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The Role Of China In Black Monday 1987, Asian Financial Crisis 1997, And Black Monday 2015

In order to make systematic analysis author wants to start from explanation of each abovementioned crises, to show reasons, consequences, and probable effect. Then, to analyze China's manipulations of GDP value and its effects on the world economy.

Black Monday 1987

19 th of October 1987, also known as 'Black Monday 1987' can be considered as one of the biggest stock exchange crushes. It began in Hong-Kong and then spread all over the world. According to D. Sornette (2003), maximum decrease of a stock index was in New Zealand (-59%) and minimum in Austria (about -11%). 23 countries suffered from the crisis which started earlier than 19 th of October and prolonged for almost 2 months; 19 of them lost more than 20% of their stock indices.

For clear understanding the whole juncture let us look at statistics of world famous stock exchange indices which have been suffered from 'Black Monday 1987. Heng Seng index HSI (Hong Kong, China) dropped 51%, Australian stock index ASX (Melbourne, Australia) dropped 46%, Financial Times stock exchange index FTSE (London, UK) lost 32%, Dow Jones industrial index DJI (New York, USA) -23%, Toronto stock exchange index TSE (Toronto, Canada) lost 26%, Madrid stock exchange index IBEX (Madrid, Spain) lost 34%, and New Zealand Stock Exchange index NZX lost record 59% (New Zealand, Wellington). Indices began to reduce on the 14 th of October, continued on 15 th and 16 th until the weekend (the most significant drop of TSE was on October 16 th). On the 19 th, minimal losses of abovementioned indices were on IBEX (0%) and maximal on DJI (-23%). Falling continued after 19 th of October. To see markets juncture from October 1 st to November 20 th look at Appendix 1. Following graph shows fluctuations of abovementioned indices on a same period:

In order to define possible reasons author has analyzed online sources. Most of researchers agree about the same factors. Author decided to divide them into three categories: background factors, specific factors, and own observations.

Background factors:

1. US trade deficit reached its maximum in a first part of 1987 since 1960. Combining with budget deficit it caused rising worries about probable crash of US stocks.

2. Need to increase capacity of trade in stock markets led to rise frequency of using program trading. Usually it gives possibility to trade faster and make more money in a shorter period but at the same time, it produces a lot of information about trading deals. Consequently, rising amount of information overburdened markets.

Specific factors:

1. Record number of margin calls reduced market liquidity with help of following change in prices. As noted by Carlson (2006), combining with first reason, market cannot deal with such fluctuations of margin calls and timing of payments.

2. Sornette (2003) argued that in September 1987 stock prices were overvalued. That time P/E and P/D ratios were at their maximum level during a long period. This caused spurring decrease in prices soon.

3. According to Sornette (2003), Derivative securities and index futures eventually led to increasing in changeability, risk and fluctuations of stock markets.

All these factors influenced falling in 1987 not suddenly. On author's opinion, crash was a result of years of combining different policies, tools and transforming their consequences into new problems. That is why author want to include own observations - emphasize trigger - chain of events in a Middle East during October 1987. Exasperating a conflict in the East altogether with all other factors influenced dropping DJIA on the Black Monday. In order to look at timeline of military conflict see: Appendix 2

Asian financial crisis 1997

Asian currencies crisis started in Thailand in July 1997 from devaluating of baht. That particular crisis was regional; due to International financial statistics, since July '97 to December '98 it directly influenced devaluating of Indonesian rupiah (-56%), Malaysian ringgit (-27%), Thailand baht (-19%), Korean won (-20%), Philippines peso (-26%), Singapore dollar (-3%). Therefore, it has changed trade balances of abovementioned countries.

As reported by the Euro Money, in 1997 Thailand faced with lack of foreign currency in order to support its fixed exchange rate. Combining with high foreign debt, it led to necessity to float exchange rate. Due to analysis of the East Asian countries by Gerhard Aschinger, the main reasons for spreading Asian crisis are deficits in current account balances, high level of foreign debt (both except Singapore), and speculations attack against currencies.

Kennard and Addison (2015) wrote that at the same time stock exchange indices also suffered. Hang Seng lost 23%; KLSE dropped 50%; Thai stock market lost record 75% and Singapore STI lost 60% of its value.

The most interesting case of this event is China, because despite of the same problems China did not suffer as well as its neighbors. China's yuan did not depreciate against American dollar; consequently, Asian currencies depreciated against CNY and USD at the same time and it has its own impact on China's trade balance.

Hai and Zhong argued that we can divide impact into two effects: price effect, and income effect.

Price effect: Since Asian currencies depreciated, Chinese goods became more expensive for people in these countries. People can buy less amount of goods for the same amount of money and/or they need to change their consumer basket. Income effect: Due to Asian currencies depreciation GDP of Asian countries in Yuan or US dollar decreased, and this fact with help of price effect reduced China's export to these countries.

Due to a report of Ministry of Foreign Trade and Economic Cooperation of China, China's export to Japan in 1998 decreased for 6.7%, to Indonesia for 36.4%, to Malaysia for 16.9%, to Singapore for 5%, to Thailand for 23,5%, and to Korea for 31.2%. The same ministry published statistics that Japan was the biggest export market: 12.76% before decreasing. The second place: Korea with 6.57% of China's export. Obviously, China needed to do something in order to save its GDP value at least at the same level. Due to Hai and Zhong, to make this China adopted following measures:

Increased tax refund rates for export goods Export barriers canceled Government encouraged reforms in the trading system Supported financially foreign trade Tried to diversify export markets

According to Ministry of Foreign Trade and Economic Cooperation, despite of 0% growth of total export in 1998, China increased it to European and North American markets; China started to export +21.5% to the United Kingdom, +13.3% to Germany, +21.2% to France, +11.7% to Canada, +16.2% to the United States, and +14% to Australia. This helped to save China's export and GDP value.

China's Black Monday in 2015

Shanghai stock market began to fall after 12 th of June 2015, when it reached its maximum. Comparing with first of January SSE increasing was 156%.

After that, day-by-day index was falling until 26 th of August, when it reached bottom (-6% comparing with fifth of January and -43% comparing with its maximum this year)

Cutting interest rate and devaluation of currency are a kind of government response on decreasing stock market. This made juncture even worse. The lowest devaluation points are 12 th and 24 th of August.

Main reason for China's Black Monday is inflation of Chinese stock market by investors who made huge capital inflow. After 12 th of June, index began to fall and worries about probable crush of inflated market began to spread faster. This led to enormous decreasing of index' value. Like a response for falling SSE, DJI dropped on 24 th of August for 4%. The lowest index' value reached on a next day, -12% since 5 th of January (See: Appendix 3).

From July 12 th, when SSE index reached its maximum, its volume was equal to 6256,234 bln, but till August 12 th it lost about 800bln US dollars. It means that at least 800bln flew out from Chinese economy. Therefoe, such step like devaluating yuan through decreasing interest rate was necessary for two reasons:

Export from China became more expensive for other countries because of strengthening of yuan comparing with US dollar. Simple average of CNY/USD fluctuations from 1 st January to 11 th of August was +0.05%. As reported by the BBC (2015), Yuan has appreciated comparing with other Asian currencies for 10% during last year, China's export decreased for 8.3% from a year ago. Therefore, devaluation of currency is a tool for saving millions of working places, because of probable decrease in demand for Chinese export caused by strengthening of CNY.

According to BloombergBusiness (2015), in 2014 Yuan had 7 th place in a list of currencies as a share of official reserves side by side with Canadian and Australian dollar after four main SDR currencies: USD, EUR, JPY, and GBP. In 2014 yuan occupied 1.1% of reserves, USD occupied 63.7%. As reported by the Yahoo (2015), last year China asked IMF for yuan to be joint currency basket but for being in Fund's Special Drawing Rights basket (NYSE:SDR), currency must be less controlled by Chinese government. Therefore, by this step China made her exchange rate more flexible.

Consequently, since the beginning of the year, CNY became cheaper (comparing with US dollar for 3.54%), it will help China to level or even exceed previous year export. At the same time, on 1 st December 2015 world news announced that CNY would join SDR basket. Due to Yahoo (2015), IMF claimed its decision and China's central bank welcomed it. Yuan will entry basket next year, on October 1 st.

All abovementioned crises have their own peculiarities, differences, and, of course, something in common.

Similarities:

All of them followed by sharp fallings of Stock Exchanges around the world. On author's opinion psychological factor played an important role in each case. Each of them were supported by too high rates of growth and overestimation (of East Asian economies in second case and stock market prices in first and third cases).

Differences:

Black Monday '87 basically caused by variety of factors related to functioning of stock markets; both Asian financial crisis '97 and China's Black Monday caused by government's monetary policy of different countries (Thailand in '97 and China in '15). Geographically, first and third crises spread around the world and second one, Asian financial crises was regional Black Monday '87 expressed by falling the biggest stock indices around the world; In Asian financial cris i s, falling of Thai baht triggered fall of other currencies, and of stock markets; on China's Black Monday, fall in a stock market caused capital outflow and China decided to devalue its currency in order to gain investments. Second and third crises began in countries with fixed or semi-fixed currency rates. Second and third crises followed by speculators attacks:"Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable," Takako Masai, head of research at Shinsei Bank in Tokyo about China's Black Monday (Forbes, 2015) Frances Copolla (2015) argues that in a second crisis, Asian economies' growth based on foreign borrowing and current account deficits (Like in USA in 1987). Accordingly, external debt helped to develop Asian economies but then supported their falling. In a third crisis, China's growth was also very fast last decades, especially since developing new industries. At the same time, China' growth has not been reached with help of foreign growth, but with export expansion, and, as a consequence, with trade surplus. This gave possibility for Chinese government to lend money for the rest of the world in contradistinction to Asian tigers in the late '90s and USA in '08, but like USA in 1929.

China's GDP level value:

China's official GDP is not true; many of researchers have discussed this hypothesis. The most significant resonance made a statement of nowadays' China's Prime Minister Li Keqiang about non-realistic official economic results of Liaoning where he was Party Secretary in 2007. As reported by the Wikileaks (2007) from the dialogue between Li Keqiang and US Ambassador, when Li Keqiang wanted to measure Liaoning economic activity he focused on three indicators: electricity consumption, volume of rail cargo, and amount of loans disbursed. Therefore, in 2010 The Economist proposed to use "Keqiang index", combining three abovementioned indicators. Let us look on graph, built by Stuart Rae and Hayden Briscoe (2015)

Researchers found out that China overstating GDP in case of economic retardation, probably for avoiding capital outflow, and understating GDP when economy growth is too fast in order to hide overheating. In both cases China cares mostly about capital flows, because according to Mundell-Fleming model, in case of floating or semi-floating exchange rates changes in amount of capital could influence changes in exchange rate and conversely. This makes impact on GDP level, the export's and import's value, because goods become cheaper or more expensive for foreign buyers which in turn would change trade balance to surplus or deficit. Blanchard (2013) argues that expectations of increasing output could change consumption in two ways:

↑Expected future GDP → ↑Expected future labour income→ ↑Human wealth→ ↑Consump tion↑Expected future GDP → ↑Expected future dividends→ ↑Stock prices→ ↑Nonhuman wealth increases→ ↑Consumption

Therefore, manipulating GDP value gives China a possibility to control investment flows, to gain investments through nominal increasing of wealth of Chinese people and control stock market prices. It can be considered as powerful tool for making an impact on a world economy. Due to CIA data, China is the world's biggest exporter and third biggest importer. Accordingly, it can mostly influence trade balances of its export partners: USA 16.9%, Hong Kong 15.5%, Japan 6.4%, South Korea 4.3%; and import partners: South Korea 9.7%, Japan 8.3%, Taiwan 7.8%, Germany 5.4%, Australia 5%. If or when China join recession, it will consequently cause recessions in other economies because of China's decreasing in demand for export of these countries and to these countries.

Taking into account China's total growth, which is too fast, economists around the world agree with the same thesis: China could probably enter a recession. It is common observation that when certain economic cycle reached its maximum, it began to transform into a bubble and cause decreasing in output that can be considered as a recession. Buiter (2015) called this phenomenon as basic for capitalist market economy.

In conclusion, each crisis cannot appear suddenly, it is a consequence of certain policies, used by government and market players.

Black Monday started in Hong Kong and spread all over the world, infected also American Dow Jones Average Index. Massive redistribution of capital flows took place those days. Asian financial crisis beat almost all significant Asian countries except China, which is very strange because of common Asian economy. China's Black Monday decreased American and Chinese indices but at the same time it gave China possibility to make its export more competitive and to allow yuan to be joint SDR.

In all of these cases crisis started also with help of speculative attacks. Author supposes that each crisis can be country-made, artificial. Black Monday beat US market, but not effected China so much; Asian financial crisis could help US to import cheaper goods from East Asian countries and helped China to afforce its positions in Asian and world area. In addition, after Asian financial crises IMF, established by USA lend enormous amount of money to Asian countries. China's Black Monday hit American indices but helped China to let off its currency and make CNY additional currency in SDR basket.

Appendix 1

Appendix 2.

References

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