Back at the start of June, I predicted that China's stock-market bubble was about to burst - click here. Over the summer, we saw the Chinese government attempt to pump liquidity into the bubble to keep it inflated, but if anything this backfired. So the big question for investors in the rest of the world is whether the turmoil in China's stock market is simply a bubble bursting or a bellwether of future economic difficulties for China? If it is the former, then investors in the West have nothing to fear. However, if it is the latter then the slowing of China will have major repercussions for those who export to China and for those who have benefited from the boom in commodity prices thanks to huge demand from China for raw materials and food.
As I highlighted in my post back at the start of June, China had all the ingredients for a classic stock-market bubble. However, its economy does have some major flaws which only a major shift in China's political institutions can address. If China cannot fix its political institutions (i.e., introduce some form of democracy), then it may be doomed to be the next country to permanently remain a middle-income economy e.g., Argentina or Greece. In other words, without major reform, China's growth will slow and stay low for a very long time.
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| Source: Radio Free Asia |