Liam Dann: China’s Lehman Brothers moment? Not now, please

EDITORIAL:

As if we didn’t have enough to worry about, global financial markets faltered this week – a reminder that no matter how dark things get, something else can always go wrong.

Fears that China may be facing its Lehman Brothers moment – its own version of the 2008 financial crisis – have rattled investors. Wall Street had its biggest slump since May.

Highly indebted Chinese property giant Evergrande, which owes more than $300 billion to creditors, has seen its share price collapse.

It threatens to take the rest of the world with it, with an interest payment deadline on its offshore bonds looming later today.

The potential collapse of such a large company is testing the limits of Communist Party power as it asserts more direct control over markets, under the ever-tightening grip of Xi Jinping’s rule.

Xi’s big policy shifts of the past few months, along with geo-political tension as the US and its allies position themselves to push back on Chinese influence in the Pacific, are all adding to the heady mix of investor worry this week.

There’s also a somewhat more predictable Wall Street “taper tantrum” ahead of a US Federal Reserve announcement, also due this morning.

Investors don’t like the prospect of the US Federal Reserve pulling back on its bond-buying programme (quantitative easing) because it is a step on the road to higher interest rates – even though they know it’s inevitable.

The US Federal Reserve knows markets don’t like this and has promised to move back to normal monetary policy settings in a slow, orderly manner.

Regardless, Wall Street never misses a chance to remind the Fed.

All of these unsettling factors are building as we head into what’s traditionally been the most problematic season for financial markets.

The big market crashes of 1929, 1987 and 2008 all happened in September and October.

Those worries might be superstitious, but in a world where sentiment determines outcomes, sometimes superstition can be self-fulfilling.

A full-blown global financial market meltdown is an almost unthinkable prospect right now.

If there has been one anchoring force throughout the 18 months of pandemic, it has been the strength of markets, shoring up consumer and business confidence even as many other aspects of society fell.

That market strength has in large part been tied to the emergency monetary policy settings of central banks – low interest rates and money printing.

As inflation rises, pressure mounts to change settings. Markets will have to adjust, hopefully in an orderly manner. But, usually, they correct in more dramatic ways.

Events like those in China this week can provide a trigger.

Analysts have warned for years of inflated market values, so a major crash could hardly be described as a surprise.

Bullish pandemic era markets might all be built on a house of cards. They might be a glorified Ponzi scheme propping up the pillars of capitalist inequality.

But none of that will matter if markets crash. When they fall, they take us all down with them.

Here’s hoping those rattling foundations of financial Babylon can to hold on a bit longer.

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