When I think of all the mayhem that is currently Chinese markets, I picture the old Dutch proverb about the boy who sticks his finger in the leaking hole of a dam, only to be besieged by more holes bursting through. In my analogy, the surging water represents the Chinese economy, and the dam represents the central government’s mass of constraints built to exercise control over it. Cracks are appearing in the dam, and as authorities grapple with ways to control the leaks, world market volatility has ensued. The biggest fear I have about this volatility, however, is the observation that the Chinese authorities are doing their best to stop the volatility. We need the stock market to correct, and we should hope for a larger currency depreciation. Without such safety valves, the Chinese economy will have a hard landing, and that could push an already fragile world recovery back into recession.
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