GLOBAL

Is China's Financial Crisis Really Bigger Than

Greece's?
Why the numbers arent everything

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, July
8, 2015.
Aly Song / Reuters

MATT SCHIAVENZA
JUL 9, 2015

Days since a referendum in Greece helped push the country closer to a

painful exit from the euro zone, another financial crisis is competing for
the worlds attention in China, where stock markets have tumbled in the
last month.
Instead of focusing on Athens, investors should be much more worried

about whats going on in China, warned CNN Money. Writing in the Wall
Street Journal, meanwhile, Ruchir Sharma of Morgan Stanley Investment
Management wrote that if ... the Chinese economy spirals downward, it
will make the drama surrounding Greece feel like a sideshow.
This point of view is naturally supported by a range of eye-popping
numbers. Over a period of four weeks, Chinese companies lost some $3.9
trillion in valuea number more than 15 times the size of the entire Greek
economy. The Chinese government has employed a range of strategies to
halt the slide. Beijing relaxed restrictions on how much investors could
borrow to buy stocks, and Chinas largest brokerage firms announced a
$19.4 billion plan to purchase shares in major companies. The
government has restricted new company IPOslest they prevent investors
from putting their money into companies already selling shares on the
stock marketand have meanwhile suspended trading on thousands of
other struggling firms. Most recently, Chinas securities regulator
announced that any shareholder owning stocks worth more than 5 percent
of an individual company could not sell those stakes for the next six
months. On Thursday, these measures temporarily seemed to work: The
Shanghai Composite Index recovered 5.8 percent of its value, while
another index, for the smaller stock exchange in the southern city of
Shenzhen, jumped by 3.8 percent. Prior to that, each market had fallen
over 30 percent since June 12.
The collapse is, to say the least, unnerving in a country of such tremendous
size and influence. China has a population 1.3 billion people as well as the
worlds second-largest economy, one that is deeply connected to world
markets. Greece, by contrast, has a population around the size of Ohios
and an even smaller economy. But dollar amounts lost only go so far as
measures of the size of the crisis each country faces.

The Chinese stock market got out ahead of where

the economic fundamentals suggested it should

be.
For one thing, China is still living on the largesse of a bull run that
preceded Junes collapse. The Shanghai index is 74 percent higher than it
was at this time last year, while Shenzhen is still up 84 percent. But that
surge in stock prices did not accompany a jump in overall economic
growth (which has slowed) or in corporate performance, which in China is
difficult to ascertain given a lack of transparency or enforced accounting
standards. The bull market instead was propelled in no small part by
popular frenzy as small investors jumped into the fray with borrowed
money. As Neil Irwin pointed out at The New York Times, while the
downturn is certainly painful to those who lost money, it may be less a
shock than a simple correction to the normjust like Chinas last equities
plunge in 2007.
The Chinese stock market got out ahead of where the economic
fundamentals suggested it should be, said Nick Consonery, a China
expert at Eurasia Group, a political risk consultancy. The best-case
scenario for the government would be to align it more with the actual
economy.
In addition, the Chinese economy is more insulated from stock market
fluctuations than those in developed countries like the United States. The
stock market just isnt a huge driver of economic activity in China:
According to The Economist, less than 15 percent of overall household
assets are invested in it. The countrys national savings rate remains
extremely high, protecting it from a U.S.-like debt crisis, and the
government could still encourage more investment by lowering interest
rates.
The real problem with Chinas stock-market fluctuation isnt that itll
plunge China into a depression. Its that it interrupts the countrys longterm economic strategy. The Xi administration wanted the equity

markets to be a meaningful channel for Chinese companies, said

Consonery of the government under Xi Jinping, who has led the country
since 2013. They didnt want them to rely too much on bank loans, and
they wanted them to use the stock market to accrue money.
Given the government panic spurred by this summers correction, though,
the countrys biggest companies may well lose faith in the long-term
health of Chinese equity marketsand that could cause serious problems
in the future. But for now, its premature to worry that the Chinese stock
fluctuation will cause significant damage to China, much less the global
economy as a whole. And that means that the worlds pessimists should
still keep their focus on Greece.
ABOUT THE AUTHOR
MATT SCHIAVENZA is a contributing writer for The Atlantic. He is a former globalaffairs writer for the International Business Times and Atlantic senior associate
editor.
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