Market Crash Day in China

As I write it is Wednesday morning in Shanghai. Last evening, on Tuesday night, my wife and I went to dinner at a local Thai restaurant with three foreign friends, two young Americans and a European. It was 7 pm here, and the Shanghai Stock Exchange had already closed after its 9% drop. It was 6 am in New York, and the markets there had not yet opened for what would become the 400-plus point drop in the Dow.

As foreigners will, we talked about the goods and bads of China, plus the basic unknowability of how the really important issues will turn out in the long run. The environment: true catastrophe for China and the world, or some nick-of-time avoidance of the worst consequences? The economy: endless expansion, or finally a breakpoint when too many strains are felt all at once (inflation, Gilded Age-style inequalities, dispossessed peasantry, our old friend environmental catastrophe, etc)? The political system: one-party rule as far as the mind can imagine, or the kind of liberalization that many Westerners assume is “inevitable” once a country develops a prosperous middle class? The Beijing Olympics: glorious coming-of-age event, or potential source of screw-up and loss of face? Environmental catastrophe plays its part here too: yes, they can close the factories and ban the cars for weeks leading up to the Olympics, but will that be enough to fix the air in Beijing? At least the answer to the Olympics mystery will be known relatively soon.

What we didn’t talk about was that day’s crash on the Shanghai Stock Exchange. I wasn’t even aware of it, having been out all day, and I’m not sure anyone else was either. I had decided early on that the ups and downs of the Chinese stock exchanges were interesting mainly in the way the weekly Powerball prize level was in the United States. That is, the market activity said something about who was making money and about this era of China’s enrichment—rather, this era of some Chinese people becoming very rich. But it was connected only hazily to what the rest of the world would consider “real” economic factors.

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A little over a year ago, the Chinese stock markets were down even though the Chinese economy boomed. The reasons had something to do with corporate corruption scandals and the realization that the markets were the farthest thing from “transparent.” Over the last few months the markets have soared—again with at best a loose connection to changes in economic fundamentals or specific companies doing well and poorly.