Forget Greece, The Real Financial Crisis Is Happening In China

imageWhilst the World watches the Greek tragedy of its imploding economy, over in China there is a far more significant drama unfolding. Since mid-June share prices on the China CSI300 have plummeted by around 30%. In real terms that equates to approximately $3.2 trillion dollars which has been wiped off their stock market.

Trying to put that number into context is rather difficult (how many zeros in a trillion again?) but here goes… as a yard stick it is actually higher than the United Kingdom’s GDP was in 2013 (a rather modest $2.7 trillion). Scarier still, it completely dwarfs the estimated $380 billion debt in Greece… don’t forget (as if you could) that there are 1000 billions in a trillion.

What is also intriguing and yet equally alarming is that this dramatic drop came on the back of several months of solid growth. Since November 2014 Chinese stocks had more than doubled and this was largely driven by relatively small investors. The BBC estimates that between 80% to 85% of buyers are the so-called ‘Mum & Dad’ retail investors playing the stock markets and, for the most part, using borrowed money.
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Only last year, the Chinese government were actively encouraging these small investors to start buying more stocks in a concerted effort to accelerate the market. And initially that plan appeared to have paid off. However, some experts are now claiming that the policy has ultimately backfired due to the ‘herd mentality’ of these small investors – basically if their friends and family start selling then they will do the same and a domino effect occurs with everyone selling at the same time.

The effect? Panic. The result? A crash.

In some quarters, comparisons are already being made to the infamous Wall Street Crash in 1929 which heralded the start of the biggest ever economic catastrophe in the US which ultimately led to the Great Depression.

Decisive steps are being taken by the China government to halt the decline and almost half of Chinese company shares have been temporarily suspended. But according to CNN the market is still expected to slide much further (predicted to be as much as 8%) in the early days trading next week. Du Changchun, a senior analyst at Northeast Securities said:

I’ve never seen this kind of slump before. I don’t think anyone has. Liquidity is totally depleted”

Of course there is a flip side to all this doom mongering. There are plenty of industry pundits who argue that because China is still essentially a centrally-controlled economy it often defies the usual conventions of economics. They predict that even if the stock market does continue to crash, the impact will be no worse than in 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus by the government, the broader economy effectively didn’t miss a beat.

On measure though, the naysayers appear to be winning the debate epitomised by a live prediction tracker on the Telegraph website where 60% are predicting a calamitous meltdown for the Chinese economy and only 40% claiming it is no more than a proverbial storm in a (China) teacup…

By Steve Blakeman
CEO Asia Pacific at OMD

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