China risk story just getting started, while Greece nearly over
Beijing, Athens have painful underlying issues to address
Jul 6, 2015
By Clyde Russell
What's the bigger risk? Greece leaving the euro zone in a messy debt default or China continuing to pump money into its faltering stockmarket while trying to boost the rest of the economy through cheap debt?
While Greece is probably ahead in the news headline count, especially in the developed world, the main impact from the weekend rejection by Greek voters of the terms of a new bailout is likely to be short-term market volatility.
This can be seen in crude oil, with West Texas Intermediate futures dropping as much as 4.4 per cent and Brent futures falling as much as 1.6 per cent early on Monday.
The euro currency and stocks outside of China also stumbled as the Greek vote against austerity brought the Mediterranean nation closer to a debt default and leaving the single currency.
But the declines were relatively modest and probably reflected the reality that Greece is just 0.25 per cent of the global economy, and accounts for a tiny 0.5 per cent of the euro zone's total exports.
The debt Greece owes is largely to multilateral institutions such as the International Monetary Fund and the European Central Bank, with only a small amount owing to private creditors.
This means that even a Greek default and exit from the euro shouldn't pose a systemic crisis for the global financial system, even if does inflict pain on the Greek public and lead to some kind of emergency aid to maintain public services.
Of far more importance to the rest of the world is China's efforts to stabilise its equity markets after three weeks of declines wiped out some 30 per cent of the value.
The Shanghai Composite Index jumped almost eight per cent at the opening on Monday, before paring gains to trade around three per cent higher after a couple of hours trading.
The rally came after extraordinary policy moves at the weekend, which saw brokerages and fund managers pledging to buy massive amounts of stocks, boosted by liquidity injections from the state-backed margin finance company and ultimately the central bank.
While the initial reaction would be more or less what the authorities hoped for, the more prickly question is whether the market can be stabilized or whether retail investors will lose confidence in the measures and resume selling.
The balance of risks would appear to be tilted in favour of further de-leveraging by China's domestic investors, which means any stockmarket rally may struggle to last.
The caution in the market can also be seen by the decline in both Shanghai steel futures and Dalian iron ore futures, with rebar dropping five per cent to a fresh record low and iron ore slumping by its four per cent daily limit.
While there may be a bit of concern over Greece in those price declines, it's far more likely that Chinese investors are taking a dim view of the likely trajectory of the economy, and marking down the key commodities related to construction and infrastructure spending.
This view is supported by the drop in Shanghai copper futures, which slipped as much as 3 percent in early trade on Monday.
Overall, the implication is that the Beijing authorities probably still have more to do in the monetary and fiscal policy front if they want to restore confidence to China's markets, and drive economic growth to meet the seven per cent annual target.
Given their recent actions, it's reasonable to expect that this is exactly what the authorities will attempt, which may end up being positive for commodity import demand in the next few months.
But it also means China will once again be relying on cheap money to boost its economy, and not all of that money will be spent wisely, thereby upping the risks of poor infrastructure and residential housing investments.
While Greece appears to be progressing its end game after several years of rolling crisis, China is still relatively early in its attempt to transition its economy away from heavy industry and export-led manufacturing toward consumer-driven growth.
China's default position so far has been to resort to pushing credit and liquidity whenever the economy loses steam, and it appears to be going down this path once more.
If anything, the lesson for Beijing from Athens is that eventually the underlying issues will have to be addressed, and the longer it takes, the more painful it becomes.
Clyde Russell is a Reuters columnist. The views expressed are his own.
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