What happened on Monday upended the conventional logic of the world economy. Suddenly, the way China finances its enterprises – previously considered a rather opaque mystery but one that was best left to China's self-contained economy – became the whole world's business.
A sudden loss in confidence in Beijing's ability to rescue its collapsing stock market and restore confidence in its currency became, overnight, a worldwide event. It wasn't just that Western stock markets plummeted as a result of a Chinese policy decision; worse, it triggered a truly global crash: throughout Monday, markets cratered in India, Saudi Arabia, Vietnam, Poland, the Philippines, Brazil, not to mention New York, London and Toronto. It may not have been the biggest or longest-lasting downturn, but it was a truly worldwide one, born in Beijing.
The stock markets are not an all-consuming force in China. Traded equities represent only a slice of finance in a Chinese economy still largely dependent on bank finance and wealth funds; the Shanghai and Shenzhen exchanges don't have much relationship to the actual Chinese economy. Chinese stocks are largely closed to foreign traders. And, significantly, the pensions and retirement savings of Chinese are not invested in stocks – in fact, a move to allow pension funds to buy shares this weekend was one of the events that triggered the sell-off.
So it would be a mistake to say that the world economy rises and falls on Chinese markets. As Stephen Roach, a former chairman of Morgan Stanley, put it on Monday: "China is the excuse, not the reason." But it suddenly is a very tangible excuse. On Monday, it was as if the world's investors, all at once, took a look at China's panicky duct-tape repair efforts and saw a dark reflection of themselves.
Beijing's desperate and very top-heavy efforts to restore economic growth, real-estate and equity markets have panicked the world's markets for a large and significant reason: China is no longer just a large country that exports products, imports foreign currency and finances debt. It is now a place where its internal economy matters.
Between 1980 and about 2008, China's record-breaking economic growth was a product of a social miracle that happened to be comparatively easy to manage from within an authoritarian state: The emergence of a billion people from peasant-farming poverty into export-driven industrial employment. This had been done, by Deng Xiaoping and his successors, by introducing export markets, keeping the currency cheap, decentralizing power and allowing some human and financial movement, but only within limits.
The post-2008 step, embraced by Xi Jinping since his rise to power in 2012, has been to try to create a country that doesn't just produce but also, and predominantly, consumes. Private property ownership, popular stock markets, rising wages and a revalued yuan are a big part of this attempt to create a middle-class country. Also, in the view of Mr. Xi, is an increasingly centralized, top-heavy state (to prevent "corruption"). Those two sets of goals were bound to collide – and this summer they have, with heavy-handed state intervention running headlong into a failed effort to create free-enterprise growth.
And this matters because China has indeed become a consumer nation, of sorts. Among other things, it consumes 11 per cent of the world's oil, 57 per cent of the world's copper and 66 per cent of the world's iron ore. Which helps explain why a seemingly internal Chinese economic development problem might create a worldwide sell-off affecting every country that exports commodities (Canada key among them).
It also spotlights one of the ironies of the world economy: If the 2008 economic crisis was the result of insufficient state intervention on one side of the globe (after the United States deregulated financial markets and allowed bad-debt bubbles to erupt), the consensus was that Monday's feverish sell-off, and the wider illness behind it, is the product of too much state intervention in the other hemisphere. China's effort to get that balance right will be, after this week, everyone's business.
Doug Saunders