China’s market crash may have been slowed by the government, but the economy still faces problems—and they extend far beyond the country’s borders.
Not to Burst your Bubble…
Standard & Poor’s reported recently that the recent burst bubble in China’s housing market could have a greater effect on its economy than previously thought. The government’s intervention after Chinese stocks lost over US $3 trillion earlier this month succeeded in slowing the decline and prevented a crash—but the economy continues to waver, and repercussions are being felt around the world. On Monday, the Shanghai Composite index fell a sharp 8.5%. S&P warned that negative effects will be seen in “the Chinese financial institutions sector”, with a small risk of contagion if the market continues to depreciate.
According to the Financial Times, multinational corporations have cut their growth forecasts for the second half of the year, citing the slowdown in Chinese markets as the reason. Auto dealers in particular are predicting slower growth—already, the Chinese market for cars has been impacted. Construction, too, is under pressure: since the housing market was the most badly damaged this month, new projects are in jeopardy and expansion is threatened. That’s affecting raw materials and harming industries in South American and African countries.
The Economist reported today that Chinese market troubles have begun to exacerbate an already rough downwards trend in raw materials prices from emerging economies. Global paper and packaging company International Paper reported losses this week due to slowing sales in Asia, particularly China. Copper and silver prices are at a six-year low, while oil prices dipped sharply this month. Manufacturing activity in China fell below expectations this month, accounting for the drop in demand and prices of raw materials.
While the government is scrambling to mitigate losses, analysts point to similar efforts to intervene that failed in other countries—namely, eerily similar failed attempts to save U.S. markets in 1929. CNN reported that while U.S. bankers were able to stabilize the market in 1929, it nonetheless tanked a while later. Some economists worry that the central government’s attempts merely mask a deeper problem that will eventually come to light, further slashing commodity prices and seriously damaging emerging market economies. Other experts believe that the government’s intervention is unnecessary, only inciting needless and harmful panic among investors in emerging economies. Irrespective of the root cause, plunging raw material prices are certain to affect the global supply chain.
While many countries are taking a hit from China’s problems, India is actually benefitting. The country gained over US $700 million in international investments in June, largely due the country’s more stable manufacturing capacities. That economic boost adds some optimism to the state of global manufacturing, but so far not enough for economists to relax. The chaos and global repercussions stemming from the market tumble emphasize China’s grip on the global supply chain, as well as the fragile state of manufacturing in emerging economies.