Six month ago, these people were barred from selling their shares in order to prevent the CSI 300 index from sliding even more than the 30% drop it had experienced in the six weeks before that. The ban was due to expire on January 8th, and in anticipation of a mass bail-out by persons who had been banned from selling for the previous half-year, investors did the logical thing, and sold in advance of the expected decline. The result was a 7% drop in the CSI 300 index in a few short hours, dragging markets down world-wide.
China's economy is slowing, and may actually be in recession. Industrial production has declined for almost half a year. The massive real estate bubble there is imploding. The government devalued the Yuan last summer, and took further measures to reduce the value of the Yuan again yesterday, obviously in the hopes of sparking growth. It is way too little, way too late.
China cannot experience a recession, as this could put the Chinese Communist Party's control of the country in jeopardy. Nonetheless, a recession is either already here, or is looming, with the potential to throw tens of millions of people out of work, and cost millions more their life savings. China's political system has no way to deal with this type of crisis, because, unlike in the democracies, there is no legitimate avenue for debate and dissent to channel the anger and desperation that will come from all of this.
A tyranny on the ropes is a dangerous thing. The most obvious response of the Chinese Communists may be a military adventure in the South China Sea to stir nationalism, and deflect from internal economic woes. Let's hope that cooler heads prevail.
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