CHINA FINANCIAL WOES A NEW DYNAMIC

3640971950_0290c20dcc_o1Whilst we agonise about what may happen to the global financial system regarding the current volatile movements on the Chinese stock market and the subsequent effects on the global economy; maybe we should look at the fundamental reasons why this possible contagion may be occurring.
Firstly one has to acknowledge that the system China now operates under ( a quasi-capitalist model) has only being in force from the early 90s when “Deng Xiaoping, paramount leader of the PRC visited the south of the country and made ground breaking statements about having an “open door” policy, thus allowing further investment in the country.
In this very short timeframe that has perhaps altered the global economic axis in a manner rarely encountered in history. China’s growth has been phenomenal with sustained GDP levels from a high of over 14% to its current level of around 7%
The Shanghai Stock Exchange has become the biggest traded exchange in the world although the currency of China the yuan and its financial markets up to this point have been controlled by the central government.
Therefore for the Chinese population many have witnessed growing prosperity creating a very strong middle class (this is estimated to grow from approximately 300 million to 600 million by the end of the decade). This is meant increasingly more disposable incomes. This begs the question where are people investing their new found wealth? We know from history that the Chinese are probably the world’s shrewdest entrepreneurs with centuries of success behind them.
Until recently fuelled by this national growth there has been a massive shift to acquire property a further avenue to increase wealth; unfortunately oversupply and increasingly overheated market is now showing signs that the faith in investing in this area for the moment is at least waning.
It is a cultural fact that the Chinese are inveterate natural gamblers and the government have tried to control this by having only selected gambling zones such as Hong Kong & Macau being licenced to conduct such activities. There is growing evidence to suggest that sections of Chinese society exhibit elevated levels of problem gambling; estimates range between 2.5 and 4% of the adult Chinese population compared to between 1.5 and 2% in Western populations.
Therefore during the rapid growth in the economy has opened up great opportunities for increasing wealth by operating on the stock market. Until now this has brought rich returns to those investors but the slowing down of perceived growth has caused a rethink on further investment decisions with a growing threat of ongoing volatility.
This burgeoning growth in the last two decades in the Chinese economy seems to have slowed (even given today is a creditable 7 % in western terms) the sentiment of a growing amount of expected investors can create an even more unstable world economic environment given the characteristics in that market. The control that had been historically exercised by the government is now being seriously tested it remains to be seen if they can stabilise the situation today and for tomorrow.
It demonstrates yet again how much we are engaged in wide ranging social and economic change around the world which inevitably will alter how we view matters.
Ken Wood *
Interventionist & People Specialist
26th August 2015
*Ken Wood has worked and lived in the Asia-Pacific region for over 30 years including spells in China