After the financial crises that hit the US and European Union (EU), another major one is expected to impact the global economic landscape significantly and even lead to a new recession. Therefore, the Chinese government is making considerable efforts to postpone it or reduce its effect at the very least.
Signs of a looming China crisis have been clear to observers and those who closely follow the overall global economic situation. The world of finance and business knows for sure that it is a crisis difficult to avoid due to China being the world’s second-largest economy as well as its strong trading ties with all countries. Even now, some of these countries depend almost entirely on imports and exports from and to China.
Among the most visible signs of the crisis are the inflated assets, notably share prices. For instance, the Shanghai Stock Exchange experienced two big slumps, registering a 25 per cent decline in the past two months — a bone-rattling drop that raises questions about the government’s ability to prevent a crash.
However, Beijing managed to stabilise the markets with a dramatic rescue in late June and early July, deploying ways to limit losses for investors. The government’s temporary intervention used such improper measures as preventing large companies from selling shares and pumping billions of dollars into the market, but may not be enough to prevent further declines.
Beijing’s moves are just pain relievers, not solutions. Hence, it needs to adjust and correct its stock markets to avoid more slumps.
The second most inflated sector is real estate, which witnessed several increases in value, often without justification. There is substantial surplus of high-priced housing units while a broad spectrum of people cannot buy them. This will inevitably trigger a painful modification in the realty market.
What happens in these sectors will affect others, primarily financial and banking institutions, which are so dependent on them, while the industrial sector needs urgent financing from banks.
This clearly means a series of collapses could happen and set off high unemployment and business bankruptcies, including at small- and medium-sized enterprises with their high manpower needs.
In addition, the worrisome economic indicators issued by the authorities show growth at 7 per cent, the lowest level in 25 years, and accompanied by a decline in fixed asset investment. Exports have dipped by 8.3 per cent and imports fell by almost the same percentage in July.
The government is trying to improve its economic performance by cutting the value of the currency — the yuan’s value was reduced on three consecutive days last week — in a bid to increase the competitiveness of its exports in international markets and consequently bring these volumes to their normal levels.
However, this move would not work, especially as it has been opposed by big economies such as the US and India. The US may postpone raising interest rates in September, as was the likely schedule earlier, while India has allowed the reduction of its currency to maintain its competitive position in the market.
What is really important here is that the Chinese crisis will strongly affect oil prices, which have already gone through a trying phase with prices falling below $50 per barrel last week. Statements on the Chinese economy continue to be of concern. In case of a further deepening of the crisis there, it is difficult what levels oil prices could drop down to.
If the earlier crises in the US and Europe were primarily of a financial character, China’s one will assume a financial and commercial character, by virtue of its huge influence in exports and imports.
Also, Middle East and Africa oil exports basically go to China, which is also a top exporter of goods to these countries and much of rest of the world. Clearly, this means the global trade will be affected by the emerging crisis, which requires all countries to be well prepared so as to reduce the impact as much as possible.