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Why the US Shouldn’t Panic About China’s Stock Market Collapse

Global investors have overreacted to China's massive stock market plunge, economists told VICE News. The US in particular does not need to be too worried, they claimed.
Photo by Justin Lane/EPA

Uncertainty continued to reign across the global stock market Wednesday as investors waited to see whether China could manage to stabilize its economy following its massive plunge on Monday.

It was hoped the worst was over after the People's Bank of China cut its interest rates late on Tuesday and lowered the amount of reserves it demands that banks hold, but the country's key share indexes continued to move up and down on Wednesday.


US investors reacted quickly to the Chinese "Black Monday," the culmination of the country's stock prices dropping nearly 20 percent in three days. On Monday the Dow Jones industrial average dropped an unprecedented 1,000 points upon opening. It recovered strongly after that, just to dip, recover and dip again — after China announced its rate cut.

But economists and finance specialists told VICE News that markets were overreacting. "Stock market investors panicked on Monday, there is no reason to do that," said Chen Zhiwu. Chen is a professor of Finance and Economics at the Yale School of Management and was born and raised in China. "China's economy is slowing down. But the American economy is looking good at the moment. And it is more than twice the size of the Chinese economy."

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Barry Eichengreen, economist at the University of California, Berkeley, told VICE News: "There was no news from China that would justify this steep decline in stock markets on Monday." August, he said, was a slow news month. "A lot of people are on summer vacation. There is nothing happening but Donald Trump — and now China. In situations like these, markets overreact." Information coming out of China is sparse, mostly controlled by the state and often questionable. "We do not know more about the Chinese economy than (we did) a week ago," said Eichengreen.


The mounting of distrust of China started when its central bank devalued its centrally controlled currency by three percent in early August. Since then money managers around the globe have been worried about the state of the Chinese economy. Many investors have assumed that the Chinese government devalued the currency because the country's rate of growth was slowing down. Yale economist Chen does not deny that this is happening. He is sure that the country will not reach its goal of 7 percent growth this year. "But it is still growing, just at a slower pace," he said.

Most experts believe the official growth rates provided by the Chinese government at the moment are overstated. Chen estimates current growth to be 5 to 5.5 percent. And he is sure that China will not return to its extremely high growth rates for the next ten years.

Nevertheless, US citizens should not be too concerned about that, Chen believes. After difficult years in the aftermath of the financial crisis, the US seems to be recovering, it is growing faster — the unemployment rate has nearly halved since 2009. Chen believes that the decent US growth could offset the slowdown of the Chinese economy. "The world economy should still be in decent shape," he said.

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It is emerging economies and commodity export economies that should be worried. "All countries that rely on commodities related to construction, infrastructure, real estate should be affected in a major way," said Chen. That is because China — after a huge building boom — is now starting fewer new projects. Chen experienced the slowdown when he went to China just two weeks ago. He found the confidence level of business people to be much lower than usual. Many restaurants were being closed down, the expensive shops stayed empty, as did the hotels. "The hotel I stayed in was so quiet," he said.

Among the countries that will be affected by this slow-down are Brazil, Chile, Australia, Canada, and the oil exporting countries of the Middle East. The US, in contrast, is importing more from China than it exports, and imports will get cheaper now. Furthermore, American companies are selling strongly to their own citizens. If unemployment goes down in the US and people bring home more money, that is good news for American businesses, better news than a China that grows fast.

Berkeley's Eichengreen is likewise not extremely worried about China. "From what we know now China is not the biggest problem in the world economy," he said. But he is not as optimistic as Chen about the state of the world economy. Eichengreen considers China's stock market crash to be "a wake-up call, a reminder that things are not well in the emerging markets more broadly." Whole economies are underperforming, he believes, citing Brazil, Turkey, Thailand, Greece as examples. He does not believe that this will lead to a major slowdown in the US. "If we are lucky, the US can continue to grow by 2.5 percent," he says. "That will have a stabilizing influence, but is not enough to solve the problems in Europe or Latin America."

Follow Lisa Nienhaus on Twitter: @lisakatharina

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