#1 The Power of Memory in Stimulating Purchases

Prof. Dai Xianchi, Department of Marketing

What we remember in the past can determine what we try or buy in the future. In this vein, study sheds new insight that inducing people to recall past experiences in a shorter time frame would make them to think that these past experiences took place in a more distant past, which may in turn spark their desire to do the same activities again.

#2 Escaping from the Dilemma of Corporate Bribery

Prof. Zhang Wenrui, Department of Finance

Corruption is a global problem, but what should companies do when they don’t want to collude? Study finds that vulnerable companies may employ more conservative accounting strategies to protect themselves when faced with demands for questionable or even illegal payments.

#3 Violent Video Games and Crime

Prof. Han Stice, School of Accountancy

Given the immense popularity of video games and the fact that many of the most popular titles released today portray gratuitous violence in a not-so-healthy light, they have long been blamed for increases in violence and crime. This research study seeks to add its voice to the ongoing debate into the potential relation between violent video games and crime. It finds that crime (particularly for young people) increases following the release of violent video games (with a rating of M).

#4 How to Nurture Creative Performance in the Workplace

Prof. Dora Lau Chi-sun, Department of Management

For businesses, the search for such out-of-the-box initiatives often hinges on creative staff who are able to come up with the innovative ideas that make the difference. This study tries to answer a critical question largely overlooked before: what role do colleagues, who can view and comment on another’s work, play in the relationship between employee creative role identity and creative performance?

#5 How Marketers Can Leverage on the Power of Comparison

Prof. Hao Shen, Department of Marketing

Consumers are highly social animals and what they purchase can often be influenced by their social needs. For companies, social comparison can be highly useful in stimulating consumption. Using data form China, study finds whether consumers choose to purchase products that make them appear to be more confident or friendly depends on how they compare themselves with others.

#6 Does Guanxi Among Auditors Defeat the Purpose of Auditor Rotation?

Prof. Wu Donghui, School of Accountancy

A group of researchers chose to look into the intricate patterns of auditor rotation practice in China to see whether there were any close network connections between the outgoing and incoming auditors, and what kind of impacts those connections might have on audit quality and auditor performance.

#7 Do Borrowers Benefit from Using Lucky Numbers?

Prof. Maggie Hu, School of Hotel and Tourism Management

In psychology, lucky numbers are a form of mental heuristic, which are shortcuts or rules of thumb that help people solve problems and learn new concepts quickly and efficiently. Study looks at the use of two popular heuristics that were commonly used on a leading Chinese peer-to-peer (P2P) lending platform, and finds the choice of their use can lead to tangible differences in the loan application outcome, such as whether a loan is likely to get funded or their likelihood of default.

#8 Global Economic Growth: Inflation or Double Dip Recession?

Prof. Paul Kitney, Department of Decision Sciences and Managerial Economics

This rise in inflation has been mirrored in many of the largest economies in the world, fueled by stimulus and pandemic disruptions, although it has generally remained low in Asia.
Is inflation here to stay or is it transitory? And how can economies around the world fight it without risking a double-dip recession?

#9 Can Robots Be Used to Obtain Honest Customer Feedback?

Prof. Lisa Wan and Prof. Choi Sungwoo, School of Hotel and Tourism Management

How can hospitality firms obtain more customer feedback at the moment of truth that leads to service improvement? To address this question, researchers suggest a novel feedback collection method: service robots.

#10 Is There a Brain Drain in Public Accounting in China?

Prof. Zhuang Zili, School of Accountancy

The public accounting sector is notorious worldwide for its high turnover. This was the basis for a study, which looked at the “brain drain” situation in the auditing industry, specifically in China. It found that (rather counter-intuitively) the departure of auditors from public accounting may actually be improving the overall competency of audits.

Inflation has captured the world’s attention. Around the world, businesses and consumers are grappling with across-the-board hikes in the prices of everything from food and gas, to electronic goods and automobiles. In the U.S., the inflation rate rose to a staggering 6.8 percent in November 2021 from a year ago, well above the 2 percent rate that the country’s central bank, the Federal Reserve, typically considers as its “sweet spot” level and a sign of a healthy and growing economy.

This rise in inflation has been mirrored in many of the largest economies in the world, fueled by stimulus and pandemic disruptions, although it has generally remained low in Asia.
Is inflation here to stay or is it transitory? And how can economies around the world fight it without risking a double-dip recession? To make sense of these questions requires an understanding of the structural changes that have taken place since COVID-19 first reared its head in the beginning of 2020, says Paul Kitney, Professor of Practice in Finance and Economics at The Chinese University of Hong Kong’s (CUHK) Department of Decision Sciences and Managerial Economics.

“Inflation is expected to remain a force to be reckoned with in the immediate future.”

Prof. Paul Kitney

“What we are seeing now is a new round of supply chain disruptions that are very different from the shocks we experienced when COVID-19 first hit,” says Prof. Kitney, speaking at a recently-held EMBA Forum. He noted that the lockdowns in early-2020, which stopped travel and shutdown businesses, were deliberate and designed to prevent the transmission of the disease.

Fast forward to the present, and consumer spending habits have drastically changed because of the pandemic. With many countries around the world have yet to reopen their borders to tourism, people are diverting their spending on services (such as purchasing airline tickets to go somewhere or booking a hotel room at their destination) to buying physical goods that require a long and complex supply and logistics chain for its manufacture and transport.

“For every $3 spent, if $2 was previously on services that did not require a physical delivery of something by a truck, ship, or airplane, it now is. The logistical setup and infrastructure is just not geared for this, and it’s not something that changes overnight,” he says, adding that this is happening as governments around the world are seeking to sustain the recovery, mostly through massive fiscal stimulus that boosts spending.

Demand for energy, a crucial component of consumer price indices, is also being buoyed by the economic recovery, leading to higher prices. At the same time, the production of energy (whether from oil, gas or coal) is also suffering the same disruption that is plaguing a myriad of goods. These factors all contribute to inflationary pressures, he says, noting that companies are seeing price inflation in the intermediate goods that contribute to the production of final products.

The Role of the U.S. Federal Reserve

On to the main topic, Prof. Kitney says whether the global economy continues with its inflationary path or makes the second part of a double dip from this point forward depends on a number of factors.

Most importantly, it will depend on how the U.S. Federal Reserve, whose monetary policies are carefully watched by other central banks around the world, reacts. “Until recently, the Fed has said that the inflation that we’ve experienced is transitionary. Recent guidance from the Fed indicates that not only are they beginning to question this conclusion, but they are becoming increasingly mindful of the risk that high inflation will be prolonged. A more permanent inflationary path will mean they will raise interest rates, and they’ll raise them sharply,” he says, referring to recent comments by Federal Reserve chair Jerome Powell that all-but-confirmed that the central bank will raise interest rates for the first time in three years by as early as March.

Mr. Powell also said the Fed will be “nimble and humble” in raising rates, which the market has interpreted as a sign that it would be more aggressive in tightening monetary policy than previously thought. Indeed, market-based estimates including the Federal Funds Futures markets are indicating at least 3 hikes in 2022 of 25 basis points. Yet, will this be enough to stem inflation? Thinking beyond this, what if the Fed overdoes it and raises rates too much?

Prof. Kitney says an overaggressive string of rate rises would reduce aggregate demand and lower prices. If the Fed does indeed tighten monetary policy too quickly, it may expose vulnerabilities in credit markets around the world, including in China (where around 80 percent of its foreign debt is dollar-denominated), causing price levels to fall back to where they were in March 2020. “That’s your risk of a double dip recession,” Prof. Kitney says.

The other scenario is that the Fed raises interest rates too moderately, and the spread of COVID-19 continues to prevent people from resuming their previous consumption pattern of spending more on services.

“It’s going to take decades to build the logistical infrastructure to be able to cope with that and no one wants to invest in it now because no one knows if it’s really permanent or not,” he says. In that case, supply disruptions will continue and prices will continue to rise.

On the other side of supply and demand, if other governments around the world continue their asset purchase programmes (the U.S. has confirmed it will end its asset purchase programme in early March and start to shrink its bond holdings) and nominal interest rates remain low, then real interest rates would fall. This stimulates investment and helps to further drive a rise in aggregate demand. “So you’ll just end up with higher and high prices and that’s how you end up with this inflation spike.”

How Will the Fed React?

To make sense of how the Fed will act going forward, Prof. Kitney notes that the U.S. central bank typically considers two factors in its policy reaction, namely the output gap of the economy (a measure of the difference between its actual and potential outputs) as well as inflationary expectations.

On one hand, with COVID-19 and its variant strains continuing to spread, consumers are unlikely to return to spending more on services too quickly. Energy prices are also rising, which means higher inflation expectations.

For the jobs sector, the U.S. unemployment rate is falling rapidly and is nearing the theoretical level below which inflation is expected to rise. All these factors are driving inflationary pressures, which the Fed will heed, he says.

In financial markets, bond yields are currently being buoyed by inflation expectations, driving bond prices down and bond yields up. This will drive continued losses in bond portfolios. Equities, which are currently on the pricey side relative to bonds, are generally at risk in either scenario. A rise in inflation will increase a firm’s cost of capital, while a slowdown in the economy will hurt earnings. Both these scenarios are likely to lead to a contraction in price-to-earnings multiples for equities, and a general correction in equity markets, perhaps more.

Inflation Here to Stay

To conclude, Prof. Kitney says that the global economic recovery from COVID-19 continues, led by a coordinated effort on monetary and fiscal policy. Aggregate demand is expected to continue to see upward pressure, driven by U.S. fiscal spending as well as supply agreements between oil-producing OPEC countries and Russia that are driving energy prices. This recovery has been demand-driven through aggressive policy stimulus, but production capacity expansion remains subdued in many industries and in some cases are adding to the inflationary pressures.

“Inflation is expected to remain a force to be reckoned with in the immediate future,” he says, adding that in which case the Fed may raise rates and taper policy more aggressively than previously thought. This could spell trouble for the recovery either by reducing demand directly or people’s likelihood to spend because of their lower level of wealth. “Policy makers will need to carefully manage credit risks and avoid financial contagion, which can have negative real economy outcomes,” he adds.

‘Sweet Spot’ Inflation

Inflation is defined as a broad-level increase in prices throughout an economy. A moderate rate of inflation is typically thought to be a sign of an economy that is showing healthy growth. The U.S. Federal Reserve, which as the central bank of the world’s largest economy sets monetary policy that can affect growth globally, considers 2 percent inflation as a “sweet spot”. Modest inflation is considered a positive because as an economy grows, demand for products and services increases and this pushes prices slightly higher.

Everyday workers benefit from this because modest growth would lead to a rise in labour demand, ultimately pushing wages upward. And rising wages means people have higher disposable incomes to purchase more produces and services, feeding into a “virtuous” cycle that promotes steady and sustainable economic growth.

On the other hand, inflation that is too high or too low can trigger a vicious cycle in the economy. Whereas falling prices signal lower demand that leads to slower economic growth, when inflation is unchecked and prices rise more rapidly than wages, consumers would see their disposable incomes fall, leading to lower demand for goods and services. Companies will also facing increased transportation costs (from the rise in the price of oil), and respond by reducing investment expenditures.

These factors can lead the economy to slow and unemployment to rise, and to a much feared combination of both rising inflation and unemployment often referred to as “stagflation”. In the U.S., the last time the inflation rate reached a high level was in the 1970s and 1980s when it hit double digits, leading to economic recession that caused great hardships.

Looking at events in recent years, Prof. Kitney notes that the spread of COVID-19 around the world in the first quarter of 2020 produced a massive freeze in global supply chains through the social distancing measures that were enacted which shut down factories and stopped the movement of goods. This happened concurrently with a substantial reduction in demand as people stopped or greatly curtailed purchases partly because nonessential shops were closed and people were discouraged or prevented from going out.

This reduction to production and substantially weakening in demand drove deflationary pressures which caused prices to fall, and would have led to the substantial increase in unemployment seen during that period.

By the middle of 2020, the world is starting to adjust to the disruption caused by the spread of the virus. This came in form of a limited policy stimulus response from the lowering of central bank policy interest rates, encouragement for banks to lend money to businesses, and the aggressive stepping up of quantitative easing (QE) programmes, a form of unconventional monetary policy where the central banks purchase government bonds or other financial assets in order to increase the money supply and provide banks with more liquidity. At this point, there would also have been some easing in supply chain disruptions as business slowly try to reopen despite the pandemic, but prices have yet to recover.

Unprecedented Stimulus

Fast forward again to 2021, and the world is witnessing the unveiling of economic stimulus packages on a scale that is unprecedented in history. “The U.S. Federal Reserve has gone on an unlimited bond purchasing programme purchasing municipal bonds, even corporate bonds, and we’ve had the European Central Bank doing the same,” says Prof. Kitney, adding that the significant stimulus effort was mirrored in China and all over the world.

The Biden Administration also announced in March a sweeping US$2.25 trillion infrastructure plan in an eight-year programme that will create millions of jobs and shift its economy away from fossil fuels. This is on top of a US$1.9 trillion coronavirus relief package which passed Congress the same month, and another US$2.2 trillion approved by the Trump administration in 2020. This massive stimulus spend is driving up demand but with supply unable to catch up, the concern is that this would drive prices up.

“Normally in an economic recovery or expansion, we have firms increasing their production to keep up with demand. However, this time around because of the uncertainty created by COVID, some industries are not able to adjust their production,” Prof. Kitney says, pointing to examples in the airlines and catering industries.

Because of ongoing travel restrictions, airline companies are unable to reestablish passenger routes that were stopped at the height of the pandemic. The same goes for the restaurant industry, which is unable to reopen to full capacity because of the social distancing measures that are still enforced to keep the virus at bay.

Meanwhile, fiscal stimulus being implemented to keep economies afloat is causing large increases in aggregate demand, but this is happening without the offsetting increases in supply. What this means is that this generates an excess demand of goods and services in the economy which could well create some inflation, Prof. Kitney adds.

“This paradigm of deflation that we’ve seen for the past 20 years may be over at least temporarily, due to some of the disruption in production with this massive recovery that we are seeing,” he says, noting that the trend was demand driven and is driving inflationary pressures.

Effect on Asset Classes

Given these inflationary trends, bond yields are expected to rise as investors demand higher returns to compensate. Because bond prices fall when yields go up, the moving into reflationary mode will cause underperformance in bond prices.

The picture is more ambiguous for equities. Whereas traditionally it has been thought that equity markets moved in the opposite direction to bond yields. That is, when bond yields go down, equities tended to outperform and vice-versa. In reality, low levels of inflation are positive for performance in equity markets.

“When earnings growth increases by more than the increase in the cost of capital, equity markets can do okay,” Prof. Kitney says, noting however that current valuations on the S&P 500 were stretched (overvalued) at around 30 times price-to-earnings multiples. The key risk for equity market is sharply rising bond yields.

Meanwhile, negative inflation-adjusted returns on U.S. Treasuries have lowered the expected return on U.S. dollar assets, driving it down against other major currencies. This has also driven the current strong performance of proxies to fiat currencies such as gold and bitcoin in the weak dollar environment.

Going forward, Prof. Kitney adds that where inflation goes will, to a large extent, depend on the actions of the U.S. Federal Reserve. “The Fed is the most important actor for anyone looking at the financial markets in the world,” he says. “A lot of what will happen going forward will depend on whether the Fed continues to run the economy ‘hot’.”

If the Fed continues with its current expansionary monetary policy, then inflationary trends are likely to persist. On the other hand, it may decide at its regular policy meetings to reign in inflationary pressures, and subsequently raise policy interest rates or to taper its QE programmes.

“We’re in the midst of a very fragile economic recovery,” he adds. “So at the end of the day, it’s going to be a very delicate tight rope for the Fed to walk. Right now is good time as any for them to make a careful choice.”