Which is the bigger risk to global financial markets — the turbulence in Chinese equities or Greece?


It has to do with fundamentals. The Chinese economy is a command economy fed by easy credit to which far too many stakeholders are addicted. The transition to a consumer powered economy is moving far too slow because consumers, citizens, do not have political power and hence cannot set the priorities. For far too long, China has been used by the communist party and its clients to create wealth for them rather than for the Chinese as a whole. That isn’t official policy but when people get chased off their lands so that real estate developers chummy with local party bosses and bankers can continue the real estate bubble, the trend is clear. China has a tradition of seeing people as a resource for grand ambitions rather than as the source of legitimacy. The solution for China is democracy and the rule of law. Other East-Asian countries like South Korea hit the same ceiling and managed to transition into democracies with remarkable success.

Xi’s drive to eradicate corruption has the right theme but the wrong execution. It is a retreat into fear and authoritarianism rather than an advance into having a powerful, independent judiciary that applies the law to all equally. The party is very afraid of losing power and is with that mindset creating the very outcome it fears the most.

Greece is somewhat similar, its citizens can vote but most parties including Syriza are clientist and see their task as rewarding their voters and stakeholders. Rather than work towards the benefit of the whole as is usual in better established democracies.

A Grexit would remove an incompatible economy from the Eurozone. Other economies such as Italy’s and Spain’s are far open and more grounded in the European reality, there’s a risk that they too can exit but contagion could be limited because Greece always has been a special economic case.

If Greece exits, the core Eurozone won’t halt, it will power on, its export prowess and efficiency will only improve with a weakening Euro. Fundamentally there isn’t much wrong with the core Eurozone and that is very different from China.