China Can Ride Out Crisis, We’re On Course For Crash
An investor watches the stock market plunge in Shanghai. Photograph: ChinaFotoPress via Getty Images
It may not yet be the moment to get in supplies of tinned food. That was what Gordon Brown’s former adviser during the 2008 crash, Damian McBride, suggested on Monday as stock markets crashed from Shanghai to New York and $1tn was wiped off the value of shares in one day. But seven years after the collapse of Lehman Brothers brought down the global financial system and plunged half the world into a slump, it’s scarcely alarmist to see the financial panic as the harbinger of a new crisis in a still crippled world economy.
The market gyrations that followed “Black Monday” this week and the 40% drop in the value of Chinese stocks since June have only underlined the fragility of what is supposed to be an international recovery. For all the finger-wagging hubris of western commentators over the fact that the latest mayhem has erupted in China, this is a global firestorm. And after three decades of deregulation punctuated by financial crises and a systemic meltdown, there is every reason to fear more fallout from casino capitalism.
Financial markets pumped up with credit and quantitative easing to keep the real economy afloat are in any case ripe for a crash – or “correction”, as the market players like to call it. The only question is how far and fast they go – and how great is the price paid by the rest of us.
Paradoxically, Beijing may be better placed than others to ride out this storm. China’s economy is slowing down, as it shifts from export-led growth to consumption. But it’s still growing at 7%, nearly three times as fast as Britain and the US, which are supposed to be the west’s current star performers. Even if China’s figure is overstated, its growth is still at least double the Anglo-American rate: the kind of economic problem the rest of the world would be happy to have.
That follows three decades when Chinese growth averaged 10% a year, delivering the fastest economic development and reduction in poverty in world history – as well as rising inequality and environmental degradation. But China’s stock market is small compared with its western equivalents and relatively insulated from the rest of the economy.
Despite its huge private sector, China is still a hybrid economy, dominated by state banks and publicly owned corporations. That means its financial system is shielded from the impact that a stock market crash on this scale would have in a western-style private banking system.
China rode out the 2008 crash by pumping public investment into the economy, delivering 78% growth between 2007 and 2014, while the US managed 8%. That has left it with a huge debt pile, estimated at 282% of national income, which some now believe will bring China’s economy to a juddering halt.
But that is mostly debt between state-owned institutions, so there is no basis for a speculative Lehmans-type collapse. In fact, some of the problems China is now facing as it tries to bring the stock market crisis under control, such as capital outflow, stem from the liberalisation urged on it by the World Bank and its own home-grown would-be oligarchs.
China’s room for manoeuvre would certainly be much narrower if it had gone for their full deregulation and privatisation package. But the main drag on the Chinese economy isn’t the failings of its own economic model, but stagnation in the rest of the world. Global trade suffered its largest contraction since 2008 in the first six months of this year, partly as a result of the ongoing crisis in the eurozone. Eight years after the financial crisis erupted in the US, its aftershocks are still being felt across the world.
A dysfunctional model of capitalism, built on deregulation, privatisation and low wages, crashed and burned seven years ago. But the fallout from that crisis is still ricocheting around the world, from Europe to the “emerging economies”, as the attempt to refloat a broken model with cheap credit inflates asset bubbles and share buybacks – or enforce it with austerity – fuels new crises.
That is what has been played out across financial markets this week, in which China has been a transmission belt rather than the motor. Any idea that the western economies that generated stagnation have been fixed is not serious. Their recoveries have been the slowest on record and interest rates remain at a historic low – because owners of capital are prepared to invest in anything except the productive economy. The likelihood must be that this stagnation continues indefinitely, punctuated by financial upheavals. Without far-reaching change in economic policy, they can be expected to trigger crises that will tip western economies, and others, back into full-blown recession.
That’s one reason why the anti-austerity movement and the demand for economic alternatives is growing across Britain, Europe and the US. The elites so evidently don’t know what they’re doing, even as they rake in the spoils. In such a context, calls for large-scale public investment, ownership and quantitative easing for the real economy made by Labour’s leadership frontrunner, Jeremy Corbyn, look far more realistic than the business-as-usual offered by his rivals.
If the current market chaos turns into another crash, the demand for much stronger measures will become unstoppable.