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What does the market crash say about China’s economy?

January 7, 2016 at 6:45 PM EDT
The Chinese stock market dropped 7 percent in the first 29 minutes of trading, before shutting down to stem further losses. China’s second major crash in the past four days drove investor skittishness around the globe, including a Dow loss of nearly 400 points. Gwen Ifill learns more from David Wessel of the Brookings Institute.
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GWEN IFILL: In just 29 minutes today, China’s stock market plunged 7 percent, and then was shut down altogether for the day. It’s the second time in just four days the China markets have crashed badly, sending major ripples around the world, including on Wall Street, where the Dow dropped nearly 400 points, and continued a two-week slide.

Let’s look at what’s behind the great fall in China with David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. He is also a contributing correspondent to The Wall Street Journal.

David, help us puzzle this out. China’s economy or at least its markets are not that big, but the reverberations certainly were.

DAVID WESSEL, The Wall Street Journal: That’s right.

China’s economy is pretty big.

GWEN IFILL: Yes.

DAVID WESSEL: And I think the one thing that’s going on here is that people are saying, uh-oh, the Chinese economy might be slowing more than we thought and the government is having a hard time stimulating it again.

So, that’s one thing. There’s worries about that. But you’re absolutely right. China’s stock market is not very big. And yet when stock market has a bad day in China, it seems, Europe has a bad day and then we have a bad day.

GWEN IFILL: What’s that connection between a 7 percent drop in China and a 400-point drop here?

DAVID WESSEL: I think it’s hard to understand in economics. It’s easier to understand on psychology.

It’s a kind of panic or a sense that the world economy is just not in as good shape as we thought and so everybody is chasing everybody else.

GWEN IFILL: And that is something in which this psychological panic is always what drives markets, not necessarily anything that makes any other kind of economic sense.

DAVID WESSEL: Absolutely. Absolutely.

But there is the fact that — people have had a lot of confidence that the Chinese leadership could fix what is wrong with their economy so it wouldn’t have ripple effects around the world. I think that confidence is being shaken by how difficult it is for them to manage their stock market and their currency.

GWEN IFILL: Well, let’s talk about managing the currency that was part of the solution here, which is to let the currency fall. But that seems to be making it worse?

DAVID WESSEL: Right.

I think it was seen as a symptom that the Chinese leadership may be really scared about their economy. Why would they want their currency to fall? Well, the only reason you would want your currency to fall, if you could control it, is in order to get more exports. Why would you want to depend more on exports if you’re a country that has a stated policy of relying less on exports and more on consumer spending, domestic spending?

They must be worried about consumer spending not being as strong as they had thought.

GWEN IFILL: And then stopping trading mid-trade, that — I remember when that happened on Wall Street here, and it sent complete panic throughout all the investors here.

DAVID WESSEL: I think the Chinese are really amateurs when it comes to running markets.

GWEN IFILL: Ah.

DAVID WESSEL: They don’t really believe in markets. They like stability, they like control. So we have circuit-breakers here and if the stock market falls some, we take a pause in trading, but in the U.S., stocks have to fall 20 percent before we shut down trading for the day.

The Chinese shut down trading after only 7 percent. And I think what they put in as a way to make people collect their wits, cool down a little bit, has, instead, accelerated panic. I wouldn’t be at all surprised if they change the rules.

GWEN IFILL: Do you expect that there will be continued volatility there as well as here?

DAVID WESSEL: Well, nobody really knows what the market is going to do, but it sure looks like we are going to have a lot more volatility.

GWEN IFILL: Yes.

DAVID WESSEL: At some point, people may decide that the U.S. stock market has fallen enough. After all, the U.S. economy seems to be getting better, that what happens in China is not going to have that devastating effect on car sales here or how many people buy Apple phones or what happens at — how many people shop at Wal-Mart.

It may be that the U.S. stock market starts to rise if people think it’s gone far enough.

GWEN IFILL: But you have alluded to the fact that people are worried that is not what is happening with the Chinese economy, that in fact it may not be that resilient.

DAVID WESSEL: Right. That’s the fear.

People have put a lot of faith in the government’s ability to get growth going in China. People have this, what I think, illusion that there are six people in China who really have their hand on every button. And what we’re learning is, it’s a very big economy and they’re not that good at it.

So, people’s confidence in their leadership has been shaken. If the government can’t get the economy moving again, they have a lot of fundamental problems. They may now show through.

GWEN IFILL: Is there a way to draw a loop between what’s happening in China’s economy, what is happening here, and what is happening with the depressed price of oil around the world?

DAVID WESSEL: Yes. Yes, there is.

I think oil prices are down for two reasons. One is, there is a lot of supply. There is a lot of supply because the U.S. now produces a lot of oil and there is a lot of supply because the Saudis seem to want to produce a lot of oil, maybe to punish the Iranians and the Russians.

But there is also a concern that there is a lack of demand of oil. And so when commodity prices fall, it’s good if you happen to be a consumer, but it’s sometimes seen as symptom of a weakening economy. So I think that exacerbates the feel that maybe China is slowing down. That means it will be buying less from Africa and Latin America. That means Procter & Gamble and Coca-Cola will sell less in Latin America and Africa. And so it is definitely related.

GWEN IFILL: Fascinating.

David Wessel, thanks, as usual, for clearing it all up for us.

DAVID WESSEL: You’re welcome.



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