China’s Economic Slowdown and the Summer Stock Market Crash

AP+Photo%2FEugene+Hoshiko

AP Photo/Eugene Hoshiko

On October 23rd, China cut interest rates and freed its banks to lend more. That makes it the sixth interest cut in less than a year as China attempts to address its worrying economic slowdown and persistently weak inflation.

In the third quarter (Q3) from July to September, China’s economy according the official data provided by the Chinese government grew by annualized rate of 6.9%, the weakest rate since the financial crisis. The credibility of this data is hard to know for sure as skeptics of China’s economic condition have expected worse, but even then it is distressing.

To be clear, for most countries, growing at that rate is enviable. Yet, China as the largest trade partner for 124 countries (while USA is for only 70 countries) was becoming responsible for an invaluable source of investment that spurred growth around the world. The striking example of this case is Latin America’s prospering emergence in 2012 where International Monetary Fund (IMF) hosted their annual meeting and now just three years later the economy is expected to shrink.

China’s slowdown has brought the prices of commodities all over the world down. Therefore economies (such as that of Latin America, which relies heavily on mass exportation of specific commodities) have suffered major setbacks in the past year.

Nonetheless, more positive economic indicators have surfaced. As the country projects itself as having a modern economy adapting to change, the service sector has shown promising results, with a significant growth of 8.6% during Q3. The service sectors now accounts for a larger share of the Chinese economy than the manufacturing industry. Overall, the Chinese economy rests at a very unpredictable position. Unfortunately, the world economy usually does not react favorably to unpredictable circumstances.

To add to the confusion, the Chinese stock market during the summer went on a roller-coaster ride that left the world dizzy with historic lows. The Shanghai Composite Index rose over 150% between the summers of 2014 and 2015, before 30% fell in less than three trading weeks.

The economic actions that led to the surge and the subsequent crash are complex, but the real cause of concern was the government intervention made in panic. In-order to save the market and the people’s confidence in the market, the Chinese government went beyond the cutting of interest rates – a step employed by mature economies to boost weak inflation – and employed drastic actions such as capping “short” selling and pensioning funds to buy more stocks. Basically, many of the actions taken by the government to save the market only made the market sink more.

Additionally, the buildup to the stock market crash was also exemplified by the mass number of people in China who started investing due to the trumpets of the state media, many who never had any experience on how the stock market operates.

Chinese teacher Ms. Bo Zhao explained, “People did not think [the stock market] could ever go down. They would say, ‘If he made so much money, then I can, too.’”

With the government encouraging stock market investment, people readily bought the idea that the stock market was the method to ‘get rich quick.’

There are trying times ahead for China as it proves itself mature and capable of adapting to change under the spotlight of the world media. Very few benefit from an unpredictable China, the world can only hope that the Chinese government is successful in stabilizing the economy and transition smoothly into a consumption driven economy without more volatility.