For decades, the Chinese economy has been facing an increasingly disturbing wealth gap between its predominantly urban elite and rural poor even though the rapidly growing economy has helped mitigate the building discrepancy in the most destitute areas. In October 2014, though, The Economist noted that the number of rural poor declined by over 16 million in 2013 as a result of national growth. The New York Times also mentioned that month that China’s economic overhaul in the 1970s lifted 660 million citizens out of poverty. In January 2014, Chinese Premier and leader of the ruling Communist Party, Li Keqiang, in a Lyndon B. Johnson-esque fashion, declared a war on poverty. China’s celebrated its first annual “Poverty Alleviation Day” later that year, an event characterized by academics and bureaucrats attending conferences across the country about the future of its lower class. Even with these huge steps, the world’s most populous nation has a long way to fully alleviate poverty.

National growth alone is not enough to eradicate poverty; more responsible government intervention is required. Last October, the Wall Street Journal estimated that 82 million rural Chinese still live on less than $1 a day. This figure is staggering when considered alongside the statistics that roughly 55 percent of the population reside in the countryside and 40 percent of total employment is in rural China. Historic reliance on agriculture in rural areas means that urbanization, while increasing, will never help the entire Chinese population. With this in mind, the persistent poverty must be addressed by state-initiated action since mere growth has proven to not be enough. Many of China’s current poverty subsidies—especially those for villages and communities—have not been as successful as anticipated.

Part of the problem is that the statistics, while standardized, do not have homogeneous interpretations. By setting the poverty threshold at 20 cents below than the international line for “extreme poverty” set by the World Bank, the Chinese government has been able to claim a that smaller portion of its population is poor. Under the World Bank’s standards, some 200 million Chinese citizens in rural areas would qualify for substantial, government aid. While the Communist Party has not released official figures about the number of citizens receiving poverty relief, the total amount of government spending on poverty alleviation subsidies is around $2 billion each year. Xinhua, the state news agency operating out of Beijing, reported last year that multiple urban structures appear opulent while their residents are the opposite. With so much manipulation regarding what constitutes poverty and to what extent it exists, the allocation of poverty relief subsidies becomes incredibly inefficient.

Financial aid is most commonly administered at the community level rather than on an individualistic basis in China. Unfortunately, the eligibility criteria at the county level is even murkier than those for individual aid. When deciding which localities to assist, the Party usually compares the average incomes, poverty rates and inflation rates of nearby provinces. On occasion, though, it also chooses to revise from an ever-changing list of secondary qualifications. In an article from April 2015, the Economist noted that while countless Chinese localities have been listed and delisted as qualifying for government aid over the past two decades, the total number of villages receiving aid has been constant at 592. With an unofficial cap on counties receiving aid, the communities themselves have an incentive to appear poorer than they may be in reality. In essence, the poorer one appears on paper, the greater the chance of aid.

The Communist Party government’s poorly defined system of awarding subsidies to combat poverty leads to inefficient targeting. Communities that need the most help often end up being unfunded, while comparatively wealthier ones benefit. County towns like Tianzhen, which have received government aid for the past several years, do not even fall into the impoverished category by China’s present standards. Last year, a piece in the Legal Daily, a Party-owned newspaper, called into question the actual use of the funds by local government. The author argued that multiple county governments were distorting their poverty statistics, using government money and refusing to disclose how the aid had been spent. State television brought the issue of bureaucratic abuse to national attention last year when it noted that two counties in the Ningxia and Hubei provinces, both of which receive poverty relief from the federal government, each spent around $16 million on new government headquarters. Although chastised by citizens at home and abroad, the Chinese government took no action to rectify the excessive expenditures.

The smokiness of the process at virtually every level of distribution makes the government’s job of poverty alleviation significantly more challenging. A necessary step in bettering long-term outcomes, then, is the creation of a more transparent process with accountable participants. This will require a major commitment on the part of President Xi Jinping and the rest of the Communist Party. For starters, the government has to remove the cap of 592 localities receiving aid. Part of the reason so many communities manipulate their numbers is partly due to the competitive the process of receiving federal aid. Lessening competition for a select few spots would bring back some modicum of authenticity to yearly poverty figures. It would also legitimize the subsidies by making them truly means-tested, rather than a function of the connections and political clout a county may wield.

What China needs now is smarter poverty reduction, not just more of it. Such change is possible, but it has to be orchestrated more appropriately by the federal government and overseen every step of the way, rather than ignored immediately after funds are disbursed. Poverty alleviation in China is making progress, but it’s not time to celebrate quite yet.

 

By definition, fear and  greed mark periods of irrationality. These evil twins of speculation signal a move away from investment and into a world in which rumors, gossip, and irrational behavior rule the landscape. In the current market, a whisper of a potentially undesirable German Parliament vote could send markets down 3%.

History and psychology indicate that this is simply a bear market strung along by fear, an irrational decline that, although troublesome, will eventually return to “normal” levels. But even though the current stretch of fear is prolonged, intense, and volatile, the sobering backdrop of global financial crises and an extended recession continue to loom over the market.

Then perhaps the fear isn’t fear at all, but a justified symptom of a changing financial system.

Domestic macroeconomic issues include lagging unemployment numbers, slow GDP growth and a tremendous decrease in investment. On top of that, the housing market has begun to decline once again, corporate profits have taken another beating, and banks again are rumored to be undercapitalized. “There are issues about the weakness of banks and uncertainty about how the government will respond to another banking crisis,” says Professor Zitzewitz, an economics professor at Dartmouth College.

Even bigger issues lie overseas – the prolonged Greek debt crisis, and concerns over the solvency of Italy, Spain, and Portugal, threaten to send the Eurozone into a financial crisis of epic proportions.

With all of these potentially disastrous domestic and international issues, Thomas Flexner, Global Head of Real Estate at Citibank, believes that the market is behaving somewhat rationally. “This is reasonable fear based on the uncertainty of the markets,” he says. “Irrational implies that the fear is misplaced or unfounded.”

If, indeed, the fear is rational, then the consequences are severe. It suggests that the incredible world economic growth over the past several decades has been inflated.

“In the past twenty years, global markets were magnified by credit creation – easy central bank policies and easy leveraging created credit that turned into purchasing power, propelling global GDP,” says Flexner.

The debt owed to the creditors has to be paid back, slowly and painfully. This paying down of debt could drastically limit the advance of the global economy for many years. If our fears come true, then we could be entering a new economic reality of shrinking credit and a diminished financial  system.

At the same time, some investors continue to make big bets on our financial system, confident that the American economy can come out of the recession unscathed and unchanged. Some might argue that the bear market has been exaggerated, that although some of the concerns are real, the sharp decline in the equities market has been intensified by fear and rumor-mongering.

On August 18th, 2011, the Dow declined a whopping 415 points based on a “trio of disappointing economic readings” and a Morgan Stanley report that the US and Europe may be heading for another recession.

Those losses were erased a few days later as the Dow posted consecutive gains of 322 and 145 points based on an “FDIC report that the number of US banks in trouble is declining.” The Dow slipped 388 points on September 22nd, 2011, for a 3.48% loss based on “several reports…warning of the dangers of another global recession.”

Again, the losses were erased by a 272 point rise two days later on rumors that the German Parliament would vote to expand the bailout fund for Greece.

From this, it seems that the extreme upswings and downswings in stock prices can be attributed to only a few economic reports. To a rational observer, a few poor (but far from disastrous) economic readings should not lead to a 3.48% decline in the blue-chip stock index of the most financially powerful nation in the world.

The tremendous attention that investors are paying to small,  insignificant data points may be evidence that the levels of fear currently exceed market rationality. “The market is moving around more than justified by the news,” Professor Zitzewitz says.

The fear could be stemming from group psychology. The closeness of the financial community, in which relationships rule all, could potentially lead to prolonged bouts of groupthink in which traders and investors move together in herd behavior, acquiring information only from those already within the circle and of the same mindset.

As a result, the effects of a single, unfounded rumor is intensified as it moves through the collective conscious of the financial markets, unchallenged by outside analysis.

Prospect theory also suggests that people who have already achieved gains would be risk-averse, while those who have suffered losses become risk-loving.

It’s possible that as investors received overwhelmingly favorable returns in 2009 and 2010 have now become risk-averse, and even the slightest tremor in the financial bedrock would lead them to quickly shift their investments to less risky instruments.

Ironically, it is the very fear that leads investors to take their money out of stocks that makes the stock market decline. The actions of the investors are a self-fulfilling prophecy.

The fear, volatility, and global decline in financial markets may not be justified, but by their very existence, create an environment that reaffirms their fear.

As Flexner states, “Fear, unfortunately, becomes self-fulfilling. It’s investor’s fear that creates redemptions, forces hedge funds to sell their liquid assets, and eventually decreases the values of those very assets. That’s the biggest problem with fear. Fear in the financial markets transmutes itself into  reality.”