Just when we think that the global economy is again stable, a meltdown so big happens that economic policy is at a loss to deal with it. China’s “Black Monday” stock crash sent global markets reeling this week. China’s stock market has over time become detached from the reality of China’s own economy, and is appallingly overvalued. China unexpectedly devalued the yuan two weeks ago in an attempt to jumpstart its flagging economy.

At the same time the Karachi Stock Exchange (KSE100) index plunged by 1,419 points or 4.11 percent on Monday creating headlines in the local media and raising concerns among both small and large investors about the fundamentals of the market. Both the local and international investors pulled out amid falling crude oil prices globally as well as the Chinese financial crisis. Monday was not an ordinary day for Pakistani investors, especially the small ones or day-traders who lost a big chunk of their equity. Foreigners have offloaded about $44 million of Pakistani stocks in the last week, which marks the biggest weekly outflow so far in 2015.

Few foreign investors have much direct exposure to these stock markets - only 1.5% of Chinese shares are owned by foreigners, China still limits the amount of overseas investment, but not in the case of Pakistan. Our economy is too close to China and we are not protected from Chinese risk. China has the will and resources to ride out its recession, but if it gets worse, Pakistan will be riding out a region recession by the seat of its pants.

Some have tried to attribute the fall to the political uncertainty prevailing in the country – specifically Dharna politics returning again – but this wouldn’t have affected the market to fall that sharply. Just a day later, on Tuesday, the market recovered 698 points, almost half of what it had lost, suggesting that the market panicked more than necessary. However, we see too much volatility, which is not good for long term investment or growth.

We must prepare. We have seen global crisis before, but the American and European crises have not affected out economy due to distance and a lack of financial linkages. Changes in the Chines economy will definitely be felt. We haven’t quite recovered from the global recession of 2007 and this one could be worse. Unless our economists have something really unorthodox planned, we are probably in for more fiscal austerity, more taxation and more IMF programs.