Why China is blamed for turmoil in the world's stock markets

In the past week, almost every newspaper and journal article attributes the new global financial crisis to the instability of the stock market in China - but is this so? Wasn't it China that saved the world from sliding into a very deep depression through being a strong engine of growth from 2006 to 2014? At that time, China had gross domestic product growth starting at more than 12 per cent but eventually falling to about 7 per cent. It maintained growth double that of any other country.

A major reason for the decline in China's growth rate was the falling demand for its exports from the United States and the European Union. After nearly seven years since the global financial crisis, the EU is still a vulnerable economic region and while the US is better, it has not shown signs of real recovery and is still being drip-fed on near to zero interest rates. Of the 29 "weak banks" listed by the Bank for International Settlements in 2013, only three came from China and they were all on the lowest tier of vulnerability. Most of the 26 others were from the US and the EU.

So why is China being blamed for the present stock market instability?

To start with, the country's stock market bubble had been developing for more than a year with the assistance of the government. It had burst spectacularly - the first in a series of crashes from June and having fallen 45 per cent since then.

Why did Beijing encourage the bubble to develop? Because the government desired non-government interests to take on the financing of public debt. For example, the People's Bank of China, the Ministry of Finance and the China Securities Regulatory Commission approved a plan that envisaged 771.4 billion yuan of municipal notes and one trillion yuan of debt swaps could be issued this year to reign in local borrowing while maintaining infrastructure investment. This enabled Jiangsu province to convert high-cost debt into affordable notes. It issued 52.2 billion yuan of municipal bonds for swapping with existing debt and general notes.

The government also thought it would be able to manipulate the equity market as it had done with all markets previously - but this did not eventuate and the market participants outflanked the regulators, resulting in both the Shenzhen and Shanghai stock markets plummeting since June 7. However, because the Chinese stock market is mostly disconnected from the rest of the world, its volatility should not affect markets in the rest of the world greatly unless other economies want it to, through ignorance or playing political and/or business games.