Things have settled down some since last Monday (Aug. 24), when fears of the next global financial crisis churned markets—and stomachs—everywhere. Major North American and European indexes finished the week just above where they had started it. Still, a queasiness lingers in the fact that there’s no good explanation for why the Chinese stock meltdown spread to trading floors across the Western world.
After all, they barely flinched when Chinese shares cratered in mid-June, and again in mid-July. And global investors have long known China is slowing; the Aug. 11 yuan revaluation—one supposed trigger of the recent plunge—told us nothing new about that.
So how did Chinese markets—casinos that only dimly reflect China’s economic health—become a source of global contagion?
Derek Scissors, an economist at the American Enterprise Institute, has a few theories. The worst, first: Shanghai has somehow gained new sway over exchange rates and, in turn, equities. But Chinese stock markets never had anything more than indirect influence on such things even in Asia; it’s unclear why this would have changed.
Then there’s what the Chinese stock implosion signaled about the competence of Xi Jinping’s administration. “The ‘new’ Chinese news is that the Chinese leadership doesn’t seem to know what they’re doing—that’s the new information we got,” Scissors says. Though this one has a satisfying feeling of solidity to it, remember: “Saying it now is a completely after-the-fact rationalization,” Scissors says. But as he notes, it at least “makes more sense than the notion that US markets don’t know what’s going on with China’s economy.”
Yet another possibility is that the US and other markets were overvalued and due for a correction—and China’s “Black Monday” happened to trip the wire.