their Central Provident Fund contribution rate will rise to match that of current employees and employers. Platform operators are required to provide their platform workers with work injury compensation insurance at the same level of coverage as employees. In addition, the Bill stipulates the formation of Platform Work Associations to ensure collective bargaining rights, including negotiations with platform operators and the signing of legally-binding collective agreements. Reportedly, Singapore may eventually consider extending the scope of the Bill to cover other freelancers.

While China, the US, the UK, and Singapore have attempted to introduce policy measures to protect the rights of gig workers, differences exist among the regulations. In comparison, the policies of China and Singapore involve more negotiations between employers and employees, whereas those of the US and the UK do not. This may be due to the fact that gig worker protection policies are a more contentious issue in the US and the UK. In any event, policy measures to protect the rights of gig workers have yet to fully mature and the outcomes of their implementation remain uncertain.

Flexible regulatory framework essential to robust growth  

How to regulate the platform economy is another major issue. According to Peking University’s Institute of Digital Finance, regulation should aim to strengthen the platform economy and to facilitate its healthy growth, rather than hindering its future growth. It is therefore necessary to establish a comprehensive governance mechanism for the platform economy. This should include the formulation of specialized and systematic regulations as well as a clear demarcation of departmental responsibilities so as to avoid the phenomena of “campaign-style regulation” and “regulatory competition”. Moreover, to prevent over-intervention in normal market operations, it is advisable to distinguish between “regulation of the platform economy” and “antitrust” — the former being a proper function for maintaining market order and the latter being a non-normal measure for restoring market efficiency.

The success of the platform economy hinges on the creation of reasonable income for companies and gig workers while consumers benefit from highly efficient platform services, altogether delivering a triple-win. Given the dominant position of platform operators, the government must play an active role in ensuring a balance among labour rights, business interests, and technological applications. That being said, the flexibility of the regulatory framework is crucial since over-regulation may compromise the effectiveness of platforms in managing supply and demand, producing a triple-lose outcome for operators, gig workers, and consumers. Finding balance on a seesaw is no easy task. How to build a sustainable development framework for the gig economy remains an issue in urgent need of further deliberation.

References

黃益平、鄧峰、沈艷、汪浩（2022）〈超越「強監管」──對平台經濟治理政策的反思〉，北京大學數字金融研究中心

Dr Maurice Tse
18 September 2024

The US presidential election is now proceeding at full throttle. Long advocated by the Republican candidate, Donald Trump, measures including tax cuts, increased military spending, and economic stimulation are bound to pump up the government’s fiscal expenditures. His Democratic opponent, Kamala Harris, on the other hand, calls for expansion of social programmes, boosted infrastructural investments, and economic stimulus initiatives. While a tax hike is on the table, without a corresponding growth in revenue, federal debt will only stack up over time.

Over the past five years, the US government’s fiscal deficit has persistently remained above US$1 trillion while its debt level has been among the highest in the world. Surprisingly, neither of the two presidential candidates regards this as a priority. One cannot help but wonder if America’s economic future is at risk of a debt time bomb, potentially fulfilling the prophecy of the fall of the West.

International standards for financial assessment

When evaluating a country’s financial situation, it is necessary to understand that debt is the total sum of money owed at any particular time while a deficit occurs when the government’s spending surpasses its income, leading to larger national debt. Fiscal deficit and debt are usually compared against Gross Domestic Product (GDP) as the latter serves as a rough indicator of a country’s solvency.

Using a collection of data covering the period from 1946 to 2009, gathered from the International Monetary Fund, the World Bank, and the Organization for Economic Cooperation and Development, American economists Carmen Reinhart and Kenneth Rogoff have conducted a study on 44 countries. Their work reveals a significant negative correlation between the government debt ratio and economic growth. In developed economies and emerging economies with a debt-to-GDP ratio over 90%, the median growth rate is lower by 1.5% and the average growth rate is lower by nearly 3% compared to economies with smaller debt obligations.

A government’s annual fiscal-deficit-to-GDP ratio consistently over 3% would cause alarm for many economists and international organizations. Take the European Union for example. Its Stability and Growth Pact, introduced in 1997, is designed to maintain sound public finances and facilitate economic growth by overseeing and controlling member states’ budget deficit levels and public debt levels. Under the pact, the annual budget deficit of each member is capped at 3% of its GDP and the public-debt-to-GDP ratio must be kept below 60%. Assessed against these criteria, the steadily high US fiscal deficits and public debts are inevitably a cause for concern among scholars and pundits regarding America’s economic future.

Under the catalytic effect of virtually zero interest rates and low debt costs over the past decade, escalating government debts have become a global issue. In June 2023, US President Joe Biden signed the Fiscal Responsibility Act passed by the Congress, which suspended the US$31.4 trillion debt ceiling until January 2025. At the beginning of 2024, the overall debt of the federal government stood at US$33 trillion, approximately US$28 trillion of which was held by the American public.

The federal government’s towering debt

Figure 1 shows that the US public-debt-to-GDP ratio in 2023 almost reached 100% while the total debt-to-GDP ratio exceeded 120%, the highest level since the 103% recorded at the end of the Second World War. Thanks to strong economic growth and financial surplus, the total debt-to-GDP ratio fell to 23% in 1974. Upon Bill Clinton’s departure from the White House in 2001, that ratio registered at 32.8%. Since then, the US has seen fiscal deficits for 23 consecutive years.

As a matter of fact, the debt-to-GDP ratio approaching 100% is not necessarily a problem; rather, what causes concern is the continuous upward trend. The Congressional Budget Office (CBO) forecasts that the ratio will reach 116% by 2034 and even 163% by 2054. A persistent trend is sure to hamper the US economy in the long term.

Critical fiscal imbalance

In June 2024, the CBO adjusted its forecast for the deficit for the same fiscal year, raising the amount by more than US$400 billion to US$2 trillion, which equated to 7% of GDP (see Figure 2). During the COVID-19 pandemic, the national deficit rocketed to an all-time high of US$3.13 trillion, representing 14.7% of GDP. By 2021, the deficit totalled US$2.78 trillion, or 11.8% of GDP.

CBO data indicates that US fiscal deficit has been accelerating: averaging US$138 billion in the 1990s, US$318 billion in the 2000s, US$829 billion in the 2010s, and even averaging US$2.23 trillion in the 2020s. During the past three years, massive deficits have arisen in an environment of economic growth, low unemployment, and stable national defence spending. The CBO therefore regards these deficits as structural and projects that the accumulated deficit between 2025 and 2034 will stand at the high level of US$22.1 trillion.

Recent deficits have stemmed from large outlays. Since 1974, with an average revenue share of 17.3% of GDP and an average expenditure share of about 21% of GDP, the annual average deficit-to-GDP ratio has remained between 3% and 4%. During the same period, revenue has stayed close to the long-term average level. The current expenditure-to-GDP ratio is around 24%. The CBO forecasts that it will remain high in the coming decade, approaching 25% in 2034 while the deficit-to-GDP ratio will reach 7.7%.

To settle the fiscal balance amounting to almost US$2 trillion, it is necessary to both raise taxes and cut spending. According to the US Internal Revenue Service’s latest data in 2021, the top 5% of income earners pay approximately two-thirds of income tax, the top 25% of income earners pay almost 90% of the total tax revenue, and half of the bottom income earners pay merely 2.3% of the total tax revenue. Evidently, any tax rise should be clearly targeted and should not dampen investment.

The Tax Cuts and Jobs Act of 2017 passed during Trump’s tenure as president has reduced both personal income tax rates and the corporate tax rate. A significant part of the Act is set to expire by the end of 2025. In the event of non-renewal, the CBO forecasts that accumulated fiscal deficit in the next decade will reach US$22.1 trillion. However, if renewed, the accumulated fiscal deficit is projected to surge by an additional US$4 trillion.

Tax hikes alone unlikely to be effective

President Biden has promised not to raise taxes for families earning less than US$400,000 annually (95% of all families) but will raise taxes for the remaining 5% to accommodate the renewal of the Tax Cuts and Jobs Act of 2017. Nevertheless, experience in Europe shows that raising taxes on the rich to balance the budget, has, at best, uncertain effects.

At present, 80% of the US government’s fiscal expenditure is mandatory, with social security and healthcare being the two largest expenditure items while only 20% is discretionary, e.g. national defence and education. Apart from national defence, the actual discretionary outlay amounts to US$750 billion. With the proportion of people aged 65 or above now at 18% of the total population, annual spending on social security and healthcare has been accelerating unabated. Over the past two decades, these two items have not been subject to review by the Congress and both are in danger of running out of funding within 10 years. Needless to say, slashing expenses is easier said than done.

Excessive debt has driven up the interest costs for the federal government, which has now become the government’s third-largest expenditure item, with an average interest-cost-to-GDP ratio of over 3%. The CBO estimates that the interest cost will reach the US$1.7 trillion mark within a decade, impacting not only the operations of government agencies but also some social welfare programmes.

How will debt expansion end

It is well known that US Treasury bonds, being the largest bond asset class, play a pivotal role in the global financial system. Given that the US Treasury has to refinance around one-third of the existing debt and fund the current deficit, bond auctions may not be effective. If anything goes wrong, market confidence could be undermined. Now that the credit ratings of US Treasury bonds have been downgraded by S&P Global Ratings and Fitch Ratings, foreign investors (who hold about 25% of US debt) may therefore exert pressure on the US to implement fiscal policy changes. For instance, urged by bond vigilantes during the mid-1990s, President Bill Clinton achieved four budget surpluses in his last term of office.

In its Annual Economic Report, the Bank for International Settlements also warns that rising debt exposes governments to the risk of a crisis similar to the UK government bond market turmoil in 2022. Investors at that time shied away from UK bonds, resulting in a surge in borrowing costs, currency depreciation, and chaos in the stock market.

All in all, the sustainability of a high fiscal deficit depends on economic growth rates, interest rates, overall debt levels, and currency stability. Against the backdrop of “the rise of the East and the fall of the West”, whether the US government is strong enough to support unlimited debt expansion is an enormous challenge for the next administration.

References
1. Annual Economic Report 2024, Bank of International Settlements
2. Budget and Economic Outlook, Congressional Budget Office 2024