by Michael Roberts
In recent weeks, the Chinese stock market has taken a massive plunge and in July shares suffered their worse month in six years, falling by 29% from the peak in June. This followed a humungous boom in stock prices since the beginning of 2015. Indeed, since August of last year, the market index in Shanghai has risen 160%. And even after the collapse in the last month the index is still nearly 80% higher than this time in 2014.
This stock market bubble is of the proportion of the US in the 1920s that led to the crash of 1929 and the subsequent great depression. Is this what is in store for the Chinese economy as well?
The recent collapse and the failure of government intervention to stop it has produced a chorus of doom-mongers about the future of the Chinese economy. But this is nothing new. As John Ross has pointed out, there are continual scare stories about the end of the ‘Chinese miracle’.1 In January 2014, the Financial Timesran an article headlined “China’s debt-fuelled boom is in danger of turning to bust”. In April, another FT headline declared: “China’s crisis is coming – the only question is how big it will be.” In October, the American Enterprise Institute announced: “An economic mess in China”.
American academic Michael Pettis is a favourite source in such articles – the US financial website Zero Hedge featured an article entitled ‘A Chinese soft landing will inevitably lead to a “very brutal hard landing”, Pettis warns’. The Financial Times carried several articles by George Magnus, former senior economic advisor to Swiss bank UBS, who predicts a coming slowdown of China’s economic growth to 3.9%.
Or take this comment more recently: the Wall Street Journalpublished an opinion piece by David Shambaugh in March arguing that “the endgame of Chinese communist rule has now begun … and it has progressed further than many think”.2
Further back, in 2002 Gordon Chang wrote a book entitled The coming collapse of China. In the same year, The Economistmagazine produced a special China supplement called ‘A dragon out of puff’. This report stated: “The economy still relies primarily on domestic engines of growth, which are spluttering. Growth over the last five years has relied heavily on massive government spending. As a result, the government’s debt is rising fast. Coupled with the banks’ bad loans and the state’s huge pension liabilities, this is a financial crisis in the making.”The Economist’s conclusion in 2002 was: “In the coming decade, therefore, China seems set to become more unstable.” In reality, far from entering a crisis, China had the fastest growth ever experienced by a major economy in recorded history.
Different this time?
But maybe this time it will be different. How do we answer that question? Well, the first thing to consider is that Read the rest of this entry »