Greece Grabs Headlines But China Is Far More Important
China has more than 120 times the population of Greece and is the second largest economy in the world, dominating demand for natural resources. Oil prices have fallen sharply once again in recent weeks, driving the Canadian dollar down sharply yesterday. Adding to the loonie’s rout was the news that business spending plans for nonresidential construction, machinery and software have been slashed, largely reflecting the cutbacks in the energy sector.
Chinese governmental authorities have taken repeated measures to prop up the stock market, including allowing public pension plans to buy equities and boosting the domestic equity purchases of the huge Chinese sovereign wealth fund. On Sunday, China’s securities regulator said the central bank would lend from its own balance sheet to support the stock market, one of the most significant measures yet.
The government is so desperate to shore up the market that homes are now acceptable collateral for borrowing to buy stocks. China could well be setting the stage for another financial time bomb to match its local government debt and real estate bubbles.
As the government discouraged consumer investment in real estate, the Chinese middle class has poured their money into stocks. Purchases on margin have increased sharply and the recent plunge in equity prices has triggered margin calls causing people to scramble for cash.
The Chinese economy has already weakened and the government is concerned that the obliteration of household wealth will exacerbate the slowdown and cause discord and unrest.
The Chinese stock market has always been volatile and anyone who has been invested for more than the past few months has done well. Nevertheless, the economic slowdown is troubling and already impacting commodity markets and resource-led economies all over the world.
As for Greece, it had no business being in the Eurozone in the first place and if Germany et al. continue to call for additional austerity measures and no debt forgiveness, the country will undoubtedly exit. This will continue to be a very painful process for Greece, but it might even strengthen the euro and the Eurozone economy. the rest of the world will be largely unaffected.