Was The China Crisis Just A Blip?
World markets are reeling from a sudden stock market fall in China. But is Asia really to blame?
Shanghai coughed and the world shivered. A wave of frantic selling engulfed the world's financial markets when the biggest fall on the Chinese stock market in a decade triggered a domino effect across Asia, Europe and North America.
The FTSE 100 suffered its biggest one-day fall since last June, but that paled in comparison to the carnage in New York where markets were reported to have taken their worst hit since 9/11. At one stage, the Dow Jones dropped 200 points within a minute, prompting an alert at the White House.
So, what prompted the rout? The immediate trigger was rumours that the Chinese government planned new controls to tame Shanghai's stock market, which has soared into bubble territory because of rampant speculation from millions of everyday investors.
In China's wild cowboy stock market, record-breaking run-ups are often followed by mini-crashes, but hitherto they've been largely confined within the country's borders.
It's tempting to conclude that the swift spread of panic is indicative of China's new global importance. But although China is a great economic power, its stock market remains a comparative sideshow in which foreigners are severely restricted from buying stocks. Moreover, Asian economic and financial fundamentals are sound.
The most likely explanation for the fall on Wall Street was that Chinese jitters tapped into growing general nervousness about monetary risk and the future of the US economy. It's now clear that the US property market hasn't recovered as hoped and that the "nightmare" sub-prime mortgage debt problem isn't going away.
An earlier warning from former Fed chief, Alan Greenspan, that the US might see a recession by the end of the year already had investors on their guard. Also lurking is the lingering fear that the yen carry trade, currently fuelling the world's liquidity boom, could unwind messily.
The question now is whether this sudden correction turns into something worse. Recent events are certainly evidence that the mood of optimism that has permeated US markets since the summer is over. After months of rising markets, stock market bulls insist a correction at some point was inevitable and that it shouldn't affect the overall upward trend.
But that would be to assume that all is rosy in America's back yard, when clearly it is not. A credit crunch is exactly what the bears have been predicting for the final chapter of the bull market. It doesn't feel as if we're there yet, but the sense of peril is not subsiding.
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