For the second time in three days, China’s major bourses have had to stop trading in the early part of the trading session due to drastic sell-offs. Automatic circuit breakers suspended trading when the herd-like dumping of shares sent equity prices in a downward spiral at dizzying velocity. The Shanghai Composite Index declined by 7.3 percent; China’s other major stock index, the Shenzhen Index , lost 8.3 percent of its opening value.
During the course of 2015, Chinese stock markets suffered a number of devastating single-session declines, signaling problems with the Chinese economy and their inevitable contagion effect on the overall global economy. As I have noted in an earlier blog article (China Stock Market Crashing and Burning Before Our Eyes http://www.huffingtonpost.com/sheldon-filger/china-stock-market-crashi_b_7752054.html ), the increasing instability of the Chinese equity markets will have profound and highly negative implications for all major economies.
What are the likely implications for global economics in the light of the wobbly beginning for China’s stock markets in the new year? To begin with, the volatile character of China’s equity markets is a signal by investors of their deep anxiety over declining Chinese manufacturing alongside the weakening economy of the Eurozone, the largest single market for Beijing’s exports. It also may be a clear sign that a new global recession may be just around the corner.
There never was a real recovery to the catastrophic global financial and economic crisis that arose in 2008. For seven years, central banks have scaled back interest rates to just about zero, while sovereigns accumulated unprecedented levels of public debt to sustain extremely marginal levels of GDP growth, while the real unemployment rate among the major advanced economies stagnated at historically high levels. In effect, all the arrows in the policymakers’ quiver have been expended, leaving sovereigns virtually unarmed if forced to confront a new global recession.
The rout in China’s stock markets may be the first signs of an annus horribilis for the global economy, with a virulent and economically devastating continuation of the Great Recession that never really ended. The one difference between 2008 and 2016 will likely stem from the implosion of China’s equity markets, as opposed to the sub-prime mortgage collapse in the United States, being the enabler of fiscal and economic crisis and germ of global contagion. An important distinction between 2016 and 2008, in addition to China replacing the U.S. as the center of gravity in a new global recession, is the international climate. The world is experiencing far more instability, multilateral tension and flashpoints than transpired during the initial period of the last global recession. Geopolitical volatility converging with China’s stock market crash may lead to a global economic contraction that will exceed 2008 in its ruinous impact.
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