Published on 6 Jul 2015 Sections , , ,

Greece: markets are more worried about China

Economics Correspondent

The no vote in Greece may be causing political shock and awe but stock markets in Europe reacted with relative calm this morning. The same, however, can’t be said for what has been happening in China.

The world’s second largest economy has been caught up in one of the sharpest and steepest sell offs in stock market history, writes Business Correspondent Helia Ebrahimi.

With more than £1.5tr wiped off the value of shares in the past three weeks, equivalent to ten times Greece’s annual GDP, China’s stock market roller coaster ride could have much broader implications for the global economy.

Bill Gross, the legendary investor nicknamed the ‘Bond King’, has warned that China is one of several events that could spark global shockwaves.
“China – a riddle wrapped in a mystery, inside an enigma,” Mr Gross said. “It is the ‘mystery meat’ of economic sandwiches – you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.”

While voters in Greece were using the ballot box to exercise their democratic privilege, in China the all-powerful communist party was exerting as much authority as possible to stem the tide that’s seen the Shanghai Composite crash 30 per cent in the last few weeks, having hit a seven year high in June.

Less invisible hand, more direct state intervention – a massive shift from the 2012 administration’s pledge to create a true market economy. While the emergency moves have highlighted china’s existential dilemma: between an autocratic Communist government and the currents of free-market capitalism – they have actually worked to increase volatility rather than to help price formation.

The raft of measures have included cutting interest rates, removing bank lending limits (introduced to take the heat out of worrying asset bubbles), barring short-selling on numerous companies and imposing a ban on 28 scheduled IPOs. Authorities have also instructed the quasi-private sector stockbrokers and asset managers to provide crucial market support and pump the system with cash.

On Monday, the result was an initial 8 per cent bounce in prices that soon fell away leaving the market in Shanghai up only 2.4 per cent – a very little bang for a lot of buck. In Hong Kong, the Hang Seng index had its worst daily loss since 2012.

Compare this to the Eurofirst 300, which today slid just under 1 per cent; Germany’s DAX down 1.26 per cent; France off by 1.45 per cent; while the UK FTSE was more or less unchanged in afternoon trading. While borrowing costs have gone up for Spain, Portugal and Italy the moves are relatively modest.

Even the euro halved its overnight losses after the resignation of Yanis Varoufakis, Greece’s colourful finance minister.

Investors are either sanguine that contagion caused by a Greek default can be contained, or hopeful of a deal, or confident that the power of the European Central Bank and its president Mario Draghi will be able cushion to blow to the eurozone’s weaker economies.

Jens Nordvig, a currencies analyst at Nomura, wrote in his note: “Pretty boring day overall. The shock was a week ago, not Sunday’s ‘NO’, and markets are telling you that pretty clearly today. Those betting on run-away contagion as a result of Greece getting on an exit path will have to re-think.”

Greece is getting all the attention but, as the Bank of England warned last week, the real threat to the global economy could be a lot bigger than one troubled economy in the Mediterranean – even if it is the cradle of civilisation. China’s credit-fuelled property and equity bubbles have proved so overpowering that the government has had to make drastic interventions and undesirable U-turns. As Mr Gross hinted, that can’t be good.