China: Financial turmoil spreads fear across global markets

Per-Åke Westerlund, with additional reporting by Vincent Kolo

Global financial markets started 2016 with a bang! A reprise of last summer's chaotic falls on China's stock markets triggered panic selling of shares, commodities and currencies around the world.

The first six trading days for China's Shanghai and Shenzhen markets saw the total value of the market shrink by 15%, a loss of $1 trillion. Worldwide, $4 trillion was wiped from stock markets as fears spread.

Does this set the tone for the world economy in 2016? The capitalist George Soros is among those predicting another financial crisis like that of 2008.

China is the world's second largest economy and biggest trading nation. The sharp slowdown that started two years ago in the Chinese economy has already brought profound crises to several countries that depend on commodity trade with China.

While stock markets offer only a limited guide to processes in the real economy, and China's stock market is widely dismissed as a 'casino' (although that could be said of all of them), the fresh outbreak of financial panic is rooted in real problems.

The world economy has achieved only the most fragile of 'recoveries' from the deep crisis of 2008, while its imbalances have become more extreme.

The Chinese economy, now the epicentre of global instability, is experiencing a much sharper and more complicated downturn than its leaders have publicly acknowledged.

Commodities slump

The Chinese economy's slower growth has been the main factor behind drastically lower commodity prices. Of the 46 commodities monitored by the World Bank, the price of 42 of them is now at the lowest level since the early 1980s. Oil prices are continuing to fall, even as tensions in the Middle East are rising,

Falling oil revenues have pushed many oil producing countries into recession, stoking political unrest from Saudi Arabia to Venezuela.

China's debt burden - particularly in the corporate sector and local governments - is now consuming almost all new credit in the economy just to keep it rolling over.

China is therefore becoming a bigger and more unstable version of Japan, in the sense that large parts of the Chinese economy are now 'zombified' and can only produce more debt, rather than offering profitable investment opportunities.

This also explains the rush by the moneyed elite to get their capital out. Credit ratings agency Fitch puts capital flight from China since the second quarter of 2014 at the staggering level of $1 trillion.

There are already clear signs of a loss of control, which is another factor unnerving global markets. We saw this with last summer's comedy of errors: a botched devaluation and misfiring market rescue policies.

Now we see the same thing with the decision to abandon - after just four days - the 'circuit breakers' that were supposed to make the stock market less volatile.

Although it is too early to say whether Soros's prediction of a financial crisis in the short-term will materialise, the risks have undoubtedly increased during the first weeks of 2016. Politicians and capitalists have no answer to capitalism's crises and this includes the dictatorship in Beijing.

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