CHINA´S SLOWDOWN IS OF GREATER IMPORTANCE THAN GREECE´S DEBT / THE WALL STREET JOURNAL

CHINA’S SLOWDOWN IS OF GREATER CONSEQUENCE THAN GREECE’S DEBT

By Jon Hilsenrath

Tuesday, June 30, 2015
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petar kujundzic/Reuters

Greece’s looming debt default has become the focal point for market angst in the past few days. Perhaps investors should be paying more attention to China, where the People’s Bank of China is trying to tame an increasingly volatile stock market and a deepening economic slowdown with ever-easier monetary policy.

Tuesday was another roller-coaster ride for Chinese stocks. The Shanghai Composite Index closed up 5.5%, after falling more than 5%. It is down 17% from a June 12 high but has doubled over the past year. This is like the Dow Jones Industrial average veering between 17,000 and 18,900 in a single day and falling to less than 15000 after shooting up from 9000.

Greece – slow growing, uncompetitive in many industries and burdened by unmanageable government debts – is in far worse economic condition than China. But the stakes in China’s economic slowdown are greater for the globe, the unknowns greater and at this point the prospect for market misjudgments potentially wider than in Greece.

China is the world’s second largest economy. Its output of goods and services in U.S. dollar terms is projected by the International Monetary Fund to reach $11.2 trillion in 2015, compared to $207 billion for Greece. You could fit 54 Greek economies into one of China’s. A two percentage point slowdown in Chinese growth is equivalent to Greece’s economy coming to a complete stop and producing nothing at all.

Investors and European authorities have had half a decade to prepare for Greece’s default, size up the problem, insulate other European economies from it and plan for different scenarios. Along the way, the market’s reservoir of faith in the capacity of Greek officials to manage the nation’s debt overhang has dried up. That means the probability of a downside surprise is diminished.

On the other hand, investors and authorities are still coming to grips with the nature of China’s problem. Growth has slowed from more than 14% in 2007 to something close to 7% in official ledgers and less than that in other estimates. Along the way, manufacturing overcapacity and a real estate bubble cropped up in many places. Central government debt, just 43% of gross domestic product according to the IMF, is small, but the scale of debt at state-owned firms and local and provincial governments is an unknown. Faith remains high among investors and global finance officials in the skill and wisdom of Chinese authorities to manage the slowdown and financial turbulence.

Investors and finance officials might well be right in that faith. If they’re wrong, the prospect of financial and economic dislocation for the globe is growing.