In the scheme of things, Greece’s problems are small potatoes compared with China’s. What makes the possibility of a Grexit (Greece exit from the Eurozone) significant is that it would call into question the concept of a unified Europe.
If Greece exits, what about Portugal, Spain and Italy, which are also struggling with massive debt? Some economists have even called for Germany to exit the Eurozone insomuch as it is the creditor nation in the Zone.
Concerns have shifted to China because we’re now talking about the world’s second largest economy.
China’s economic growth is at its lowest rate in more than two decades, with its GDP having slowed last year to 7.4 percent and the first quarter of this year to 7 percent. These are growth numbers that if posted by the US would send stocks soaring. But China has seen growth rates many years in excess of 10 percent.
Responding to the lower numbers, the Shanghai and Shenzhen stock indices are down 33 percent since the sell-off started June 12, with investors having lost nearly $3 trillion. China’s reactions are pure Keynesian.
The China Securities Regulatory Commission recently released a statement that the People’s Bank of China (China’s central bank) would “uphold market stability” by quadrupling its funding of CSRC’s capital to Rmb100 billion ($16 billion). The CSRC could then lend to a fund being launched by 21 brokerages to “support the market.” Seventeen percent of the stocks on China’s two primary exchanges have been purchased on margin.
Twenty-eight companies whose IPOs that had been previously approved have withdrawn them. The notion here is that already suffering stocks will not be sold to buy the new issues, thereby supporting the markets.
Additionally, 25 fund managers pledged to buy shares in their own funds and to hold them for at least one year. The 21 brokers contributing to the market stabilization fund agreed not to sell as long as the Shanghai Composite index was below 4,500.
And, the PBC last month lowered its lending rate for the fourth time since November. Further, it reduced the reserve requirement for commercial banks, which frees up money for lending.
In response to concerns about China’s slowing GDP, commodities prices fell. Copper was hit the hardest, falling 8.4 percent in two days to its lowest level since 2009. Gold and silver prices followed with big drops today (Tuesday, July 7, 2015). I suspect the precious metals declines were the result of hedge fund managers thinking that if copper is down, gold and silver have to follow.
In fact, lower gold and silver prices are buying opportunities. Typically, severely declining stock prices send gold and silver prices higher as frightened investors seek the safety of gold and silver. One China expert said of the above mentioned actions, “Almost every one of these measures reeks of panic and is very short-sighted.”
We will not know for weeks if the stock declines in China resulted in increased gold and silver purchases, but there’s no reason to think that the Chinese are any different from Americans when it comes to protecting their assets.