China crash would dwarf subprime crisis
When the U.S. subprime mortgage industry sputtered out, it sent world markets into a tailspin. But that's nothing compared to what a crash in China's financial market would do to the global economy, Chris Farrell tells us.
Marketplace economics correspondent Chris Farrell
More on Asia, Chris Farrell's Q & A, Economics, International
TEXT OF INTERVIEW
Scott Jagow: Today, China's stock market hit 5,000 for the first time. While other stock markets around the world have floundered, China's just keeps steamrolling along. While other central banks have poured money into their banking systems, China is doing the opposite. It's tightening. It just raised interest rates for the fourth time this year. Our economics correspondent Chris Farrell is here. Chris, why is there such a disparity between China and everybody else?
Chris Farrell: The Chinese central bank is facing a floodgate of liquidity; much of it is pouring into the stock market. The Chinese Shanghai Index is up 147 percent so far this year.
Jagow: Yeah China seems kind of immune from what's going on in the rest of the world right now with the subprime worries and credit worries. Does China have anything to worry about?
Farrell: Well, to the extent that the subprime crisis and the financial crisis leads to slower U.S. growth, I think that that will spill over into China. That's what I would worry about, is that the next blowup will happen in China and that will even be bigger than the subprime issue.
Jagow: Bigger than the subprime issue?
Farrell: Much bigger.
Jagow: Why?
Farrell: Because China is right now one of the driving forces in the global economy. And although there's lots of issues right now with a lot of the Chinese imports, China is the manufacturing epicenter of the global economy.
Jagow: But it seems like the Chinese government is taking this pretty seriously for rate hikes this year trying to keep the economy cool. Do you get the sense that they're on top of this and that maybe they can prevent it?
Farrell: Well the sense that I have is that they're taking it very seriously, but to a large extent the central bank does not have enough control over the economy the way that ours does because what has happened in China is that you have a lot of very powerful regions and those regions are growing but a lot of the regions, they're off on their own, they have their own economic policies, there's a lot of money sloshing around in these regions and so what extent the central government can have control? It's a big question, which means that the central bank may have to take more dramatic action, which raises the risk that the hope for a soft landing — you know that's the Holy Grail of central banking, it's rarely accomplished, especially when you've gone through a period of such rapid growth and some real questions about the soundness of the financial system, especially the banking system.
Jagow: OK Chris Farrell our economics correspondent, thanks for joining us.
Farrell: Thanks a lot.
