The forecast of the IEE #5 (61). The Chinese crisis: dress rehearsal

For the present there are no economic preconditions for a global crisis though the crisis potential is high. Falling of share indexes, by short-term decrease of indexes at the Chinese equity market, is caused first of all, by a kickback - technical features of the tenders at equity market. As it seems to us, there arose a casual coincidence in time of large number of profit's fixations. The situation statistically possible, and that was indicated by practice though its probability always happens not very often. And though some analysts express the assumption that the case has arisen as the coordinated effect on the market having purpose to swing it, not excluding such opportunities, we believe, that in this case the technical adjustment not having under itself sufficient economic or other reasons took place.

 Important roles here have played expectations. It is especially necessary to pay attention to a role of modern economic mechanisms of management by expectations. It had a reason that the last 2006 Nobel Prize in the field of economy was awarded for development, including those of expectations.

 Let's return to Tuesday of the last week. Among operators at equity market there were rumours, that the government of China is just about to come to an end to observe an expanding speculative bubble at the market and it is going to accept strict measures. The rumours are not unfounded for on the eve, on Sunday the government has declared about formation of a special commission to struggle against illegal operations at equity market. The increased pressure has led to situation that on Tuesday February, 27 many market participants have preferred not to risk and fix profits.

Flight of capitals from the Chinese equity market has made about $140 billion. Out of 300 shares entering into index Shanghai and Shenzhen of 300, 249 papers have fallen in price on 10 % - a level at which the tenders at exchanges should come to a halt. Index Shanghai Composite which structure includes the shares which are quoted at the Shanghai exchange, has fallen 8, 8 %.

 Though there was a coincidence in time of considerable closings of positions, it is necessary to note, that for equity market the psychological factor plays much greater role, than for other markets. Exception can make money market. And even when  to the majority the reason is clear, the process can further take a great interest to players, speculating for a fall, in spite of absence of economic preconditions, theoretically it is able to cause falling indexes in a short-term period even up to 30 % and to influence a real sector of economy.

 The European markets have psychologically reacted to events in China. All 18 European markets on Tuesday have fallen. Having demonstrated the most significant decrease for the past three and a half of a year, British FTSE 100 has fallen on 2,31%,  German - on 2,96 %, French CAC 40 - on 3,02 %. Aggregate all-European index Dow Jones Stoxx 600 has lost 11, 61 items, or 3, 04 %. 

 And if in an economic system the negative potential is accumulated, then during such periods marked factor is able to cause crisis processes action of which comes to regulating (shaking down) the markets.

  To speak frankly in world economic system the crisis potential now is really accumulated. The huge external payments deficit of the USA, reaching little less than trillion dollars cannot remain like that in a long-term prospect and sooner or later this imbalance will have to be brought to conformity by dollar devaluation as it is approved, on 30-40 % or by growth of exchange of the Asian macroregion. However the Asians do not hurry up with strengthening of their own currencies and we are to expect other events which would “settle” the balance of payments of the USA.

At the beginning of 2006 many economists, considering this crisis factor, predicted falling of a dollar exchange rate to the end of 2006 just as it is indicated value. The institute of evolutionary economy has stated its view with the forecast, that falling will not be, giving reason for the stability of dollar by « the Asian stability ». We shall remind that, the reason of this stability we argued by an unusually high level of first line reserves of the Asian macroregion the sum of which exceeded for that moment $2, 6 trillion. Thus, to efforts of monetary authorities of the USA, should to add joint efforts of monetary authorities of the countries of the Asian macroregion which has not been interested in falling of a dollar exchange rate as in that case crisis of the American currency would be paid by depreciation of their first line reserves. For the Asians this urgency intensifies also for the reason, that in structure of their reserves the currency takes up more than 98 % and accordingly gold - too small share that does not exist at any developed country of the world.

At that time, in the mentioned forecast, we brought to a focus the role of an economic situation in the Asian macroregion regarding possible world currency crisis. And at last this week in this region the event has occurred. But, we repeat it was a simple event, actually there was no crisis. There was a technical moment of simultaneous fixation of profits by many operators of the market on a background of expectations, that the government of China will bring the measures directed at restriction of speculations.

 Taking into account a high crisis potential of leading macroregions the crisis of global economy is very much possible and present reaction of world equity markets has demonstrated what can occur in the world if crisis really takes place.

We still do not remove this forecast. Therefore the present situation we suggest to consider as a dress rehearsal of crisis which nevertheless can go for a ride in the world economy. But only the consequences of the present crisis will bring to movement all world economy and as a result there can be some changes in the world existing system. It is enough to think in size of possible risks and try to take measures to decrease crisis potential.

 The general conclusion

 1. The consequences of this week will still affect in 2007, however economic preconditions for a deep crisis in China for all that was not enough.

 2. Nevertheless, the present Asian crisis push during the time can cause a world economic crisis. The crisis potential in world economy is present; first of all it is a huge deficit of balance of payments of the USA. Therefore everything will depend on number of rounds and waves of crisis recession of share indexes will roll over the world from the depth of their decrease. 

IEE

References on a theme: http://iee.org.ua/ru/detailed/prog_info/4291

Posted on the website: 2007-03-02