China And The (Potential) Impending Financial Crisis Explained With The Help Of “Arrested Development”

Prognosticators are warning of another economic meltdown, not unlike the global financial crisis of 2008.

As ABC’s The Drum reports, economic analysts are usually a gloomy bunch, so warnings of the coming financial apocalypse are frequent.

However, is there something more worrisome about this particular crisis?

The Royal Bank of Scotland (RBS) recently urged investors to “sell everything except high quality bonds,” in anticipation of a “fairly cataclysmic year ahead,” based on China’s economic slowdown, global debt, the decreasing price of oil and the increasing automation of jobs (actually – half of all the jobs in the developed world).

This is a major bummer for the Eurozone, who have worked hard to turn around the Euro and had started showing signs of recovery.

Also on the Debbie Downer side of the argument is J.P. Morgan Chase, who have begun telling investors to sell any bouncing stocks for the first time in seven years.

Meanwhile, strategist Albert Edwards, of Société Générale in London, isn’t pulling any punches, sharing this bit of straight talk at a conference in London: “Developments in the global economy will push the US back into recession… The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”

Billionaire investor George Soros sang a similar song at a forum in Sri Lanka.

“Unfortunately China has a major adjustment problem and it has a lot of choices and it can actually transfer to the rest of the world its own problems by devaluing its currency and that is what China is doing,” he said.

So… do we need to be paying more attention to this thing? And how can we even, when this whole tangle of economic jargon is so impossibly complicated to understand? Here’s the basics of what you need to know.

Slow down. What was the global financial crisis?

In 2007 and 2008, the global economy was struck a blow when the United States' housing bubble burst.

Much of the American economy - and the investments of average Americans - were tied up in what was thought to be a reliable housing market; in reality, predatory lenders we're handing out mortgages to people who flat out could not afford to pay them back.

Eventually, homeowners either abandoned their homes - and the mortgage that came with it - or were foreclosed upon, in which the organisation who initially loaned the money simply took over the property. Not only did this lead to widespread devastation and financial distress among families, it left a massive chasm of owed money.

The giant companies who had bet big on the now-crumbling housing market lost $512 billion.

America's government attempted to keep their economy from cratering by bailout out these newly-bankrupt institutions, but by this point, stock markets around the world had crashed. The GFC led to a global recession, and though Australia avoided such a fate, many European nations were left in disarray.

Slowly, the global economy crept back from the brink. Cut to...

China: Kind of a big deal.

China has seen a dramatic devaluation of their currency over the past year.

It's largely a reaction by the People’s Bank of China to a number of concerning trends.

Primarily: a growing retired population and a shrinking number of workers. China instituted a new plan to allow parents double the number of babies in an effort to stem the nation’s declining birthrate. However, it won’t affect their workforce until after 2030.

That’s not all. Interest rates have been cut six times since November, manufacturing has declined and Government budget commitments (to end poverty via infrastructure; to build-up the military; to construct China’s first home-built aircraft carrier) are outpacing the economy’s growth. According to Al Jazeera (and many others), China could soon find itself facing a significant budget deficit. In fact, they already have about $US28 trillion in debt.

This sounds bad. How is China reacting?

Not great. A recent stock-market slump led to “circuit breakers” going into effect. These are automatically triggered and put immediate halts on trading, which, obviously, sent the market into a panic. (It’s the stock market equivalent of thinking the sky is falling around you, but suddenly you’re not allowed to run.) China removed the trading barricades to ease their concerns, though it couldn't keep the market from dipping even further.

Now the Shanghai Index is nearing what is known as a ‘bear market’, which is basically when a sustained decline of 20 per cent encourages the selling of shares, and where the panic and pessimism it inspires keeps the decline “self-sustaining.”

All bad news for an economy that for many years had grown 10 per cent, annually, and is now in sudden decline.

Though it’s hard to blame freaked investors, their rash reactions to the slowdown might make this a self-fulfilling prophecy.

How does that affect us?

Well, simply put, the economic slowdown of the world’s second-largest economy is going to have a ripple effect on a global scale, with many relying on China for exporting purposes.

Australia, for instance, relies on China as an export market… to the tune of 33 per cent. That’s right: a third of Australian exports goes to China. It’s fairly important to our economy that they be able to afford those exports and keep our industries plugging along.

Already, we’ve seen lower demand for our mining commodities. For instance, Australia anticipated exporting quite a bit of iron ore to China, to accommodate their aforementioned infrastructure projects; projects that, soon, may be re-evaluated.

When might we start feeling this?

Err, we already are.

Today, the Australian share market fell by 2.5 per cent, wiping $38 billion off the market’s value.

Our dollar even slid to 69.4 US cents. This is the “risk sell-off” zone, which you probably don’t need defined to know that it ain’t great.

Okay, but how much of this is just economists and investors being worrywarts?

You ask that, invisible reader, as if panic doesn’t massively influence the market all on its lonesome.

Consider The Washington Post’s explanation:

“[W]hen people move their money out of China, what they're really doing is selling their yuan to buy, say, dollars. But that's just another of way of saying that there isn't as much demand for yuan—so its price falls. And if that happens, other people who hadn't wanted to get their money out of China might decide that they better do so before it loses any more value.”

Even the rumblings of an impending market crash can be enough to send investors scurrying, and, as we’re seeing with China, that is having a direct influence on their currency. Without the confidence of the local and global market, it may struggle to recover.

Well, what’s the good news?

It would be inaccurate to say the United States, Australia and many other nations didn’t learn some lessons from the 2008 GFC, with some structural reforms now in place to help protect us from future calamities of that nature.

Also, not all economists are so apocalyptic with their predictions, with many noting that the Chinese government has been long aware of their economic issues and are working to buck the trend.

But nonetheless, Australians should definitely be keeping an eye on what’s happening with China.

If you want to know more – and we hope that you do - follow any of the above links and do some armchair investigations of your own.