Petr Ježek

While attention in Europe is rightfully centred on the situation in Greece at this time, there is also economic volatility further afield which by some commentators' reckoning could be even more disastrous to the global economy. In recent weeks, the Chinese stock market has lost $3.2tn in value. This is an amount which makes the €317bn of debt in Greece look like pocket money.

It is true that many analysts had expected a correction in the Chinese markets as they rose by 150% in the last year, but the rate at which this has happened has unnerved most, with the Chinese governement stepping in already to micro-manage the stock markets. With no clear underlying cause of the troubles in the Chinese market, the Economist asserts that the government's intervention is in fact adding to market jitters. There are real fears that a crash in China could happen, and it would not be good news for the global economy.

The increasing instability has come about as the country continues to internationalise its currency, with further offshore centres opening which deal in exchange of the Renminbi. This process began in the wake of the 2009 Financial Crisis, to which China had become exposed due to the fact a number of its assets were denominated in US$. Analysts agree that the ultimate aim is to make the Renminbi a reserve currency, which would eventually rival the dollar as the largest reserve currency in the world and give China more control should there be another global financial crisis.

I recently spoke at an event which took stock of the steps taken so far by the People's Bank of China and which also set out what was needed in the future to complete the internationalisation process of the RMB. It was widely recognised that going through such a process would bring some uncertainty to China's economic growth as it becomes more subject to volatile market conditions.

While some argue that China will not have as big a crash as was witnessed in the US in 2007 due to the cultural and political emphasis on 'saving face' as well as its still relatively low percentage of household wealth which makes up the market (8% compared to 20% in developed nations), the very fact that it is opening up to global markets means that the iron fist which the Chinese government has until recently held on its markets could loosen to become more of limp wrist. I would argue that we are already seeing the effects of this change, despite the attempts of control of the market from the government. China seems unable to entirely dispel concerns among investors, despite encouraging its largest firms to invest further, as smaller investors continue to withdraw from the market.

The next few months should give a clearer idea of whether there is a 'bubble' in the Chinese market and what knock-on effects this could have, especially if the government's smoke and mirrors approach to internal economic policy becomes ineffective in entirely concealing the troubles within the market, or worse, exacerbates them. The EU may be walking on thin ice with the turmoil in Greece, but there may be nothing it can do if an economic tsunami arrives from the East.  

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