‘Blame it on the circuit breakers’

CHINA was not facing a ”cataclysmic” economic slowdown and last week’s market turmoil was more about badly designed stock market circuit breakers, the Nobel prize winning economist Joseph Stiglitz said yesterday.

The circuit breakers, which caused local exchanges to close early on two days last week after stocks plunged to a 7 percent limit, were not as well designed as they could be, Stiglitz, a professor at Columbia University in New York, said in a Bloomberg Television interview in Shanghai.

The market closures and lower daily fixing rates for the country’s currency against the dollar roiled global markets, heightening anxiety that it could presage a deeper slump with growth already at a 25year low last year. The Shanghai composite index slid again yesterday, pushing its decline this year to 15 percent.

“There’s always been a gap between what’s happening in the real economy and financial markets,” said Stiglitz.

“What’s happening in China is a slowdown by all accounts. It’s a slow process of slowing down. But it’s not a cataclysmic” slowdown.

Regulators said last week the circuit breakers rule exacerbated rather than calmed the stock market panic and scrapped it on Thursday.

The events showed that market rules mattered and they could either diminish volatility or increase it, Stiglitz said.

The short-lived circuit breakers were criticised by analysts for exacerbating losses as investors scrambled to exit positions before getting locked in.

Stiglitz said the government’s new focus on supply side economic reforms could precipitate a deeper downturn if not accompanied by measures to boost demand. – Bloomberg