While Greece has been the focus, China seems to be heading for a much more dangerous financial crisis that could impact the entire world. When viewed side by side, the $350 billion Greece debt is dwarfed by the $3 trillion lost in the Chinese market so far, a clear sign that it should warrant more attention than it is getting.
Fear of 1929
Several analysts have already started to make comparisons between the history’s biggest stock market crash of 1929 in America and the situation as it is developing right now in China. In fact, the similarities are simply too many to ignore.
Both countries had gone through excessive economic growth and wealth creation in a decade prior to the crisis, both fueled by rapid credit growth. Trading on the margin played a huge role in both cases, contributing to the creation of a stock market bubble that ultimately burst.
Additional parallels can be seen in the huge population migration from rural to urban areas in search of prosperity. This has boosted the industrial sector, creating massive growth in China’s economy in recent years, adding to the situation by over-inflating the real estate market.
Drop in the Economy
Now, after nearly 30 years of continuous growth, the Chinese economy has started to significantly slow down. That, combined with the housing market starting to show weakness, has helped cause a 25% decrease in its stock market value.
Both situations are very dangerous, and could crash both the stock and the real estate markets, ushering in a period rivaling the Great Depression in the United States and impacting the entire world if it comes to pass.
Government is the Key
It all comes down to the Chinese government, and if investors should trust that it can truly get a handle on the situation as it claims. China is still a centrally planned economy, which proved in the 2007/2008 crisis, that it is robust enough to survive with little to no fallout, defying the usual economic rules. However, whether it can survive a simultaneous stock and real estate crash remains to be seen.