Prepare for all scenariosThe Chinese stock market crash has rattled markets across the globe. The Shanghai composite index finished what the media described as “Black Monday” at 8.5 percent lower after trading of hundreds of shares were suspended when they lost 10 percent. The main Shanghai index has fallen nearly 40 percent from its peak in June. Asian stocks took a heavy beating with shares in Tokyo and Hong Kong losing nearly 5 percent. The Korean shares that have been losing grounds steeply due to military conflict and escalation of tensions sank an additional 2 percent. The jittery sell-off expanded to European and U.S. stocks. The Chinese stock volatility has now become a global matter.
The Shanghai index’s fall below the 3,500 mark is psychologically important since Chinese authorities used all possible policy ammunition - interest rate cuts and currency devaluation - to defend the threshold. The government authorized the state pension fund to use up to 30 percent of its balance to invest in stocks on Sunday to stabilize the market. The fact that the 3,500 front was broken despite an all-out defense suggests the Chinese government could lose this war with the market.
Investors at home and outside have lost confidence in the Chinese government’s interventionist policy. Many raised doubts about repercussions on the Chinese economy and public finance from the fast growth led by overcapacity and excessive debt. But experts as well as investors mostly believed that the Chinese authorities had the capacity to control the economy and finance. But skepticism now prevails due to the disastrous fallout from interventionist policy that aggravated market volatility. The loss of confidence could build up to overall doubts about China’s economy with its massive shadow finance and unreliable statistics.
The market instability also could spill over to the broader economy. Foreign experts initially believed the crash would not greatly affect the consumer economy as financial investments take up a small amount in household assets. But if companies face difficulties of raising funds due to a poor stock market and spike in bond yields, corporate investment would be pared. If corporate and household spending dwindles, the ramifications on the global economy could be huge.
It is still too early to conclude that the Chinese stock market woes could develop into a global financial crisis. The Chinese economy may be in a correction period after fast growth and shift to a domestic-oriented market. But we must be fully ready for all possible scenarios.
JoongAng Ilbo, Aug. 25, Page 30