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The Transformation of the U.S. Financial Ecology in the Context of Excess Capital

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The U.S. stock market has long been dominated by institutional investors, with retail investors accounting for only about 10% of the trading volume. In mid-2018, U.S. institutional investors accounted for a whopping 93.2% of the market capitalization, while retail investors accounted for less than 6%. The latest data shows that the retail trading boom is reshaping the U.S. stock market in the wake of the Covid-19 outbreak. Retail stock trading in the United States is at its highest level in a decade. In the U.S. stock market, which has traditionally been dominated by institutional investors, the trend of retail investors picking up is becoming a new phenomenon with structural implications for U.S. capital markets.

In the face of the pandemic, the stay-at-home young American generation has started trading in the stock market. In addition, the zero-commission model of online brokerages has attracted a large number of retail investors in the U.S., who have become increasingly active as the U.S. stock market continues to hit record highs. Robinhood Market Inc.’s exposure in financial news and stock forums has skyrocketed recently. Robinhood is the favorite zero-commission trading platform for U.S. millennials, where users can trade stocks, ETFs, options, etc. The platform now has more than 10 million accounts, mostly owned by retail investors, with an average age of 31. In the first four months of this year, Robinhood saw a 30% increase in users.

Robinhood, the emerging retail brokerage that bills itself as the “retail stronghold” in the U.S., added 3 million trading accounts in the first quarter of this year, bringing its total number of accounts to 13 million. Recent data shows that Robinhood hosted more than 4.3 million daily average trades in June and its daily average trades more than doubled in the second quarter from the previous three months. According to a recent regulatory filing with the U.S. Securities and Exchange Commission (SEC), Robinhood generated USD 180 million in order flow revenue in the second quarter, of which USD 111 million came from options trading, roughly doubling revenue from the previous quarter. The other three major U.S. retail traders, TD Ameritrade, Charles Schwab, and E-Trade, have all seen record growth in their trading accounts in 2020.

It is worth noting that retail investors in the past are driving big moves in some stocks, creating the so-called “Robinhood effect” — investors using popular apps stampeding in and driving irrational price movements in stocks. Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence, said recently that retail trading accounts for a greater share of market activity than at any time in the past decade. In the first six months of this year, retail investors accounted for 19.5% of U.S. stock market trading volume, up from 14.9% last year and nearly double the 2010 level, Tabb estimates. On some days this year, retail activity even accounts for about 25% of market transactions. The data suggest that retail traders are upending years of trading patterns in the U.S. stock market.

To what extent will the large number of retail investors entering the market affect the trading structure of U.S. stocks? Will this be a confirmed and sustained trend, or just an occasional blip?

Traditional institutional investors are not optimistic about retail investors entering the market, believing that retail investors are a kind of crazy people who do not understand market risks. As hedge fund magnate and founder of Omega Advisors, Leon Cooperman, says the frenzied trading in certain stocks in recent months is a warning sign for the market. He sees this as a sign that the market is close to its peak and that the surge in daily transactions for apps such as Robinhood is a “crazy market”. Cooperman warns that speculative trading by retail investors would not end well, They are just doing stupid things, and in my opinion, this will end in tears.” The stock market is so crazy that even professional investors fear it. “With a market like this, who needs to go to Las Vegas and Macau?” said a 20-year veteran trader in Germany.

However, researchers at ANBOUND believe that institutional investors’ dismissive attitude to new developments in the U.S. stock market may be too conceited. Institutional investors once dominated trading in the U.S. stock market, and the “rules of the game” in the market were set up for them — the market trusts them and hands them money (in various funds); institutional investors establish an investment team to evaluate the investment value and risk; institutional investors determine investment strategies and portfolios and make investment transactions; the institution determines their principle of returns, such as the proportion of capital management fees; regulatory rules were also set up for institutional investors. However, institutional investors have been disrupted by an influx of retail investors who are not following the rules of the game at all and are trading irrationally. So, it is entirely understandable that retail investors provoke the “wrath” of institutional investors.

In our view, this is a significant shift that may be related to the changing context of the current financial markets. Unlike the past, when there was a shortage of capital, today’s world is a world with excessive capital. Historically, since the collapse of the Bretton Woods system, the “floodgates” of central banks’ credit expansion have been removed, and the world has gradually moved towards a credit expansion trajectory. Since 2008, in particular, the continued massive easing by the world’s major central banks has exacerbated the extent of the world’s capital glut. The “crisis triangle” model proposed by ANBOUND explains the origin of excess capital from the perspective of credit expansion; with excessive urbanization brings about capital expansion, while capital expansion brings about crises.

When these changes accumulate to a certain extent, financial ecology begins to change. We tend to believe that this is not an accidental fluctuation, but a major change or shift involving the development of financial markets. From the perspective of Modern Monetary Theory (MMT), widespread excessive capital is not an accident. In the view of MMT, money originates from the debt-liability relationship, governments spend money by creating money, and fiscal expenditure precedes revenue. MMT argues that sovereign governments do not go bankrupt under a sovereign monetary system, and that issuing bonds is similar to monetary policy, sovereign governments do not need to borrow in their own currency to spend. The corollary is that government spending is not constrained by the country’s tax revenue, i.e., there is virtually no constraint on fiscal expenditure. With the current outbreak hitting the global economy, MMT is undoubtedly a gateway for governments in need of fiscal expansion to stimulate their economies — a tempting policy of debt expansion for governments not to worry about local-currency debt leading to government bankruptcy.

While MMT remains highly controversial in academic circles and policy departments, the practice of countries under the pandemic shows that major countries have adopted fiscal expansionary policies to varying degrees. Especially the United States, where the federal deficit could reach USD 3.4 trillion in FY2020, and the balance of government debt will soon exceed the size of the annual GDP. This means that the world will be in the midst of an ever-growing glut of capital for a period and even an era to come. As the environment changes, the trend of retail participation in the U.S. stock market is likely to continue, which will change the trading structure of the U.S. stock market and even the financial ecology of the United States.

Final analysis conclusion:

As a result of the pandemic, a large number of retail investors participating in the stock market is becoming a trend, which could change the pattern of the U.S. stock market. In the context of excess capital, this change is not an accidental market fluctuation and is likely to imply a structural change in the financial ecology of the United States.

Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy

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Economy

Mosul’s recovery moves towards a circular economy

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Five years since the end of the ISIL(so-called Islamic State in Iraq and the Levant) conflict in 2017, the International Organization for Migration (IOM) in Iraq and the UN Environment Programme (UNEP), with funding from the Government of Japan, has established a debris recycling centre in Mosul. After its initial use, the centre has now been handed over to Mosul Municipality for its continued, sustainable operation.

“On behalf of the Iraqi Government, the Ministry of Environment expresses its gratitude to the Government of Japan for generously supporting this important project and to UNEP and IOM for enabling the sustainable management of the huge quantities of conflict debris and restabilization of the liberated areas in an environmentally sustainable manner,” said Iraq’s Minister for Environment, Dr. Jasim Abdulazeez Humadi.

The handover of the Mosul debris recycling centre marks a significant step in the sustainable management of the huge volumes of debris — an estimated 55 million tonnes — created by the ISIL conflict. It also opens the way for the recycling of routine construction and demolition waste, contributing to ‘building back better’ and an increased circularity in Iraq’s development.

UNEP West Asia Regional Director, Sami Dimassi, emphasized that “by reducing waste, stimulating innovation and creating employment, debris recycling also creates an important business opportunity.” Indeed, construction companies in Mosul have expressed interest in purchasing the recycled aggregate, thereby underscoring the longer-term sustainability of debris recycling.

“This project supports recovery and livelihoods by drawing on principles of a circular economy, wherein waste and land pollution is limited through production processes that reuse and repurpose materials for as long as possible,” explained IOM Iraq Chief of Mission, Giorgi Gigauri. “Collaboration and sustainability are key priorities in IOM’s work toward durable solutions to displacement, and we are pleased to have partnered with UNEP and the Government of Japan so that this is represented not only in the function of the plant itself, but also in its functioning, by supporting local authorities to be prepared to effectively operate the plant moving forward.”

On 28 July 2022, Mosul Municipality hosted an event to officially hand over the debris recycling centre, attended by senior government officials and academia, as well as representatives from IOM, UNEP and the United Nations Assistance Mission for Iraq (UNAMI).

Masamoto Kenichi, Charge d’Affaires, Embassy of Japan to Iraq stated: “We are glad to know that the project funded by the government and people of Japan has contributed to cleanup of debris and reconstruction of Mosul. We would like to commend UNEP, IOM and the city of Mosul for their tremendous efforts of turning the legacy of ISIL’s devastation into building blocks of reconstruction”.

Through the rubble recycling project, nearly 25,000 tonnes of debris have been recovered and sorted, of which around half was crushed into recycled aggregate. Material testing of the recycled aggregate endorsed by the National Center for Structural Tests of the Ministry of Planning confirms its compliance with the Iraqi State Commission for Roads and Bridges design standards for road foundational layers and its suitability for several low strength end-use applications such as concrete blocks and kerbstones.

The project created 240 much-needed jobs through cash-for-work schemes targeting vulnerable persons, including 40 women.

Building on this experience, IOM has set up two other debris recycling operations in Sinjar and Hamdaniya in Ninewa Governorate, and a third in Hawija in Kirkuk Governorate, where a pilot phase using a mobile crusher was implemented in al-Buwaiter Village in 2021. In addition, two other conflict-affected governorates — namely Salah al-Din and Anbar — have  also shown a high-level of interest in replicating and scaling up debris recycling in their own regions. 

UNEP has been supporting Iraq in cleaning up the huge volumes of debris created by the ISIL conflict since June 2017. Initially, this included carrying out technical assessments and planning workshops with UN-Habitat, and subsequently designing and implementing debris recycling pilot projects to support returns in Mosul, Kirkuk and other conflict-affected areas in cooperation with IOM.

UNEP

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Economy

Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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