Market turbulence reflects global connections
To put the fall in context, bear in mind that, over the past 12 months, China’s stock markets doubled in value on the back of an economy that grew by 10.7% last year.
Concerns about global economic growth and the outlook for corporate profits have bothered investors since the start of the week, when rumours of possible changes to Chinese tax rules caused markets to panic.
Most experts on China expect the economic boom to continue, convinced that the bizarre combination of rampant capitalism and a totally repressive communist regime can continue to deliver strong growth.
However the shock waves set off by the plunge in China’s stock markets at the very least raises doubts about how long this boom can be sustained.
Indeed, with foreign interest in China increasing all the time events this week brought that country into sharper focus.
China has been delivering incredible growth figures from an economic and political mix that most people would regard as irreconcilable.
In that context alone, question marks hang over the sustainability of that country’s boom, which, for other reasons is causing concern among the Chinese authorities.
They fear the pace of growth is unsustainable and would prefer to see it scaled back to about 7.5%, a figure most economies would kill for.
Even allowing for the peculiar blend of politics and economics, fears about the quality of financial controls in place at a time of such enormous expansion raise questions about the possibility of a banking collapse.
Fears about corruption lurking below the surface and basic concerns at the lack of democracy and flagrant abuses of human rights are also sufficient to create a sense of unease about China’s economy in the longer term.
But outside factors may also have been at play this week for investors including nervousness over Iran and the threat of a slowdown in the US economy, an issue raised at the beginning of the week by former head of the US central bank, Alan Greenspan.
Trouble in emerging markets is not new however. Back in 1997 Asia was hit by a financial crisis, and that was followed a year later by trouble in Russia and Latin America.
But China is a growing story and, if anything events of the past week, suggest it is rapidly becoming a major part of the global economy.
It is also a market increasingly interlinked with the United States with two-way trade of more than $260 billion generated last year.
Also, China is a major holder of dollar reserves, with enough in its coffers allegedly to buy out the entire US stock market, at current values.
Arguments that what happens on China’s exchanges do not affect the rest of the world have already been disproved by the reactions of the global markets which lost billions this week, although the dip was less pronounced, suggesting it is not the bell weather for the rest of the world.
But the events of the past week do suggest that China’s economic reach, underpinned with a population of at least 1.3 billion, is being felt internationally.
It’s extraordinary that its emerging power is built on the highly improbable mix of free markets and a political system that is a mockery by Western standards. It has become the new manufacturing base for the world and economic fundamentals suggest its future looks good.
The stock market rout of this week is a sharp reminder the once slumbering giant is no longer constrained by the Great Wall and is a force to be reckoned with in every sense.
