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17THEINDIANEXPRESS,THURSDAY,JANUARY21,2016

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INCLUDINGSELECTIONSFROMTHEECONOMIST Topinternationalstories,commentand analysis fromTHE ECONOMIST

WHATIFwecouldjustbeChinaforaday?mused Thomas Friedman, an Americancolumnist,in 2010.Wecouldactually,youknow, authorise theright solutions.Fiveyearson,fewaresoreadytosingthepraisesof Chinastechnocrats.Globalmarketshavefallenby 7.1% sinceJanuary1st,theirworststart tothe year since atleast1970. A largepartof theproblemis Chinasmanagementof itseconomy.

Forwell over a decade, Chinahasbeentheengineof globalgrowth.But theblister-ingpaceof economicexpansionhasslowed.Thestockmarkethas beenin turmoil,again.Although sharepricesin Chinamatterlittleto thereal economy,seesawingstocks feedfearsamong investorsthat theCommunist

Partydoes nothavethewisdomto managethemovefromMaotomarket.Therestoftheworldlooksat thedebtsandgrowinglabourunrest inside China, and it shudders.Nowhereare thoseworries moreapparentormoreconsequentialthanin thehandlingof itscurrency, theyuan.

FaultyforexChinaseconomyis notonthe vergeof

collapse.Nextweekthegovernmentwillan-

nouncelastyearsrate of economic growth.Itislikelytobecloseto7%.Thatfiguremaybeanoverestimate,but it isnot entirely di-vorcedfrom reality. Nevertheless,demandis slowing,inflationis uncomfortablylowanddebtsare rising. Thebullish caseforChina depends partly uponthe belief thatthegovernmentcan alwayslean againsttheslowdownbystimulatingconsumptionandinvestment with looser monetarypolicy

justas inanynormaleconomy.Yet China isnotnormal. Itis caughtin a

dangerousno-mans-landbetweenthemar-ketandstatecontrol.And theyuanis theprimeexampleofwhat a perilousplace thisis.Aftera seriesof mini-stepstowardsliber-alisation,Chinahas a semi-fixed currency

andsemi-porouscapitalcontrols.Partlybe-causeastrongerdollarhasbeendragginguptheyuan,the PeoplesBank of China(PBOC)hastriedtoabandonitsloosepegagainstthegreenbacksinceAugust;but itis stilltarget-inga basketofcurrencies.A gradualloosen-ing of capitalcontrolsmeans savershaveplentyofwaystogettheirmoneyout.

Aweakeningeconomy, aquasi-fixedex-changerateandmoreporouscapitalcontrolsareavolatilecombination.Loosermonetary

policywouldboost demand. Butit wouldalsoweakenthecurrency;andthatprospectisalreadyprompting saversto shoveltheirmoneyoffshore.

Inthelastsixmonthsof 2015capitalleftChinaat anannualisedrateofabout$1 tril-lion.The persistentgapbetweenthe officialvalueof theyuanandits pricein offshoremarkets suggests investorsexpect thegov-ernmentto allow thecurrencyto fallevenfurtherinfuture.And,despitearecordtradesurplusof$595billionin 2015,therearegoodreasonsforit todo so,atleastagainstthedol-lar,whichisstillbeingpropelledupwardsbytighter monetarypolicy inAmerica.

Theproblemisthattheexpectationof de-preciationrisksbecoming aself-fulfillingloss

ofconfidence.Thatis ariskevenfora coun-trywith foreign-exchangereservesof morethan$3 trillion. A sharplyweakercurrencyisalsoa threattoChinascompanies, which

havetakenon$10trillionofdebtinthepasteight years,roughlya tenth of itin dollars.Either those companies willfail,or Chinasstate-ownedbanks willallow themto limpon.Neitheris goodfor growth.

Thegovernmenthas reactedbytryingtorigmarkets. ThePBOC hassqueezed thefledgling offshoremarketin HongKongbybuying up yuan so zealously that theovernight interestrate spiked on January12that 67%. Likewise,in thestockmarketithasinstructedthe national team of statefundsto stickto thepolicy of buyingandholdingshares.

Onestep back, twoforwardsYetsuchmeasuresdo nothing toresolve

afundamentaltension.Onthe onehand,thestateunderstands thatthelack of financialoptions for Chinese savers is unpopular,wasteful and badfor theeconomy. On the

other,itis threatenedbythe ructionsthatlib-eralisationcreates.For Xi Jinping, thepresi-dent, nowin hisfourthyearin charge,thatdilemmaseemsto crop uptimeand again.He needsmiddle-classsupport, but feelsthreatened by the capacity of themiddleclasstomaketrouble.He wantsstate-ownedenterprises to becomemore efficient,butalsofor them togivejobs tothe soldiersheis booting out of the Peoples LiberationArmy.Hewants tocage powerbystrength-eningthe rule of lawand byinvokingtheconstitution, yethe is overseeinga viciousclampdownon dissent andfree speech.

Itis easyto saysonow,butChinashouldhavecleaned upits financial systemandfreeditsexchangeratewhenmoneywasstill

flowingin. Nowthatthe economyis slow-ing,debthaspiledupandthedollarisstrong,ithasno painlesswayout.

A sharp devaluationwouldwrong-footspeculators.Butitwouldalsocausemayhemin Chinaand export itsdeflationarypres-sures.The poisonwouldspread acrossAsiaandinto rich countries.And becauseinter-estratesare lowand manygovernmentsin-debted,theworld isill-equipped tocope.

Betterwould befor Chinato strengthen

capitalcontrolstemporarilyandat thesametime to stop stage-managing the yuansvalue.Thatwouldbea lossoffaceforChina,becausethe IMFonly recentlymarkedtheyuansprogress towardsconvertibilityby in-cluding it in thebasket of currenciesthatmakeup itsSpecialDrawing Rights. Butitwould letthe countryprepare itsfinancialinstitutionsfor currency volatility,not leastbystartingtoscrubtheirbalance-sheets,be-foreflingingtheirdoorsopento destabilis-ingflows. MrXi could embracemorecom-pleteconvertibilitylater,whentheywere lessvulnerable.

Onereasonthe PBOCis rushing towardsconvertibility,despitetherisks,isthat itfeelsthatitmustseizethechancewhileithasMr

Xisblessing.Butbettertoretreattemporar-ilyonone frontthantotriggera globalpanic.Thatmight alsoleadto some clearerthink-ing.Thereisa contradictionbetweenliberal-isation and partycontrol,betweengivingmarkets theirsay andsilencingthem whentheirmessageisunwelcome.Whenthetimeisright,Chinasleadersmustchoosethemar-kets.

TheEconomistNewspaperLimited2016

CHINAS ECONOMY

The yuan and themarkets

THE BILLBOARDSadvertisingPowerball, anAmericanlottery,werenotbig enoughtodis-play thesizeof thejackpotinthe drawthattookplaceon theevening of January13th:$1.6billion.Thatprizewillbesplitamongthethree winners,who bought their ticketsinCalifornia,FloridaandTennessee.Forseveraldaysbeforehand,Lottofevergrippedthena-tion:longqueuesformedoutsideshopssell-ingticketsand onthe dayof thedrawsaleswere ringingup ata rate of $787,000perminute.Powerballs websitehad somead-viceforitsfranticcustomers:Swingingalivechicken aboveyourhead whilewishingforthefuturenumbersdoes NOTwork.

A moreuseful bitof counsel wouldhavebeenthatbuyinga lotteryticketis funbutfi-nanciallyfoolish.ApunterbuyingaPowerballtickethas a 1in 292mchanceofwinningtheackpot. Buyers arearound fourtimes more

likelytobe killedby anasteroidimpactthisyear.Lotteriesaredesignedtobe a baddeal,hooveringupparticipantsmoneyin ordertoplugstatebudgetsand fundgood causes.

Whats more, thedesigners aregettingbetterat theirjobs.VictorMatheson,profes-sorof economicsat theCollegeof theHolyCrossin Massachusetts,explainsthat salesaremuchmore sensitivetothe size of theackpotsthanto thelikelihoodof winning.

Aftera particularlybig prizeis won, thereis

a haloeffect, whereby ticket salesremainhigheventhoughthejackpothas revertedtothenorm.Solotterydesignersgo togreatlengthsto boostthesizeof thebigprize.

One easy trick is to make the jackpotseem biggerthanit is.ThesumsadvertisedbyPowerballrepresentedthe pre-taxvalueover29yearsof anannuitythatwinnerscanopttoreceive.If thewinnerschoosea lumpsuminstead,theyget just over 60%of that,onwhich they wouldhave topaytax ofat

least40%.Anotherapproachis toboostthe jackpot

byexpandinga lotterys geographicscope,andthus itspotentialpool of participants.PowerballandMegaMillions,the twolargestAmericanlotteries,havebothtakenthistack.Byforging alliancesamong state lotteries,

they arebothnow available toresidentsof44 of Americas 50 states. Similarly,EuroMillions, a lottery that covers nineEuropeancountries,hastwiceoffereda jack-potof 190m($206m).

Powerballs record-breaking jackpotstemsmainlyfrom a riskierstrategy,how-ever. If thechancesof winningbecome soslimthatno oneguessestheright combina-tionof numbers, theprizerolls over,grow-

ingto a vast sum. Both Powerballand theBritishnational lotterychanged theirrulesto thiseffectin October,by increasingthenumberof ballsin thedraw.In Britain thechange slashed the chance of a winning

guessfrom1 in14mto1 in45m.InAmericaitfellfrom1in175mto1in292m.

Thereis a catch:makeittoo hardtowina lottery, and punterswill loseinterest.Soeven aslottery designershave been lower-ingthe chancesof winningthe jackpot,theyhavebeen boosting thechancesof winninglesserprizes,notesDavid SpiegelhalteroftheUniversityof Cambridge.

Aslargerjackpotsdrawmorecustomers,

thechancethatsomeonewillwinshootsup.Butso doesthe chanceof multiplewinners,whichlowerstheexpectedvalueof a ticket.Inthe run-uptothis weeksdraw,Powerballsorganisersexpected that roughly 86%of allpossiblenumerical combinationswouldhavebeenbought, suggestingsalesof some570m tickets. Withthatmany ticketssold,thechanceof a winnerhavingto share thepotwithothers(as indeed happened) wasaround68%,comparedwithjust4%formoretypicalsalesof 25mtickets.

Onlyvery rarely haveso manyplayerspiled inthatthe expectedvalueof thejack-pothasfallen,and mostlywhen therearehugejackpotsonoffer.Buttheafflictionissettobecomemorecommon.BritainsNationalLottery enjoyed unprecedented demandintherun-upto therecord66m ($95m)jack-potwonon January 9th. Salesforthe 28Powerballdrawssinceits rulechangeinOctober (excludingthe drawon January13th)were134%higherthanforthe28 pre-cedingdraws. Accordingto Mr Matheson,thecustomerswhoare drawn inby higher

jackpots tend tobe richerthantheaverage.Sowhilelotteriesmaybesnafflingevermoremoneyforaneversmallerchanceofstrikingitrich,atleasttheburdenistiltingawayfromthevery poorest.

TheEconomistNewspaperLimited2016

Strains on thecurrencysuggestthat somethingis verywrongwithChinaspolitics

LOTTERIES

High stakes

Jinping, nowinhis fourthyearin charge, needs middle-class

support,butfeelsthreatenedbytheircapacityto make trouble. He,

instead,wantsstate-ownedenterprisesto becomemore efficient

Sales aremuchmoresensitive to

thesizeof thejackpots than to

thelikelihoodof winning. After

a particularly bigprizeis won,

there isa halo effect,whereby

ticketsales remainhigh even

thoughthe jackpot hasreverted

tothe norm

Chinashandlingofits currency theyuan feeds fearamonginvestorsthattheCommunistPartydoesnothavethewisdomtomanagethemovefromMaotomarket.Reuters

Buyinga Powerballtickethasa 1in 292mchanceofwinningthejackpot.Buyersarearoundfourtimesmorelikelytobekilledby anasteroidimpactthisyear.Reuters

Lotteriespullin punters bymakingit harderto win