China Voice: China factor exaggerated in global market swing

While some people blamed the slowing Chinese economy for the global equity rout last week, it should be noted that overstating China's role in the fiasco conceals its real cause and does little good for the global recovery.

From Feb. 8 to 12, when Chinese markets were closed for the Lunar New Year holiday, stock markets experienced a brutal week.

The market retreat was global. Japan's Nikkei Index lost 11 percent in one week. In the United States, the sell-off saw the S&P 500 touch a two-year low, finally losing 0.8 percent for the week after a rally on Friday pared losses, and the Dow Jones fell 1.4 percent. London, Frankfurt and Milan all reported losses, too.

Once again, the "China slowdown card" was played and murmurs concerning China's economic future were heard on trading floors.

Such an explanation is not only facile, but lazy. While there is no denying the influence China's moderating growth has on the world economy at large, the current sentiment should be used as impetus to think outside the box and delve deeper into the matter.

The global sell-off last week was a knee-jerk reaction to jitters over a faltering global economy, which has its roots in a failure by developed economies to support a prolonged market rally following the events of 2008.

In response to the 2008 global financial crisis, many central banks adopted ultra-easing monetary policies with very low or negative interest rates, which only encouraged excessive speculation and led to asset price bubbles.

Compounding this, China's double-digit growth was taken for granted and a speculative frenzy became the norm globally. Subsequently, structural reforms were postponed by many countries, sowing the seeds for a global economic recovery that is fragile, at best. Investors chose to jettison stocks once they recognized that prices were inflated and unsustainable.

Last week's market swings were also partly due to febrile crude oil prices, forcing oil producing countries to repatriate their sovereign wealth funds to ease domestic money strain.

This capital flight put more pressure on banks, intensifying the market slump.

"The prospects of the world's economy are gloomy as the investment-led model of developing countries and the monetary easing approach of the United States, Europe and Japan have both reached their limits," said Ren Zeping, an analyst with Guotai Junan Securities.

For China's part, it has embarked on painstaking economic remodeling to achieve sustainable growth from household consumption and services.

Though the Chinese economy has slowed somewhat, encouraging signs show that its efforts are paying off.

In 2015, consumption contributed 66.4 percent of China's gross domestic product (GDP), up 15.4 percentage points from 2014.

From Feb. 8 to 13, Chinese cinemas took 3 billion yuan (460 million U.S. dollars), up 67 percent from last year. The first day of the Lunar New Year saw a record 660 million yuan in box office takings, with 19 million people flocking to the country's cinemas.

These positive developments pave the way for a more sustainable economic model.

In an article for The Financial Times last month, Yale professor Stephen Roach said China is making reasonably good progress in the transition to a new growth model, especially in shifting from manufacturing to services.

"The good news is that fears of a Chinese hard landing are overblown." he wrote.

"The bad news is that central banks are starting to wean markets from the artificial support of years of unprecedented quantitative easing. In the end, that could prove far more problematic than another China scare." Endi