Updated Feb 10, 2018

The next global financial crisis: Made in China?

Chinese President Xi Jinping (center) stands with other members of China's Politburo Standing Committee. Photo: Wang Zhao / AFP / Getty Images

If you own stocks, anywhere in the world, there’s a good chance that the markets’ wild ride this week upset your stomach. But, worried as you were, you probably felt some confidence that the U.S. and European economies are relatively stable, that governments in those places know what they're doing and are relatively transparent about it, and that markets would recover.

The big picture: Now consider a day in the (not-so-distant) future when a market meltdown begins not on Wall Street but in China. Imagine further that when that day comes, China is the largest economy on earth (by some measures, it already is). Will you be as confident in China’s leadership and markets are you are in the U.S. and Europe’s?

A few thoughts:

  1. In China, all the big political and economic decisions are made behind closed doors by seven men — the Politburo Standing Committee. No one alive today has ever lived in a world where the largest economy on earth was governed in such secrecy.
  2. Last week’s stock market rollercoaster started in part because of expectations that the U.S. Federal Reserve will soon raise interest rates to keep the economy from overheating. Investors don’t like higher interest rates, but they know how the Fed works and what it wants to achieve. The Fed has a responsibility to explain its decisions. Imagine the uncertainty when investors are instead hanging on the words of China’s central bank, where decisions must be approved by politicians who feel no need to explain their actions.
  3. Starting this year, Chinese stocks are included in the MSCI EM index, one of the largest indices of stocks from “emerging market” economies. Because many American pension funds hold the MSCI EM Index, they — and maybe you — now have direct exposure to China’s domestic stock market for the first time, even if you're not aware of it.
  4. Today, China’s economy appears strong, but many analysts say economic statistics produced in that country are more vulnerable to political manipulation, particularly at the local level, than stats from countries like the U.S., Germany or Japan. In fact, several Chinese provincial governments admitted recently that they faked their GDP data for 2016. Investors shrugged off this news because they’re confident in smooth sailing for China’s economy. But what happens when the waters get choppy and investors get queasy?
  5. Investors know that, in a crisis, China’s leaders will worry about political stability first and the credibility of state-generated information a distant second. So even if China produces accurate info, will panicky investors believe it? How long will it take for confidence to be restored? 

The bottom line: Confidence is the fuel that powers economies forward — at the local, national and global levels. Today, China and its economic engine inspire confidence. That may no longer be true on the day when real trouble shakes an economy governed by secretive leaders who care more about political survival than the credibility of the information they share with the world. That day is coming.

Go deeper:

Sign up for Signal, a twice-weekly newsletter from GZERO Media, a Eurasia Group company.

Go deeper

Updated 49 mins ago - Health

World coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Axios Visuals

India extended its nationwide lockdown — one of the longest-running in the world — on Saturday, as deaths and infections rise, per Johns Hopkins. The country also moved to allow restaurants, hotels and churches outside of hotspots to begin reopening.

By the numbers: Nearly 6 million people have tested positive for COVID-19 worldwide and over 2.5 million have recovered from the virus. Over 367,000 people have died globally. The U.S. has reported the most cases in the world with over 1.7 million.

Updated 2 hours ago - Politics & Policy

In photos: Protesters clash with police nationwide over George Floyd

Police officers grapple with protesters in Atlanta. Photo: Elijah Nouvelage/Getty Images

Police used tear gas, rubber bullets and pepper spray as the protests sparked by the killing of George Floyd spread nationwide on Friday evening and continued into Saturday.

The big picture: Police responded over the weekend in force, in cities ranging from Salt Lake City to Atlanta to Des Moines, Houston to Detroit, Milwaukee to Washington, D.C., Denver and Louisville. Large crowds gathered in Minneapolis on Saturday for the fourth day in a row.

Updated 2 hours ago - Science

Live updates: SpaceX launches NASA astronauts to space station

Photo: NASA TV

SpaceX just launched NASA astronauts Doug Hurley and Bob Behnken on an historic ride to the International Space Station.

Why it matters: The launch brings crewed launches back to the U.S. for the first time in nine years, since the end of the space shuttle program.

Follow along below for live updates...