Introducing: The Eastern Crisis
The Eastern Crisis
Last Monday saw one of the most unprecedented crisis in financial markets since 2008. China’s Black Monday actually took its toll on several markets, totaling some 182 billion dollars in losses for 400 richest people on the planet alone. Financial markets and their players are still reeling from the losses, with no end in sight. While the markets will undoubtedly recover in time, as they always do, questions remain about the causes as well as the future of these uncertain events.
Chinese stock markets have been going downhill since their peak in June, but this sudden drop was much larger than expected, triggering a chain reaction in other markets. Germany was arguably the most affected, due to their extensive business ties with China, although no market in the world came out unscathed. A similar thing occurred in 2007, prior to the global financial crisis of 2008. What makes matters worse is the sensation that this is only the tip of the iceberg, and the worst is yet to come. So what actually happened?
– the Shanghai stock market saw a massive (150%) surge over the course of one year, culminating last June. This happened due to a number of factors, including lax monetary policy and an increase of companies offering stocks at Chinese markets. The fact that investors jumped at the opportunity, disregarding the fact that the rise in prices was actually caused by the rush itself, rather than sound economics, made this a textbook example of a stock market bubble. Even though it realistically had to burst at some point, measures implemented by Chinese authorities, including a sizable interest rate cut and trade freeze, only increased concerns regarding the future of Chinese stock markets; after all, these are no ordinary measures being implemented here, so there must be something big going down. Although, there is another way to look at this sudden (over)reaction: For a long time, Chinese officials took great pride in their country’s unprecedented economic growth, so reverting this trend could be interpreted as a failure on their part, making them lose face and thus having to take a more direct approach to resolving this issue than they normally would. At this point, Chinese authorities also have to account for a strong possibility of protests or even riots like the ones seen in Yunnan province last month, as most Chinese investors who got burned last Monday were small, retail investors – and there are a lot of them to boot. In fact, these small, retail investors account for some 85% of all investors in China. Furthermore, these Chinese retail investors have been going through a lot in the past couple of months, suffering losses after losses, one margin call after another, so the discontent has been piling up for quite a while – something simply had to be done in order to maintain order, or things could get… hectic. After all, nobody likes losing money (especially their own), and people who have lost all of it can be quite unpredictable. Stock markets correcting themselves can only go so far as a valid explanation before people stop caring.
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In the meantime, Chinese authorities have decided to abandon their long-term low wages/high export policy in favor of upgrading the manufacturing sector and addressing overall living standards of Chinese people through internal development, as dictated by the twelfth five-year plan, which coincidentally expires this year. However, this new focus on high technologies is not without consequence, as all financial markets in the world are interrelated. With Europe implementing austerity measures across the board, US trying to jumpstart its own economy and Russia dealing with economic sanctions, focusing on sustained exports under these conditions could indeed prove detrimental to any export-based economy. China accounted for this, but the adjusting process takes time, and financial markets are unforgiving in this regard. But focusing on internal demand is meaningless, unless accompanied by appropriate purchasing power; people have to be willing and able to afford to buy these products, so the increase in wages was an integral part of this strategy. The wealth gap in China has been increased dramatically in comparison to the 1970’s, with those on top preferring to invest in assets rather than consumer goods, and those on the bottom rung trying to save up as much as possible because social institutions in China are not what they used to be, and these savings may prove their only provisions for old age. Promoting consumerism and a strong middle class are expected to address several issues that will be plaguing Chinese economy for years to come, as they have in the past.
In the meantime, we have witnessed the formation of Asian Infrastructure Investment Bank (AIIB) led by China, unhappy about US-dominated Asian Development Bank (ADB). AIIB was joined by 21 countries, including US allies Great Britain, South Korea, Australia, France and Germany. Tensions are only beginning and are expected to continue. Military standoff with US and Japan in the eastern seas will likely influence financial markets to an extent.
There is a lot of ways to profit from this situation, you can find a lot of brokers who might help you. The effects of China’s thirteenth five-year plan remain to be seen, along with the actual thirteenth five-year plan – it is only conjecture at this point. It is expected to focus on internal economic development rather than cheap exports. Technological innovation will most likely be one of the focal points, especially in terms of robotics, engineering, electronics, new materials and service industry, which offer much greater rewards than cheap labor and low-end products. The Asian Infrastructure Investment Bank is likely to provide funds for this development. The focus is expected to slowly shift away from the US, towards Asia and its emerging markets, although this is definitely not going to pass unchallenged. Events similar to those from last Monday are expected in the future, and not just in Chinese markets either, as the Eastern crisis could prove to be anything but eastern. We may need to think up a different name for it, and soon.