Is Another Economic Crisis Coming?

Concerns are mounting over the possibility of a global economic crisis triggered by the slowdown of the Chinese economy. The Chinese stock market plunged on July 8 to jolt the other bourses around the world.

Due to the stock market crash, market capitalization of US$3.2 trillion went up in smoke in a single month. This amount is equivalent to 200 percent of Korea’s annual GDP, 200 percent of the aggregate value of the Indian stock market, or 16 times the GDP of Greece.
  
The likelihood of economic turmoil is supported by the fact that a large number of foreign investors are found in the Chinese stock exchange. They are likely to rush out of the Chinese market once the stock price index falls further. Then, a rapid decline in domestic consumption would follow, to affect the economic growth rate. In the banking sector, individual investors who borrowed money from banks but failed to pay them back could drive the banks and their enterprise customers to bankruptcy.

China is one of the countries where shadow banking prevails. The practice of a non-qualified borrower taking out a loan in the name of a qualified borrower on the condition that the former pays a commission to the latter could make things worse, as the practice is not much different than non-performing loans.