Summing up: China crisis will be widely felt

After the saga in Greece, our eyes now turn to China. Picture: PA
After the saga in Greece, our eyes now turn to China. Picture: PA
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SO IT turns out that the Grexit has been averted (for now) and we can all relax, right?

Wrong, according to a growing number of pundits who reckon the Greek woes are simply the hors d’oeuvres to a main course of Chinese in a menu of troubles that could trigger the next global meltdown.

The Shanghai stock market has recovered some of the 30 per cent wiped off its value at the start of this month, a rout that led to the Chinese authorities suspending 1,400 companies on the index from trading, but nerves haven’t calmed.

It’s never wise to confuse a country’s stock market with its economy, but the uncertainty hanging over China surrounds the extent to which market volatility points to more fundamental problems. The outlook darkened even as it was estimated that China’s economy had grown at a faster than expected annual rate of 7 per cent in the second quarter.

Private sector debt in China is growing faster than the economy and at nearly double the rate of 2008. There have only been four other credit booms over the past 50 years of similar magnitude to that seen in China, according to BlackRock, which said all four were followed in three years by a banking crisis.

That a prolonged slowdown in China would have a significant ripple effect through Asia and the rest of the world is not in doubt. Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, suggested a China slowdown would be the trigger for the next global recession.

Ordinary UK investors could afford to be fairly sanguine about events in Greece. That’s not so much the case when it comes to China. Retail investors and pension savers have ploughed billions of pounds into China, Asia, Far East and emerging markets funds and stocks, particularly since the slowdown in developed economies.

Normal UK equity funds are exposed to emerging markets and China too, due to holdings in firms with significant operations there. Among the FTSE 100 firms hit hardest by turbulence in China were the global mining and resources giants, for example, while several other multinationals are similarly vulnerable.

No wonder nerves are jangling. Research published last week by Merrill Lynch revealed that investment fund managers have more money in cash than at any time since the financial crisis, as they move out of equities in fear of a sharp correction. The slow pace of the US recovery isn’t helping, nor is the awareness that so much of the asset price growth of recent years has been driven by US (and UK) quantitative easing that is now being unwound.

This could all present opportunities, and fortune may favour those who keep their nerve when things get dicey. Regular Scotland on Sunday contributor Alan Steel will tell you that the contrarian approach tends to pay handsome dividends. He will also remind you of Warren Buffett’s advice to “buy when others are panic selling and sell when others are greedily buying”.

That doesn’t apply so much to those sticking a few quid each month into long-term pension and investment funds, but the point about staying calm remains valid. Contagion from events in China may be limited, but any ripple effect will still be widely felt, even by those without investments in the country or even in emerging markets.