Today I’ll give a gong to Miranda Maxwell at BS:
…while stockmarkets can and do pop with limited economic impact, this time there are clear warnings that it is different. The frantic response from China’s authorities to stem the wave of losses is as clear a signal as there ever was that this is a broad and serious issue.
…China’s leaders threw everything at propping up the nation’s sinking sharemarket, including the highly controversial decision to allow property as collateral for equities — a measure tried out during the Wall Street crash in 1929.
…“We need to take this as seriously as the authorities,” says Credit Suisse strategist Damien Boey, who describes China as being in a “deflationary, credit bust type of environment” and points to unofficial data suggesting it possible that China has shown no real economic growth in the year to date.
MB led the debate on the impacts of the crash on the real economy being manageable. We then got a little more bearish as the tangled web of finance behind the bubble became more clear. That led us to conclude that the crash will slow growth more swiftly than otherwise but continue the “glide slope” to lower growth.
But, it must be said, the last few days are beginning to suggest that the problem could be altogether larger. If Chinese authorities cannot arrest the slide, and it appears to do so they will need to socialise some ludicrous percentage of the bourse, then faith in the so-far well managed wider structural adjustment is going to collapse.
For that to have large economic consequences once generally needs contagion to flow into the credit system to trigger a “sudden stop”. China owns its banks and is able to prop up credit activity more easily than privately owned systems so any credit fallout may initially be limitable.
But if the crash does not stop then confidence itself may drag down credit demand, stall out an already weak property market “recovery” and lead to a growth shock sooner rather than later. Such an outcome would cause a hard landing, stimulus and rebound then a more permanent slowdown as Chinese financial system deleveraging accelerated. Maybe a better analogy than 1929 is Japan in 1991.
China has the dough to bail this out, but only for a limited time, and the implications for global growth would be severe enough to end the global business cycle, a’la 1991. A stall in Chinese growth would hit Europe hard through the German export machine, hit the US hard through a share market crash, and hit emerging markets and Australia hardest of all through a final terrible capitulation in commodity, equity and house prices.
I can’t say it’s the base case yet, though that may just be my sunny disposition, because I don’t know how China is going to prevent its market falling a lot further when the moment that authorities buy then everyone else sells.
