Black Monday gives the world foretaste of bitter 2016
Do we have to brace for the worst or hope for the best? What happened on stock markets across the world Monday, the first trading day of the New Year, lets us know we have to brace for the worst that is almost certain to come, and our hope for the best is increasingly unlikely to happen.
A mini-crash in Shanghai sent stock prices down by 6.8 percent, triggering an early closure to trading. Korean shares market tumbled 2.17 percent, Japanese stocks 3.06 percent, Taiwanese 2.68 percent and the U.S. 1.68 percent. Germany saw a fall of nearly 4 percent Tuesday; while the KOSPI rebounded.
The Shanghai sellout suggests more than superficial contagion and could indicate an approaching storm that will engulf ― with great force ― the tightly interconnected global economy. According to some experts, this year may dwarf the aftermath of the 2008 U.S. subprime mortgage crisis.
In other words, Monday may be the precursor of something far nastier. One quarter of Korea's exports ― processed and finished products ― go to China. The Shanghai sellout was triggered by China's manufacturing overcapacity, which is already cutting orders for Korean manufactured products. It's no coincidence that Hyundai and Kia reduced their annual car sales target this year for the first time in their history.
Already, there is an increasing consensus that China will not reach its 6.8 percent growth target this year. For Korea, the government wants to see growth of over 3 percent but a more realistic view comes down to somewhere above 2 percent.
Besides its idling factories, China faces a big property bubble and shadow banking to deal with. The real problem is that the Chinese Communist Party and President Xi Jinping are running out of tricks to enable a soft landing. Reports have it that Xi is trying to imitate U.S. President Ronald Reagan's move of introducing big tax cuts and deregulation to reinvigorate the sagging growth, but few are convinced that he will prove to be a quick study about this most sophisticated capitalistic trick in time.
It is worth remembering that the Chinese stock prices lost about 40 percent of their value in a matter of weeks before strong government intervention enabled them to recover about half of it. That also forced the U.S. to delay its key rate hike.
A Chinese hard landing means, for one, that the currency value of China and other emerging markets will fall, which leads to strengthening of the dollar and yen. This vicious cycle will likely aggravate deflationary pressures in the U.S. and Japan. In other words, nobody can escape unscathed. With the Korean economy tied down by that of China, it is not possible for Korea to avoid a direct hit.
But there is a way of diminishing the impact ― preemptive, across-the-board, down-to-the-core restructuring. Alas, the nation doesn't appear to be in a mood for such a drastic change, what with the general elections slated for April, businessmen reluctant to take risks and the administration becoming a lame duck.
Do we have to brace for the worst or hope for the best? What happened on stock markets across the world Monday, the first trading day of the New Year, lets us know we have to brace for the worst that is almost certain to come, and our hope for the best is increasingly unlikely to happen.
A mini-crash in Shanghai sent stock prices down by 6.8 percent, triggering an early closure to trading. Korean shares market tumbled 2.17 percent, Japanese stocks 3.06 percent, Taiwanese 2.68 percent and the U.S. 1.68 percent. Germany saw a fall of nearly 4 percent Tuesday; while the KOSPI rebounded.
The Shanghai sellout suggests more than superficial contagion and could indicate an approaching storm that will engulf ― with great force ― the tightly interconnected global economy. According to some experts, this year may dwarf the aftermath of the 2008 U.S. subprime mortgage crisis.
In other words, Monday may be the precursor of something far nastier. One quarter of Korea's exports ― processed and finished products ― go to China. The Shanghai sellout was triggered by China's manufacturing overcapacity, which is already cutting orders for Korean manufactured products. It's no coincidence that Hyundai and Kia reduced their annual car sales target this year for the first time in their history.
Already, there is an increasing consensus that China will not reach its 6.8 percent growth target this year. For Korea, the government wants to see growth of over 3 percent but a more realistic view comes down to somewhere above 2 percent.
Besides its idling factories, China faces a big property bubble and shadow banking to deal with. The real problem is that the Chinese Communist Party and President Xi Jinping are running out of tricks to enable a soft landing. Reports have it that Xi is trying to imitate U.S. President Ronald Reagan's move of introducing big tax cuts and deregulation to reinvigorate the sagging growth, but few are convinced that he will prove to be a quick study about this most sophisticated capitalistic trick in time.
It is worth remembering that the Chinese stock prices lost about 40 percent of their value in a matter of weeks before strong government intervention enabled them to recover about half of it. That also forced the U.S. to delay its key rate hike.
A Chinese hard landing means, for one, that the currency value of China and other emerging markets will fall, which leads to strengthening of the dollar and yen. This vicious cycle will likely aggravate deflationary pressures in the U.S. and Japan. In other words, nobody can escape unscathed. With the Korean economy tied down by that of China, it is not possible for Korea to avoid a direct hit.
But there is a way of diminishing the impact ― preemptive, across-the-board, down-to-the-core restructuring. Alas, the nation doesn't appear to be in a mood for such a drastic change, what with the general elections slated for April, businessmen reluctant to take risks and the administration becoming a lame duck.
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