‘Black Monday’ - analysts were quick to brand Monday August 24th, and they had good reason to. The Shanghai market plunged by 8.5% in a day (its largest drop in history), and was soon followed by markets all over the world, from Japan to Europe to the United States, all dropping significantly (and largely recovering) over the course of the day. However, finding an explanation for these occurrences is not quite as easy as coining terms to characterize them, and different opinions have emerged on what to make out of the situation.
With China at the center of the current financial unrest, a lot of the focus has been on the ‘Middle Kingdom’. Could this be China’s 1929 moment, in the sense that after many years of seemingly unstoppable growth, it has run into the ceiling? Although stopping short of making the comparison with the 1920’s, Cambridge economist Coen Teulings seems to think so. In his view, “China’s old formula has run its course”. With the decade-long urbanization process coming to an inevitable slowing down, it makes sense that the economy would follow. The way forward, according to Teulings, lies in a shift from investing to consuming. Since the Chinese are traditionally more prone to saving rather than spending their money, caused in part by the absence of a collective health care system, this will require real government action.
Yet another view is that China’s troubles should not be over exaggerated: despite the recent downfall, the Shanghai Composite is still up 43% compared to last year and most of China’s wealth is held in the stable market for property, not shares. The country also has vast reserves to cover its foreign currency debts and a tight grip over its banking system, deeming a repeat of both the 1997 East Asia Crisis and the 2008 World Crisis not very likely.
Still, it would be foolish to disregard or downplay the current turbulence. China’s economy is indeed slowing down, as the numbers released last Friday, largely believed to have triggered the plunge, proved. Its leaders will have to make tough decisions about the future, which may involve a radical change in economic and social policy. Although it is highly unlikely that we are witnessing the great fall of China, a significant redirection of the world’s second-largest economy is very probable.
What do you, the risk professionals of the world, think? Will the current crisis force China to restructure its economy? What will the consequences be for the rest of the world? I'd love to hear your thoughts. Please share your comments below.