One year later, China-induced crash increasingly farfetched

A year ago today, the Dow Jones crashed over 1,000 points to kick off the trading session, as fears of a large and uncontrolled devaluation of the Chinese yuan which had built up since PBOC's surprise reset of the currency on August 11, 2015 finally came to a head in US markets; beginning August 24, when the Dow eventually ended down nearly 600 points, some $5 trillion of equity was liquidated from US bourses over the course of a mere three weeks.

The same horror show of a China-induced global correction was replayed in January and February. The overwhelming effect of these two episodes within just five months of each other was to create a popular narrative in much of the world that it was just a matter of time until the entire global economy would reset on back of a China debt crisis-induced crash that would trigger a universal deflationary shock via a large one-off yuan devaluation.

Now, however, as China prepares to host its first ever G-20 summit in Hangzhou on September 4-5, the dark clouds over the global economy are undeniably still present, but don't seem particularly China-centered anymore.

The problem with most bearish analysis of China is that it tends to focus on eye-catching headline figures - especially pertaining to its high debt levels - which gives the impression that radical and immediate reform is needed from Beijing or else everything by default just goes to hell. This makes it easy to overlook low-key, unspectacular changes in the Chinese economy, like trimming of corrupt SOE executive salaries and nascent bank recapitalizations, that have already prevented the worst-case scenario from materializing thus far.

So one year later, a China-induced global crash looks increasingly farfetched. It can happen, for sure, but even the pessimists now tend to push its timetable further out, if they haven't settled for a prolonged Japan-style stagnation as China's more likely fate.