Is China's Financial Crisis Really Bigger Than Greece's?

Why the numbers aren’t everything

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

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 world’s attention in China, where stock markets have tumbled in the last month.

“Instead of focusing on Athens, investors should be much more worried about what’s 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 value—a 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 China’s largest brokerage firms announced a $19.4 billion plan to purchase shares in major companies. The government has restricted new company IPOs—lest they prevent investors from putting their money into companies already selling shares on the stock market—and have meanwhile suspended trading on thousands of other struggling firms. Most recently, China’s 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 world’s second-largest economy, one that is deeply connected to world markets. Greece, by contrast, has a population around the size of Ohio’s and an even smaller economy. But dollar amounts lost only go so far as measures of the size of the crisis each country faces.

For one thing, China is still living on the largesse of a bull run that preceded June’s 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 norm—just like China’s 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 isn’t 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 country’s 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 China’s stock-market fluctuation isn’t that it’ll plunge China into a depression. It’s that it interrupts the country’s long-term 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 didn’t 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 summer’s correction, though, the country’s biggest companies may well lose faith in the long-term health of Chinese equity markets—and that could cause serious problems in the future. But for now, it’s 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 world’s pessimists should still keep their focus on Greece.