Lessons from China's summer of instability
A COMMON market axiom is: "Nothing ever happens in August". In fact, this has often been proved wrong, from the start of the financial crisis in August 2007 all the way back to the outbreak of the first world war in 1914. And this year has provided yet another counter-example. The summer-long swooning of the Chinese stock market caused Western nerves to crack and markets to dive in sympathy.
It is worth standing back to consider why this was so, and what is driving that weakness. Signs of a softening Chinese economy is not good news for international economic activity, and for world markets.
China's economy, after a generation of rapid growth, is now the second-largest in the world, and represents the largest single contributor to world growth. The Chinese economy matters. And for any other economy, it might be a fair assumption that extreme weakness in the stock market reflects weakness in the underlying economy. The falls on the Shanghai bourse are surely a warning for the West.
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