China’s two main stock markets, the Shanghai and the Shenzhen Exchanges, plunged more than 30% in recent weeks from their previous record highs of June 12. The Shanghai dropped 30%, and the tech-stock heavy Shenzhen by 37%. That’s the steepest stock decline in China since 1992.
The markets briefly stabilized on July 9. But the question remains, will they continue their free fall again, as they had after several previous brief stabilization efforts since June 12? And what does it mean for China if they do? Or for the global economy in turn, given that China’s economy is at least as large as the USA’s and, by some measures, now larger? If the collapse resumes, does it signal the start of another global financial crisis?
If the China stock market rout continues, it may likely spillover to China’s real economy and slow it still more than it has already. The contagion could spread to other financial markets in China—housing, local government debt, bonds and loans for industrial companies, all of which have recently continued to struggle with excess debt, speculation, and bubbles. The loss of $4 trillion in wealth so far will undoubtedly have an effect on consumer spending that China’s new economic reforms program is counting so heavily on to lead economic growth in the near term. The collapse of stock prices will discourage private sector investment as well.
What about contagion beyond to global financial markets—i.e. stock markets in Hong Kong, elsewhere in Asia, in the USA, global commodity prices, or on world oil prices which are falling once again below $60 a barrel, as well as all those unknown and unreported derivatives markets worldwide whose transactions are conveniently hidden and contributed so much to instability last time around in 2008?