From Tokyo, Japan and Changsha, China – this is Down to Business English. With your hosts Skip Montreux and Dez Morgan.
Hello Dez. Good to be back with you. How are things going?
Things are going pretty well, Skip. I’m just back from a quick holiday in Vietnam.
Oh, you took a holiday. I wasn’t aware of that.
Well, I did. As Changsha is in southern China, Vietnam is just a very short three hour flight away.
You went to Vietnam. Very nice.
You know, if I’d had more time I could have gone by train, which would have been interesting, but I didn’t really have the time.
Hmm. How long were you gone for?
I was away just for a week. And I went to Ho Chi Minh, er, a small town called Hoi An and then up to the northern capital, Hanoi.
So, does this mean you are going to be giving us a report on Vietnam and its economy today?
As a matter of fact, that was what I was planning on doing but I’m going to do that later now, not today.
No? So what are you going to be reporting on?
Well, there’s been a lot going on in China in my absence, and it would be remiss of me not to cover that first here on D2B.
Well, with a country as big as China there is always a lot going on.
Ha, very true.
So, which news headline out of China are we focusing on today?
Economic stimulus in China is the order of the day, or maybe I should say order of the month.
Economic stimulus. You often hear on the news that governments are intervening in markets to stimulate economic growth, but a lot of people don’t really know what that actually means, or how it works.
Then my report today might be of interest to them. First I am going to cover economic stimulus in general and then focus on how the Chinese government is promoting growth and intervening in markets today.
Sounds great.
So let’s do it, let's get D2B … Down to Business with Understanding Economic Stimulus. What is it? How does it work? And how is it being applied in China today?
So Dez, let’s start off with the first of those three questions. What is economic stimulus?
Simply put, economic stimulus is when a government spends money in some way, or takes some type of financial measure that encourages economic growth.
And what do you mean by some type of financial measure? Isn’t that just a fancy way of saying ‘spend money’?
Not necessarily. Instead of spending money, or even worse borrowing money, to pump into the economy, a government could instead cut taxes. Let’s say a government cuts personal or business taxes, what do you think would happen next?
Mmm. The government would have less revenue, obviously.
Yes, but don’t look at it from the government’s point of view. Look at it from the taxpayer’s perspective.
Okay. Well, fom the taxpayer’s angle, people and businesses would have more money in their pockets to spend.
Which would stimulate the economy — and that’s the idea.
Okay, got it. Reducing taxes is one type of economic stimulus.
Similarly a government could start spending on infrastructure projects. This type of public spending provides employment, which in turn puts money into people’s pockets, and again promotes economic activity.
Isn’t that what President Franklin Roosevelt did in the 1930s in the US to combat the Great Depression?
Well spotted, Skip. As part of his New Deal as it was called, Roosevelt poured $6 billion into the PWA, or Public Works Administration between 1933 and 1939. With that money they built dams, roads, hospitals, and schools. It was risky but it worked and the US was able to climb out of the depression.
And that was $6 billion in the 1930s, how much is that today?
Around $113 billion, if we took an average inflation rate of 3.8%.
Really? Is that all it took to get out of the Great Depression?! $113 billion? It doesn’t seem like that much compared to the figures you hear governments shelling out these days on programs.
Well keep in mind though Skip, that $6 billion was just for the PWA. There was more to the New Deal than just that. The entire bill amounted to around $42 billion, which is equivalent to just over $790 billion today.
Okay, well that makes more sense.
So those are two examples of fiscal stimulus — tax cuts and public spending. But neither of those is a quick fix. They both take time to filter through to the economy and translate into measurable growth.
So what can a government do if it wants faster results?
Ah. Now we enter the world of monetary stimulus. The most common way for a central bank to instigate monetary stimulus is to lower interest rates.
And why is that a faster way to stimulate the economy?
The less it costs to borrow money the more likely people are to buy new homes, a new car, or any other big ticket item.
Which promotes almost instant economic growth.
Exactly. And yet another action governments or central banks often take is to ease lending requirements on major banks.
And how is that accomplished?
Well, governments regulate how much capital a bank is required to hold against how much they are allowed to lend to customers. They simply lower the requirement, and banks are free to lend out more money.
It sounds so simple.
It is very simple but it’s also very risky as banks now have less assets to fall back on if they need them.
So, is this what is happening in China? Has the government lowered interest rates and eased lending requirements?
It sure has. On September 24th The People’s Bank of China, or PBOC, lowered both short term interest rates as well as the rates on existing mortgages. Interestingly though, the one year loan prime rate remains unchanged at 3.35%.
With major economies around the world cutting their prime interest rates that is a little surprising.
It could well be that the Chinese central bank is holding that in reserve if it’s needed at a later date.
And what about lending requirements? Did they make it easier for banks to lend money?
Those were eased as well. Banks are now allowed to hold less liquid assets compared to the amount they’re allowed to lend. And the minimum down payment requirements on property purchases were also lowered.
All in an attempt to get people to take out loans and buy property — stimulating the economy.
Precisely.
As these new regulations have only been in place for just over a month, it’s probably too early to say if they have been successful or not.
It is a bit early, that's true. But, another related policy shift from the People’s Bank of China, or PBOC, is it’s now allowing local governments to issue special bonds to finance the purchase of vacant land and unsold inventory from property developers.
Do local governments actually want to buy property and unsold apartments from developers?
Ah, well that is as yet unclear. Although I strongly suspect that they will be encouraged from the powers above to do so.
The powers above?
The Chinese government.
Ah, I see. And who would likely be buying these bonds issued by the local governments?
Nobody knows for sure but my guess would be that the PBOC will buy them either directly or indirectly. Which means this is really just a form of indirect quantitative easing — through the backdoor.
Quantitative easing? Like when a government or central bank purchases financial assets to increase liquidity in the economy.
That’s right. More liquidity is just a fancy way to say more money is available for spending. If banks or other institutions have too much money tied up in non-performing assets, there isn’t enough money, or enough liquidity, to keep the economy moving.
So when you say all of this is just quantitative easing through the backdoor, what you are saying is the PBOC is buying bonds issued by local governments to buy up excess real estate, which is an indirect way of buying the property itself.
That’s exactly it. And the stock market has so far reacted favorably to all of these measures with the biggest rally in Chinese stocks in the last two years. Some beaten down real estate stocks rallied 7% in a single day.
So this is all good, right?
Ah, so far yes. In addition to their focus on real estate stocks the PBOC has also been encouraging state run funds to purchase technology stocks like Alibaba and Baidu.
More indirect quantitative easing?
Uh, no. This is more direct because in this case as state run funds are spending state money to intervene in the stock market.
Mm. Okay, got it. The bottom line though is that tech stocks have also been rallying.
Oh, that they have, which has led some investors to take a hard look at Chinese technology stocks as their valuations are relatively lower than their US counterparts. However, and this is a big however, the rally so far has been stimulus driven.
So you are saying the danger is when the government stimulus stops stocks will stop rising.
That is indeed the worry with any market move that has been driven by outside forces.
The question is whether stocks can continue to rise without government support.
That is the question and that is way beyond my pay grade to answer.
Okay well, with that question left unanswered, I think it is time for us to get D2V … Down to Vocabulary. I will start D2V today with the adjective remiss. When someone is remiss of something, they are not giving enough care or attention to it.
We need to point out that ‘remiss’ does not come before a noun the same way adjectives usually do.
No, it doesn’t. Remiss is used in a few different grammar patterns. For example, “He was remiss in his duties”. Or “I would be remiss missing the deadline”.
Often it’s used in a conditional structure with ‘It would be ...’ to politely introduce something that should not be forgotten.
And that is how it was used in today’s report. In the introduction, when I asked Dez if he would be reporting on Vietnam as he had just returned from a holiday there, he answered that he wouldn’t. Instead he would be reporting on a topic out of China, because it would be remiss of him to ignore the business news currently unfolding in that country.
In other words, as I live in China and I’m responsible for covering Chinese business news for D2B, I would not be giving enough care or attention to my responsibility if I didn’t report on a Chinese market intervention because it’s a pretty big story here.
Especially since the topic relates to the Evergrande real estate crisis that you reported on in D2B 288.
Yes, it certainly would have been remiss of me not to keep our listeners updated on that story.
Can you give us another example using ‘remiss’?
Sure. It would be remiss of a financial advisor to not tell their client that they personally own any of the investments they’re recommending.
Yes, it sure would be careless of them not to mention that they could personally benefit from their client’s investment. It is a conflict of interest.
It’s either a conflict of interest or is downright criminal.
Okay. What is our next word?
Moving on, our next word is the verb instigate. The basic meaning of instigate is to cause something to happen or to begin.
‘Instigate’ often implies that the action is deliberate or well thought out and that it starts a chain of events that lead to a desired or wanted result.
In today’s story, I reported that lowering interest rates is the most common way to instigate monetary stimulus.
Dez was telling us that lowering interest rates starts a chain of events that leads to a more active, healthier economy.
Can you give us another example using instigate, Skip
Mm. My favorite convenience store here in Japan is 7-11.
I love Japanese convenience stores. My go to convenience store when I lived in Japan was Family Mart. But hey, 7-11 is pretty good too.
Well, a big business news story happening at the moment is a French Canadian rival, Alimentation Couche Tard or just ACT, has instigated a hostile takeover of Seven & i, the parent company of 7-11 Japan.
Is that right? Will it go through?
It is hard to tell. ACT’s first proposal was rejected, but they are now in the process of trying again.
It will sure be interesting to see where that story ends up. Next up we have the term big ticket item or big ticket purchase. Big ticket items are major purchases, such as a house or a car.
A purchase that requires a significant financial commitment like a car loan or home mortgage.
In the story, again talking about the impact of lowering interest rates, I said that, “The less it costs to borrow money the more likely it is for people to buy new homes, a new car, or any other big ticket item.”
In terms of retail purchases, big ticket items are major appliances or electronic items. Like a fancy refrigerator or a wide screen TV. Dez, have you bought any big ticket items recently?
I can’t say that I have to be honest. Mm, you?
Mm. I’m afraid not. Neither of us are doing our part to help with economic growth.
Nope, I guess not. Although I do need to buy a new laptop soon as my current one is getting pretty old.
A new laptop? That’ll be fun. Our final item for D2V today is the idiom beyond my pay grade. This idiom is used to show that the person is not senior enough to give an answer or to make a decision.
In my report, I said that answering the question of whether the stock market rally will continue was above my pay grade. I was indicating that I don’t have the experience or expertise to give a proper opinion.
Can you give us a practical example in a business setting?
Sure. Let’s say that you notice that too many employees in your department have all requested leave in a particular week.
Everyone wants to take the same days off. Not good for the company.
It isn’t. So, you point this out to a colleague and ask them how they think it should be handled. They might tell you to ask HR because a decision like that was above their pay grade, indicating that someone more senior would have to make that decision.
Great example!
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And that is our report on Understanding Economic Stimulus. We hope everyone found it informative.
I certainly learned a few things. It’s not an easy topic, but you explained everything in a very clear way that I could understand, Dez.
Well, I would be remiss if I didn’t.
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Thanks for listening everyone. See you next time.
Bye bye.
Down to Business English … Business News, to improve your Business English.