Worst Threat to Your Portfolio (and Global Markets)
Which is the worst threat to your stock portfolio (and global markets), a Greek debt default or a Chinese stock market meltdown? Two economic situations are unraveling on opposite ends of Eurasia. The Greek people have voted “no” to more austerity measures in return for further debt relief. The seemingly miraculous Shanghai stock market has lost a quarter of its value in the last month. Which is the worst threat to global markets? China obviously has a larger economy than Greece but if the Greek situation damages the European Union that will affect one of the two super economies in the world (North America and Europe).
The Chinese Market Meltdown
The Chinese economy is cooling but that is not the immediate problem. The problem for China is debt. Similar to Japan in the late 1980s, many Chinese companies are deep in debt and much more fragile than one might expect. The Chinese stock market is dominated by mom and pop investors who have all too often borrowed money to invest as the Shanghai market went up 150% in a year. But anyone who invested late has lost money as the market has lost a quarter of its value (eleven years of Greek economic production) in the last month. And there is more to the market rout in China. The New York Times talks about a double threat.
For nearly three years, President Xi Jinping of China has crushed opposition by silencing and often locking up anyone who dares defy the government. But that aura of invincibility has been shaken by stock market speculators who have made a mockery of efforts to halt a steep slide in share prices.
The losses – Chinese shares have shed more than a quarter of their value in three weeks – pose an added risk, and possibly greater danger, to a global economy grappling with Greece’s difficulties in repaying foreign loans and its possible exit from the euro. About $2.7 trillion in value has evaporated since the Chinese stock market peaked on June 12. That is six times Greece’s entire foreign debt, or 11 years of Greece’s economic output.
The underlying issue in China is that the Communist party seeks to project an aura of invincibility in order to maintain control. A significant economic downturn coupled with loss of savings across a broad spectrum of Chinese society could lead to social upheaval. That would be a worse threat to global markets that a Greek economic decline.
Is This about Greece or the EU?
Greece has a small economy compared to China but the European Union is a far larger economy than China. It is the integrity of the European Union and the European Monetary Union that is of concern when investors worry about the Greek debt crisis. Thus USA Today reports that U.S. shares as well as global markets opened lower after news of the Greek vote against more austerity