Prior to most country financial market crises, one finds a whole slew of supposed experts assuring us that this particular country is different. They tell us to disregard the clear flashing of early warning signals — which might have accurately predicted major economic and financial crises elsewhere — since this country is somehow different from and immune to the basic laws of economics. This now seems to be very much the case in China, where there is a whole chorus of analysts who soothingly tell us that worries about the Chinese economy are overblown… despite many indications to the contrary.
A passerby is reflected on a panel displaying Asian market indexes at the Hong Kong Stocks Exchange in Hong Kong, China August 24, 2015. REUTERS/Bobby Yip.
There are at least two reasons why these China optimists will prove to have been overly Pollyanna-ish in their views.
The first is that there has never before been such a rapid run-up in private and quasi-official sector debt than there has been in China over the past six years. Indeed, Chinese private sector debt has now increased from around 110% of GDP in 2009 to over 180% of GDP at present. Such a rate of increase substantially dwarfs that which preceded either the US housing bubble’s bursting in 2006 or that which preceded Japan’s lost decade in the 1990s. As we know all too well, there are few instances where credit bubbles even on a very much smaller scale have not ended in tears.
The second is the very rapidity and scale of the Chinese equity market bust. In the space of but a few months, approximately half the value of the Chinese equity market’s valuation has been wiped out. This amounts to about US$ 5 trillion, or the equivalent of 50% of China’s GDP. It is difficult to believe that this will not take a big toll on Chinese household and business confidence. This is particularly the case considering that almost 10% of Chinese equities were bought on margin and that highly indebted households are not in the best position to weather large equity market losses as they might have been in earlier Chinese equity busts.
All of this suggests that the Chinese crisis is unlikely to be quickly resolved and that it will be very much on the US political agenda in a presidential year. It also suggests that China is more than likely to constitute a major headwind to the global economic recovery, especially considering the way that it is depressing global commodity prices and thereby adversely impacting a number of other major market economies.
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