The stock market in China is still unstable and many wonder if it is merely a bubble or something more fundamental that will impact gravely on the world economy. The crash of the stock market in China has parallels to the crash in 1929 on Wall Street some observers are suggesting. And this could impact on us across Europe and the rest of the world. This according Jeremy Walker of the Telegraph is the big financial crisis of the present day and one that puts the Greek crisis into perspective and one that will affect Europe perhaps more profoundly than the crisis over the Euro.
His article was written in July of this year but very pertinent given the Chinese stock market crash that we are seeing at the present time. It is worth considering his arguments. He points out,
“The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth.”
“As noted by JK Galbraith in his classic account, The Great Crash 1929, even as late as 1927 it was possible to argue that American stocks represented fair value.
It was only in the final year that the “escape into make-believe” happened in earnest, when the stock market rose by nearly 50pc. This applies to the Shanghai Composite, too. Stripping out the lowly-rated banking sector, valuations for just about everything else have rocketed, making those that ruled on Wall Street in the run-up to October 24, 1929, look relatively modest. Nor do the similarities end there. As in 1920s America, China’s stock market boom has ridden in tandem with an equally speculative real estate bubble. “
“The macro-economic backdrop is also surprisingly similar. Then, as now in China, rural workers had emigrated to the cities in vast numbers in the hope of finding a more prosperous life in fast-growing industrial sectors. In 1920s America, virtually all these sectors – from steel to automobiles and the new technologies of radio and consumer durables – grew like Topsy, inspiring households to invest in them and chase the apparently bountiful profits they were generating.
A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history before, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate. “
Whether the crash will be as serious as 1929 remains to be seen because as Jeremy Warner states in his article states we have learnt a lot since 1929 but whether what we have learnt will help is the critical question. Warner argues that there is “very little evidence for China’s technocratic elite having things under control.”
The next few months could be an interesting time as we adjust to this new situation and what responses can be made.http://www.telegraph.co.uk/finance/china-business/11725236/The-really-worrying-financial-crisis-is-happening-in-China-not-Greece.html