While the world has been sidetracked by the never-ending Greek Debt Crisis, another economy with a GDP that is 40 times the size of Greece is giving signs of serious, even critical financial weakness. The world's second largest economy, and supposedly most-powerful "communist" nation, has seen its stock market enter a downward spiral that Beijing seems helpless to retard.
As the Chinese economy slowed down over the past year, China's equity market soared by 100 percent or more, creating the largest bubble in the Far East. Now, for the past three weeks, the Shanghai index has been witnessing a massive sell-off that has contracted its value by more than 30 percent. The government, fearing a financial panic and social instability as tens of millions of Chinese investors rush for the exits, has been trying every stratagem known to man to halt and reverse this slide, including compelling government companies to buy massive blocks of shares , cutting interest rates and temporarily halting trading in some companies. All to no avail.
As the implosion in Chinese equity markets continues, the rest of the world is starting to take notice. It should. If what is occurring in China is no mere correction but an actual financial panic, the resulting damage to China's economy and fiscal health will impact Chinese imports for its massive industrial sector, negatively impacting global commodity prices at an already fragile moment for the global economy. All this will only heighten the already elevated level of volatility among the world's financial markets.
The world may be about to discover the true significance of China's emergence as one of the two largest economies on the planet. During the past several years, many business analysts have warned of the proliferation of signs that much of China's spectacular economic growth was based on bubbles financed by the central government. There have been numerous accounts of new cities built with virtually no inhabitants, of vacant office complexes and condominiums. In effect, a trail of pump-priming that has artificially boosted GDP growth in an economy that is still characterized by a very low level of internal consumption, especially in comparison with Western economies, has been the primary driver of China's economic expansion. There have been earlier signs of an unsustainable real estate bubble and a flood tide of debt by municipal governments and economic enterprises that defy rationality . What is now occurring on the Chinese stock market may be a leading indicator that all is not well with Beijing's still highly-centralized economic model. Should things unravel beyond the capacity of the government to control, it may be that China in 2015, as with the United States in 2008, will become the primary catalyst of a severe global recession.