China vs Greece: Global economic threats to Britain
Which country should British business worry about most, China or Greece? Both economies, while very different, are in danger of imploding.
China has a population of 1.3bn and a gross domestic product of $9,000bn; Greece is a minnow with 11m people and – if we believe the figures – GDP of around $350bn. Yet if Greece has problems they will quickly become Europe’s problems and companies that have never traded with Athens will be affected.
Greece has been a disaster waiting to happen for decades. When euro was created at the end of the 1990s it failed the tests to join but its eager European neighbours bent the rules and turned blind eyes so that a miraculous recovery allowed the Greeks to join just in time for the launch.
A decade later the truth has emerged. The figures were false and the structural imbalances that caused Greece’s economy to lag in previous years have not been bridged. The country spends 113 euros for every 100 euros earned.
In a pre-euro world, the drachma would have been devalued, foreign holidays there would have got cheaper and the few companies that trade with Greece would have seen imports rise in price and exports get easier. But as part of the euro, the currency cannot give, so Greece must undertake a tough regime of pay cuts, falls in property prices and increased productivity to bring it into line with the other eurozone members.
However, it risks dragging down the other weak euro members – Spain and Portugal in particular – while rich members such as Germany have to finance the Greek deficit. So countries already struggling with recession find their recovery hindered by having to support a weak partner.
Most British companies may think they are spectators to Greece’s problems, but that contagion across Europe means they are affected directly.
China’s problems are very different. The talk there has not been of a need to devalue but of pressure to revalue its currency. The Chinese economy has boomed: while growth has slipped, it is still close to 10 per cent. Yet the boom is looking increasingly like a bubble of the very sort that landed the West with its current problems. Leverage and inflated asset prices are a particular problem.
And if China has suddenly to apply the brakes to its economy, the effects will be felt directly in Greece, Europe and the West. Britain will suffer along with other countries that have come to rely on China as a source of cheap imports and an expanding export market. If the Chinese bubble bursts, its imports from the West will be cut sharply and its export of capital to the US and Europe will dry up, making it harder for Western governments to refinance their debt.
Greece’s problems are those of its long economic failures. China’s are problems of success. Athens’s difficulties could result in a weaker euro that helps UK companies sell into weakened economies; Beijing’s difficulties threaten international trade, however, and could switch off the world’s engine of growth. Of the two ancient civilisations, China’s situation is potentially far more consequential than Greece’s.
February 1st, 2010 at 9:35 pm
Dear Sir,
I do not agree with your statements of inflating asset prices being the most imminent threat to the Chinese economy. Furthermore, drawing a parallel with the our recent Western asset prices is also a rather superficial claim. There are a few key differences between rising asset prices in China and here in the West.
Though recent increase in bank lending has increased leveraging in individuals and companies, their high savings will cushion them from any credit shocks they may experience. Furthermore, on the topic of inflating real estate prices, the Chinese regulations on home-buying and selling prevent it from deteriorating into a 2007-esque sub prime mortgage crisis. Large deposits and down payments and high taxation rates for selling houses within 5 years of purchase are prudent measures that will prevent housing prices from spiraling out of control.
I believe the most pressing issue right now is China’s currency issue. Although China is often touted to be recovering and growing at the expense of the Western economy due to undervalued currency, there is an aspect that is greatly overlooked - most of the export companies that operate in southern China survive on tiny margins of a few percent. Any drastic appreciations in currency, which is what the U.S. is pressuring for, will only put thousands of these SMEs out of business. If the 2007 crisis gave any clue as to how fragile the export industry is, we can expect millions of unemployed, which will destabilize China and benefit no one. If there is any issue that should be of concern in the short term, this should be it.
Sincerely,
Robert