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article imageOp-Ed: The hidden risks behind China’s stock market crash

By Kenneth Szabo     Jul 27, 2015 in Politics
Remember Japan? In the 1980s, thanks to its spectacular economic growth, Japanophobia and Japan bashing were the most popular pastimes in the U.S.
Alas, fears of Japan’s takeover of the world proved to be overblown when, in 1989, the country’s stock market imploded, plunging the country into a two decade-long slump. As the government rushed to throw money into the market and prevent banks from failing and companies from going under, public debt skyrocketed, permanently throttling its economic growth. Tokyo never recovered and ever since, dreams that Japan could overtake the U.S. as the world’s biggest economy have long been buried.
So it’s not surprising that, when the Chinese stock market lost 30 percent of its value in one month, wiping more than $3 trillion worth of wealth, analysts started wondering whether this is China’s Japan moment. In the run-up to last month’s crash, the market had created $6.5 trillion of value in one year, growing by 150 percent into pure bear territory. Half the companies listed on the two main indexes (Shanghai and Shenzhen) were priced ludicrously at 85-times earnings. After a 15 percent rebound, shares dipped by 8 percent on July 27th, indicating that the government’s efforts have been insufficient to calm jittery investors.
It has been called the greatest financial bubble in history (in real terms), while the Washington Post called it "the greatest stock market bubble since the dotcom boom." Unlike other bubbles, China’s has some unique characteristics. To begin with, novice investors have caused it. After the government urged its citizens to invest their savings in the markets, some 100 million followed suit. Even farmers abandoned growing crops for buying equity. Most have used margin trading (using borrowed money to buy stocks), raising volatility in the markets. Why? Because if the value of a share falls below a given level, novice investors receive a margin call, meaning they need either to sell the share or deposit money in their account. When some investors started selling, the herd mentality kicked in, putting huge downward pressure on indices. The government intervened on an almost daily basis, at first by lowering interest rates and then by dumping 5 tons of gold onto the markets, ordering half of China’s 2,800 listed companies to suspend trading, making $483 billion available to prop up the market and urging companies to buy back their own shares. The Ministry of Public Security even threatened to arrest “malicious short-sellers.” Stocks continued their free fall.
But what makes this crash especially dangerous is that it will quickly translate to the real economy. Since the bubble was inflated by average individuals (two thirds lacking even a high school degree), the tumble will lead to a decrease in China’s aggregate demand for goods and services, further slowing its already sluggish growth. Indeed, even equipped with a looser monetary policy, China’s economy never regained its 10-percent-a-year momentum.
Political aftershocks in Africa
Unlike other developed countries, China requires a minimum yearly growth rate of 8 percent to quell social unrest and create enough jobs to keep a steady rate of unemployment. The direct impact of this slowdown is that global Chinese clout will decrease. Meek economic growth and financial instability will force the Chinese leadership to look inward and stop July 2015 from becoming "Japan’s 1989."
A particularly salient point is Africa, the region most intertwined with China’s economy. In the words of one analyst, “African economies have hinged their economic wagons to the Chinese growth locomotives.” In exchange for raw materials, China has channeled billions into Africa, becoming the continent’s main trade partner. Over one million Chinese immigrants are working on the continent, while the Chinese language itself is increasingly popular in places like Nigeria. However, an issue of even greater consequence — one that has flown under the radars of most analysts and Africa watchers — is the sustained impact on the continent by a China beset by grave financial woes.
In an interesting turn of events, China’s special relationship with several client states in Africa could come under fire in the event Beijing gets sidetracked by its financial bubble. Many African states depend on Chinese largesse either for protection inside the U.N. (Sudan, Zimbabwe) or for keeping in power kleptocrats. After the death of Muammar Gaddafi, the self-proclaimed “King among African Kings” who had planned to channel $97 billion to "free Africa from the West," China stepped in to fill the void. Zimbabwe and Sudan are the most well-known example of authoritarian leaders that have thrived solely thanks to Beijing’s deep pockets. But they are not the only ones.
As I’ve written before, Djibouti, a country heavily indebted with Chinese loans, is probably the best such example. The country is supposed to host Beijing’s first military installation outside of Asia: a significant breach of China’s policy of "no overseas military bases." Thanks to Chinese backing — several multi-billion white elephant projects are being funded with Chinese money — the country’s president, Ismail Omar Guelleh, was able to facilitate the financing of a patronage and security system that has kept him in power.
A throttled Chinese economy would have dramatic consequences for Africa, increasingly reliant on Chinese trade and money. A weakened Chinese economy would decrease its intake of commodities, dealing a serious blow to African countries. However, at the same time, left without their paymaster, the regimes in Zimbabwe, Sudan or Djibouti would be seriously weakened. Analysts and policymakers should be aware of the multiple consequences of the coming Chinese crunch and plan accordingly.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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