There was once talk of the "January effect" on the financial markets to indicate the anomalous increase in the Stock Exchange at the beginning of the new year, when investors transferred part of the interest received at the end of the old year. This time, however, the January effect is of the opposite sign. This is not only because the old interest flows have dried up in the era of interest rates reduced to a flicker and following more advanced savings management. All the equity markets in the world are infecting by a series of factors ranging from tensions in the Middle East, to the collapse of the oil price, to the downward revision of growth estimates for the world economy. To these factors, the bearish convulsions of the Chinese Stock Exchanges have recently been added. The VIX, which measures the volatility of the equity markets, returned to exceed the danger level of 25. It had done so during 2015 only at the beginning of September, to then return to 15 when the markets were reassured by the Fed's rate hike.
I fears coming from China concern a sharper than expected economic slowdown. After thirty double-digit years, since 2009 Chinese growth has dropped to 7%, then 6% and that may not be enough. This poses significant problems for the Chinese authorities, who are trying to cushion the slowdown in both orthodox (expansionary economic policies) and even heterodox (a forced devaluation of the exchange rate) ways. Despite the powerful development of the thirty-year economic miracle, the celestial empire could fall prey to what economists call the "middle-income trap", i.e. the inability of a high-growth country to continue to do so at high rates when it reaches a certain level of per capita income. An event of this kind would disturb the sleep of Beijing's rulers who for decades have invested everything in economic growth: a Chinese society no longer satisfied with the prospect of ever-increasing well-being could ask for counterparts - for example in terms of individual freedoms - which would be indigestible to leaders of that country.
Then there is another fear. What China experiences, 25 years later, what Japan suffered in the early 90s. The bursting of the huge financial and real estate bubble quickly knocked out the Japanese economy, by which the Americans then feared they would be outclassed. Japan has not yet recovered from that blow. Its policies that have been too timid for a long time have been criticized, but even the expansive acceleration imposed by Abe seems to have ended up in a soap bubble. The Japanese lesson tells us that financial crises can do a lot of harm and have long-lasting depressive effects, a sort of secular stagnation. The fact that the United States appears to have emerged relatively unscathed and rather quickly from its 2007-09 financial crisis – but we need to remain vigilant about America's external imbalance that has never healed – does not mean that other countries can too. And that should worry China.
However, there are two major differences between Japan 25 years ago and China today. From a financial point of view, Beijing has not yet liberalized capital movements and it is doubtful that he will do so given the ongoing tensions. This limits the possible consequences of the financial crisis and makes it more manageable, also limiting the gains of the big speculators who (re)appear on the scene in these circumstances. Even more important is the difference in terms of the real economy. The size and conformation of the Japanese economy did not lend themselves well to moving from a growth model based on exports to one focused on domestic demand. This option, on the other hand, seems within China's reach. Obviously, changing the development model is never an easy and painless operation. However, the gradual development and the enormous reserves accumulated constitute not negligible strengths, relying on which the celestial empire could find a solution to its incipient economic maladies.
In short, as was foreseeable two years ago when Tapering began, that pendulum that had brought the crisis from the periphery – think of the Asian crisis and the many others of the 90s – to the center (the US subprime crisis) is now bringing it back in the periphery, towards emerging economies. But in the meantime many balances and balances of power have changed. And so, China might just dodge the pendulum blade. And it is to be hoped that this really happens.
