Chinese markets plunged, should one worry?

Still a few days ago, one could read comments from the financial and political sectors according to which the Chinese economy is not a cause for particular concern and that its less impressive than usual rate of national economic growth translates its evolution towards a “new normal.” Increased volatility and the sharp drop in Chinese financial markets have suddenly weakened general optimism and have replaced it with certain tension. While the recent weeks’ bearish trend seems relative since the CSI and XINHUA indices still remain at record levels YTD, anxious caution might have succeeded to excessive euphoria.

Concern is even greater that it’s been amplified by media coverage that, just weeks ago, was promoting the Chinese markets as a great investment opportunity and is now questioning its excess over the last few days. But this is not the core of the issue. It is rather the inability of market participants to analyze the possible causes of a sharper than expected slowdown of the Chinese economy in the longer term. Instead, one usually prefers to accuse short-sellers of over-selling whereas the same one didn’t say a word when long-buyers were over-buying. Better yet, hostile foreign forces would be seeking to cause panic because they dislike China.

On a more serious note, China’s economy could be weakening because it is normalizing indeed, implying a slowdown essential to prevent overheating and sustainably meet the needs of an increasingly demanding population. Structural issues do exist too that could threaten the very foundations of the Chinese economy if it were to suffer a recession someday. One of the most serious issues originates from the lack of transparency of China’s banking sector and the wide use ofshadow finance” that prevents a complete assessment of the debt that may thus be bigger and of lower quality than expected. If there ever was manipulation on Chinese financial markets, it was most likely upwards rather than downwards.