Raphael Stevens

THE WORLD championships of slot-car racing are a microcosm of mayhem. Tiny remote-controlled models of cars fly up, down and off a convoluted circuit faster than befuddled spectators can follow. Forecasting winners is impossible. This year’s race, due to be held in America, was cancelled owing to travel restrictions. But amateurs of high-risk betting might instead find consolation in the equally bewildering, rapidly changing world of commodities.Until recently these seemed comfortably installed in the fast lane; the Dow Jones Commodity Index rose by about 70% in the year to June. But the rally has since run out of puff. Some materials, such as lithium, continue to climb. Other once-hot commodities have gone into reverse. The price of iron ore is down by 45% since its peak in mid-July; lumber, by 63% since early May.Things used to be much simpler. During the 2000s China’s rise fuelled a commodity “supercycle”—a prolonged period of high prices. When Chinese growth ebbed in the mid-2010s the sustained boom ended. This time, however, no single motor is propelling commodities upward. Both supply and demand are being hit by a series of short-term shocks that are interacting in unpredictable ways, creating a sense of chaos.Three categories of shock matter. The first is the stop-start, uneven nature of the economic rebound. China seemed on a tear early this year but has since faltered. America is going at full throttle, with Europe in its trail, but the Delta variant and supply bottlenecks may slow it down. Many poor countries have yet to pick up pace. All this creates sudden surges in demand for raw materials at a time when both producers and the shipping infrastructure, still disrupted by local bouts of covid-19, are already under strain. The price of copper was pushed up as demand recovered, but also because of mine closures in South America early in the pandemic. Freight futures, which investors, curiously, class as a commodity, have surged.At the same time, governments are intent on speeding up the green transition. This creates demand for the wood and the metals used to construct wind and solar farms, and boosts natural gas, a popular bridge between the dirtiest fuels and clean ones. Lithium, used in electric-vehicle batteries, rose by 21% in September alone. The same underlying cause—climate change—is causing disruptive weather events. Snow in Brazil, for instance, has helped push coffee prices up by 22% since early July. In August Hurricane Ida shut down most of the offshore oil and gas output in the Gulf of Mexico.Geopolitical tensions, the third driver, muddy the outlook further. Australia, a mining and farming giant, has entered a new alliance with America that is intended to contain China, its main customer, after the government in Beijing imposed embargoes on its prized exports. Russia is accused of limiting natural-gas sales to Europe to justify a controversial pipeline linking it to the continent. The European gas spot price has shot up by more than 80% since mid-August.Combine these factors and you get an insight into the commodity chaos. Iron ore has cratered because China no longer wants so much steel. But coking coal, the other ingredient in steelmaking, is glowing hot because Mongolia, a big producer, is in lockdown.Oil crossed $80 a barrel for the first time in three years on September 28th. Prices are high because OPEC and its allies are being unusually disciplined in limiting output, and shale wells in America, often quick to turn on the taps, are instead paying down debt. That would typically boost corn, the main component of American biofuel. But President Joe Biden is mulling a cut to the amount of biofuels refiners must blend into the total fuel pool, dampening demand. The price of palladium, used to make catalytic converters, has slumped by 25% in the past month because a shortage of microchips has halted car production.Jean-François Lambert, a former head of commodity-trade finance at HSBC, a bank, reckons the mayhem could well last until 2025, when the pressures on the market will start to ease. That might be why few investors seem keen to bet on the direction of prices. Although commodity markets have attracted strong inflows since the start of the year, analysts at Capital Economics, a consultancy, reckon that is mostly down to the popularity of exchange-traded funds tracking gold. Considering the chaos in the world’s commodity markets, it’s no surprise that investors want a haven.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Supermayhem” More

HOUSE PRICES in the rich world are growing at their fastest rate for 30 years. Those in America rose by a record 19.7% in the year to July, according to figures published on September 28th. House prices measured relative to incomes are above their long run averages in three-quarters of OECD countries. Policymakers nearly everywhere are under increasing pressure to make housing more affordable.Higher interest rates would bring down house prices relative to incomes, by making mortgages more expensive to service and tempering housing demand. But raising interest rates to cool the property market now runs the risk of jeopardising the economic recovery from lockdowns. More promising, in some people’s eyes, could be to tighten the “macroprudential” tools available to central banks and financial regulators, which seek to limit risky mortgage lending.On September 23rd the Reserve Bank of New Zealand tightened macroprudential housing policy for the third time this year, saying that past tightening had not done enough to tackle unsustainable house prices. Regulators in several other countries, including France, have also become stricter this year. Although these tools were designed to make lenders and borrowers more resilient by restraining the growth of debt, the case for using them to control house prices directly is weak.Macroprudential policies have a long history and encompass a wide range of levers, such as capital and reserve requirements and direct controls over lending rates and quantities. Policies aimed at the housing market can include restricting the amount of lending that banks can do at high loan-to-value (LTV) or loan-to-income ratios. LTV tools are the most common: in Europe more than 20 countries deploy them, and their use has increased significantly since the global financial crisis of 2007-09.These controls, by having limited credit growth, may well have been one reason why last year’s covid-induced recession did not trigger a financial crisis. Because household-borrowing growth and house-price growth often feed off one another, it could be tempting to tighten lending controls in order to improve affordability. But there are three reasons why that policy would be a mistake.The first is that research suggests that the effects on house prices do not seem to be large enough to make much difference to affordability. One intriguing example is a recent paper by Steven Laufer of the Brookdale Institute and Nitzan Tzur-Ilan, then of Northwestern University, which studies an LTV policy introduced in Israel in 2010. Faced with rampant house-price inflation, the central bank told lenders to hold additional capital against loans with LTV ratios of more than 60%, but only for lending of more than 800,000 shekels (around $220,000). This allowed the authors to compare the price growth of the houses subject to the measure with that in the rest of the market. The measures were found to reduce aggregate Israeli house prices by no more than 0.6%.Moreover, lending controls typically make mortgages more expensive for affected borrowers by rationing credit. So even if prices end up slightly lower, houses may not be more affordable. A study of European countries, for instance, shows that average mortgage rates rise when LTV policies are tightened.The third reason why macroprudential policies are not suited to improving affordability is that LTV controls may affect disadvantaged households disproportionately. The Israeli study found that the biggest negative effects on house prices were in the less desirable parts of more expensive cities, which they suspect occurs because credit-constrained households tend to buy in those areas. A previous paper by Ms Tzur-Ilan concluded that affected borrowers in the residential areas around Tel Aviv had to move on average 4-7km farther from their place of work following LTV-policy tightening, and faced up to an hour a day of extra commuting time. These side-effects may be justified if the ultimate goal is a more resilient financial system. But if the policies were intended to reduce house prices to help poorer households, they could prove counterproductive, entrenching existing inequalities.Over the past decade macroprudential policies, including housing tools, have played a big role in reducing borrowing growth in some countries, making the financial system safer. But the tools were never designed to improve housing affordability, and are ill-suited to that job. People frustrated by eye-watering rises in house prices might do better to press governments, rather than financial regulators, to solve the problem. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Home truths” More

WITH ITS fast trains, super-apps, digital payments and techno-surveillance, China can seem like a vision of the future. But for some scholars, such as Yuen Yuen Ang of the University of Michigan, it is also reminiscent of the past. Its buccaneering accumulation of wealth and elaborate choreography of corruption recall America’s Gilded Age at the end of the 19th century, an era that takes its name from a novel by Mark Twain and Charles Warner.China, including Hong Kong and Macau, now has 698 billionaires, according to Forbes, almost as many as America (724). The habits of the new rich could fill a novel in the spirit of Twain. Even the non-fiction accounts are outlandish. One billionaire, according to the book “Red Roulette” by Desmond Shum, offered the author’s well-connected wife a $1m ring as a gift. When she refused, he bought two anyway. One businessman remarked to Ms Ang that his neighbour’s dog will only drink Evian. Meanwhile, over 28% of China’s 286m migrant workers lack a toilet of their own. And in parts of rural China, 16-27% of pupils suffer from anaemia, according to a 2016 study, because they lack vitamins and iron.None of this makes Xi Jinping, China’s ruler, happy. According to a leaked account by a professor who grew up with him, he is “repulsed by the all-encompassing commercialisation of Chinese society, with its attendant nouveau riche”. Mr Xi has begun to talk more frequently about “common prosperity”. In January, he declared that “we cannot allow the gap between the rich and the poor to continue growing…We cannot permit the wealth gap to become an unbridgeable gulf.”Measuring China’s gaps and gulfs is tricky. The most common gauge of income inequality is the Gini coefficient, which has become popular despite being hard to interpret. One way to make sense of it is with a thought experiment. Suppose two people in a country are to meet at random. What will be the expected income gap between the two? If you know the income of everyone in the country, you can guess by calculating the average gap from every possible pairing. That expected gap can be expressed as a percentage of the society’s average income. Cut that percentage in half (to get to a number between 0 and 100) and you have the Gini coefficient. China’s official Gini is 46.5%, meaning that the expected gap will be 93% (ie, twice the Gini) of China’s average disposable income. Since average disposable income was 30,733 yuan ($4,449) in 2019, the expected gap would be about $4,138.China’s official Gini is higher than that of many advanced countries, including America and Britain. An alternative calculated by the World Bank looks better (38.5% in 2016), because it takes account of cheaper prices in rural areas. Another source, the World Inequality Database overseen by Thomas Piketty and his colleagues, reports higher figures, because they look at pre-tax income and because they take extra pains to ferret out the unreported income of the rich. But, as Martin Ravallion of Georgetown University points out, the poor may also have unreported resources, which may be large relative to their paltry reported incomes.Although the level of inequality differs between these measures, they all agree on one striking point. Inequality in China today is not as bad as it was about a decade ago. Indeed, some scholars have remarked on the “great Chinese inequality turnaround”.Why then has concern about inequality turned up, even as inequality itself has turned around? Twain may offer one answer. One of the protagonists of “The Gilded Age” comforts himself with the thought that although he and his wife have to “eat crusts in toil and poverty”, his children will “live like the princes of the Earth.” Similarly, many Chinese may tolerate life on the lower rungs of society, if they think they or their children can climb up the ladder.But that kind of social mobility seems to be slowing. Yi Fan and Junjian Yi of the National University of Singapore and Junsen Zhang of Zhejiang University have tried to calculate the persistence of income from one generation to the next. Chinese born in the 1970s inherited about 39% of any economic advantage enjoyed by their parents. Those born in the 1980s inherited over 44%. That is, if you knew one set of parents was 1% richer than an otherwise similar set of parents, you would expect their children to earn 0.44% more in their own careers than the other parents’ kids.Inequality may also be more conspicuous than it was. As Mr Ravallion and Shaohua Chen of Xiamen University have pointed out, the decline in Chinese inequality since 2008 does not reflect softer divisions within cities. It results instead from a narrower gap between urban and rural China. People tend to be more conscious of social fault-lines within a city than they are of disparities between one far-flung place and another.The guilted ageMr Ravallion suggests another reason why China’s great inequality turnaround has gone unnoticed: people do not think in Ginis or percentages but in yuan and fen, dollars and cents. The expected income gap between two random Chinese may have declined from 98% of average income at inequality’s peak in 2008 to 93% now. But because average income has risen in that time, the expected gap in yuan terms is still far larger. The income per person of the top fifth of households was 10.7 times that of the bottom fifth in 2014. That ratio has since fallen a bit. But the gap in yuan has increased from 46,221 yuan in 2014 to 69,021 yuan in 2019.The professor who grew up with Mr Xi speculated that if he became leader Mr Xi would “aggressively” tackle China’s gilded decadence, even “at the expense of the new monied class”. Mr Xi has already browbeaten some billionaires into public acts of philanthropy. The gestures will do little to shift the Gini coefficient. But they will make redistribution more conspicuous. Deng Xiaoping, one of Mr Xi’s predecessors, famously said that he did not care if cats were white or black as long as they caught mice. Mr Xi’s main opinion about cats is that he does not like them fat. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Black cat, white cat, fat cat, thin cat” More