The Coming Dip of China

L. R. Laverde-HansenStarred Page By L. R. Laverde-Hansen, 6th Jul 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/3umpi3qo/
Posted in Wikinut>Writing>Columns & Opinions

Since this past June, China's stock market has fallen greatly, losing around 30% of its value. China looks like it's headed for a massive economic crisis.

Not Yet the Big Economic Story

The most widely-reported business story last week (indeed last month) is of the continuing Greek debt-crisis. Greece's recent referendum as to whether to accept or reject the European Union's restructuring terms regarding that debt resulted (as many know) in an overwhelming rejection. This is also related to the ongoing crisis in other Eurozone countries, resulting in the further sliding of the Euro (As of the end of trading on 6th of July, 2015, the Euro trades at roughly 1.10 US Dollars, very near its lowest point in over ten years.) .

Meanwhile in China

But while this is an emotional story with major repercussions for the Eurozone (and the global financial future), this was probably not the most important financial news of recent weeks. On the other side of the globe, the largest economy in the world (according to certain metrics and polls) is undergoing a major stock selloff. No, this is not about the United States of America; this is about the People's Republic of China, which is encountering its biggest financial crisis since the worldwide recession of 2008.

Since June 12th, 2015, Shanghai's Composite Index has fallen nearly 30%; after posting unreal gains of around 150% in the previous year. What makes this stock market plunge even more startling it that is has happened in spite of efforts by Chinese officials to stave off the bloodletting. The People's Bank of China, China's central bank, recently announced its fourth interest rate cut in the past seventh months to keep liquidity in the markets. Furthermore, as of this week, new Initial Public Offerings (IPOs) of companies have been suspended and future IPOs will be smaller in number and valuation of shares offered.

Causes of the Crisis

While it can be argued that this is not that big right now (the market is still up 17% this year), there are serious concerns ahead. This plunge is not an isolated end of some speculation bubble; but the result of a combination of factors. Its Gross Domestic Product (GDP) growth rate of 7.4% in 2014 is the lowest seen since 1990. It's not had a double-digit rate rise since 2010.

Its real-estate market is on the skids, with unsold properties equaling the size of the City of Singapore. China's officials have been buying unsold private developments and converting them to into public housing units. While this strategy does temporarily solve the matter of paying for the real estate, it's only a temporary one. In the long run, real estate not bought at the market rate will either be too pricey for the government (thus saddling the state with overrated plots) or so cheap that developers will eventually go out of business.

The irony here is that Chinese government regulators and officials are betting that government intervention will avert the crisis that's coming, but instead may only delay the inevitable and even make it worse. A stock market propped up by the state mechanisms will not inspire confidence. Government can set up "pads" to provide a "soft landing" in the event of a crash (and to protect those most vulnerable), but it cannot stop the normal cycles of boom and bust. It's a lesson in capitalism these lifelong Communists will soon have to learn.


Composed and Revised in New York
July 6-7, 2015

Tags

China, Debt Crisis, Economics, Financial Crisis, Greece

Meet the author

author avatar L. R. Laverde-Hansen
Poet, playwright, commentator. I write wherever I can. Currently I reside in the City of New York.

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Comments

author avatar M G Singh
7th Jul 2015 (#)

These are normal dips and do not ring alarm bells. The bigger debacle is in Europe where the concept of one European nation is in shambles

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author avatar L. R. Laverde-Hansen
8th Jul 2015 (#)

Chinese stocks hammered again as of early trading on Wednesday. The bloodletting continues.

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author avatar Ptrikha
8th Jul 2015 (#)

Interesting analysis.

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author avatar L. R. Laverde-Hansen
8th Jul 2015 (#)

Thank you, P.

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author avatar Sivaramakrishnan A
8th Jul 2015 (#)

Thanks for this highlight, LR. Chinese economy is rather opaque compared to free market economies.

I think they will be more proactive than America and Europe though fluctuations cannot be avoided.

I am more curious how they get paid the four trillion owed to them by America and others which is still growing! And they are taking the leadership to de-link the world economy from US dollar which will have great repercussions - siva

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author avatar L. R. Laverde-Hansen
15th Jul 2015 (#)

These are good questions, Siva.

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author avatar GV Rama Rao
8th Jul 2015 (#)

A good prognosis of the world economy. However, I wonder why you call them lifelong communists. They have been communists for the last seven decades, but with so many billionairees and millionaires, they are not likely to remain communists for long.

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author avatar L. R. Laverde-Hansen
8th Jul 2015 (#)

Very good point, GV Rama Rao. Perhaps I was basing characterizations on the past, not the present.

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author avatar Carol Roach
10th Jul 2015 (#)

an excellent presentation, I noticed a typo or two in your piece as well. But to me that is insignificant.

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author avatar L. R. Laverde-Hansen
11th Jul 2015 (#)

Fair enough, Carol. You really are an amazing writer.

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author avatar Retired
15th Jul 2015 (#)

I have to confess that I was not aware of this impending crisis - thanks for the information.

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author avatar L. R. Laverde-Hansen
15th Jul 2015 (#)

Thank you. John.

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