Never mind Greece, watch China

File photo of yuan notes. Photo: Jason Lee, Reuters.

File photo of yuan notes. Photo: Jason Lee, Reuters.

Published Jul 7, 2015

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As the world's eyes continue to watch Greece unravel, the potential contagion on South Africa will be limited.

However, a potential threat does lurk on the horizon as concerns mount over China's continued ability to keep growing, and the sharp come off on its stock market.

Absa Investments analyst Chris Gilmour says there will not be any meaningful local effects of the Greece crisis. The Greek situation, he explains, is "not manageable in any time frame", and caused by a "very special situation" as the country's economy is worse than any other in the world.

Gilmour notes Greece has specific dynamics that led to its defaulting on its loan and the resignation of its financial minister. Among these, he says, is the government's inability to collect tax. "Tax evasion is an art form in Greece."

In addition, says Gilmour, SA does not do much trade with Greece - which has an economy the same size as that of Scotland - and the stock market had already factored the default in. "I cannot see any fundamental reason why South Africa should have a problem."

Gilmour notes, however, the local economy will be disadvantaged when emerging markets are in trouble. He points to the "huge meltdown" happening on the Shanghai stock exchange as an issue, noting the exchange has lost $3.2 trillion over the past two weeks.

The amount investors have lost is equivalent to Brazil's economy after the Shanghai exchange lost 30% of its value, says Gilmour. He adds China's economy is also slowing down, and this is not entirely showing in the numbers.

Currently, China's gross domestic product (GDP) is growing at 7%.

A halt in China's growth would send shockwaves around the world, says Gilmour. He adds a fall out in China would affect SA because of emerging market contagion and the fact that the rand is the 19th most tradable currency in the world, making it very liquid. He notes China's current woes could be a catalyst for a big fall in global stock markets.

Gilmour says share trading is big business in China, as the country has 19 million stock brokers. "There's a lot of money sloshing around" on the world's third largest exchange, he adds.

Although the Chinese government is trying to cool the market down - with companies able to request a halt in trade to avoid a bubble burst and new listings halted- Gilmour is of the opinion that the damage has been done.

Vunani portfolio manager Rowan Williams-Short adds he is "surprised" the Chinese market took so long to come off. He is also concerned about its growth figures, suggesting they could be misleading.

Williams-Short says, if China's economy is not as strong as it has been made out to be, this would be "bad news" for South Africa. Much of South Africa's commodities are purchased by the Chinese, he adds.

However, Vestact analyst Bryon Lotter argues China has "massive savings" and the market - which is known to be volatile - will mature. He says the Shanghai exchange will become a vital global market and start to accurately reflect earnings.

In a note, Vestact adds, if Chinese stocks are in a bubble and the government's plan is to keep prices stable until earnings catch up to prices, which will take years, the situation will end badly because people will get bored of a sideways market, start selling and the government will end up owning all the stocks, or prices will tank.

"This may be a bigger case of kicking the can down the road. Remember that Greek GDP is around the $250 billion mark; the Chinese stock market lost around 12 times more than that in three weeks.

"The market probably pays more attention to Greece because it is a little closer to home and because the assumption is that the Chinese authorities will do what they need to do to fix the problem in the end."

IOL

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