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Economy

Little to cheer in the global economy

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Chinese investors are miserable.   © Reuters

TOKYO -- "I can't sell my stocks even if I want to, damn it!"

     Liu Guang Kun, a 60-year-old man, cut a desperate figure as he ranted July 10 at a brokerage in China's northeastern city of Dalian, Liaoning Province.

     Trading in the stocks Liu held had been suspended for nearly three weeks. Impatient, he caused a scene at the brokerage. His retirement fund and money borrowed from acquaintances was all in his shares, which were once worth about 200,000 yuan ($32,210). By the time he was shouting in the brokerage, the value of his holdings had been cut in half.

     Shanghai share prices began to plunge in June. The Chinese government subsequently took a slew of measures to prop up the market as companies suspended trading of their shares. Still, the market continued its slide, much to the anguish of investors.

     Global financial markets now face a period of deep uncertainty.

     China's stock markets have calmed after persistent plunges. They are, however, widely expected to become erratic again. Investors may shun the market for fear of a situation where they cannot sell shareholdings. It is now common knowledge that the Chinese government is trying to keep a tight grip on the stock market.

     In Europe, countries agreed at last to resume support for debt-ridden Greece. But the new deal is not seen as a solution to Greece's deeper problems. Prime Minister Alexis Tsipras' ability to push ahead with unpopular measures, such as tax hikes and government job cuts, is also far from guaranteed.

     Puerto Rico, a dominion of the U.S. in the Caribbean, is also mired in its own debt crisis.

Five millennia

A chart unveiled June 30 by Andy Haldane, chief economist of the Bank of England, shows that global average interest rates are at their lowest levels in the past 5,000 years. For Haldane, the extremely low interest rates we see today are symptomatic of "dread risk" and "recession risk."

     Haldane describes dread risk as a feedback loop in which households and businesses crimp spending because of exaggerated fears about future crises, causing damage to the economy. Recession risk is less psychological: The further we are from the last crisis, the closer we are to the next one.

     The global economy has not fully recovered from the 2008 financial crisis and subsequent trauma in Europe. People are fully aware of this and are not looking to borrow money. They are being more careful about spending. Interest rates, therefore, remain low.

     Recent market turmoil can be put down to dread risk and recession risk. Looking at the 5,000 years charted by Haldane, never before have rates reflected those fears to such a degree. China's stock market plummeted amid growing anxiety about the market's irrational exuberance at a time when the economy is slowing. The debt crises in Greece and Puerto Rico also have much to do with their worsening economies. All three problems have stoked anxiety across the world.

     Now, weaker consumer spending threatens to further dampen the slowing Chinese economy. If share prices continue to fall, households, whose holdings are declining in value, will spend less. There are more than 200 million securities trading accounts in China, accounting for some 15% of the country's population.

     Market participants are more concerned that the latest Chinese stock market plunge could become "a possible trigger for a financial crisis in China," as Bank of America Merrill Lynch put it on July 7.

     Banks have poured money into the Chinese stock market, either directly or indirectly. Large shareholders have borrowed money using their shareholdings as collateral, and retail investors have taken out loans to invest in stocks. That money, at some point, needs paying back.

In the quagmire

Mizuho Research Institute estimates 3 trillion yuan has flowed into China's stock markets, amounting to a quarter of commercial banks' capital. If bank loans to stock investors go sour, the banks will grow reluctant to lend, which could lead to "Japanization," according to Hajime Takata, chief economist with Mizuho Research. As happened in Japan, if China cannot escape the quicksand, banks will curb their balance sheets, prompting corporations and households to follow suit. In other words, China will see the sort of balance sheet recession that hit Japan in the 1990s. 

     Shock waves would be felt across the world. Copper prices and the Korea Composite Stock Price Index -- the Kospi -- tumbled from late June in tandem with Chinese stocks. U.S. economist Ed Hyman, who dubbed them "Dr. Copper" and "Dr. Kospi," believes these two markets indicate the direction in which the global economy is heading. Copper is widely used around the world in housing, autos and power cables; the Kospi is sustained by the global performance of South Korea's smartphone, shipbuilding and steel businesses.

     And there is more bad news. The U.S. Federal Reserve is expected to raise interest rates in the near future. This could prompt market players to flee emerging economies and buy higher-yielding U.S. assets. The market upheaval in China occurred at a time when investors are trying to figure out where to put their money next.

     "[Investors] look at the fundamentals of economies, look at the strength of government, look at the predictability of policies ... and decide to move in, to stay, to move out," said Christine Lagarde, managing director of the International Monetary Fund, in January 2013. At that time, the Fed appeared close to ending its quantitative easing program.

     The latest market convulsions are a wake-up call: Every country must prepare for a stormy future.

Nikkei staff writer Daisuke Harashima in Dalian contributed to this story.

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