Global growth hasn't been shaping up to optimistic expectationsby George Magnus / August 25, 2015 / Leave a comment
China’s equity market fell by 8.5 per cent on Monday and around 6 per cent on Tuesday as the authorities, having reportedly spent over $200bn trying to prop it up, seemingly gave in. Global markets took their cue, falling sharply in ways that reminded us of the collapse in 2009. In China, the market action was promptly labelled Black Monday, echoing the collapse in the US and other markets in October 1987. It’s a misnomer, of course, because the real Black Monday saw the US Market fall 22.6 per cent. In the US and other advanced nations, the fall in equity markets has been widely attributed to developments in China, specifically, the 35 per cent decline in the equity market since mid-June, and more recently the mini-devaluation of the yuan two weeks ago, which was taken as a sign that all is not well with the Chinese economy. And indeed it isn’t.
This year, the penny has dropped regarding China. Ironically, it has taken a crunch in the stock market—which matters little for the Chinese economy and for global markets—and a small currency depreciation to remind markets and commentators that China itself is facing a growth crisis. China is transitioning from a political and economic model that was shaped 20-30 years ago to something different as yet unknown. It is doing so in a political environment which is designed to facilitate change but is at the same time complicating and stifling it. The upshot is likely to be a sustained economic slowdown to around 4 or 5 per cent over the next couple of years. In itself, this need not be a disaster in China or elsewhere, but no one knows what the transition will look like, how it will be managed, or what policy errors will be made along the way. So this, maybe, is what markets are now starting to sense.