Already this week the market has fallen 5% in one day. Falls in the Shanghai and Shenzhen stock exchanges took their losses so far this year to 15% and 20%, respectively. The installation of this circuit-breaker reveals how nervous the Chinese government is of the underlying economic instability.
The slowdown of the Chinese economy has been an established fact for some time now, and is known as a major cause of the recession in Brazil and slowdowns in many economies such as Australia, as well as the sustained collapse in commodity prices in the world market. The extreme turbulence of the stock market is an omen of a very “hard landing” for the real economy, exposing the mountains of debt and contradictions the long boom has built up.
Prior to this and last week’s stock market crashes the real economy had already ushered in 2016 with bad news. The manufacturing sector, the heart of the Chinese economy and the world’s largest, shrank for the fifth month in a row in December, marking 9 months of overall decline. The decline is so undeniable that even the National Bureau of Statistics, notorious for “cooking the books” to deliver good news, said that “financial tensions had become ‘more prominent’ toward the end of the year and ‘the downward pressure on manufacturing was still relatively big’.” ( Financial Times, 1.1.16). There is no doubt that the slowdown is real.