By Jason Margolis and Matthew Bell
It’s only one week into 2016 and twice now, massive sell-offs of Chinese stocks have triggered a new circuit breaker meant to prevent a market free fall there. This has sent shock waves to markets beyond China’s borders.
So, is it 2008 all over again?
“It is not,” says Bill Bishop, author of the influential Sinocism China Newsletter. “Even if it were, it wouldn’t be caused by the Chinese stock market.”
China’s stock market is easy to understand, Bishop says. It works like a casino. There are winners. There are losers. Lady luck is in charge.
“The markets in China have never really been related to the economy itself,” Bishop says. The market has only been around for about 25 years. It has relatively few investors.
Most people in China are also well aware that stocks are bets and winnings need to be snatched off the table quickly, before they disappear.
Bishop says some Chinese investors learned the hard way, when the market crashed and erased around two-thirds of its value in 2007. Then it crashed again last summer.
“What’s happened over the last couple of days is more a set of policy errors on the Chinese government, [rather] than something more fundamental going on,” he says.
The plunge in Chinese stocks might seem panicky and sudden, but the cooling off has been long in coming.
“China’s slowdown certainly wasn’t sudden,” says Robert Kahn, a senior fellow for international economics with the Council on Foreign Relations. “It’s important to remember that China, over the last several decades has grown in excess of 10 percent per year and has accomplished one of the most impressive economic transitions from an emerging market to a major economic power.”
But economists knew that China’s meteoric rise wasn’t sustainable. Read more