Global Stocks Fail To Rally After Monday's Slide

Global Stocks Fail To Rally After Monday's Slide

6:37pm Aug 25, 2015

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For much of today, it looked like the U.S. stock market might finally break its losing streak, but it was not to be. Late in the afternoon came another major sell-off, both the Dow and the S&P 500 closed down more than 1 percent. Stocks have been falling all over the world because of fears that the global economy is slowing, especially in China. NPR's Jim Zarroli starts off our coverage.

JIM ZARROLI, BYLINE: Over the past few days as stock prices slid, investors have been waiting for Chinese government officials to take action. Today they finally did. The Chinese central bank announced it was cutting interest rates and lowering the reserve requirements for its banks. Officials hope these moves will encourage more lending which in turn will stimulate business activity and keep growth high. Jack Ablin is chief investment officer at BMO Private Bank.

JACK ABLIN: You know, it's back to their reliable strategy, and that's encouraged borrowing and encouraged expansion and kind of capital markets.

ZARROLI: Chinese officials are under intense pressure to stop the slide in stocks. In recent months, the government has been encouraging Chinese citizens to put their savings in the stock market, and with few alternatives for investment, a lot of people did. As a result, stock prices soared. But Harvard economist Ken Rogoff says the surge has proven temporary and prices have come back down to earth.

KEN ROGOFF: Let's remember that a lot of what's happened in the last couple weeks is an unwinding of this epic boom where the stock market was going up and up and up.

ZARROLI: With its credibility at stake, the government has been desperately trying to pump money into the stock market in an effort to keep prices from falling even further, says Jack Ablin.

ABLIN: Beijing believes that if they can keep the stock market stable then that will eventually maintain confidence and encourage spending.

ZARROLI: But even if today's moves succeed in keeping stock prices from falling further, they're unlikely to address the longer-term problems faced by the economy as a whole. China has grown so much in large part because government policies have favored huge amounts of investment. The country has built vast infrastructure projects such as factories, apartment buildings and roads, and banks have been encouraged to lend money for them. Again, Jack Ablin.

ABLIN: At some point, all of this borrowing ultimately comes back to haunt them. And so while, you know, encouraging borrowing and spending is great in the very short-term, these loans do eventually have to be paid back.

ZARROLI: Now China is approaching the point where it has more infrastructure than it needs, and that's risky, especially at a time when growth is slowing, says Ken Rogoff.

ROGOFF: There are something like, you know, a million empty apartment units. There are whole cities which are practically ghost towns. They're thinking it will all work, but if growth slows down, it won't.

ZARROLI: Government officials acknowledged that they need to change course and switch to a different kind of economy, one driven by consumption instead of investment. That would mean taking steps such as raising wages and interest rates. But that would hurt many banks and businesses, and a lot of them might not survive. With the measures announced today, China has made clear it's not yet ready to switch gears, and for the time being, it will be business as usual. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.

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