China’s summer of economic troubles got even worse on Monday with a spectacular stock market dive, its poorest one-day showing since 2007. But even with the market’s gains for the year wiped out, and as global bourses reacted with anxiety and sell-offs, analysts said suggestions of a full-blown economic crisis are premature.
The shock to China was severe enough that Xinhua, the government-controlled news agency, labeled the plunge “Black Monday.” But the overall impact on the health of China’s economy — for which the country’s leaders have pushed to maintain an annual gross domestic product (GDP) growth rate of 7 percent for years — remains uncertain.
“China’s a big question mark right now,” said Scott Kennedy, Director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies, based in Washington, D.C. “There is no consensus on anything right now on where China’s economy is going. … The leadership has done a terrible job of clarifying what their goals are.”
Since China’s benchmark Shanghai Composite index (SSE) shed some 30 percent at the beginning of July, the government has taken a number of major steps to try and shore up the stock market, including injecting about $200 billion into the economy.
Some analysts believe that Beijing — after spending all that money and still seeing share prices plummet — has decided to let the market correct what has been widely seen as a bubble, with massive and unsustainable gains in the last year and the first half of this one.
One reason China may feel it has some leeway with stock market declines is, compared to some other advanced economies, that segment of its financial system plays a relatively lower role in maintaining the health of the country’s economy. Its real estate market, by comparison, is seen as a much more vital indicator of overall economic well-being.
“The collapse of the equity bubble tells us next to nothing about the state of China’s economy,” said a note issued Monday by economic consultancy Capital Economics. “In fact, recent data have been more positive than the headlines might suggest, with large parts of the economy still looking strong.”
“Monetary policies have been very expansive in recent years and an adjustment is necessary," said Carlo Cottarelli, a board member of the International Monetary Fund (IMF), on Saturday. “China's real economy is slowing but it's perfectly natural that this should happen … it's totally premature to speak of a crisis in China.”
Kennedy agreed that the relation of stock market performance to the overall health of China’s economy was “tenuous at best.” But like other analysts, he said the broader picture shows China facing a number of major potential pitfalls — especially its large measure of debt, which he called “a big weight around its ankles.”
For years, Beijing has relied on an export-driven economic policy to achieve its high targets for annual growth. But after the 2008 global financial crisis, China has had to pick up the slack left by a global contraction in demand through internal investment — something it has done in recent years with a massive stimulus, particularly in the construction sector and through wide-ranging infrastructure projects.
But one of the side effects of that policy has been to create both a higher debt burden and potential inefficiencies in state-owned sectors, upon which the government has relied for that stimulus.
Tyler Cowen, an economist that writes for the popular economics blog Marginal Revolution, said these policies have placed China in an acute dilemma.
“Part of its earlier pro-growth program overstimulated particular sectors of the economy, for instance construction and a variety of heavy duty state-owned enterprises,” he wrote. “The more specific dilemma is this: China’s main paths for boosting its nominal GDP path also tend to stimulate or re-stimulate these overextended sectors.”
But, The Economist magazine said in an analysis published Friday, “at the same time as growth is slowing, the structure of the economy is also changing.” The analysis suggested that debt and economic problems in one industry are being offset by better economic news elsewhere.
The seriousness of China’s tumbling share prices — even if not wholly indicative of the country’s broader economic picture — was nonetheless compounded by the reaction of markets around the globe on Monday. In the first hour of trading on the NYSE, the Dow Jones industrial average lost more than 1,000 points. But that, as well as other prominent global benchmarks, went a long way toward recouping early huge losses as the day went on.
Still, the news is unsettling given that China has the world’s second-largest share of total global GDP. According to the Financial Times, China accounts for more than 10 percent of the world’s consumption of oil and more than half the world’s use of copper, and it imports two-thirds of the world’s iron ore. The knock-on effects of its stock market swings, and what course its policymakers take, will remain troubling issues — not just for China’s economy but for the world’s — in the weeks and months to come.
“There is good reason to be anxious about China,” The Economist analysis said, “but the pessimism is almost certainly overdone.”