Sunday, July 5, 2015

Chinese stock market crash far worse than Grexit

Australians should be far more worried about a Chinese stock market crash than Greece exiting the eurozone, but it is impossible to predict the fall out from both, or whether both will occur, economists warn.

A group of 25 top forecasters – leaders in academia, consultancy, market and industry economics – have told BusinessDay that a crash on China's share market would have a greater impact on Australia's economy.

They say Australia's trade linkages with China are far more advanced than with Greece, and if a Chinese share crash affected the country's growth it would hit China's demand for steel and hence for Australian iron ore and coal.

That would be a "major negative" for Australia's iron ore mining company profits and "disastrous" for the smaller miners with higher costs "with a corresponding impact on mining revenues and the balance of payments," Richard Robinson, BIS Shrapnel, says.

The warning comes after Greece this week defaulted on its loans from the International Monetary Fund, missing a €1.5bn repayment on Tuesday after a previous eurozone bailout expired and deprived the country of access to billions of euros of funds.

Bill Mitchell from the University of Newcastle says Australia is far less dependent on trade with the eurozone than with China, and our financial markets are hardly about to fail following Greece's default.
"Neither will be particularly damaging for Australia, although an exit from the eurozone by Greece is more likely, given that the Chinese government, which is totally sovereign in its own currency has shown a propensity to use that capacity to ensure that growth is well managed and financial stability is retained," Mr Mitchell said.
"Most of the Greek debt is now held by European Union governments or other institutions (ECB) as a result of the 2012 default and restructure."

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