Finance

CHINA’S LENDING boom to poor countries is turning sour, as governments struggle to repay their debts to its state-owned lenders like the Export-Import Bank of China and China Development Bank. So how will China handle countries on the brink of default? Will it show the solidarity one developing country might expect from another? Or will it insist on its pound of flesh?Some think defaults would be good for China. It is often accused of “debt-trap diplomacy”: lending heavily to poor countries with an eye to seizing their strategic assets, such as ports, when they cannot repay. The truth is more prosaic. A fresh effort to count China’s debt restructurings finds that when faced with a debtor that cannot repay, China mostly just kicks the can down the road.The new paper by Sebastian Horn and Carmen Reinhart of the World Bank and Christoph Trebesch of the Kiel Institute for the World Economy counts 261 instances of debt relief or renegotiation since 2000. Since China is far from open about its lending, the number is probably an underestimate. It includes 149 cancellations or reschedulings of small, interest-free loans by China’s commerce ministry, mostly in the 2000s when debt relief became a cause célèbre, embraced by G7 governments and Irish rock stars. Another 28 were payment holidays granted to countries in no great debt distress as part of the G20’s response to the pandemic. That leaves 84 restructurings proper (of which 30 were also part of the G20 initiative, but to countries under financial strain).China’s 84 credit mishaps compare with 158 in total by all 22 members of the Paris Club, an informal group of rich-country governments including America, Japan and Britain (see chart). China was perhaps unlucky in lending a lot at a bad time, just before the prices of oil and other commodities exported by African countries began to drop in 2014. In almost all these cases, China simply gave borrowers more time to repay. In only four did it reduce the face value of the debt (Cuba, Iraq and Serbia, twice). Its approach thus resembles that of Western lenders in the 1980s, when they seldom provided deep debt relief.The pandemic may force China to move from forbearance to forgiveness. Otherwise the authors fear that a debt “overhang” may inhibit growth in poor countries. China has joined the G20’s “common framework” for debt relief, which is meant to bring it into line with the Paris Club. In becoming a big lender to poor countries, China has followed in the footsteps of the club’s leading economic powers. It has also repeated a number of their blunders. Now it must follow them in writing off some of its past mistakes. Who is China’s Bono?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 “How to default on China” More

INFLATION HAS shot to multi-decade highs in much of the rich world during the past year, with the effect of supply constraints, covid restrictions and a burgeoning economic recovery all helping to drive consumer prices higher. In Asia, however, pressure on prices is much weaker. Why?In much of the region—in China, Hong Kong, India, Indonesia, the Philippines and Vietnam—inflation is in fact below average levels over the decade before the pandemic, notes Abdul Abiad, director of macroeconomic research at the Asian Development Bank. Where it is higher than the average for 2010-2019—in Malaysia, Singapore, South Korea, Taiwan and Thailand—it is by around two percentage points or less.The divergence between East and West is the result of several factors. Some of the disparity with the booming prices seen in North America and Europe, as well as many non-Asian emerging markets, comes down to food. Whereas prices of food globally have surged, Mr Abiad notes that the effect has been uneven. Maize and wheat prices rose by 18% and 20% respectively in the 12 months to the end of January. In contrast, the price of rice fell by around a fifth in the same period. In a country like the Philippines, rice makes up a quarter of the food share of the consumer-price index, and one-tenth of the entire index. In China in particular, average wholesale pork prices dropped by more than half in the 12 months to January, as the African swine fever epidemic that has raged through the country since 2018 began to abate.The impact of food prices is most obvious in developing economies, but there are reasons why Asia’s richer countries have recorded lower inflationary pressure too. For one, supply-chain bottlenecks are not as severe as they are in the West. The cost of shipping a 40-foot container from Shanghai to Rotterdam has risen by around 60% in the past year, to $13,686, according to Drewry, a supply-chain consultancy. In contrast, the price for the return journey is little more than a tenth of that, at $1,445, a figure which has dropped by 1% in the past year. Surveys of purchasing managers suggest that supplier delays are still worsening in most of Europe and America, but falling in China, India, Indonesia, Thailand and Vietnam.The different ways in which countries have emerged from the pandemic matter too. Researchers at Capital Economics, another consultancy, note that Asia’s “reopening” inflation in consumer services remains low. The rise in prices for recreation and cultural services in Indonesia, Malaysia, the Philippines, Singapore, South Korea and Taiwan is half or less of the American year-on-year rate of around 4%. The difference may be caused by more gradual loosening of restrictions, as well as a dearth of international tourists.Not all forms of inflationary pressure can be avoided. Energy prices are more influenced by global trends than those for most other goods and services. Rising energy costs have been the biggest contributor to the inflation surge in Asia, making up as much as a third of the total increase recently, according to analysts at Goldman Sachs, a bank.Many economies in the region may face higher interest rates despite their milder inflation. Potential interest-rate increases from the Federal Reserve this year raise the threat of a stronger dollar, which would bring imported inflation to Asia. Monetary policymakers in Indonesia, Singapore and South Korea have already announced small steps to tighten monetary policy. They are unlikely to be the last. ■This article appeared in the Finance & economics section of the print edition under the headline “Rice restraint” More

YOU HAVE probably noticed that there has been something of a reckoning for the shares of fledgling technology companies in the public markets. An index of stocks that have floated via an initial public offering (IPO) within the past two years, compiled by Renaissance Capital, is down by around a third in the past year. In the private markets where venture capitalists (VCs) supply funding for startups, the term you hear for more sober valuations is “reset”. This is gentler than “reckoning”, with its overtones of punishment. In venture circles, mistakes carry no shame. If your startup is a bust, you learn lessons, move on and back a new firm.There are some signs that the public-market reckoning is causing a rethink in private markets. Technology IPOs are being pulled. Entrepreneurs are advised more pointedly to conserve cash. And there is tentative evidence that VCs are pulling in their horns. The Information, a tech-industry news site, reported recently that Tiger Global Management, a prominent financier of maturing tech firms, had cut back its earlier offers of financing to a handful of startups.Is this the start of a trend? Don’t be too sure. A lot of venture capital has been raised from investors. Around $750bn was committed, waiting to be deployed, at the end of 2021. The most gilded startups might be hard pushed to notice any shift. Their big funding cheques are likely to keep coming. In the rest of the startup market, any mark-down to more sober valuations will happen with a delay. For now, at least, the wall of venture money militates against a big reset.The world of VC has changed a lot in the past decade or two. It used to be a cottage industry based around San Francisco. But as interest rates slumped, other kinds of investors were pushed into taking VC risk to generate sufficient returns. The lower interest rates are, the less investors care about whether they receive a dollar today or a dollar tomorrow. It is a perfect climate for funding startups, whose pay-off may be years away. The cottage industry soon faced competition from private-equity and hedge funds, especially in the funding of mature “late-stage” startups. These “macro” investors look at a portfolio of pre- IPO firms much like a portfolio of listed stocks, says Ajay Royan of Mithril, a VC firm based in Austin, Texas. Their instinct now is to write smaller cheques for startups to reflect the heightened risks to IPO pricing.But competition from rivals makes this harder than it sounds. A VC firm that tries to align a funding round with the prices paid in public markets may find that another VC firm comes over the top with a better offer. Venture capitalists are caught between two opposing forces. On the one hand, they see that interest rates are going up and technology stocks are falling. On the other hand, there is an array of tempting startups that are also being chased by lots of rival shops.The expectations of entrepreneurs matter in this regard. Many will look to the terms their startup peers achieved recently as a guide to their market value, says Simon Levene of Mosaic Ventures, a London-based VC firm. It is not healthy for startup founders to think that capital will always be forthcoming. But try telling them that. An excess of optimism is part and parcel of being an entrepreneur. People who are more mindful of risks get regular jobs. Memories do not reliably stretch back to the dog days of 2002 when VC funding was hard to come by. Founders grew up in a world of near-free money. It will take time for them to adjust to a different landscape.A deeper fall in tech stocks might nudge that adjustment along. But a true reset would require something else to happen. Were VCs themselves unable to raise capital for new funds, they would surely be forced to be less generous in the prices they paid. If you can’t raise money and you know your peers can’t raise it either, you become more sparing with capital. Discipline becomes a watchword. Valuation matters more.This could happen. But it would probably take a much bigger fall in the overall stockmarket to spur it. The share of portfolios allocated to VC would then have to fall in line with diminished public stockholdings. Subscriptions to new funds would dry up.But there is not much sign of this. Big new funds are still being raised, even after the repricing of listed tech stocks. VC does not yet seem to have lost any of its sheen with pension funds, endowments and family offices. As long as the money flows in, it will be deployed. The reset may have to wait a while.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 “The reset button” More

THE PARALLELS between rollercoasters and financial markets are plentiful. Both go up, both go down. A mountain-high climb is often followed by a stomach-churning plunge. And, on reaching the peak, some riders start to wonder whether they will make it off alive.The recent tumult in stockmarkets has brought the fairground metaphors flooding back. Should equity investors brace for a sickening lurch downwards? And as they plummet, will the groaning girders beneath them—the infrastructure underpinning markets—hold firm? The structure of finance has changed dramatically since the financial crisis of 2007-09. Every new big-dipper has to go through rigorous testing to ensure it is safe to ride. Post-crisis global markets may be about to experience a wrenching stress test of their own—though with cars packed not with dummies but actual people.For almost two years after markets recovered from a brief but vertiginous slide when covid-19 spread globally, investing was a scream. Much fun was had bidding up shares in Hertz, a bankrupt car-rental firm; engineering a short-squeeze in shares of GameStop, a video-game retailer; and piling into cryptocurrencies, including dogecoin, a joke one. With markets so buoyant, picking winners was like shooting fish in a barrel. Stocks, particularly those of tech giants, were supercharged by the Federal Reserve’s announcement in March 2020 that it was cutting interest rates to zero and would begin buying Treasury bonds and other assets. The S&P 500 reached all-time highs on 70 of the 261 trading days in 2021. Only in one other year, 1995, has it reached a greater number.The laughter is not so loud now. On January 27th the S&P 500 closed in correction territory, 10% below its high at the beginning of the year (it has since regained some lost ground). The NASDAQ composite, a tech-focused index, is down by 9.8% from its all-time high in November. Volatility is back with a vengeance: on January 24th, for instance, on the back of no obvious catalyst, the S&P 500 sold off by almost 4% before a sharp rally saw the index close up 0.3% (and then tumble again the next day).Robert Shiller of Yale University, who won a Nobel prize for his work on financial bubbles, sees parallels with the go-go years before the crash of 1929. Back then, “there was an explosion of fun things to do with stocks. I think we’re in a similar situation now.” According to Mr Shiller’s surveys, over the past year the share of individual investors who think the market is overpriced has been higher than at any point since the turn of the millennium, before the dotcom bubble burst (see chart 1). Yet at the same time their belief that stocks will rally if there is ever a fall has never been so high. This contradictory combination of fear of overvaluation and fear of missing out mirrors the dynamic in 1929.The proximate cause for the boom in valuations is more than a decade of all-but-free money. Central banks slashed interest rates after the financial crisis, then took monetary and fiscal support to new levels in response to the pandemic. This lit a rocket under asset prices. The average stock in the S&P 500 cost 40 times its earnings in early January, as measured by the cyclically adjusted price-to-earnings, or CAPE, ratio, a level so high it is only topped by the period which preceded the stockmarket crash of 2000 (see chart 2).Frothy valuations attracted a torrent of capital-raising. A record-breaking $600bn was raised in initial public offerings in 2021. Private-equity firms saw the pots of capital they oversee overflow. Nor were stocks the only financial assets soaring. Cryptocurrencies leapt by even more. House prices in America have climbed by 29% since the start of 2020.“All asset prices are where they are today because of liquidity and interest rates,” says Greg Jensen of Bridgewater Associates, a hedge fund. As demand for goods and services has jumped in the face of supply-chain constraints, the consequences have cropped up as inflation and shortages. This has forced policymakers to change course and start removing liquidity. As recently as October investors expected just a single 0.25 percentage-point rate rise from the Fed in 2022. They now expect five, and there is talk of the Fed beginning “quantitative tightening”, selling off its bond holdings, later this year. This reality is now “catching up” with valuations, says Mr Jensen.A correction—quite possibly a big one—appears to be unfolding, then. The most important question is whether the financial system is equipped to handle the ride. “Markets need to be able to correct, and some people will lose money. That is a necessary part of the process,” says Sir Jon Cunliffe, a deputy governor of the Bank of England. “What matters is does that knock on to something else or is that correction absorbed? You want a financial system that can absorb corrections.”The last big correction, in March 2020, was a weird one. Caused by an exogenous shock—the pandemic—it was easy for policymakers to justify intervention. The last crash caused by endogenous financial risks was that of the global financial crisis. Since then the financial system has undergone a period of unusually rapid technological and regulatory change which has fundamentally altered its structure. It is hard to know how a correction would rattle through this new system.The financial landscape has been altered in three main areas: who owns financial assets; which firms intermediate markets; and how transactions are settled.Start with the owners of assets. A smaller share of these is now held on bank balance-sheets. In 2010, just after the crisis, banks held $115trn-worth of global financial assets. Other kinds of financial institutions, such as pension funds, insurers and alternative asset managers, held roughly the same amount. But non-banks’ slice has swollen far more quickly since. By the end of 2020 they held $227trn, 26% more than the banks did. The share of American mortgages that originated in banks (many of which they held on to) was around 80% before the financial crisis. Today around half originate outside the banking system and most of these are sold on to investors.A post-banking worldThe composition of non-banks has also changed. In the past most individual investors held their financial assets indirectly, through pension funds. In the early 1990s around a quarter of the wealth of American households came from claims on defined-benefit pensions and just 10% was in equities directly. Today, households hold 27% of their wealth directly in stocks, the highest-ever share. Just 15% comes from pension claims.It was a lot harder for those individuals to move in and out of investments before the financial crisis than it is today. Thanks to the rise of low-cost retail brokerages, it is now trivially easy for people to buy or sell stocks or bond funds on a smartphone. The ease with which the little guy can trade has made it far easier for there to be a run on the investment industry. And the investment industry does not have the same backstop that banks enjoy through deposit insurance and central-bank support.Next consider the intermediaries. Bank trading desks have long been outcompeted by specialist high-frequency trading firms like Citadel Securities, with whizzy algorithms which automatically match buy and sell orders. But increasingly, over the past decade, there has also been a retreat from bank intermediation of Treasury and corporate bonds, owing to both technological and regulatory changes, including new rules that deter banks from holding trading assets.Broker-dealers’ gross inventory positions of Treasury securities fell from 10% of outstanding bonds in 2008 to just 3% in 2019. The share of corporate bonds held by dealers has fallen even further, to less than 1%, down from 8% in 2007. This hampers their ability to act as middlemen in markets in times of trouble. It can also amplify the impact of the failure of a fund. “Twenty-five years ago, if a bank had a client that could not make a margin call the bank could bid [buy] that position itself and absorb it on its balance-sheet. But now banks don’t have that balance-sheet. So they just hang out a For Sale sign and everybody sees it and it just drives the market down further,” says Robert Koenigsberger of Gramercy Funds Management.At the same time as capacity to intermediate has dropped the supply of bonds has grown, in part driven by a deluge of government supply and in part because corporate borrowers rely more on debt issuance than bank loans. And the demand to trade bonds has been fuelled by the growth in exchange-traded funds (ETFs) built by the likes of BlackRock, the world’s largest asset manager.It used to be hard to buy bonds in small increments. Now, thanks to ETFs, it is much easier. Some of the fixed-income ETFs offered to individuals by BlackRock might have 8,000 or more different bonds in them. If demand for units of the fund rises or falls it begins to trade above or below the fair value of its component bonds. That incentivises market-makers to intervene, either creating units by buying up a portfolio of similar bonds or destroying them by selling a portfolio. Much of this activity is automated.Problems can arise in times of stress. ETFs trade far more frequently than their component bonds. In March 2020, as volatility shook markets, BlackRock’s biggest investment-grade corporate-bond ETF traded 90,000 times a day, while the top five holdings of the fund traded just 37 times. Some argue that this makes bond prices more accurate. But it can also reveal just how volatile prices are in times of stress and could encourage a run.The problems can be most acute with investments like emerging-market bond funds. In times of stress, liquidity dries up. If funds need cash to meet redemptions they have to sell their most liquid assets, like Treasuries, instead of their emerging-market bonds. These dynamics contributed to the pressure on liquidity in the Treasury markets in March 2020.Stop this correction, I want to get offFinally, think about the settlement layers. In the past, banks often settled complex trades like derivative contracts or interest-rate swaps bilaterally. But during the financial crisis this meant that they could only see the trades they had with each bank, not the full picture. Each had no idea whether there were mitigating (or exacerbating) trades with others. Fearful their counterparts were insolvent, banks stopped lending to each other.International regulators decided to try to fix these issues by forcing more derivatives trading through central clearing houses, which settle trades between a wide range of members. Positions are transparent and netted off. To join a clearing house a member must post an “initial margin” in case it defaults on its trades, and that margin can climb if markets move against it. There are now a handful of major clearing houses worldwide including LCH in London, which clears most interest-rate swaps; ICE in Atlanta, which settles credit default swaps; and the DTCC in New York, which clears and settles American shares.In sum these changes have reduced the role of banks: they own and intermediate less than ever before, while settlement is now carried out by centralised institutions. In many ways this seems like an improvement over the old system, in which banks whose failure could rock entire economies were highly leveraged and exposed to swings in asset values. But it comes with its own potential perils.One risk is that although leverage has fallen in banks, it has grown in some non-banks, from insurers to hedge funds. A stark illustration of this was the blow-up of Archegos Capital Management, a previously low-profile family office, in March 2021. The case also showed that banks can remain dangerously exposed even when it is non-banks taking the craziest risks. Archegos’s collapse caused banks—mostly those that had served it as prime brokers—more than $10bn of losses.How might this high-tech, bank-light financial system fare under severe stress? Some insight can be drawn from recent mishaps. In 2019, as the Fed cut its holdings of Treasury bonds, interest rates in the overnight repurchase market, where banks and investors swap Treasuries for cash, spiked as high as 10%. In March 2020 the Treasury market went into spasms when a flood of sellers, spooked by illiquidity elsewhere and desperate for cash, all tried to offload bonds at once. Market-watchers like Mohamed El-Erian, chief economic adviser at Allianz, an insurer, think the short-squeeze in GameStop wiped as much as 5% off the S&P 500 as hedge funds with open short positions were forced to deleverage their portfolios.In the first two cases the Fed ultimately saved the day by buying assets and creating liquidity. During the GameStop saga the clearing system imposed such high capital calls on Robinhood and other brokerages that they were forced to suspend trading, halting the squeeze. Had it been allowed to continue it could conceivably have bankrupted enough funds, and caused them to fail to deliver enough GameStop shares, that the retail brokerages would have been forced to buy the required shares at any price. That could have caused them to go bust, too.It is possible to imagine such an event causing havoc. Instead of retail traders and other investors buying the dip, as has been their habit, markets continue to slide. Moves are big and wild because market-making capacity is reduced. Margin calls go out to a slew of hedge funds, some of which fail to meet them because they are more leveraged than anyone anticipated. Bond and equity funds suffer overwhelming outflows. To meet redemptions, managers sell their most liquid assets, like Treasuries or blue-chip stocks, causing yields to jump and equities to fall further. Retail investors use their brokerage apps to bale out of their investments, too.Even if this does not trouble the banks much, such an event could upset the wider economy. “Ownership has widened significantly,” says Mr El-Erian. “That is a good thing long-term, but in the short term it might amplify household financial insecurity. People with less income and less of a wealth buffer now have a greater proportion of wealth subject to volatility.”In some ways this would mark a return to form. In the 1990s people would go out shopping on the back of wiggles in the Nasdaq, because they felt suddenly richer. That connection seems to have returned, especially for moves in cryptocurrencies and popular stocks.In extremis, volatile markets could prompt bankruptcies of enough leveraged investors or funds to wipe out a member of a clearing house—perhaps a smaller, weaker bank or insurance fund—which might in turn wipe out the clearing house’s default fund. This would send margin calls around all of the banks. If they, weakened by the same defaults that felled the other member, failed to meet these, the clearing house itself could be jeopardised. Paul Tucker, a former deputy governor of the Bank of England, has written that a clearing house that could not withstand a member’s default could be a “devastating mechanism for transmitting distress across the financial system”.Both pedals at onceThis scenario is speculative fiction. At some point central bankers would step in. The advantage of market-based finance is that intervening by buying assets is often enough to quell dysfunction. But it is harder for central bankers to intervene if their financial-stability objectives and inflation mandates are pulling them in different directions, as they would be at present with inflation well above target in many advanced economies. “You’d be sort of stepping on the brake while trying to keep one foot on the accelerator,” says Sir Jon. “It’s not impossible but it could be difficult.”The big vulnerability of the new financial system is that chaos can be self-fulfilling: more participants are exposed to market swings, and those swings have become potentially more violent. The banks themselves are certainly much more resilient than they were before the global financial crisis. Yet it is difficult to know whether the high-tech, market-based financial system that has been created is sturdier than the more bank-based system of 15 years ago. Those still in for the ride may not have to wait long to find out. ■This article appeared in the Finance & economics section of the print edition under the headline “What goes up” More

WHETHER OR NOT Vladimir Putin sends Russian troops into Ukraine, increasingly icy relations between East and West may signal a coda to the era of increasing global economic integration which began with the collapse of communism. In the mid-1980s scarcely a quarter of the world’s population lived in economies which could be considered open to foreign trade and capital flows, according to an estimate published in 1995 by Jeffrey Sachs, Andrew Warner, Anders Aslund and Stanley Fischer. Less than a decade later, the figure had jumped above 50%, and a three-decade burst of rapid globalisation was under way.The era of openness has been good for much of the world. Yet the performance of the countries of the former eastern bloc has been decidedly mixed. While some, like Poland and Latvia, grew faster than the emerging world as a whole between 1992 and 2019, Russia did little better than the far richer American economy, and Ukraine did worse. Thirty years on, the question of why some succeeded while others failed remains difficult to answer.In the critical early years, transitional governments faced huge challenges. Their economies lacked functioning labour and capital markets, and were burdened by uncompetitive manufacturing sectors and a forbidding macroeconomic picture. In the early 1990s inflation exceeded 1,000% in Estonia, Latvia and Lithuania, and 2,000% in Kazakhstan, Russia and Ukraine. Economists broadly agreed on what should be done: economies needed to be opened to trade and market forces, state enterprises sold off, and new institutions built. They differed, though, on how fast to do it. Some, including Mr Sachs, argued for a speedy transition—an approach dubbed “shock therapy”—reckoning that rapid reform would reallocate capital faster and put food on shelves sooner. Critics reckoned that a slower pace would accommodate more institutional reform, and win more political support.In practice, most governments wasted no time opening to trade and confronting macroeconomic challenges. Strategies diverged with respect to privatisation. Some, like Estonia, moved relatively slowly, matching buyers to enterprises one at a time. Others, like Russia, favoured rapid privatisation through schemes which transferred shares to existing managers and employees (though the Russian state retained stakes in critical industries like oil and gas). Building new institutions took longest of all. Early results were mostly disappointing. A few countries notched up healthy growth: in Poland, GDP per person, on a purchasing-power-parity basis, rose at an annual average pace of nearly 8% in 1992-98. Most did not. The core of the former Soviet Union experienced a collapse in incomes—punctuated, in Russia, by a financial crisis.By the 2000s some economists were calling for a reconsideration of the fast-versus-slow debate. In 2006 Sergio Godoy and Joseph Stiglitz argued that faster privatisations had in fact been associated with slower economic growth, and that persistence in developing high-quality legal institutions paid dividends. Similarly, work published by Jan Svejnar in 2002 credited thorough reforms in places like Poland and Hungary for lifting growth, by securing property rights and encouraging good corporate governance.While economists reassessed, the facts on the ground changed. From 1998 to 2013 all of the post-communist world enjoyed a boom. Per-person annual GDP growth accelerated to 7% in the Baltic states and Ukraine, 8% in Russia and 13% in Turkmenistan. Russia’s resurgence enabled it to recapture some geopolitical stature. And the robust growth of emerging markets as a whole, led by China, forced economists to reassess the importance of democracy and the rule of law.Yet in recent years a different picture has come into focus. From 2014, the long boom in commodity prices ended and the fortunes of economies which had hitched their wagons to resource exports turned. From 2013 to 2019, GDP per person in Turkmenistan shrank, while growth in Russia and Kazakhstan decelerated sharply. As economies stalled, living standards stagnated and corruption and inequality became harder to ignore. Frustrations exploded onto city streets in Kazakhstan in January.You don’t know how lucky you areAmong the economies which joined the EU, in contrast, growth remained strong. In 2016, GDP per person in Romania overtook that in Russia. While much of the former Soviet Union remained dependent on exports of grain, gas and gold, central Europe and the Baltics became deeply integrated with European labour and financial markets, and tied into European supply chains. Sailing has not been entirely smooth; over the past decade, populist governments in Poland and Hungary have weakened democratic institutions. But such systems remain miles away from the authoritarian regimes common across most of the post-Soviet world.These divergent experiences raise difficult questions: did the quality of institutional reform determine the economic and political avenues available, for example, or did other factors—like natural-resource endowments or the prospect of closer ties with the EU—affect how robust reforms were? Certainly, the literature on transitional economies suggests that countries faced different internal constraints as they reformed. An analysis of Russia’s experience in 1993 by Maxim Boycko, Andrei Schleifer and Robert Vishny reckoned that the country’s privatisation scheme favoured insiders because management and employees enjoyed outsized influence within the Russian parliament, without whose support privatisation could not proceed, to take one example.And yet external forces do influence internal politics. Western Europe’s attractions surely shaped decisions taken in Warsaw and Budapest, and continue to in places such as Belgrade, Tirana—and Kyiv. The lure of close ties with the rich West can be a powerful inducement to reform, and a spur to growth and democratisation: a fact Mr Putin seems to recognise all too well. ■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 “The curtain falls” More

Check out the companies making headlines before the bell:
Coca-Cola (KO) – Coca-Cola shares added 1.3% in the premarket after the company beat estimates by 4 cents with adjusted quarterly earnings of 45 cents per share. Revenue also beat Wall Street forecasts, and Coca-Cola projects commodity price inflation will be in the mid-single-digit percentage range for 2022.

Twitter (TWTR) – Twitter jumped 6.6% in premarket action, despite reporting top and bottom-line misses for its latest quarter. Twitter also announced a new $4 billion stock buyback program.
Tapestry (TPR) – The company behind the Coach and Kate Spade brands reported adjusted quarterly earnings of $1.33 per share, beating the $1.18 consensus estimate. Revenue beat estimates, and Tapestry also raised its full-year guidance on rising demand for its luxury goods.
Canada Goose (GOOS) – The maker of winter wear saw its shares tumble 10.3% in premarket trading after its earnings fell below analyst forecasts, although revenue topped predictions. Canada Goose cut its full-year forecast, as Covid-related restrictions impact demand for its parkas and footwear.
Walt Disney (DIS) – Disney surged 7.5% in premarket trading after beating Wall Street forecasts on the top and bottom lines for its latest quarter. Disney earned an adjusted $1.06 per share, well above the 63 cents per share consensus estimate, helped by growth in its Disney+ subscriber base and as record profit from its theme parks.
Uber Technologies (UBER) – Uber reported better-than-expected quarterly results as its ride-hailing business rebounded. The company continued to see strong demand in its Uber Eats food delivery business. Shares gained 5.8% in premarket trading.

Mattel (MAT) – Mattel came in 23 cents above estimates with adjusted quarterly earnings of 53 cents per share, and the toy maker’s revenue also beat analysts forecasts. Mattel’s results were driven in part by growth in its Barbie brand, and it also issued an upbeat 2022 outlook. The shares soared 12.6% in the premarket.
Sonos (SONO) – Sonos rallied 6.4% in premarket trading after topping analyst estimates on the top and bottom lines for the latest quarter. The maker of smart audio equipment said demand remains strong although it is still being impacted by supply chain issues.
Datadog (DDOG) – Datadog surged 14.5% in the premarket after the cybersecurity platform company reported better-than-expected profit and revenue for its latest quarter.
Twilio (TWLO) – Twilio rocketed 19.8% higher in premarket action after the communications software company reported a narrower-than-expected quarterly loss and revenue that was well above estimates. Twilio also issued an upbeat current-quarter revenue outlook.

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The current interest rate environment could favor Japanese conglomerate SoftBank Group’s strategy of long-term investing, according to CLSA’s Oliver Matthew.
The planned IPO of Arm is also a catalyst for shares of SoftBank Group, said Matthew.
Shares of SoftBank Group in Japan soared on Wednesday after the company announced it will seek a potential listing for its Arm unit. The conglomerate had originally planned to sell Arm to Nvidia, but the sale collapsed amid regulatory scrutiny.

The current interest rate environment could favor Japanese conglomerate SoftBank Group’s strategy of long-term investing as it looks to buy earlier stage tech companies at lower valuations, according to CLSA’s Oliver Matthew.
With prices of potential acquisitions now coming down as investors brace for higher rates, Matthew told CNBC’s “Squawk Box Asia” on Wednesday that SoftBank may end up “getting a better deal.”

Still, he acknowledged that the drop in valuations for listed growth companies this year has also been a clear headwind for the Japanese conglomerate’s stock. Valuations of growth firms in sectors such as tech tend to suffer in a higher interest rate environment as it makes their future earnings look less attractive.
SoftBank’s Vision Fund is a powerhouse in venture capital, investing in everything from Uber to Chinese tech titan Alibaba. Caught in the crossfire of Beijing’s ongoing regulatory crackdown on its domestic tech sector, SoftBank has had to trim its stakes in companies like Uber to cover those losses.

Arm IPO: A catalyst for SoftBank shares?

The planned IPO of Arm is also a catalyst for shares of SoftBank Group, said Matthew, who is head of Asia consumer at CLSA.
Shares of SoftBank Group in Japan soared nearly 6% on Wednesday after the company announced it will seek a potential listing for its Arm unit. Some of those gains were later trimmed, with the stock falling about 3% in Thursday morning trade.

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The Japanese conglomerate had originally planned to sell Arm to Nvidia, but the sale collapsed amid regulatory scrutiny.

The deal was announced back in 2020 and valued at $40 billion in Nvidia stock and cash. With the sale now off the table, Arm is set to prepare for a public debut within the fiscal year ending March 31, 2023.
“When they did the deal with Nvidia, it was a little bit complicated because they were taking two-thirds of the price in Nvidia stock — which we know SoftBank was very, very bullish on,” said Matthew. As a result, the Japanese conglomerate is likely to look for a higher valuation and let Arm go public “at a pretty decent price.”
SoftBank bought Arm in 2016 for $32 billion.

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U.S. stock futures were slightly higher on Wednesday night ahead of key inflation data due Thursday morning.
Dow Jones Industrial Average futures rose 60 points, or 0.1%. S&P 500 futures and Nasdaq 100 futures were flat.

Shares of Disney jumped 8% after hours after the company reported a quarterly earnings beat and a doubling of revenue from its parks, experiences and consumer products division. Uber gained 5% in extended trading after reporting a revenue beat and a bounce back from omicron-induced challenges.
In regular trading, Nasdaq Composite jumped for a second day as tech shares led the market higher and helped it recover some losses from the January sell-off, which was also led by tech names. The Nasdaq jumped 2.08% and the S&P 500 gained 1.5%, while the Dow Jones Industrial Average rose 305.28 points, or 0.86%.
Early pandemic winners of 2022, including Shopify and Etsy, as well as stay-at-home stocks like DocuSign and Zoom, were some of the biggest winners Wednesday.
“The market seems to have found a more constructive tone in the tug of war between trepidation over the Fed and the better fundamentals that we’ve seen in both earnings and the economic data,” said Art Hogan, chief market strategist at National Securities. “Having Disney do better than Netflix after its earnings report certainly seems to be a positive.”
Last month Netflix reported disappointing quarterly earnings, which added to investors skittishness towards tech stocks and the volatility in trading that followed.

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Bond yields, which have surged this year, cooled slightly, perhaps helping boost tech shares. The benchmark 10-year Treasury note traded near 1.945%.
Investors were also preparing for Thursday’s Consumer Price Index report, which is expected to show headline inflation for January at the highest pace since 1982. Core inflation, which excludes food and energy costs and is the Federal Reserve’s preferred measure of inflation, is expected to rise by 0.4%, or 7.2% year-over-year.
“You’d be hard pressed to find anybody that doesn’t believe the CPI number’s going to be hot, because we seem to be playing a game of leapfrog, with everyone trying to get more hawkish about what the Fed may or may not do and monetary policy in 2022. That tends to set us up for a continuation of the rally,” Hogab said.
Twitter, Coca-Cola and Kellogg are scheduled to report earnings before the opening bell Thursday. Expedia, Affirm and Zillow will report after the closing bell.

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