Monday 29 February 2016

G20 fails to inspire the market with lack of information

On Friday I wrote a piece stating that Shanghai would be host to a G20 summit meeting involving finance ministers and central bankers of the top 20 largest developed and emerging market economies with much belief that policymakers would reiterate their support for economic growth with measures such as fiscal, monetary and structural policies that would lift the world economic outlook from bleak to prosperous again.

After concluding on Saturday it would seem the meeting failed to meet market expectations by lacking sufficient substance that would ably describe to market participants how policymakers intended on supporting growth or address issues that are currently hindering government's ability to bring about the change needed to boost confidence again.

Policymakers were in agreement that the perpetual nature that both monetary and fiscal policies have taken on cannot remain in place indefinitely and stressed the importance of structural policy in reaching the targeted goal of sustainable global economic growth. We heard ahead of the meeting that German finance minister Wolfgang Schauble said that more focus needed to be put on structural issues arising in each member's economies rather than simply abating the problem by pushing for the continual use of expansionary measures.

This would suggest that member nations have heeded the warning made by Schauble and wish to exhibit a degree of caution when using these measures in the future. The specific measure I suspect being referred to is the much debated NIRP (Negative Interest Rate Policy) we've seen implemented in a number of countries that have been suffering with long term structural issues.

However as much as the policy allows for more flexibility in areas previously thought to have reached its limitations, the market itself has voiced its concerns over its usage and questions whether policymakers and more so central bankers have the right judgement in executing a policy that has yet to be tested, let alone studied by academics.

Although not explicitly stating the obvious, leaders have shown evidence that would lead us to believe that they have made an acknowledgement of the markets concerns and the debate around issues that could cause financial market catastrophe have been noted which will be re-examined carefully over the next few months before further measures are put in place.

I think this was an important takeaway from this weekend's summit but not delved too much into in this morning's commentary with most of the focus being driven towards China and the lack of substantial information over the reform of their economy.
But much of the dismay at the lack of information from Chinese policymakers could be as a result of the upcoming National People's Congress which begins on the 5th March 2016 where the gathering will set the stage for policy discussion amongst top government officials who might have kept mum over the past weekend's G20 summit in favour of proposing new measures to the constituents in assessing support for them as opposed to making the same proposals to global leaders but being unable to secure the backing from the real decision makers.

China's recent drive to shore up confidence in its financial market reforms have been met positively by the market and it is expected they won't disappoint come the weekend. Having come this far I don't envisage authorities passing up the chance to charm the market with added initiatives planned to boost faith in the current transitory phase that has so far dogged leaders on poor execution.

What we've seen over the past two months from Chinese authorities is the realisation that the abrupt nature of reform doesn't necessitate an artificial support of the financial system but rather a more transparent delivery of information in terms of market expectations.
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