Publicat în 15 iulie 2015, 19:34 / 538 elite & idei

Antonia Colibasanu: The Twin Threats of a Grexit and a Chinese Crisis

Antonia Colibasanu: The Twin Threats of a Grexit and a Chinese Crisis

by Antonia Colibasanu

Over the past few weeks, we have seen how two of the pillars of the world economy, Europe and China, have entered a phase of uncertainty about their future. The worries relating to the Chinese stock markets drop have been intersecting with those linked to Greek crisis in the global news. In fact, the dra(h)matic feelings’ buildup relies in the way the two countries are facing needed structural changes.

In 2012, I wrote here about the change and the problems China was visibly starting to face. The interdependency between the EU and China made me constantly take note on the evolution of Chinese economy (the latest “worry” of my own, noted on this blog, here). I see the news about the stock markets in the same key  – thus, I am probably less worried about this specific event than most (considering what I’ve read so far), and more concerned about what lies ahead – having in mind, the very same interdependence between the EU and China.

During the past few days the PBOC, the securities regulator, China’s largest brokerages, state-owned enterprises and mutual funds as well had to step in to prevent a collapsing market impacting the consumer spending. Private household consumption stays at the core of the new economic model the Chinese leadership works to implement. This addresses the need for having stable employment in consumption related sectors when the housing and heavy industry sectors started to decline. In order for the Chinese leadership to ensure a successful transition, they need not run the political risk of losing citizens’ confidence. As more Chinese citizens lose more money on the stock market, both confidence in the political leadership and spending on nonessential goods are likely to decline.

Another important element to follow – both in the short and long term – is the effects that the stock market decline will have on corporate debt. Historically, both-state owned and private Chinese companies (at least the well-connected private ones) have relied on credit lines from state-controlled banks for virtually all of their financing. During 2014, the government focus on market-oriented reforms, the consolidation of key industries, made the flow of credit coming from banks tighten. This forced some enterprises going on the stock market to fill the gap in financing needs. If the market continues to decline (very) rapidly and banks or shadow lending don’t fill in, China may face a corporate debt crisis. This will likely have an impact on Chinese trade and therefore on China’s international partners economic performance.

Considering the risks, Beijing will work for the current stock-market decline not end in a collapse. The current decline will most likely have Beijing put some effort into inventing more avenues for investment for ordinary citizens to generate wealth, beyond real estate and stocks. Alternatively, a collapse in the stock market would drive a rapid surge of deposits into banks forcing Beijing to turn once again to the financial sector to support the economy. Such a scenario encounters the risk of repeating the same speculative bubbles that attended the post-2008 stimulus drive, or even worse, if banks hang onto the surge in savings rather than expanding lending we may ultimately have an economy-wide crisis.

The economic slowdown registered by China last year has underlined the expected: the long-term process of economic restructuring has started. The burst of the stock market bubble is one of the outcomes, another (more visible) signal that China is approaching a period of unprecedented economic change and hardship. This doesn’t mean that we should expect lots of breaking news items about the Chinese economy – however, observing the societal transformations will likely be interesting.

As to what extent the current Chinese stock market decline brings financial contagion to the world markets: there are relatively few overseas businesses listed on the Shanghai Stock Exchange and therefore the real international impact of the decline will be limited. However, considering the regional integration levels, it is likely that on the short term, markets like Singapore, Hong Kong or Japan to see a drop in investor confidence.

China stock exchange decline will not have a direct influence on the EU economics and will only be bearing a longer term potential impact on the EU–Chinese trade and investment, especially if the (unlikely) corporate debt crisis occurs in the future. The intersection between the stock market crisis in China and the crisis in Greece is not really happening at the moment. Considering the potential scenarios following the stock markets decline in China as well as the constant interest China has shown in trade and investment opportunities in Europe, and in Greece in particular, the two events are relevant in the long-term geopolitical game.

On the surface, China remains neutral in all crises on the European continent (be it Greece or Ukraine). However, this doesn’t mean China isn’t looking for opportunities. Some months ago, China’s interest in expanding its presence in the Greek port of Piraeus made the news. Greece attended BRICS summit on July 6 as an observer, with everything in the news pointing to Russian-Greek good relations. There are some analysts who argue that a possible end-game (with or without Eurozone for the Greeks) includes China assuming responsibility for some of Greece’s debt and – quietly – pumping funds into the Greek financial sector against agreed investment opportunities. Russia has openly said that it is prepared to advance some funds against a new energy pipeline currently under negotiation. Greece seems to be playing the West against the East. Will the West make a counter offer to meet the speculated offers from Russia and (possibly) China? Either way, from the financial markets perspective (and not only – after all)…Greece will likely keep its options open for the time being.

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