The ripples of the Chinese market crash and the globalisation of finance

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3rd August 2015
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The ripples of the Chinese market crash and the globalisation of finance

private debt growth
This week so far (26/08/2015) the markets around the world have been shaken by the Chinese stock exchange crash. Indexes from around the world seem as if they jumped off a cliff.

By the end of the trading day on Mon 24 Aug the Hang Sheng fell by -15.25%. In the same time in the U.S. the Dow Jones Industrial Average (INDU index) and the S&P 500 (SPX index), were losing -7.22% and -5.34% respectively, while in the European market the Deutsche Boerse AG German Stock (DAX index) closed just above the zero point at 0.63%. Since then these same indexes have fared either better or worse, but still struggling to cope with the ongoing situation in the Chinese markets.

The Chinese crash itself is closely linked to the slowdown in the growth of the Chinese economy. The Chinese economy took a hit after demand from the European and the U.S. markets fell in the recent past few years, due to the Euro-area crisis in one hand and the aftermath of the sub-prime mortgage crisis in the U.S. on the other. Of course, not all the effects can be traced to the respective economic crises I mention here, but there are undeniable linkages that have affected all crises in a chain reaction via the globalisation and high interconnectedness of the modern financial system. If there is any instance that the so-called “butterfly effect” can manifest is in the current state of the financial system. At the moment, there is a huge effort by the world's financial regulatory agencies to further harmonise processes based on the industry's best standards so that the next crisis can be avoided, or so the story goes. And yes, the shady practices and all the ineffective/wrong-incentive regulations need to be re-evaluated and amended. But high levels of harmonisation of the financial markets increases the levels of risk of a global meltdown in the same time that it promotes best practices. That is because it constrains the range of diversification of the financial markets. The point here is that theoretically it will be harder to get to a crisis point after the global harmonisation of regulations, but if we get there, and history teaches us we Will get there, then because of the harmonisation itself there will be nobody left standing. All markets will effectively have the same textbook of how to run their business and all will be following the same rules. Zero diversification.
Funnily, after the most recent crises in the US and later in Europe and while in the process to identify best practices to further harmonise the financial system there was a suggestion to follow the paradigm of Canada that apparently had coped better with the crisis. Now this creates a paradox, because Canada had not followed previous harmonisation practices in the first place.
Intellects whose desires have outstripped their understanding.

Friedrich A. Hayek

The financial map has been redrawing and will keep on doing just as it always has been. Trying to keep failed markets alive is just a bad practice, and a costly one indeed. One has to look on the Chinese governments spending to keep its market from tumbling down the rabbit hole, or the losses in bank and insurers bailout in the U.S. and the EU. Markets fail and new markets arise. It is like keeping on spending money on the marketing of a bad product just because it is hard to accept it is a bad product.

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