World Financial Markets Have A Rough First Week In 2016
DAVID GREENE, HOST:
Not much of the world has been spared this week. Stock markets in China, Europe and the United States have had it very rough. U.S. stocks are off to one of the worst starts to any year in memory. So what is happening, and what does all this new turmoil tell us about the health of the U.S. economy? To find out, we turn, as we often do, to David Wessel. He's director of the Hutchins Center at the Brookings Institution, a contributing correspondent to The Wall Street Journal and also a frequent guest on this program.
David, good to have you back.
DAVID WESSEL: Good morning.
GREENE: Let's begin with China, if we can, and the plunging stock market there. What is behind this slide?
WESSEL: Sure. Well, it's important and helpful that China's stock market's steady today. It actually was up 2 percent, probably because some state-owned vestment (ph) funds were buying, but it's still down 10 percent for the week.
GREENE: So maybe - a little reason for optimism that this...
WESSEL: Right. And stocks in Europe responded a little bit, too.
But basically, China's stock market is far from an unfettered market. It's as much theater is economics. After it plunged last summer, the government pumped a lot of money in. It barred companies from selling stock.
This week, it tried something called circuit breakers, suspending trading - it's supposed to have a cooling off period. They totally backfired. Trading was suspended 29 minutes into the day on Thursday. Now the government's given up on that. So I think there's ever less confidence that the Chinese market is a safe place for money, and it's going to be volatile going forward.
GREENE: So in the United States, we're used to a stock market that's actually determined by the economy, investors and everything. I mean, you describe it as theater, like the Chinese government is sort of a theater director, sort of running the show in a way?
WESSEL: They're trying, but they're not doing a very good job.
GREENE: (Laughter) Not doing a good job.
WESSEL: I mean, look. Look, the economy in China is huge. The stock market is not. So the question really is - why is this turmoil in China spreading around the world to London, Frankfurt and New York? And I think there are three reasons.
One is the Chinese leadership has been pretty klutzy. And that's undermining global confidence that they can steer their economy through a period of slower growth, a transition to an economy that relies less on exports and more on domestic demand.
Secondly, they've been letting their currency fall, presumably to help boost exports because they're worried about the economy. This has created a lot of confusion about what they had said they were going to do, which is let markets determine the exchange rate. And when their currency falls, that really hurts its trading neighbors, the Asian countries. Yesterday, the Mexican finance minister accused China of starting a currency war. Kind of ironic - the last round, people were accusing the U.S. of that.
And then there's a lot of psychology in markets. And I think this turmoil and other indicators are fueling fears that China's economy is really in trouble. It's really slowing a lot, and that means less appetite for imported commodities with effects in Africa and Latin America and Australia. And basically, it's leading people to think that maybe the world economy is going to be in for a rough patch.
GREENE: OK, so we have, in the United States, people worried about the behavior of the Chinese government, worried about the health of the Chinese economy. Is that all what's really driving this big drop on the U.S. stock market?
WESSEL: I don't think so. I think there's a tendency when markets fall for people to look at what happened five minutes before and that must be the cause. There are a couple of other things that are going on.
One is oil prices keep coming down. Now, that's good for SUV sales. It's good for people who heat their houses with oil this winter. It's bad for energy companies. There's been a lot of layoffs in that sector. Some of this is an increase in supply. The U.S. produces a lot more oil than it used to. Saudis are pumping a lot of oil, maybe to punish Iran and Russia, keep prices down. But the persistent weakness of oil and other commodities may be a symptom, again, that weakening demand all around the world. So it may be - that's, I think, weighing on markets.
And then secondly, you know, the world isn't looking any safer day by day. Terrorism; tension between Iran and Saudi Arabia; North Korea, whatever they're doing with their nuclear things - this has to have some depressing effect on the outlook that investors have for what the year's going to be like.
GREENE: All right, David. Thanks as always.
WESSEL: You're welcome.
GREENE: That's David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent to The Wall Street Journal. Transcript provided by NPR, Copyright NPR.