The really worrying financial crisis is happening in China, not Greece
China looks like it is heading for its version of the 1929 stock market crash



By Jeremy Warner

12:17AM BST 08 Jul 2015
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While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it’s already being called China’s 1929 – the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression.

In any normal summer, a 30pc fall in the Chinese stock market – a loss of value roughly equivalent to the UK’s entire economic output last year – after an ascent which had seen share prices more than double within the space of a year would have been front page news across the globe.

The dramatic series of government interventions to stem the panic – hitherto unsuccessful, it should be added – would similarly have been up there at the top of the news agenda. Yet the pantomime of the Greek debt talks, together with the tragi-comedy of will they, won’t they leave the euro, has relegated the story to little more than a footnote - even though 940 companies, more than a third, have now suspended trading on China’s two main indices.

The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess.

True, the Chinese stock market bubble is only a one-year wonder, whereas the build-up to the Wall Street Crash of 1929 was more sustained. Even so, the comparison still holds. As noted by JK Galbraith in his classic account, The Great Crash 1929, even as late as 1927 it was possible to argue that American stocks represented fair value. It was only in the final year that the “escape into make-believe” happened in earnest, when the stock market rose by nearly 50pc. This applies to the Shanghai Composite, too. Stripping out the lowly-rated banking sector, valuations for just about everything else have rocketed, making those that ruled on Wall Street in the run-up to October 24, 1929, look relatively modest. Nor do the similarities end there. As in 1920s America, China’s stock market boom has ridden in tandem with an equally speculative real estate bubble.

The macro-economic backdrop is also surprisingly similar. Then, as now in China, rural workers had emigrated to the cities in vast numbers in the hope of finding a more prosperous life in fast-growing industrial sectors. In 1920s America, virtually all these sectors – from steel to automobiles and the new technologies of radio and consumer durables – grew like Topsy, inspiring households to invest in them and chase the apparently bountiful profits they were generating. A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history before, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate.

Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash – depressed commodity prices and a virtual hiatus in global trade growth. The Chinese economy is like one of those cartoon characters who manages to keep running long after leaving the edge of the cliff, only belatedly to look down and plunge into the abyss.

Naturally, there are many dissimilarities too, not least that China is still essentially a planned and centrally-controlled economy which has so far managed to defy the usual rules of economics. The consensus is that this time will be no different, that even if the stock market does continue to crash, the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus, the wider economy barely lost a beat. Have no fear, the Chinese authorities have it all under control. Believe it if you will.

I don’t buy it. Indeed, I can see very little evidence for China’s technocratic elite having things under control. The firebreaks that China put in place over the weekend to mitigate the panic are, in practice, not much different from those applied during the Great Crash of 1929, only this time it’s public rather than private money that promises to quell the fire. They failed spectacularly in 1929. This time around, they’ve thrown the kitchen sink at the problem, but so far it has produced only a mild, and wholly unconvincing, rebound. The fire still smoulders, threatening to break out anew.

Besides, China cannot forever, Greenspan-like, keep answering each successive bubble by creating another. First it was gold, then housing, and when cooling measures threatened an all-out bust in the property and construction markets, the taps were turned on afresh, producing a further flood of money into the stock market. The authorities were happy to tolerate the bull market at first, hoping it might encourage a switch from debt to equity financing, but there seems little chance of that now. The stock market boom has only succeeded in adding to the debt.

Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and more particularly its shadow banking sector, as it pretends.

One further thought on these parallels. Now that the export-led model of economic of growth seems to have reached its natural end, at least for China, president Xi Jinping pins his hopes on internal consumer demand to drive growth, and he’s vowed to continue with the free-market reforms of predecessors to help achieve this. Unfortunately, it’s proving a difficult transition. Part of the problem with free markets is that by definition they cannot be controlled. Busts are as much part of their DNA as the wealth-enhancing properties of their booms. As China is about to discover, bad downturns come with the territory.

 TheDraconicLord wrote:
So as someone who never understood much about stocks and the market, my guess is because everything is related to China now, if that particular Stock Market crashes, the global economy is fethed? Again?

 LordofHats wrote:
It's almost like all those people who've been laughing for years at the silly notion that China's economy is some kind of unstoppable juggernaut when it's really a massive glass cannon were right all along.

Imagine that

Dropbear Victim wrote:
What joyous times we live in. The generous bankers are going to cause another economic collapse so that the current generations living now can experience a great depression. No longer do we have to feel left out for not being alive in the 1930s.

Here comes WWIII.

Dropbear Victim wrote:
What joyous times we live in. The generous bankers are going to cause another economic collapse so that the current generations living now can experience a great depression. No longer do we have to feel left out for not being alive in the 1930s.

Here comes WWIII.

Dropbear Victim wrote:
What joyous times we live in. The generous bankers are going to cause another economic collapse so that the current generations living now can experience a great depression. No longer do we have to feel left out for not being alive in the 1930s.

Here comes WWIII.

 Frazzled wrote:

Dropbear Victim wrote:
What joyous times we live in. The generous bankers are going to cause another economic collapse so that the current generations living now can experience a great depression. No longer do we have to feel left out for not being alive in the 1930s.

Here comes WWIII.

Bankers? What do bankers have to do with the Chinese stock market, which is generally closed off to foreign holders?

 Sinful Hero wrote:
Will this be an all-at-once kind of thing, or a slow trod over several years?


Automatically Appended Next Post:
If it happens that is.

 Kilkrazy wrote:
Being British you probably won't have a pension by the time you retire unless you are already nearly 65.

 Iron_Captain wrote:
If this is China's 1929, WWIII can't be far off now.
Looks like Russia is going to need a bigger sabre to rattle with.

 Kilkrazy wrote:
Being British you probably won't have a pension by the time you retire unless you are already nearly 65.

 r_squared wrote:
A lot of properties in London are owned by Chinese investors, apparently.
I have heard that Hong Kong Chinese investment has been one of the driving forces for the hyper-inflated property prices in the capital.
I wonder how a far-eastern financial collapse would affect that?

 Iron_Captain wrote:
If this is China's 1929, WWIII can't be far off now.
Looks like Russia is going to need a bigger sabre to rattle with.