Leading article: A shockwave from the East

The roots of this week's stock market fluctuations lie in the East. On Tuesday, the Shanghai stock exchange fell 9 per cent because of rumours that the Chinese government was planning to impose a capital gains tax on share dealings. This, in turn, prompted the biggest one-day fall in New York since the 11 September terror attacks in 2001. The Japanese Nikkei index lost 3 per cent. Here in Britain, £36bn was wiped off the value of the FTSE 100. From Hong Kong to Brazil, there was a mass sell-off of shares.

Such a knock-on effect is not unprecedented. The 1997 East Asian economic crisis had a similarly negative impact on global markets. But this is the first global equities sell-off driven purely by falls in one Asian country. The immediate question on many minds is whether this signals the end of the longest equities bull-run the world has seen in recent years? Certainly there are some ominous signs. The US housing market appears to be sputtering. The former chairman of the US Federal Reserve, Alan Greenspan, has warned of a possible US recession this year. Yet it is too early to say whether this signals the end of the boom. Stocks in Shanghai bounced back yesterday, as they did to a lesser extent here in Britain, too. And Mr Greenspan is very much in a minority with respect to his views on the likelihood of a US recession this year.

Nevertheless, history tells us that a downturn is inevitable at some point. And it could potentially be very painful. Many Western governments are running budget deficits, making them vulnerable to a fiscal crunch. The recent German recovery is based on impressive manufacturing export growth. But that would be very susceptible to a fall in global demand. Even Britain, although it is better placed than many of its Continental peers, is not in particularly good shape to weather such a storm. The public finances have little room for manoeuvre now. Budget deficits are creeping up. In a downturn, tax revenues would fall. Britain would then have no choice but to cut spending and raise taxes. The Chancellor, Gordon Brown, faced a pretty obvious political challenge yesterday. It could get worse for him if his economic achievements begin to unravel.

We have seen something of a paradox in recent years. While there have been extremely benign economic conditions, a number of surveys of Western business leaders have also identified a surprising level of nervousness about the future. This is, in part, a reflection of the uncertainty over the economic rise of China. After this week, such uncertainty seems justified. It is now clear that what was once said of America also holds true for China: when it sneezes, the world catches a cold.