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What happened on Monday upended the conventional logic of the world economy. Suddenly, the way China finances its enterprises – previously considered a rather opaque mystery but one that was best left to China’s self-contained economy – became the whole world’s business.
A sudden loss in confidence in Beijing’s ability to rescue its collapsing stock market and restore confidence in its currency became, overnight, a worldwide event. It wasn’t just that Western stock markets plummeted as a result of a Chinese policy decision; worse, it triggered a truly global crash: throughout Monday, markets cratered in India, Saudi Arabia, Vietnam, Poland, the Philippines, Brazil, not to mention New York, London and Toronto. It may not have been the biggest or longest-lasting downturn, but it was a truly worldwide one, born in Beijing.
The stock markets are not an all-consuming force in China. Traded equities represent only a slice of finance in a Chinese economy still largely dependent on bank finance and wealth funds; the Shanghai and Shenzhen exchanges don’t have much relationship to the actual Chinese economy. Chinese stocks are largely closed to foreign traders. And, significantly, the pensions and retirement savings of Chinese are not invested in stocks – in fact, a move to allow pension funds to buy shares this weekend was one of the events that triggered the sell-off.
So it would be a mistake to say that the world economy rises and falls on Chinese markets. As Stephen Roach, a former chairman of Morgan Stanley, put it on Monday: “China is the excuse, not the reason.” But it suddenly is a very tangible excuse. On Monday, it was as if the world’s investors, all at once, took a look at China’s panicky duct-tape repair efforts and saw a dark reflection of themselves.
Beijing’s desperate and very top-heavy efforts to restore economic growth, real-estate and equity markets have panicked the world’s markets for a large and significant reason: China is no longer just a large country that exports products, imports foreign currency and finances debt. It is now a place where its internal economy matters.
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