Joint efforts needed for world economy's sake

UNCERTAIN TIMES: The People's Bank of China building in Beijing. The latest plunge in Chinese share prices will send another chill down the spine of overseas investors.


    Aug 26, 2015

    Joint efforts needed for world economy's sake

    HAVE all the efforts Chinese policymakers made to save the once-10-trillion-dollar domestic stock market from falling over the cliff since early July come to nothing? The country's benchmark Shanghai Composite Index ended with the sharpest fall since early 2007 on Monday.

    That is a mind-boggling question for not only tens of millions of individual stock investors in the country, but also Chinese officials desperate to steer the world's second-largest economy through a year of increasing uncertainties.

    Following a poor week that saw an 11 per cent drop in market value, Chinese stocks nosedived again on Monday, with the Shanghai Composite Index plummeting 8.49 per cent to close at 3,209.91 points, the sharpest decline in more than eight years.

    Amid growing international worries over the health of the Chinese economy, a long-term source of growth for the global economy, it is predictable that the latest plunge in Chinese share prices will send another chill down the spine of overseas investors after a broad sell-off in global markets wiped trillions of dollars off stock values last week.

    Given the dire consequences of panic sales that could wreak more havoc than expected on investors as well as the national economy, it is absolutely necessary for the Chinese authorities to come up with more and stronger support measures to arrest the downward spiral of share prices.

    While the use of emergency measures is well justified to stop the haemorrhaging of the stock market, it does not mean policymakers should shore up equity prices at any cost. Instead, they should try to find a workable middle path after first identifying the real causes behind the plunge in share prices.

    Domestically, the continuous slowdown of the Chinese economy has apparently eroded investor confidence, which was first overinflated by a year-long rally from below 2,000 points to more than 5,000 points in June, and then extremely dampened by a 40 per cent correction in the past two months.

    If such turbulence in Chinese shares cannot be dealt with in a timely and effective way, the likely contagion of pessimism from the stock market will only make it harder for the Chinese economy to bottom out any time soon.

    Globally, the confluence of negative factors such as falling share prices, volatile exchange rates and disappointing commodity prices indicates that the global recovery may be in for a moment of reckoning, even before the United States actually raises interest rates for the first time in almost a decade.

    If there is a silver lining in the cloud over stock markets around the world, it should be that it is a wake-up call for global policymakers to recognise the need for joint efforts to address rising uncertainties over global growth as well as global financial stability.