Morgan Stanley: The Next Recession Will Be Led By China

The recent decline in Chinese stock markets has unnerved many and according to Ruchir Sharma, managing director and co-head of the emerging markets equity at Morgan Stanley Investment Management, this might be a sign that the Chinese government is not as powerful as it is perceived to be.

Sharma was on CNBC recently to discuss the dramatic fall in Chinese equities over the last few days.

Beijing Omnipotence Questioned

Sharma was asked if one should be worried about the slump in the Chinese stock market. He replied, "Yes, I think we should be because I think that it's suggesting to us that Beijing is not that much in control of all things going on in China as the world has believed for the past few years.

"So, I think that that's the real message from what's happening in Shanghai – that this omnipotence of Beijing that the world had come to believe is being questioned in public display."

Related Link: Internet Penetration In China Remains Below 50%

China Will Start Next Recession

Sharma explained the relation between the meltdown in the Chinese stock market and the overall Chinese economy, saying, "They are somewhat separate, but they are also related...It's the psychological impact that when people see that Beijing is not that much in control of what's going on in the stock market, are they that much in control of what's happening in the wider economy?"

He continued, "I think that is the fundamental problem out here, and yes, the economic risk from China today are much more significant. As I have sort of argued in the past that there is a global recession every seven to eight years; over the last 50 years that's what we have seen. Historically, that has always been led by the U.S.

"But this time, I think it will be led by China, just because the size of the Chinese economy now is so big in the global economy, and that's where the vulnerability lies given the debt build up that China has seen over the last few years," Sharma concluded.

Image Credit: Public Domain
Posted In: Analyst ColorCNBCEmerging MarketsMarketsMediaChinaMorgan StanleyRuchir Sharma
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