Europe

Your 411 On The China/Greece Crises

“Awesome week.”

That’s probably the best answer the PYMNTS team received when asking others to describe the state of the world economy this week (which we did today via a poll – more on that later).

It’s also the most accurate.

Despite how it is commonly used, awesome, in this case, does not mean good. It just means awe-inspiring. Which also means that as a word, “awesome” is one of language’s better switch-hitters. It works for things that are great like Star Wars, roller coasters and sights of natural beauty. It works equally as well for horrible things like tsunamis, riots and the wrath of God.

When contemplating the world’s economic fortunes this week, last week was more the “wrath of God” type of awesome.

In a survey which we do not claim in any way to be statistically significant, we asked the first 117 people we could get our hands the following question:

What’s the scariest thing happening in the world economy right now?

The vast majority (61 percent) said some variation of Greece leaving the Eurozone and the chaos it will cause. Twenty-two percent mentioned Greece and China, and 9 percent said China alone. It’s worth noting that the possibility that Donald Trump could be the next president of the United States performed only slightly worse than China (7 percent), and that 70 percent of the “China only” respondents work at PYMNTS.com.

That result is a little troubling because the China problem unfolding this week is 10 times the size of the problem in Greece. And we mean that quite literally — the key figure to keep in mind for the Greek crisis is $350 billion, which is the approximate amount of money Greece currently owes. The operating number to keep in mind about China on the other hand, is $3 trillion – that’s trillion with a T, which is the amount of value that evaporated (on paper) from the Chinese stock market in the last month.

In fact, if anything, we are underselling the difference in scale and scope of the problem, since earlier this week, that number was closer to $4 trillion — though big measures by the Chinese governments managed to get Shanghai and Shenzhen back under control, ending the last two days of the week in positive territory.

But those controls may not in themselves be terribly exciting news for the world economy.

“The Communist Party has figured out that they can’t actually control stock markets,” MPD Founder and economist Dr. David Evans noted when we asked him about the scariest thing about the world economy today. “China’s stock market is melting down with unpredictable consequences for both its economy (could crater) and its government (could decide they’ve had enough of this crazy market stuff since they can’t control them).”

That tells us that world market watchers just might be worrying about the wrong thing, or at least worrying too much about one right thing at the expense of a much, much more important thing. To help you keep it all in perspective, PYMNTS has your quick guide to the two financial crises playing dueling banjos on the world stage right now.

Or to put it more accurately — the two crises that are playing dueling kazoos and electric guitar on the world stage right now.

Greece – The Tempest In A Europe-Size Tea Kettle

The PYMNTS executive team wins the award for best responses to questions about what’s going on in Greece this week with these two synopses.

“[The Greeks] are going to have to eat their spinach – and they don’t like it. But who cares? I don’t.”

That was MPD CEO Karen Webster, who, in a rare act, managed to give only the second most colorfully correct executive summary of the Greek crisis the week.

“Greece is going to pay more since their election when they stomped their feet, acted like a child and demanded relief. Germany said – tough crap, pay up, maybe more now that you are so stupid. You have nowhere to go, so stop acting like a spoiled child.”

A quick history of the Greek crisis: In the 2000s, Greece — new to the Euro and armed with Germany’s credit rating because of the shared currency — borrowed a lot of money. However, given Greece’s long celebrated traditions of no one paying taxes, one in four people employed by the government, a retirement age of 55 and corruption run amuck, that turned out to be a spectacularly bad idea.

“What’s going on in Greece, you ask? Not much work but I hear the bribes are good,” Dr. Evans noted.

How spectacularly bad an idea it was didn’t become apparent until the world financial markets crashed in 2008 — at which time Greek’s creditors came a calling. But when you collect few taxes and give away money in graft, you at some point have a problem: You don’t have enough money to pay your creditors. And, guess what, in 2010 Greece needed to go to the ECB, IMF, and World Bank to get a loan.

Those entities pretty much needed to bail Greece out at that point, because allowing Greece to default would have likely annihilated banks already ailing from the previous meltdown and probably would have caused a chain reaction that would have seen Greece, Spain, Italy, Portugal and Ireland all knocked out of the Euro. So Greece got its bailout, but it got it with some very tough austerity conditions like raising taxes and cutting pensions.

<GASP>

According to most economists, that austerity pushed Greece from an economic disaster into a full-blown depression, leaving them out of money again and in need of more funds. The bankers at the ECB and IMF won’t give up those funds unless Greece agrees to more austerity. The Greeks formally voted last week not to agree to more austerity, noting that, under such measures, their economy will never recover.

So, the “do or die” date is July 20, when Greece owes €3.5 billion ($3.86 billion dollars thanks to a largely depreciated euro) on a bond held by the ECB. If Greece does not pay on that bond, the ECB will all but certainly refuse future collateral from Greek banks and pull €89 billion (~$98 billion) in emergency liquidity assistance. Without Euros to provide liquidity, Greece would have no choice but to return to printing its own currency.

However, it seems that it might not get that far.

Despite starting the week with great swagger — Germany’s mid-week assurances that they would sooner let Greece leave the Euro than offer any significant debt concessions — Greek Prime Minister Alexis Tsipras seems to have blinked in this particular game of chicken late yesterday. Tsipras submitted a “cash-for-cuts” proposal to the ECB yesterday that, according to The Washington Post, took a deeper and harder bite out of the Greek budget in some places than the original austerity proposals rejected last week did.

The ones Tsipras referred to as “blackmail.”

The watercooler talk among leading financial types is cautious optimism. The proposal must be approved by Greece’s Eurozone — in particular Germany, which is known to be tough-minded on this subject.

However, French Prime Minister Manuel Valls called Greece’s blueprint for spending cuts and new taxes “solid, serious and complete.”

The markets are even more enthusiastic, and have surged around the world as Eurozone officials contemplate a completed Greek deal.

Which is good news for the markets, since on Tuesday it was quite a different story when they were in chaos all over the world.

Except that story is far from over.

China – The Approaching Global Tsunami

“What’s going on in China has the potential to put a serious dent in the world’s economy not just b/c their stock market lost $4 trillion, but b/c the Chinese government may decide this free market stuff is not their cup of tea – that could have some pretty big ripple effects. We are a global economy after all.”

MPD CEO Karen Webster may not care that much about Greece, but she sure thinks there is plenty to be worried about in China.

Probably because there is.

This also requires a brief history lesson.

In the 365 days preceding June 12, China’s stock market brought new meaning to the word “boom.”

According to Fortune, the Shanghai exchange rose 150 percent. That incredible growth was driven along even faster in the first part of this year by the 18 million brokerage accounts created since Jan. 1, 2015 — over four times the number of brokerage accounts created over the previous four years combined in China.

And then on June 12, the flip side of the boom showed up — in force. The bust.

Over the last month, the Chinese stock market has lost about a third of its value — or over $3 trillion. That activity spiked on Tuesday. The CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 1.8 percent that day, the Shanghai Composite Index lost 1.3 percent and the ChiNext growth board home (home of China’s small-cap valuations) took a 5.1 percent plunge. And those dispiriting results came despite the fact that the Chinese government intervened in the market to attempt to stem the bleeding.

In recent days, however, the plunge has stopped, though largely aided by government measures that include IPOs being shut down, short-selling being banned and more than 700 shares — about a quarter of the market — being suspended from trading.

It also helps that a government-backed fund is buying billions of dollars’ worth of stock to create a floor in price.

It also bears noting that the Chinese stock market is a weird place in general.

Booms and busts are common in the marketplace and are driven by rapidly proliferating number of “fast investors” and heavy government intervention, reports The Wall Street Journal. Also, unlike any other markets of their size, China is almost completely closed off to foreign investors. This current explosive — though terrifying, as outsiders looking in — is according to some analysts just a symptom of Chinese market weirdness, and likely to contain itself.

However, what is going on in China should still be scary for three reasons — two obvious and one historical.

The obvious two reasons.

China is the second largest economy on earth and its two main stock markets rank second in the world in market capitalization behind the New York Stock Exchange. Given its scope alone, its problems should attract more attention than the economic problems of a small Mediterranean nation with an economy that is smaller than the state of Massachusetts and a population smaller than the state of Ohio’s.

The less obvious reason is found in who the investors in China are.

“Everyone, from translators, to taxi drivers to investor relations, were checking their phones every few minutes to look at share prices,” said Matthew Vaight, global emerging markets portfolio manager at M&G Investments, commenting on the notable change in China’s street in the last year.

There is a famous, if apocryphal story about why Joe Kennedy held on to his fortune during the Great Depression. Kennedy said that about six months before the whole thing crashed, an elevator boy recognized him and gave him a tip on a hot stock. Kennedy got out of the elevator and immediately pulled all his money out of the market, on the logic that if he was getting stock tips from elevator boys – the market was doomed.

It seems that China’s markets have a lot of elevator boys in them right now, and though the parallel between 2008 is popular, it seems as though the comparison to 1929 is a bit more apt. In 2008, a segment of the market went bad and dragged the economy down with it. In 1929, the whole thing got so totally overheated by the roaring ’20s that it just full tilt collapsed.

And stayed that way. For a long, long time.

Many analysts have pointed out that the Chinese stock market is a less direct barometer of overall economic health than the U.S. stock market is domestically.

“The country’s stock market plays a smaller role in its economy than the U.S. stock market does in ours, and has fewer linkages to the rest of the economy,” Bill Adams, senior international economist at PNC Financial Services Group, wrote this week. “This probably limits the potential for China’s equity correction to trigger widespread economic distress.”

While Adams’ optimism is appreciated – it seems that if the government in China can’t figure out a way to let the air of their stock bubble slowly and the whole detonates at once, Adams might just be underestimating the potential of the second largest economy in the world to trigger widespread economic distress.

 

 

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