Generations have lived with the truism that when America sneezes, the world catches a cold. Now we must add China to this neat aphorism. Its stock market and economy have sneezed mightily. And financial markets around the globe have followed suit.
With incredible speed we have been pitched into global crisis mode, reminiscent of the dark days of 2008-09 when drastic action was required by governments and central banks to halt a devastating slide in markets and a global depression. Are we really back to all that?
News yesterday that China’s central bank is to cut its interest rate and change the rules to enable the country’s banks to lend more cash was eerily familiar.
The hope is that this may pull the Shanghai stock market out of its ferocious downward spiral. It plunged a further 7.6 per cent on Monday, taking the collapse to 35 per cent in just 11 weeks. Rough estimates suggest a trillion US dollars were wiped off global stock markets on Monday. In the UK the FTSE 100 tumbled 4.7 per cent before a rally yesterday broke ten days of losses. It has lost 15 per cent since May.
What lies behind what is already being dubbed the Great Fall of China? How will it impact on us here? And what is likely to happen now?
The proximate cause of this massive sell-off is not just the bursting of a speculative bubble on China’s stock market. It is a manifest concern that China – now the world’s second largest economy whose stupendous growth has fuelled trade and investment worldwide – has entered a severe slowdown.
What makes matters worse is a singular feature of China and its culture since time immemorial: inscrutability. The true state of China’s economy is wreathed in mystery. Few trust the official figures. Chinese sources suggest the growth of this powerhouse economy has slowed from an annual rate of 10 per cent to just over seven per cent.
But recent pointers on industrial production and import levels suggest a more marked slowdown - to around 2 to 3 per cent.
There is little more clarity over the health of the country’s banking system – in particular the incidence of bad or non-performing loans. The country’s massive construction boom has been driven by soaring levels of bank debt. Reports tell of stalled work on many building sites.
A China economic slowdown means lower demand – and falling prices – around the world for commodities, natural resources and, of course, oil, where the price has slumped $15 since June to barely $43 a barrel. This threatens further investment cutbacks and job losses in Scotland’s North Sea oil sector, where more than 5,000 jobs have already been lost.
Without an early stabilisation in Chinese and Asian markets, stock markets around the world will struggle to rally. And that will mean pension funds and long-term savings here face further turmoil. China’s government is now caught in a deadly Catch 22. If it does nothing, its economy would be left facing a devastating recession, one felt worldwide. Many of its banks would fail, threatening unemployment and social unrest. But if it intervenes – for example by further devaluation of the yuan or attempts to prop up the stock market – investors would read this as a sign of panic, and confirmation that the country’s economy was indeed in a much worse state than those official figures suggest.
However, even this black cloud over China has silver linings for us here. First, lower oil prices, bad though these will be for the north-east, will raise consumer spending power. The UK consumes around 1.5 million barrels of oil a day, so the $15 a barrel price fall since June would boost household spending power and add 0.3 per cent to GDP.
On top of this, there is the likelihood that the Bank of England and the US Federal Reserve will put plans to raise interest rates on hold: so much for the much-hailed return to interest rate “normality”.
Pushing back a rate rise from the current 0.5 per cent level would be good news for mortgage borrowers. According to Bank of England research, if official interest rates are a quarter percentage point lower than expected, GDP should be around 0.15 per cent higher. The fear, of course, is that slower global growth will depress investment spending. But there is little sign of this at present and the CBI has just increased its forecast for business investment growth this year, despite the China traumas.
Meanwhile, news of China’s interest rate cut has been well received in US and European stock markets, with strong rallies yesterday. But these are volatile times and the world will anxiously await clear signs Chinese markets have stabilised before allowing any relief that this crisis – and its far-reaching implications – is over.