(Yicai Global) Nov. 10 -- "Fluctuations in economic growth and the financial market pose the most serious 'gray rhino' risks [threats that everyone sees coming but fail to address] to China," Lu Lei, a member of China Finance 40 Forum (CF40) and deputy head of the State Administration of Foreign Exchange (SAFE), noted at the seventh 'CF40 Sun Yefang Reading Club' seminar on Monday.
Michele Wucke, the author of the book The Gray Rhino, also considers volatility on the capital market a gray rhino threat confronting all economies worldwide.
Unlike the metaphor of a black swan, which refers to highly unlikely events with potentially severe consequences that are difficult to predict, a gray rhino is a highly likely yet ignored threat. It is an apt metaphor referring to disasters that we had the ability and opportunity to prevent, but failed to.
Fluctuations on capital markets are mostly caused by psychological factors and behavioral finance phenomena, and they are also one of the sources of gray rhino risks. These fluctuations, Lu suggested, pose the greatest gray rhino threats as they relate to asset allocations in the household, corporate and financial sectors. "We come across this gray rhino virtually on a day to day basis," Lu said.
The second reason for the existence of gray rhinos is that they can breed new gray rhinos. For example, he noted, the downward pressure facing the Chinese economy today was an inevitable consequence of the policies that the government introduced some years ago to fight off the financial crisis. In other words, after you take down a gray rhino, another one will emerge.
The third reason is the existence of the phenomenon 'looking without seeing' and its practicality. Looking without seeing is not negligence, Lu argues. Instead, the former is a prudential and harmonious approach to handling gray rhino risks. The main challenge facing China now is a continuous decline in return on investment for traditional industries, which has in term led to a rise in corporate defaults and in financial risks. Therefore, we are "in a race against time," he advised. Instead of directly interfering with the gray rhino, we can create a new battlefield, and create innovative businesses and more growth drivers.
Gray rhinos can never be eliminated, Lu believes, and the government should minimize their adverse effects. The 19th National People's Congress proposed in a report the introduction of a regulation framework supported by two pillars -- monetary policy and prudent macroeconomic policy. "This should be an important strategy for handling gray rhinos and black swans," Lu insisted. The most difficult part is for someone to stand up and oppose a strategy, when all the others have reached a consensus on it.
For a market economy, there should be a 'counterpart' who fulfills two functions -- managing expectations and ensuring the authenticity of trading activities. "Such a person can solve many issues, and this what the counter-cyclical prudential macroeconomic approach means," he opined.