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For students of history, the China stock market crash looks eerily familiar.
It's playing out much like the Wall Street stock market crash of 1929.
In case you've been distracted by such things as the Greek debt crisis and a bizarre glitch that shut down the New York Stock Exchange for more than three hours Wednesday, the Chinese stock market has been in a free fall lately.
Although it rebounded 5.8% today (Thursday) thanks to more government intervention, the Shanghai Composite Index has shed 29% over the past month.
An equivalent loss for the Dow Jones Industrial Average would be a drop of more than 5,100. Paper losses already exceed $3.25 trillion.
This follows a dramatic run-up of 150% in the 12 months leading up to mid-June.
That's disturbing enough, given how interdependent the global economy is today. But the similarities of the China stock market crash to the Crash of 1929 make it particularly troubling.
Both have prominently featured failed interventions.
Back in 1929, it was the big bankers of Wall Street that tried to stop the bleeding. The top names of the day - Morgan Bank, Chase National Bank, and National City Bank - pooled their resources and tried to prop up the market by buying shares of blue-chip stocks such as United States Steel Corp. (NYSE: X).
But the strategy could not overcome the wave of selling, which eventually dropped the DJIA 89% from its peak.
In China, the government has done just about everything it can think of to halt the Chinese stock market crash. The government has:
- Loaned $42 billion to 21 brokerage firms to buy stock
- Announced a $40 billion economic stimulus plan
- Allowed half the listed companies to stop trading of their shares
- Prohibited controlling shareholders and company board members from selling any shares for six months
- Put all IPOs on ice for now
- Instructed the People's Bank of China to cut interest rates by 0.25%
- Announced a crackdown on short selling
These drastic measures have succeeded in only briefly reversing the China stock market crash.
And the reason why echoes yet another parallel with the 1929 crash...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.
LOOK OVER THERE
I don't believe China's problems will spill over into the U.S. and cause another 2008 financial crisis, at this time. We are not concerned about it and except for companies like Apple that do lots of business over in Asia, still insulated. Only 45% of U.S. Households even have any mutual funds or stocks themselves.
Those that do are mostly tied-up in IRA's and 401 (K) investments and are largely illiquid. Mom and Pop investors stayed home after 2008-2009, but some bought bonds and bond funds. Rising interest rates are a bigger market concern in the U.S. due to all the debt we have piled-up in the last 10 years.
The '29 crisis in the US caused a recession in Europe, due to excessive global financial linkage.
The crisis in China could spread to the US & Europe in the same way the '29 crisis spread from the US to Europe. Or it might not. It's a question of the exact details of the financial linkages. The US crisis in 1929 caused a loss of industrial financing and a loss of consumer lending which reduced final consumer demand for all products. The Chinese crisis will certainly cause a crash in final consumer demand in China — so companies hoping to export to China are out of luck — but will it spread to the US? There are two ways it could spread, at least:
(1) financial contagion could cause a crash in consumer spending in the US, if US banks & corporations have to take huge losses on Chinese holdings and cut back lending & spending as a result
(2) a crash in industrial finance within China could cause production supply chain bottlenecks and cause supply-shock inflation in the US (which imports most of its goods from China). Unlike demand-side inflation, supply-shock inflation causes stagflation.
What if they demand payment for borrowed money?