Comment: China crisis needs weighing on world scale

Global market meltdown, or storm in a China teacup?

By the end of Monday, a second straight day of turmoil in world financial markets, many experts were inclined to think it was the latter. True, there are potentially serious issues out there in the global economy – falling commodity prices, high levels of sovereign, corporate and personal debt, and slowing economic growth – but China’s crazy financial markets are not going to be the pin to prick the global bubble.

That is not to minimise the risk. It has been a scary few days. Market crashes are characterised by that hopeless feeling that there is nothing anybody – governments, regulators or investors – can do to halt the downwards spiral, and there have been occasions when that feeling was ominously close recently.

When US markets fell back to pre-Lehman levels on Monday, there was briefly a hint of the vertiginous spirals of 1929, 1987 and 2009. The VIX indicator – the “fear index” – spiked at unprecedented levels.

The other date much in mind was 1997, when a run began on some currencies that heralded the full-blown Asian financial crisis of the following year.

This week, Black Tuesday followed Black Monday, at least in China, with huge declines in that country’s stock exchanges. But let’s get some perspective here.

Last week, coincidentally, the World Economic Forum (WEF) produced one of its occasionally frivolous but always illuminating graphics, entitled “what the world would look like if countries were the size of their stock markets”. It showed a world map dominated by a gigantic United States, whose stock exchanges are valued at nearly US$20 trillion. A larger-than-life UK was plumb in the middle, valued at $2.7tn. Japan was on the far right, priced at $3tn.

Peer into the bottom right of the map and you struggle to make out tiny China, with the market capitalisation of all its exchanges just $890 billion. Even if you add in Hong Kong, its equity markets are almost marginal on a global scale.

So all the talk of “contagion” spreading from China to Europe and America was just that – talk. After a couple of wobbly bouts, stock markets in the west recovered and began to ask themselves why they were so worried in the first place.

The economists pointed to the very real fear that China’s market convulsions were a sign of a deeper economic and political malaise in the country, with the transition from a producer to a consumer economy putting strains on the social and political system that would force the country into recession.

But again, perspective is needed. China has been the dynamo of global economic growth for so long that any slippage from GDP rates of 7 per cent plus might seem disastrous.

But that would be to ignore rising growth rates in the rest of the world. The American economy looks to be on the brink once again of sustained, significant growth; India is approaching Chinese levels of expansion; a turn-round in Europe, if it ever gets its act together, would more than compensate for a slowing China.

The rest of the world needs China, but not as much as China needs the rest of the world, as one expert opined.

Where does this leave the UAE, whose stock markets, incidentally, are too small to even figure on the WEF map?

Largely unchanged, is the best answer. Dubai and Abu Dhabi equity markets took fright on Sunday, almost it seemed out of a sense of equity solidarity, but recovered pretty quickly on Monday and Tuesday. China, of course, is an increasingly important trading partner for the UAE, but there are other fish in the sea if China’s growth falters, such as India and, lately, Russia.

There are still big economic challenges ahead for the UAE, most significantly the continued and seemingly unstoppable fall in the price of oil, upon which so much depends. Add in high levels of debt, corporate and personal, and a rickety property market, and there are plenty of things to keep Emirates policymakers awake at night.

But they should not be losing too much sleep over Chinese stock markets.

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