This newsletter provides summaries of economic issues in three main articles. The first discusses the slowdown of the Chinese economy due to the creation of a stock market bubble through loose lending. The second explains that UK interest rates will likely remain low as inflation remains below the 2% target. The third outlines the Volkswagen emissions scandal where the company manipulated software in 11 million vehicles to pass environmental tests, resulting in major fines and loss of trust in the brand.

1. December 2015 Welcome Issue
AES NEWSLETTER
Bringing you up-to-date news on
relevant economic issues occurring in
the UK and around the world.
Issue 1 (December 2015)
What to Expect?
Welcome to Aston Economics Society’s first ever
newsletter. This is an opportunity for the society to
keep in contact with all its members and ensure that
you are up to date with key events.
This will become a monthly newsletter, whereby we
will be sharing stories that we feel would interest
students with an economics and business background.
Writer: Dinesh Patel. Editor: Victoria Poku.
Content
Pg.2
Pg. 3
Pg. 4
The Chinese Economy
Interest Rates in the UK
VW Scandal

2. The Chinese Economy
The Issue
A lot of the economic news lately has been
around Asian markets. It’s all about the
slowdown of the world’s second largest
economy.
And it began when China’s Frankenstein like
hybrid economy turned on its creator.
A couple of years ago the Chinese
government opened its stock market to the
public, in an attempt to stimulate growth.
Working class people now had the ability to
trade on the world stock market. The
number of stock accounts created increased by
around 45 million. The size of the Chinese
stock market doubled over a period of year.
But, this wasn’t the only issue.
Many of the new stocks were being purchased
with borrowed money. More than 65% of the
investors held less than a high school
education and therefore, there were not
enough qualified investors in the market to
correctly judge its strengths and weaknesses.
This created two problems
1) A bubble was created in the financial
market. The valuation of Chinese
companies became heavily inflated.
2) Competing to attract investors, banks
began to promise unrealistic profits.
The perceptions of stocks shift to being seen as
bets as opposed to highly complex shares of
ownership. The startling issue here is that the
problem was compounded by the Government
of China selling off their scrap assets in the
free for all casino like stock market.
Why is this important?
It became a case of damage limitation for the Chinese
government. They pumped capital into the market and
prevented many investors with over 5% ownership from
selling their shares.
This revelation has been met with great surprise across
the world. It is an unexpected travesty from China, a
nation which was lauded for its extraordinary success in
economic development, as it shifts away from the holy
grail blueprint of growth coined by Soviet Russia.
Only time will tell the true effect of the Chinese market
collapse both in China and the rest of the world. But, one
thing we know for sure is that retaining the confidence of
the population of China is going to be a tough ask for
their current Government.

3. Interest Rates in the UK
Interest rates remain at a record low.
The monetary policy comity commonly
referred to as the MPC, recently voted
8-1 in favour of keeping interest rates at
a record low of 0.5%.
The years of low interest rates have cut
the savings on bank deposits, whilst
mortgage owners reaped the benefits of
low repayment and it looks set to
continue. For the time being at least…
Why?
Bank of England stated that cost
pressures in the UK labour market are
rising too slowly for inflation to return
back to the 2% target rate. This target
rate of 2% is important and is derived
from numerous economic theories,
such as the Phillips Curve. Thus, a 2%
rate of inflation is seen as an optimal
rate. The rationale behind this is often
debated, but economists often coin
price stability and certainty to make
long term economic & financial
decisions as some of the key reasons.
Inflation can be harmful; but deflation
can be disastrous, hence why the target
inflation rate is set at 2% and not 0%. A
rate of 2% will enable prices and wages
to adjust without causing uncertainty of
high inflation rates. Higher inflation
would mean that people would be
reluctant to invest because of
uncertainty over future prices.
Basically, the interest rate is like one of
the tools in a toolkit that the Bank of
England tries to use to control
inflation.
BUT…
Opinion is split. Some suggest that the ability to decrease
interest rates in times of instability is a vital feature of any
economy. However, interest rates are at extraordinary lows of
0.5%. It appears that the ability to stimulate the economy in the
not so distant future will have to be achieved with a separate
toolkit if it is required.
It seems home owners are keen to lock the opportunity
presented by the low interest rates, as in the last twelve months
over 95% mortgages have been taken out at fixed rates.
Whatever the case, it appears that we can expect interest rates to
begin a steady rise to around 2.5% over the next few years.

4. could have massive implications beyond that
of just VW or the Diesel car market. The effect
will mainly impact Germany, a nation that
prides itself on its reputation for exceptional
manufacturing. A likely slowdown in future
sales might be a signal for danger for a share of
those employed within the automotive
industry in Germany where over 2% of the
entire population is employed.
Another of those affected will be GKN, a
huge British supplier for Volkswagen.
Question marks remain over whether some
suppliers will wish to continue to have their
brand associated with Volkswagen, but for
some the lure of large scale orders may be too
great to refuse.
One thing that is for certain is that it might
take considerable research and changes to the
regulation of carmakers to restore consumer
confidence in the once famously proclaimed
hypothesis that diesel cars are much better for
the environment.
Mauris laoreet elit sed dolor.
Volkswagen Scandal
The issue
Coined as the “Diesel dupe” VW have been
accused of manipulating the software
embedded within millions of their cars. This
manipulation of software means that the car is
able to recognise when it is being tested and
therefore, improve the environmental report
that it provides.
VW have recently confirmed that these
accusations are true and admitted to having
over 11 million cars fitted with these devices.
The response?
Volkswagen boss Michael Horn recently
confessed that the VW had “screwed up” in an
honest assessment of the company’s recent
performance. Furthermore, the former chief
executive, Martin Winterkorn, has been
replaced with former boss of Porsche,
Matthias Mueller. It appears that top down
structural and personnel changes are at the
forefront of VW’s strategy to regain consumer
confidence. They have also recalled over half a
million cars with many more set to follow
after the turn of the year.
Discounting the incomprehensible effect of a
tarnished brand image, the financial
implications on VW could be set to get even
worse. The EPA (Environmental Protection
Agency) has the ability to fine VW $37,500 for
every single car that breaches the current
regulations. That potential fine is capped at
$18 billion, but it presents the question of
whether it was really worth the risk for
Volkswagen in the first place?
The effect on everyone else?
Carmaker shares are down around 30%, a
result that is likely to have been fuelled by the
VW scandal. Evidently, it is certainly a huge
blow to the diesel car market.
Many economists suggest that the VW scandal