What China's 'Black Monday' Means for the British Economy

This article originally appeared on VICE UK.

China's "Black Monday" has spooked traders right across the world. The biggest one-day fall in share prices since the dark days of the financial crisis, back in 2007–8, left speculators frantically ditching shares in markets from Tokyo to New York, fearful of the consequences for a fragile world economy if China goes belly-up.

Some went further. Damian McBride, the former press chief of former UK Prime Minister Gordon Brown, could be found on Twitter recommending readers stock up on food. He could remember the depths of the 2008 crisis when Brown was to be found musing on the need to use troops to restore order, should the government's trillion-pound bank bailout fail.

We're not in 2008. You can hold off on stockpiling baked beans. But what the tremors show is that the foundations of the world economy are as shaky as ever.

2008 was a crisis caused by debt. As the superheated boom of the early 2000s reached its peak, countries like the US and the UK saw their financial systems dishing out fresh loans to anyone who could be persuaded to take them.

When these loans failed, the house of cards the financiers had assembled came crashing down. The global economy collapsed into its worst recession since the 1930s.

China was one of the few bright spots. After decades of double-digit growth, it was on its way to becoming the world's second-largest economy. Investment was pouring in to its industries. The response of the authorities to the crash was immediate: they made it far easier, and cheaper, to borrow money, with fewer questions asked. Billions of yuan flushed through China's creaking financial system.

Its economy sailed through the recession, hauling the rest of the world behind it. By sucking in raw materials to feed its boom, China helped exporters like Australia keep moving.

Growth, however, has slowed. And China's total debt—including firms, households, and government—has skyrocketed from $7 trillion in 2007 to $28 trillion today. Just like in in the West, much of that borrowing has helped fuel a property bubble. Its local authorities, dependent on property taxes for their own income, and with corrupt officials happy to have their palms greased by corrupt developers, encouraged the boom. Land sales raised $438 billion for China's local governments in 2012.

That bubble has now burst. Property prices are sliding. Like the US authorities at the end of the 1990s, China's rulers have responded to one collapsed bubble by stoking up another. Egged on by the authorities, smaller investors have been piling into Chinese shares. Prices have risen 150 percent in 12 months.

But by early July that bubble was also running out of steam. Slowing growth turned into falling share prices as speculators began to pull out of Chinese markets. The authorities have attempted to intervene, using at least $480 billion to buy shares and keep prices up.

That hasn't worked. Traders have lost faith in the government's capacity to keep prices afloat. East Asian economies, their biggest export market shrinking, are hardest hit, followed by the raw materials exporters.

And the Western country with the largest amount of money loaned to China? That would be the UK. Contagion can spread rapidly—as demonstrated by China's slump causing uncertainty across the world.

China is likely to slash borrowing costs still further in the next few weeks. If that, too, fails, the crisis will worsen. But if it succeeds, it'll be at the cost of adding still more to the debt pile. It'll push the real day of reckoning into the future. It won't prevent it happening.

It's unlikely we'll see direct repeat of 2008 in the UK. But we're recreating the economic conditions that got us there, as the "recovery" pushes households back into unsustainable debts. The economy we have is geared to produce crisis after crisis: maybe China this time, maybe Europe next, maybe our own property bubble bursting after that. Until we make a clean break with that debt-ridden model, this is our future.

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