Institutional investors must have scratched their heads at the remarks of Jacob J. Lew, secretary of the Treasury Department, a few weeks before the beginning of the recent turmoil in the markets.
In a discussion July 8 at the Brookings Institution, Washington, Mr. Lew was asked: “Do we have something to fear from the meltdown of the Chinese stock market and the slowdown of their economy?”
Mr. Lew replied, “I'm not going to comment on market movements on a day-to-day basis either in the United States or China. But I will say that China's markets are pretty much still separated from world markets. They're obviously moving toward being more integrated, but right now they're not. So you're not going to, I don't think, see the direct linkage there.”
Mr. Lew seemed little concerned about any fallout from the events in China. His viewpoint might confound institutional investors' market outlook.
Janet L. Yellen, chairwoman of the board of governors, Federal Reserve System, seems to disagree with him
Underscoring the Chinese economy's significance to U.S. markets, Ms. Yellen noted in a Sept. 17 news conference: “A lot of our focus has been on risks around China, but not just China — emerging markets, more generally, and how they may spill over to the United States.”
While economic and monetary policymakers in Washington appear at odds on the influence of China's economy on the U.S. markets, market participants seem clear on the issue, blaming the giant Far East economy in part for the tumult in August that began a declining trend and instability that has continued at least through Sept. 25.
In light of the market decline since Mr. Lew's talk, Rob Friedlander, Treasury Department spokesman, reaffirmed the secretary's perspective, drawing attention to Mr. Lew's elaboration in the same talk.
“I think the concern, that is a real one, is what does it mean about long-term growth in China?” Mr. Lew added, noting it is critical for China to continue its commitment to reforms “to move more toward having much more market forces in China's economy.”
Asset owners and other institutional investors expect a wide range of views. From policymakers, institutional investors should always seek perspectives that reflect a diverse set of views on the markets to identify risks and responses. But they have to challenge policymakers to provide clear explanations of the reasons for their differing views. Otherwise investors will have less confidence that policymakers will arrive at policies that strengthen and stabilize markets, and less chance of avoiding a rush to judgment when a different course might perform better.
Nothing will stabilize the markets more than institutional investors equipped with better and timelier information.