adminBEIJING – On Monday August 24 China’s Xinhua TV announced “Black Monday” on Twitter.
“China stocks join global panic selloff, dive 8,5 percent, worst since Asian financial crisis at midday”, it said.
Stock markets around the world responded.
The Dow Jones, the FTSE100 and the DAX all fell sharply, with the Dow briefly recording a fall of over 1 000 points.
Commodities continued their losing streak, and mining companies were especially hard hit, with Glencore, Rio Tinto, Anglo American and BHP Billiton all down significantly.
HSBC, the UK bank which has 70 percent of its business in the Far East, also saw its share price fall.
Currencies around the world were hammered, especially those most exposed to China. Not since 2008 has so much red been seen on trading screens.
So is this a global stock market correction?
Yes. Mohamed El-Erian, former CEO of PIMCO, describes it as a “very unpleasant repricing”.
Will it lead to another financial crisis like 2008? No. Unless someone does something stupid, we are not going to see another Lehman-like collapse in the Western financial system.
Significant work has been done since 2008 to shore up banks and make the financial system more resilient, which makes it much less likely that a major shock in the Far East would have significant negative effects on Western banks: even HSBC has a more robust balance sheet than it did in 2008, so should be able to withstand the fallout reasonably well, although it would probably suffer a sizeable dent in its profits.
The Chinese financial system is highly leveraged, so bank failures are likely, but the Chinese authorities are not likely to make the mistake of allowing disorderly failure of a major bank as the US government did in 2008.
Several commentators have said this looks like a re-run of the Asian financial crisis of 1997. From Reuters, for example:
“Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable,” said Takako Masai, head of research at Shinsei Bank in Tokyo.
This doesn’t seem right to me. The “Asian tiger” economies built their fast growth on high foreign borrowing and large current account deficits, supported by inadequately regulated and supervised foreign and domestic banks lending excessively to corporations and households with scant regard for risk or sustainability.
It all ended with a “sudden stop” in 1997, causing widespread corporate and household defaults and fiscal and currency crises in several countries.
The Asian crisis, therefore, was caused by excessive external debt. That’s not the case in Asian countries today.
Nor, despite the name, is this much like the “Black Monday” crash in 1987. That would now be regarded as a “flash crash”.
No, to find the right analogy we must look further back in time. The closest equivalent is the Wall Street Crash.
The Wall Street Crash did not occur in a single day.
It was actually a series of sharp falls occurring over the space of about six weeks.
The largest single fall was on the original “Black Monday”, October 28th 1929, when the Dow fell by nearly 13 percent.
But the Dow hasn’t fallen by anything like as much as it did in 1929, has it? Forgive me, Americans, but this is not your party. It is the Shanghai stock market that is falling. This is China’s 1929 moment.
Admittedly, the Shanghai has not fallen by as much as the Dow did in 1929, either.
But then it hasn’t had a nine-year bull market preceding it.
Nevertheless, it has suffered a series of falls of which the latest is the most severe, and there is more to come. – Forbes
Online Reporter