Why are global markets acting so choppy lately? The short answer: China. The proportion of global growth has historically been the purview of developed economies. Given the explosive growth in China over the past few decades, we’re now seeing developing markets make a greater influence on worldwide commerce and investment.
Ok, so what is happening in China? There isn’t a short single answer, but several good ideas. First, investors, as a rule, don’t like government interference in markets such as the Chinese backstop on their local equity exchange. Government intervention installs problems of moral hazard, incentive distortion, and lack of transparency, none of which promote investor confidence. Second, the 7% growth targets for China have been so high for so long, that a modest slowdown might not be politically viable for the ruling Communist party, encouraging even more interference. Third, Chinese currency fluctuations are seen as a sign of weakness. There are a variety of reasons for the recent yuan devaluation (maintaining exporter competitiveness, concessions to the World Bank to make yuan a reserve currency , deflationary concerns), but currency devaluations are, at best, a zero-sum game for global growth. At worse, a full blown currency war could *really* disrupt the markets. Fourth, there is an existential worry about such a large economy with so many unknowns. For instance, there are multiple sets of accounting books and balance sheets for many Chinese businesses – one for public distribution and one for insiders only. The lack of accountability in the Chinese system means that some lessons may only be absorbed after a catastrophic failure, like the Tianjin chemical depot explosion.
A slowdown in China is a legitimate cause for concern, but not panic. We’re still looking at recession based on fundamental slowdowns, probably not an outright collapse akin to 2008. A sophisticated market isn’t one that NEVER goes down, but rather one balanced and strong enough where inevitable downturns are met with clarity, grace, and corrective action. It’s a lessen we hope China learns sooner rather than later.