For most economies in the world, a 30 per cent drop in the stock index within a span of three weeks would certainly be considered a crisis. Certainly, the Chinese stock free fall (32 per cent at its peak) is a significant concern in China.
In fact, I was told the occupants of China’s Zongnanhai (the equivalent of the U.S. White House) endured the ensuing weekend with no rest, relentlessly laboring over rescue measures. In the final analysis, however, this was not a real “crisis” but a scary and revealing fire drill. Most likely, the stock market will be stabilized before long.
Why is the 30 per cent drop in the Chinese equity market not a real crisis, compared with the chaotic trading days on Wall Street in the fall of 2008, and the financial panic in Thailand in 1997? First and foremost, the Chinese stock market is much less connected with China’s overall financial system, where commercial banks still remain at the center.