Wonkblog
How China could trigger a global crisis
By Matt O'Brien
January 11
A woman reacts as she checks stock prices at a brokerage house in Fuyang in central China's Anhui province, Monday, Jan. 11, 2016. (Chinatopix via AP)
When China sneezes, the rest of the world might not catch a cold, but it does feel bad for a couple of days. The question, though, is whether China is sicker than it seems and how contagious that would be for the global economy.
In other words, is China's latest stock market selloff — the Shanghai index lost 15 percent of its value in the past six days — and currency devaluation just a blip or the beginning of a bust? I say latest because the same thing happened in August. That was our first real inkling that Beijing might not have as much control over its economy as it seemed. And now we know: it doesn't. It's made one ham-handed attempt after another to prop stock prices up to unsustainable levels—buying shares itself and banning others from selling—which only works as long as it keeps doing so. But more than that, it's the fact that the government either can't decide whether it wants a cheaper currency or can't stop it from happening that hints at bigger problems under the economic hood. It's enough that no less an authority than George Soros thinks this could be like 2008.
What's going on? Well, China is trying to manage a slowdown that was always going to happen at the same time that it deflates a credit bubble that it wishes hadn't happened. Either one would have been hard enough on its own, but together they might be too much for even the most competent government to deal with. That's because Beijing needs to intervene even more to keep the economy growing today—at least as much as it wants—but loosen its grip on it to keep it growing tomorrow. So there are two dangers. The first is that a tug-of-war within the government leads to half-measures that don't solve either problem. And the second is that fears over a tug-of-war might make these problems harder to solve than they already are. Still, we shouldn't overstate this. It's not like China's economy is about to collapse. Its growth is real, if not as spectacular as it was before. It just might slow down further or faster than we thought, grinding down to 3 or 4 percent growth instead of 6 or 7 percent.
READ MORE: https://www.washingtonpost.com/news/wonk/wp/2016/01/11/how-china-could-trigger-a-global-crisis/
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