A False Alarm About China
The volatility in Chinese equity prices in recent months has more to do with the peculiarities of the country's stock markets than with underlying economic fundamentals. As long as China continues to pursue pro-market reforms, its economy will thrive in the long term.
MANILA – To hear some pundits tell it, China’s economic miracle – one that lifted 300 million people out of poverty and shifted the world’s geopolitical center of gravity – is coming to a tumultuous end. The volatile stock market and the renminbi’s “surprise” depreciation are signs of imminent economic collapse, according to this view, as risky investments and high levels of government debt put the brakes on decades of turbo-charged output growth.
Fortunately, there is little reason to believe such dire predictions, or that the market gyrations that have been driving recent headlines represent anything more than short-term volatility. After all, equity-price movements are a poor predictor of the real economy’s performance.
Indeed, when Chinese GDP was growing strongly during 2010-2013, stock prices were falling. More recently, when stock prices began soaring during the first half of 2015, the economy’s slowdown had already begun. As the American economist Paul Samuelson famously quipped, “The stock market has called nine of the last five recessions.”