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08 July 2015

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PirateLaddie

Well, it's certainly different. Both are based on financial shenanigans and regulatory monkey business. I expect the Russkies to step in & help the Greeks set up a "new" currency -- drachma 2.0, in return for future favors, tbd. The Chinese situation will make it more difficult for their new Asia Infrastructure Bank to provide "back-up" for Putin. Still expect the Greeks to be saved via the good offices of a Russian-Sino initiative, but it will be more complicated and drawn out.
We can all rest assured that there is (REPEAT AFTER ME): "Absolutely no connection between the Greek situation, China market meltdown & the on-going closure of the NYSE."

Fred

Col.,

Good questions sir. Another is just what is happening on the NYSE? All trading stopped?
http://www.nytimes.com/2015/07/09/business/dealbook/new-york-stock-exchange-suspends-trading.html?

The Beaver

Colonel

from what I have been reading since last month, it is 10X bigger than the Greeks' problem.

"The plunge in Chinese equities during the past three weeks has reached almost $3 trillion in market value, about 10 times Greece's gross domestic product last year – and nearly double Australia's." from different sources

This one from yesterday:

https://fortune.com/2015/07/07/china-market-greece-debt/

paulj

"Is this bigger than the Greek problem?"

It's a completely different problem…apples and oranges.

Stock markets suck money out of an economy, only a relative few benefit from gains. In China's case this could affect consumption but there is no demand shortage in existence that can't be fixed with more government spending.

Supply problems are much harder to solve.

rjh

Short form: YES, China is a much larger danger. But the opacity of Chinese practices make it extremely hard to quantify the danger or its timing.

One huge internal/external issue is their governance foundations. Purely authoritarian governments have control because of power and threats. China is transitioning to a public bargain of greater personal freedom, less authoritarian behavior, accepted because they provide a much better standard of living. If this bargain breaks down, the alternative become ugly. Creation of an external enemy, re-imposition of authoritarian rules, etc. are all candidate behaviors.

charlie

Drive out the hot money. Create a 2-3 week drop that gets people who day-trade or gamble out of the market, and make it painful enough that they don't come back for a while.

BabelFish

I believe this is primarily an internal Chinese problem. The central government encouraged amateur investors into the market, which has been around only since 1990. The mentality is a 'get rich quick' process, with little to no thought of long term investing. Many investments are made by tips or or recommendations from friends or family.

However, it will probably slow the Chinese economy down in a significant way. If that slows down their military spending, that might be good for us and their neighbors.

kim sky

one explanation... gloomy as most their articles are, unfortunately probably correct.

"The Chinese government now confronts a runaway plunge, threatening to destabilise the entire debt-ridden financial system. Local government authorities alone are estimated to have some $4 trillion in outstanding loans."

http://www.wsws.org/en/articles/2015/07/08/pers-j08.html

otherwise, is simpler terms, yep stocks are down, but if you invested a year ago your investment still stands well.

confusedponderer

Almost always illuminating, here's nakedcapitalism's take:

http://www.nakedcapitalism.com/2015/07/chinese-stock-market-rout-continues-trading-halted-in-over-half-of-listed-stocks.html

A. Pols

Maybe it is, but we here have our problems too and in the "Global Economy" all share the "Global Debt" problem. Greece is small and lacks the Mojo to game things independently and, hence, is a canary in the coalmine.

nick b

What goes up must come down. There's been a huge run up in the Chinese stock markets over the past two years. Smaller investors, eager to get in on the rally took advantage of favorable terms to buy shares on margin, flooding the markets with cash and running up share prices dramatically. This run up was based more on investor speculation than by any improvement in economic conditions.

Excessive leverage in any market is always troublesome, as we saw so very clearly in 2008. Now that the market has traded off, there are margin calls. The value of the collateral securing the margin loans has dropped and money must be raised. Generally this happens by selling margined shares. If everyone is running for the exits at the same time, trying to sell the same shares, prices tumble dramatically. To cover margin calls, anything that can get a decent bid will be sold, increasing the contagion from riskier shares to all shares. Combine this with many Chinese companies using their heretofore soaring shares for collateral on bank loans, and you have a real problem. The need to raise cash causes share prices fall quickly. Sellers abound and buyers are scarce.

I don't see this turning into a problem along the lines of Greece, as the Chinese Central Bank and Government still have many tools available to them to provide liquidity. Chinese investors who may have borrowed to invest will feel the most pain. I could be wrong, as global markets are a fickle thing, but that's what I see thus far.

Walrus

Yes, it is bigger than the Greek problem in terms of reduced Chinese demand for imports and purchases/ sale of U.S treasury bonds.

The Greek problem is threefold; European bank losses, contagion to Italy, Portugal and Spain and that sovereignty thing.

Will try to judge reactions here in Italy while travelling.

Cameron Kelley

It could certainly become much larger. Yves Smith's piece at Naked Capitalism goes into some more detail, and it isn't reassuring. http://www.nakedcapitalism.com/2015/07/chinese-stock-market-rout-continues-trading-halted-in-over-half-of-listed-stocks.html

Cameron Kelley

Yves Smith thinks it may be, and she goes into some detail.
http://www.nakedcapitalism.com/2015/07/chinese-stock-market-rout-continues-trading-halted-in-over-half-of-listed-stocks.html

liza

I'm concerned what implications the Chinese stock market crash will have for the American economy. China holds $1.2 trillion in US treasury bonds (as May 2015), and is now America's leading debt holder, surpassing Japan. A massive sell-off of Chinese treasuries presents a severe threat to the US economy: the federal debt now exceeds $18 trillion, and has increased by $9 trillion since Barack Obama assumed the presidency. If the Federal Reserve were forced to raise interest rates to attract buyers for treasuries, our economy will be crippled by rising interest payments and inflation. The American economy is now extremely vulnerable: expenditures for Social Security and Medicare will increase by 10 percent a year to finance the retirement of the baby boomers.

I believe that there is an escalating risk that the Chinese may sell off treasuries. China's economic growth slowed to 5 percent last quarter; their property market has overheated and collaosed, and now their stock market has crashed. Their government may need additional liquidity. More critically, their government may seek to lower the value of the dollar, which their currency is tied to. Chinese exports would become more competitive if the value of the dollar was lowered. China also intends to increase investment in Europe: Premier Li visited Europe last week and announced the creation of a Chinese-Europe investment fund.

I believe that the crises in China and Greece have both result from the same underlying problem: global debt has reached a level that is unsustainable. McKinsey released a fascinating report on global debt earlier this year

http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

Global debt has increased by $57 trillion since the 2008 financial crisis. China's debt has quadrupled. Germany's total debt is more than 200 percent of their GDP.

The global economic system is now confronted by two threats arising from unsustainable debt. Greece epitomizes the first threat: a growing number of nations, corporations and individuals will simply not be able to repay their debt. The Chinese crisis represents the second threat: high-risk investments have become increasingly attractive to investors because banks no longer offer interest. American pension funds are facing bankruptcy for this reason. And Wall Street will sustain significant losses as American oil companies increasingly file for bankruptcy.

Ultimately, the greatest risk is held by Wall Street. Greece's debt is marginal in relation to the European and global economy. But an estimated $26.45 trillion in derivative contracts are tied to the value of the Euro. American "too big to fail " banks hold more than $200 trillion in derivatives; JP Morgan alone holds 70.trillion. The risks presented by a Chinese "hard landing" are inestimable. The Chinese have characterized the American and Chinese economic systems as "Siamese twins"-- if one dies, the other dies. My fear is thatthat characterization is correct.

mbrenner

Let's start by acknowledging two things.

1. Nobody is in a position to make an even reasonably informed guess as to why; or the repercussions.

2. The American media will play this to the tilt in emphasizing that "see, China is really not that strong, and we'll be number one for a long, long time." The New York Times has stories that convey that message at least a couple of times a week - the point of reference can be something as idiotic as children's color preferences shifting from red to blue or yellow.

(2) of course is classic avoidance behavior and is an expression of the peculiar American need to live in a fantasy world of wish fulfillment

Joe100

We are facing two visible meltdowns: EU/Euro structural flaws finally coming home to roost and in China an indication that the Xi leadership is not managing China's necessary economic rebalancing competently, which suggests China could be heading for serious political unrest combined with a very hard economic landing.

China's need to rebalance from their investment-driven growth path to a household driven one has been clear for somee time. This need and the consequences of botching it are clearly described in Michael Pettis's recent book "Avoiding the Fall" (highly recommended reading).

China's government actions that helped drive the current stock bubble/crisis and their inability now to control the situation have been well described in several recent blog posts, most recently today at

http://wolfstreet.com/2015/07/08/china-syndrome-burns-stocks-commodities/

another good recent overview is at

http://www.nakedcapitalism.com/2015/07/chinese-stock-market-rout-continues-trading-halted-in-over-half-of-listed-stocks.html

In China's case this is more than a stock market crash as apparently those getting wiped out are primarily the "little people" who were lured into the stock market in part by the government thinking that this might be a painless path to rebalancing. The potential for political unrest is high as can be seen by the government's banning coverage of the rapidly growing urban protests.

The convergence of the Greece/EU political meltdown and the near-term political unrest and medium term economic hard landing in China could lead to another "Lehman Brothers event".

ex-PFC Chuck

The short answer? Sooner or later all market bubbles burst, especially when large amounts of debt underlie them. Some burst with a gentle hiss, others with a loud boom! The current Chinese one is well toward the latter end of the spectrum.

As to which is the bigger problem, the Greek or the Chinese one? I suspect they're both going to go down as among the most pivotal turning points of the 21st century. First Europe. The immediate effect on the Greek people will be vicious regardless of whether or not they agree to accept the Troika's austerity nostrums. Sooner or later I expect them to bail from the Eurozone. The "sooner" could be as early as the next week or two. The "later" will be several years down the road after the austerity regime has set the country back into Third World status and significant population turnover has occurred as the younger cohorts of native born Greeks have emigrated and been replaced by refugees from Africa that the country, because of the effects of budget constraints on its ability to control its borders, couldn't keep out.

The Germans and their allies think the E'zone will survive and thrive just fine without Greece, but sooner or later (and more likely the former) the fundamental contradiction embedded in the design of the Euro will have its way with them. That contradiction inheres in the fact that whereas there is a single currency, there is no fiscal union that underlies it. Thus when one or a small minority of countries in the union successfully pursue a policy of becoming net exporters by substantial margins to the other countries of the union, and the fiscal policies of all countries are constrained by hard agreements on debt limits, there is no way that the surplus cash accumulating in the treasuries of the exporting countries can be recycled. This leads to the long term build up of debt in the importing countries that will eventually put them behind the same 8 ball Greece is in the shadow of. The question will the E'zone shrink to just a northern European entity as the Latin countries pull out or are kicked out? How will this affect the European Union itself? And NATO?

As heterodox economist Steve Keen emphasizes over and over, the notion that austerity can somehow restore a country's economic health is not only based on an incorrect understanding of economies, but it has also has been disproven by experience. From what I have read recently it seems that the intransigent position on the benefits of austerity taken by its government, and especially the Finance Minister, have roots in German culture that became deeply embedded during the hyperinflation of the1920s. Perhaps some of the German people who read this blog can disabuse me of this notion or maybe even expand on it. See Max Kaiser's interview with Keen on the Youtube link below; it begins about 12:10 in.

https://www.youtube.com/watch?v=EiZnhuDWkd4&feature=youtu.be

As for China, I don't have much to say since I haven't been following the situation there closely. However it's hard to see this market crash, and the economic issues behind it, not having a considerable impact on the country both internally and its international relations, both economic and otherwise. One can envision urban and rural unrest as jobs evaporate, squillionaire-wannabes jumping out of office buildings in Shanghai and the government charging the estates of the more egregioius fraudsters for the bullets that make their into their skulls behind one ear and out behind the other.

Jack

Sir

IMHO, China is a significantly larger problem compared to Greece. Greece only represents 2% of EU GDP.Even if they default and not payout anything it would mean a loss of around 100-150 billion euro for Germany and a little less for France.

On the other hand China has lost $3 trillion in stock market capitalization in 3 weeks. Their stock market had gone parabolic over the past few months rising some 150% on the back of massive influx of retail trading accounts and huge increase in margin debt. With margin calls rising and many unsophisticated retail investors now sitting on paper losses there could be a self-feeding panic. So Chinese authorities are trying to intervene by increasing lending to brokerages, preventing government pension fund from selling stock and have suspended trading on nearly 50% of the stocks.

Zanzibar had written several comments on the massive growth in financial leverage in China over the past few years driving asset booms in property,industrial capacity, infrastructure and shadow banking. If I recall it correctly he noted that credit growth in China quadrupled to some $25 trillion over the past few years. His analysis was that when asset values decline loans that don't perform would continue to be rolled over and at some point the government would have to back the losses. His concern was that if there was a general panic it could threaten social stability by bringing to the open the sub-surface factionalism in the communist party. He had also noted the repercussions of a Chinese slowdown in commodity prices and it's impact on Brazil, Australia and Canada. I wonder what his opinion is now on all the financial turmoil that he predicted.

Sidney O. Smith III

Jack
Agree completely re: Zanzibar. He's the best I have seen. He saved a lot of mom and pop investors from severe pain a few years ago. I trust him (Plus would like to know his opinion re: mmt as I agree with your comments on the same but I am no expert).

William R. Cumming

Ah So! There is a connection! While double-entry book keeping a gift to the world from the Italian Renaissance the world of accounting a gift to the modern world from the SCOTS.

But that was a long time ago. In the 1970's having spent a lifetime already studying the officialdom of Washington and those who stoked and manipulated it I became that quite a large number of senior accounts from major firms were arriving not to do the books so to speak but to lobby on behalf of the profession. Now at one time lawyers could not split fees with non-lawyers or accountants. Then accounting firms dropped the ban on hiring in house lawyers.

So the law and accounting professions were moving to a corrupt system that desired that ultimate protection--FREEDOM FROM LEGAL LIABILTY--when things went wrong. They largely succeeded.

How does this relate to China and Greece? Both have some of the egregiously dodgy accounting systems in the so-called developed world. Not just funny money but funny systems. YUP! THE BOOKS DON'T COME CLOSE TO BALANCING! And never confuse MODERN FINANCE with ACCOUNTING!

Paul Escobar

To all,

Dean Baker was one of the few economists who noticed the American housing bubble as far back as 2002, and warned about the upcoming burst in no uncertain terms.

He does not seem particularly hysterical about China:

------------
http://www.cepr.net/blogs/beat-the-press/china-s-stock-market-plunges-back-to-february-level

China's Stock Market Plunges Back to February Level!

I won't claim any great expertise on China's economy, but the exasperated reporting on the recent fall in China's stock market should also note that it followed an enormous boom. Undoubtedly many people who bought into this boom will be hurt, but it's not clear that it is a disaster for China's economy if it's stock market returns to its level of five months ago.

It is also worth noting that its market had a far sharper drop in 2008. Its economy continued to grow strongly after the crash, although it did require a large government stimulus program.
------------

Economics Expert

My family/friends still live in China so here's info direct from there:
1) China's stock market was up 86% from just last year (up over 150%+ in a few years) so it's it's declines now are actually expected since it was known as a bubble

2) China's gov banks (the 7 largest & most profitable in the world) take their orders from the Chinese gov, who's priority is socioeconomic stability & growth (rising incomes & standards of living), which
is why China's gov banks create $1-$2 trillion extra each yr in loans as jobs/employment projects to fund hiring MILLIONs of it's people building cities, factories, solar plants, interstates, harbos, etc

China's huge growth in incomes/standards of living actually comes from mostly this ever since it was taught MMT in 1998 by Warren Mosler & Randall Wray PhD Economics, which showed that them gov money creation ('gov deficits' of spending more money (to hire/produce) than it takes in taxes) does NOT cause inflation since increased supply of goods/services offsets the increased money supply.

Countries that ISSUE THEIR OWN CURRENCY & NOT on a foreign-currency standard nor gold-standard can ALWAYS PAY any & all debts in it's own currency UNLIKE THE EURO-using nations who do NOT issue nor control the EURO nor the EURO Central Bank,
which
WHY interest rates & inflation is near 0%-2% for both US (100% gov debt) & Japan (250%+ gov debt) & Singapore (118%+ gov debt) & China (250% gov debt if counting their gov banks) despite them having record deficits/debt & lowered credit ratings because they can always repay any & all debts since they control the 'printing presses' (really more like keystrokes on a computer bank spreadsheet)

The central banks of US, Japan, China, etc are all controlled by their federal govs (ie, president/PM appoints all the board of governors) & the US Federal Reserve's own charter/bylaws, US law states that should there ever be a conflict, the US Federal Reserve MUST defer to the US Secretary of the Treasury (who himself is replaceable by & answers to the US President) &
it's chartered mandate is "full employment, maximum production, & price stability, low inflation"

Thus, the Federal Reserve & China's central bank will always supply enough liquidity to their respective banks (ie, Fed creating $2+ trillion to 'buy' trillion in MBS & other asses) & will always pay any gov debts.

More so, China's gov & gov banks will supply trillions (it spent over $2 TRiLLION in stimuluss since 2009 & thus escaped the global recession & lowered their unemployment rate down to 3% with around 2% inflation & 3%-4% interest rates)

below uses US as example but this applies to China, Japan, US, & any other country that issues it's own currency not on a foreign/gold standard :
"US Treasury Debt is denominated in dollars.

Any time the US wants to "pay off" the debt, it just needs to credit bondholders with newly created dollars.

Since bonds are the equivalent of cash, no new money is created by this operation - the money was created when it was spent and covered by bond issuance.

As long as the US sticks to this system, it cannot by definition go bankrupt, since it always has the ability to create dollars to pay off or service debt.

You seem to be forgetting where dollars come from.

Dollars don't come into existence in China nor do they grow on trees., nor are they collected by taxation.

They are created by the US Government, and they are spent into existence by the act of government spending.

China obtains dollars to by treasuries by trading goods to the US market in exchange for dollars. It can then choose to either hold these dollars by investing them in US Debt,
or
selling the dollars and obtaining some other currency or good for them.

No matter what China does, the dollar doesn't go away.

The very first US Dollars came into existence by monetizing the debt from the War for Independence, and new dollars were then created by
offering free coinage at the mint for anyone bringing gold or silver bullion to be assayed,
as
well as by the seniorage operation of the US Mint purchasing bullion and then coining it into money and collecting the difference in value.

Without the gold standard, this is all now much simpler.

The government spends money into existence by sending it in checks to people and businesses which creates bank reserves,
then
it offers US Treasuries as a way to invest the reserves it just created, and it collects some money back in taxes."

Sidney O. Smith III

Zanzibar...help needed! One last time...in the memory of Thomas Jefferson and, perhaps, America!

SAC Brat

A big person was probably taking a bath and needed a do-over.

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