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Magazine of Socialist Action in Australia

China’s stock market dive: How could it affect Australia?

Reading Time: 3 minutes

In the past year China’s stock markets rose by an incredible 150%. They then shed about a third of their value in a matter of a few weeks – an amount twice the size of Australia’s entire economy!

By Socialist Party reporters

While the world was watching Greece a much bigger economic drama was unfolding. By some measures China is world’s largest economy and it is the top trading partner of more than 120 countries, including Australia.

While the issues facing Greece are significant, they pale in comparison to the problems facing China and the potential for global contagion.

In the aftermath of the 2008 global financial crisis the Chinese government facilitated huge amounts of investment in housing and infrastructure. This stimulated economic growth but resulted in excess capacity.

With thousands of unsold apartments and local government debt stacking up that strategy has run its course. In order to try and find a new source of growth the government then encouraged millions of middle class people to invest in the stock market.

Government policies helped to create a huge bubble with the stock market performance completely at odds with the real economy. While shares boomed company profits declined and economic growth slowed to its lowest level in 25 years.

These unbalances are now being exposed. The bubble has begun to burst and while the Chinese government is desperately trying to contain the situation, such is the complexity of the mess that it has the potential to get out of their control.

The biggest concern is that a full blown stock market crash would ruin millions of investors and spread into China’s broader economy. That would slow economic growth even further and have flow on effects around the world, especially to China’s major trading partners.

Lower growth rates in China have already impacted on Australian exports in the last couple of years. As a result federal tax revenue has taken a hit and the government has sought to address the problem by making budget cuts.

The budget cuts have been exclusively designed to make ordinary people pay while protecting profit making conditions for big business. If Australian exports were to tumble further as a result of reduced demand in China, the government would take an even harsher approach to the budget.

Thousands of public sector jobs would be at risk and more cuts to welfare, health and education would be on the cards. With Australia already experiencing recession-like features, it wouldn’t take long for conditions to resemble Europe with high levels of unemployment and hardship.

With the mining sector slowing the only thing keeping the Australian economy moving is investment in property led largely by Chinese capital. This too would be hit in the event of a crash in China.

Developments in China are not just of academic interest. They have the potential to dramatically change Australia’s political situation. Australia entering a recession after 25 years of boom would have a profound impact on people’s outlook and their attitudes.

Relatively stable economic conditions in Australia have meant that the vast bulk of the population has seen no need to engage in politics. A change in the economic and political situation would force politics upon people. Inevitably it would provoke a response.

Questions about whether ordinary people or big business profits should be sacrificed would become much more pressing. Millions of people would begin to seek out answers, and with the major parties being largely discredited, people would become open to alternative ideas, both left and right wing.

Socialists in Australia need to prepare for the debates and struggles that will unfold as the capitalist crisis intensifies. There will be a need combat divisive right wing ideas and win people to progressive solutions that undermine the rule of the profiteers and use the wealth created for the benefit of all.

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