Is Our Preoccupation With Greece Blindsiding A Bigger Worry Of China?

By Peter Switzer, Switzer Super Report

With all of this preoccupation with Greece, its failed debt negotiations and the drama of the out-of-the-blue referendum idea that the creditors rejected, the question I have is:

Are we ignoring a potentially scarier problem for our stock market — China?

Last week the 4% plus spike of the German Dax stock market index, following the expectation that the new Greek proposals for debt repayment would get a thumbs up from its creditors, [confirmed] the bad news over the weekend for the Greeks [would] play out badly in stock markets this week.

Uncertainty around what a default means on [today] and its implications for the Eurozone, as well as the big three creditors that are owed most of the 320 billion euros — the European Central Bank, the European Commission and the International Monetary Fund — will be potential market-rocking issues for stocks.

I guess it has to be what goes up can come down, but it will take most of the week to see how scared financial markets are about the failure of an economy that is only 0.3% of world GDP and 2% of the Eurozone GDP.

Undoubtedly hedge funds, short-sellers and speculators will exploit the uncertainty but I suspect the fallout won’t affect the general positive view for stocks for 2015, despite some likely worrying moments at least for this week.

I damn well hope the lenders who have played hardball with the Greeks are prepared for the market ructions for the week ahead. The ECB in particular should have worked out a “what if the Greeks screw this up” plan B.

China problems

That aside, in case you missed it, the Shanghai Composite plunged 7% on Friday and gave up 9% over the week. It lost 13% the week before. All of this has to be put into context, and the first thing you need to know is that the Chinese stock market was one of the world’s worst performers for about six years. However its domestic A-share market then surged about 150% in a remarkably short period of time and the rise this year has been around 30%.

Yep, 150%, so do you think a retracement is way overdue? I’d say so.

Some experts say the forward P/E ratio is not too overvalued but still, that rise has to be a worry.

Stewart Richardson, the chief investment officer at RMG Wealth Management warned us on CNBC about Chinese stocks. “We’re cautious on Chinese equities, which we think is a bubble, which is bursting real-time here,” he said. He says a 50% fall is on the cards, blaming the recent slowdown in growth and poor corporate profit stories.

Adding to the dodgy picture, the Chinese stock market is often compared to a casino with retail speculators using margin loans to leverage up their returns.

It’s a big reason why I don’t advocate playing Chinese stocks as I simply don’t understand what’s going on.

A bubble?

The Washington Post recently looked at why the Chinese market looks like a bubble and why it might burst, arguing that it could have global consequences.

First, the Post explained that: “In 12 months, the Chinese stock markets rose enough to create $6.5trillion of value. That’s the equivalent of around 70% of China’s GDP in 2013, or about 40% of the total value of the New York Stock Exchange – or enough to pay off Greece’s debt 20 times over.”

Second, inexperienced Chinese investors are trying their hand at stocks and they could be up for a big sucker punch.

Third, Bloomberg says “the market has experienced bigger swings over the past 30 days than any other market except Greece.”

Fourth, the slowdown in Chinese economic growth could not come at a worse time, though I would argue 7% growth on a bigger economy could be exaggerating how bad this slower growth is. That said, if growth slows into the 6% band, it could spook stock players.

Finally, excessive lending has fuelled this stock market surge with The Washington Post pointing out that “a measure of the amount of money sloshing around the economy – was $20 trillion at the end of 2014, an incredible 70% larger than in the US.” Adding to the worrying picture has been an explosion of margin loans to buy shares and this has tripled in the past year.
 

The home game

One reason not to be too spooked by the Chinese market’s big ups and downs is the fact that only about 7% of individuals in China actually trade stocks. So a market crash would have limited effects on overall consumption and the economy, despite a big number of wealthy Chinese doing a lot less shopping in luxury brand shops. Ouch!

Another reason I am relaxed about China is that Wall Street’s main reports on why stocks were mixed on Friday ignored China and in fact the Dow put on 56 points to close at 17,946.68 despite that big market fall. Of course, the experts who play the NYSE and the Nasdaq are not infallible, but I reckon these big Chinese market falls would have attracted a comment or two, and a sell-off or two, even with all of the Greek antics dominating the headlines.

Finally, I never underestimate the Chinese Government’s ability to manipulate its economy and markets, though I will be watching this latest Chinese market drama play out and will keep you informed, as you would expect.

So in summary, Greece should be the main market game this week but a good jobs number out of the US on Friday could even keep this in perspective. Never underestimate the Yanks’ ability to ignore problems outside its borders. I will put China concerns on the shelf for this week but with a moderate watch on them.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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