This article was co-published by Seeking Alpha on Sep. 13, 2015.

Over the past few months, China’s precipitous stock market drop has been wreaking havoc in markets across the globe. In the middle of June, China’s stock market hit a seven-year peak after surging more than 150% in 12 months. Many analysts had been warning that the rise in the Chinese market was driven by momentum rather than fundamentals, since the Chinese economy seemed to be losing steam. Yet, the dramatic surge in stock prices continued unheeded until mid June, when the market suddenly turned. Since then, the Chinese stock prices have dropped nearly 40% culminating in a one day drop of 8.5% on August 24 which is now being called China’s Black Monday. According to Barrons, top strategists and money managers predict another 15% decline before the market hits bottom.

Shanghai Composite Index performance over 1 year (Source: VOX)
Shanghai Composite Index performance over 1 year (Source: VOX)

Around the globe, fears have been rising as to the potentially catastrophic political, social and economic consequences a financial crisis could have for China, its closest trading partners and the global economy as a whole. In China, individual retail investors directly own the majority of shares and their losses risk hurting the real economy and even leading to social unrest. Therefore, the rapid decline of the stock market has worried the government and president, Xi Jinping, who were already struggling with a Chinese economy that had been losing steam. Having increasingly drawn its credibility from the strength of the stock market, the Chinese leadership has become increasingly desperate in their effort to prop up equity prices.

What was behind the bubble?

The Chinese stock market bubble is largely believed to have been abetted by a host of measures undertaken by the government. The central bank had loosened monetary policy, leading to falling borrowings costs stimulating investment. Similarly, several liberalizing laws had made it easier for funds to invest and for firms to offer shares to the public for the first time.

Thus, after languishing over the past few years, the stock markets in Shanghai, with 831 listed companies and Shenzhen, with 1700, took off last summer rising to dizzying heights. Shares of newly listed companies soared, sometimes thousands of percentage points within months of their initial public offering, fueling a large amount of speculative buying among a new cadre of retail investors which included tens of millions of ordinary workers, farmers, housewives and pensioners.

As Orville Shell from the Guardian reported in “Why China’s Stock Market was Always Bound to Burst”, there were several unmistakable signs that should have raised alarm bells. First of all, Chinese stocks were climbing ever higher while the Chinese economy was experiencing a slowdown. Secondly, a significant disparity in prices between “A-shares”, which can only be purchased by investors inside China, and “H-shares” stakes in the same companies available to foreign investors through the Hong Kong exchange, should have been a telltale sign that Chinese investors were bidding up prices beyond any reasonable value.

Schell reports that , “drawn by the casino-like profits to be made in the boom, more and more small investors flocked to the thousands of brokerage houses that are now proliferating in every Chinese city.” With the Shanghai and Shenzhen exchange up 135% and 150% respectively in less than a year, stocks had begun to seem like a sure thing with promises of quick profits for the millions of Chinese investors hungry for wealth. As such, compared with the 2% annual rate of return promised by traditional bank savings accounts, investing in the stock market for those able to do so,seemed like a no brainer.

Instead of focusing its efforts on regulating the speculative boom, “The government itself had become bedazzled by the seemingly invincible rise in stock prices”, according to Schell. The Chinese government took measures that further inflated the bubble. The government itself took advantage of the rising prices to sell equity stakes in dangerously debt-burdened state enterprises and clean up messy balance sheets.

What caused the market to turn?

In mid June, investors suddenly realized that stock valuations had lost touch with all fundamentals, and the bottom finally fell out. Within less than a month, the market had suffered a 32% decline. The loss of investor confidence led to a precipitous rush to sell.

The fall has been exacerbated by the amount of margin lending that had built up during the boom. Over the past few years, there had been a substantial increase in margin lending in which individual investors borrowed from a broker to buy securities. While the market was booming this allowed small time investors to put very little money down, borrow the rest to buy stocks, and then pocket outsized profits when they sold. However, the explosion of margin lending left many households highly exposed to the risk of a drop in stock prices. As prices of securities began to fall in mid June, brokers made demand for more cash or collateral (margin call) which meant that investors had to sell immediately. .

What measures have been taken?

Since mid June, nearly half of the market, or 1300 companies have suspended their shares in an attempt to stall the steep decline. Meanwhile, in desperation, the Chinese authorities hastily enacted a series of measures which they hoped would stop the decline.. They curbed the amount of new shares issued, in order to prevent any further dilution, and enlisted brokerages and fund managers to buy large quantities of shares, supported by the China Securities Finance Corporation (CSFC), China’s state backed margin finance company which has a direct line of liquidity from the central bank. On July 4, China’s top 21 securities brokerages pledged to invest at least 120 billion yuan (19 billion dollars) collectively to help stabilize the market.

Despite these measures, the Shanghai Composite index closed the month of July with a decline of 15%, the worst it has suffered since 2009. On August 10, the People Bank of China’s 2% devaluation of the yen, enacted in an attempt to respond to their recent economic slowdown, caused stocks to drop even more over the following days. On August 14, the CSRC surprised the market and the world by announcing that Beijing was going to allow market forces to play a bigger role in determining prices, marking a dramatic reversal from its previously interventionist stance.

On August 24, following the dramatic one day 8% drop which erased all gains for the year, the Chinese central bank again cut interest rates. A few days later on August 27, senior Chinese central bank officials shocked the world by telling Reuters that wide gyration of markets over the past week was caused by concerns over a possible interest rate rise by the US Central Bank rather than any measures by the Chinese government. At this date therefore, it is not clear what the Chinese government can or will do.

Will this spread into other markets?

The effect of the Chinese stock market drop is being most immediately felt by a broad decline in commodity prices around the world. Particularly, China’s problems have further pushed down the price of oil, which briefly fell to under $40 a barrel in the United States. The price of most other commodities, notably copper and aluminum have also been undermined by the possibility that lower than expected sales to China, which is the largest market for industrial commodities.

Russ Koesterich, Global Chief Investment Strategist at Blackrock noted that the roller coaster ride in China is mainly a domestic one, because, as noted above, most foreign investors hold H-Shares that did not experience the same bubble valuations and the linkage between China’s economy and its stock market isn’t particularly strong. Nonetheless, markets around the world became jittery as the Chinese bubble continued to deflate. The Chinese “Black Monday” on August 24, caused world markets to tumble in a rout that erased $3 trillion in value from stocks globally. While most markets stabilized the next day, ending fears of a free fall, the recent turmoil caused by China has led many investors to turn their focus to government officials- who have become the most prominent players in many financial markets since the 2008 crisis. In particular, the apparent eternal debate about whether the Federal Reserve in the United States will still follow through with plans to push through an interest hike has once again been revived.

Traditionally considered a catalyst for regeneration and growth, the Olympic Games certainly bring prestige and media attention to the host country. The conventional argument is that this increased visibility benefits the host nation by attracting additional foreign investment, creating jobs, and boosting tourism. However, preparing to host the Games in the first place is a massive undertaking that first requires considerable capital investment in upgraded infrastructure, athletic facilities, housing, telecommunications, security, and sanitation, as well as covering other operational expenses during the Games themselves.

For London, these expenditures have totaled upwards of $14.5 billion, which well exceed its initial $5 billion estimate. The phenomenon of runaway costs is not atypical for host countries historically, however. For the Olympics in Athens and Beijing, preliminary estimates amounted to $1.6 billion in both cases, but ended up costing $16 billion and $40 billion, respectively. Unfortunately for London, the years leading up to the 2012 Games have been marred by constant upward revisions on cost estimates, of which the Olympic Park’s Aquatics Center is a perfect example. Originally budgeted at $118 million, the facility ended up costing $434 million. Despite this, the London Games actually proved to be a leaner Olympic Games than in years past.

Given the tumultuous economic climate in which England finds itself, it is unsurprising that the London Games lacked much of the extravagance that defined the Games in Beijing. Facing its second recession in four years, faltering consumer and investor confidence, and a seemingly imminent eurozone crisis, England is desperate for an economic boost. Manufacturing has fallen at its fastest rate in more than three years, and the economy has contracted by 0.7% in just a few months, suggesting even greater hardships are still to come.

To make matters worse for England, due to the global economic downturn, private investors largely reneged on their commitments to fund various projects related to the Games. Lacking a sufficient pool of private financing, England’s government was forced to absorb even greater expenditures than it initially anticipated. By contributing to England’s rising budget deficit, such additional expenses have only exacerbated England’s current dismal fiscal situation.

To be fair, funding the Olympic Games always places a strenuous burden on the government budget, irrespective of the current economic conditions. This harsh reality is nowhere more obvious than in Montreal during the 1976 Olympic Games, where severe cost overruns necessitated the introduction of a tobacco tax to help pay off its debt. While London has not yet reached this extreme, the substantial unexpected costs incurred challenges the economic viability of hosting the Games in the first place.

Although the majority of costs incurred by England from hosting the Games consist of direct expenditures, a more subtle but equally important component quantifies what the country is sacrificing in order to host the Games. By funding Olympic endeavors, England’s scarce capital is diverted from potentially more productive uses. As a result, hosting the Olympics can conceivably translate into slower rates of economic growth than what could otherwise be achieved. This opportunity cost, as it is referred to in economics terms, continues even after the Games end, as the projects that would have been undertaken with these public funds still do not receive the proper amounts of resources to be completed.

Over the last two decades, the economic impact of hosting the Games on the host country has been quite mixed. Although Barcelona in 1992 and Atlanta in 1996 enjoyed continuous and meaningful economic growth following the Olympics, the last three host nations—Sydney in 2000, Athens in 2004 and Beijing in 2008—all failed to secure sufficient long-term benefits from the sporting event. In each of the three most recent cases, it became increasingly apparent following the Games that the anticipated future revenues failed to materialize and thus did not justify the large upfront costs.

Having established the source of both the direct and indirect costs of hosting, one can now consider the potential for long-term benefits in order to ultimately decide whether sustaining the costs is justified. The primary factor underlying whether the Olympics will deliver future benefits or become an economic flop is the ability to smoothly transition from the Olympics to normal operations. For host cities like Athens that failed to achieve this, a rather lackluster residual legacy persisted following the Games. The current state of Athens’ athletic facilities is a constant reminder of the lofty expectations that never came to fruition. Because its infrastructure was constructed specifically for the Games without regard for post-Games integration, the overcapacity that has since ensued has led to severe underutilization of 21 of Athens’ 22 once world-class facilities. Most of its stadiums are in a state of disrepair, its Olympic village is a ghost town, and the government cannot afford the 60 million euros per year necessary to operate and maintain its facilities. By contrast, Salt Lake City, Utah, the host of the 2002 Winter Olympic Games, continued to enjoy higher volumes of skiers in future years following the games, because of its ability to find long term public uses for its Olympic venues.

London, now acutely aware of this issue, is determined to learn from Athens’ mistakes in order to ensure long-term feasibility and optimize the economic legacy of the Olympics. In an unprecedented move, the UK established a committee in 2009 to focus exclusively on post-Olympics development. London has designed venues that are more suitable for hosting events long after the Olympic Games have passed, by concentrating on portability and adaptability. For instance, its main stadium, which seats 80,000 people, has an upper tier that will be dismantled after the two-week sporting event. By relying on temporary as opposed to permanent installations, London will likely avoid the problems of excess capacity faced by Sydney, Beijing, and most prominently, Athens. Now with a more manageable capacity of 25,000, the core stadium becomes more usable for hosting smaller sporting events, concerts, and commercial events in the future.

Along similar lines, ensuring that any and all benefits are distributed among the city’s population is an important consideration. The 2012 Olympics has been coined “The Regeneration Games,” because of London’s mission to achieve urban renewal in the previously neglected neighborhoods of East London. Featuring 250 acres of open space, state-of-the-art athletic facilities, and the Athletes’ village, the newly built 500-acre Olympic Park in East London embodies the transformation of the urban landscape. To facilitate the integration of the eastern and western parts of the city, London spent billions of dollars on a new rail line that will connect the traditionally affluent West London with the poorer Eastern half. Additionally, developers have already opened the largest urban shopping center in Europe in East London, as well as various commercial spaces, housing, schools, libraries, and community centers.

Throughout the entire process, though, London must be wary of simply attracting wealthy outsiders. Instead, London should seek to raise the standard of living of East London’s poorer constituents by stressing affordability. For this reason, the city of London also has plans to build over 11,000 affordable homes in the region, in addition to its plans to convert the Athletes’ Village into 2,800 affordable apartments following the Games. For these plans to succeed, the government must actively promote continued regeneration in the region even after the Games are completed and the impetus has weakened, through encouraging job creation, improved health, and steady economic development.

Sustaining meaningful, long-lasting economic growth is also largely contingent upon maintaining increased levels of foreign investment beyond the short-term outlook of the Games. To do so, London has made an effort to attract increasing foreign capital as well as foreign direct investment—both public and private—by targeting companies based in China, India, and the United States. In fact, London has plans to host exhibitions and conferences designated to increase visibility and promote British businesses abroad. Its active promotion has already begun to pay dividends, as foreign companies, including Jaguar, Nissan, and a transportation contractor have recently announced over $8 billion in investment over the near term, including a $7 billion contract to build 92 inner-city trains.