“If China sneezes, the whole world catches a cold”
In a world of increasing economic interdependence, when one country suffers, the whole world feels its pain.
The wave of fear began with China, as the Shanghai Composite fell 8.5% on Monday, August 24th. After two decades of massive growth, China’s economy is now facing massive volatility, terrified investors, and an all-time low in manufacturing activity in six years. All gains for the year of 2015 were wiped out overnight. A Beijing spokesman for the Xinhua News Agency, the official press agency for the People’s Republic of China, dubbed the Chinese stock market crash “Black Monday”, referencing the global market crash of 1987. Although this drop occurred within hours, China’s economic slowdown has roots in earlier activity. Devaluation of its currency (the yuan), suspending the sale of new stocks, and gradually declining stock prices were major factors leading up to the crash. Mounting concerns of China’s economic slowdown were bound to erupt at some point. This website gives an organized list of events leading up to August 24th:
It is important to note that only 7% of China’s population owns stocks, leaving the rest in the hands of foreigners. This fact provides a sense of China’s deep wiring into the world economy, and the global fear that inevitably followed the crash. Markets across the world were set into a state of panic. Japan fell by 4.6%, its largest drop in two years. The MSCI Emerging Markets Index was down 4.5 percent. The S&P 500 went into correction mode, signaling a drop by 10%. The Dow Jones Industrial Average closed on a nearly 600-point loss, its worst decline since 2011. Some of America’s favorite stocks, including Disney, Tesla, and Apple, are now in bear market territory. ”Global fears about China’s economic slowdown are shaking stock markets around the world”, claims a reporter for CNN. Overall, 2.7 trillion dollars were wiped out from global stocks.
Although China’s economic slowdown has wreaked havoc on large economies, the most worrisome effects will be felt by smaller countries. China is the largest consumer of raw materials, especially copper, iron ore, and oil, which have contributed largely to its economic growth. However, as growth turns to decline, commodities are beginning to crumble. Emerging markets like Brazil, Sierra Leone, Gambia, and Mongolia, who rely on China to import their raw materials, are likely to take the biggest hit. This video explains the declining price in commodities and affected emerging markets: http://money.cnn.com/2015/07/09/investing/china-crash-in-two-minutes/index.html?iid=EL
The fact that China’s stock market crash has sent the world into a panic has larger implications. The resulting global economic fear can be seen as yet another consequence of the world’s interconnected economies – especially China’s and the US’s. China, the world’s second largest economy, is known to be America’s rising competition. However, because of stories like this, (that show the two superpowers’ intricately woven economies), I don’t think we need to worry about China aggressively challenging US hegemony through war. China-U.S. Strategic Economic Dialogue (SED), formed in 2009, also strengthens economic relations between these partners by setting a framework for biannual talks about mutual economic issues. Although the democratic side of the Kantian triangle is missing, I still think a liberal peace can be maintained through extreme economic interdependence. Nevertheless, as China retains its status as the US’s largest foreign holder of debt and major creditor, it will continue to have a joint identity as a potential adversary and strategic partner.
I found these websites to provide helpful summaries of the stock market crash and its causes and effects:
http://money.cnn.com/2015/08/24/investing/stocks-markets-selloff-china-crash-dow/
http://fortune.com/2015/08/24/chinas-black-monday-as-stock-market-slides-8-5/