Athens may top news agendas - but China is the one we should be worried about
Published 09/07/2015 | 02:30
While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it's already being called China's 1929 - the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression.
In any normal summer, a 30pc fall in the Chinese stock market after an ascent which had seen share prices more than double within the space of a year, would have been front page news globally.
Yet the pantomime of the Greek debt talks has relegated the story to little more than a footnote - even though more than a third, of companies have now suspended trading on China's two main indices.
The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies - America in 1929 and China today - are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth.
True, the Chinese stock market bubble is only a one-year wonder, whereas the build-up to the Wall Street Crash of 1929 was more sustained. Even so, the comparison still holds. As noted by JK Galbraith in his classic account, 'The Great Crash 1929', even as late as 1927 it was possible to argue that American stocks represented fair value.
Nor do the similarities end there. As in 1920s America, China's stock market boom has ridden in tandem with an equally speculative real estate bubble. The macro-economic backdrop is also similar. Then, as now in China, rural workers had emigrated to the cities in the hope of finding prosperity in fast-growing industrial sectors. In 1920s America, virtually all these sectors - from steel to automobiles and radio and consumer durables - grew, inspiring households to invest in them.
A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate.
Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash - depressed commodity prices and a hiatus in global trade growth.
Chinese authorities have thrown the kitchen sink at the problem, but so far it has produced only a mild, and unconvincing, rebound.
Besides, China cannot forever answer each successive bubble by creating another. First it was gold, then housing, and when cooling measures threatened an all-out bust in the property and construction markets, the taps were turned on afresh, producing a further flood of money into the market. The stock boom has only added to the debt.
Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and its shadow banking sector as it pretends.
Now that the export-led model of economic growth seems to have reached its natural end, at least for China, president Xi Jinping pins his hopes on internal consumer demand to drive growth, and he's vowed to continue with the free-market reforms. Unfortunately, it's proving a difficult transition. Part of the problem with free markets is that by definition they cannot be controlled. Busts are as much part of their DNA as their booms. As China is about to discover, bad downturns come with the territory. (Daily Telegraph, London)