Global bloodbath sparks financial crisis fears

GLOBAL markets are in meltdown with losses approaching those not seen since the GFC. Should we be worried? Absolutely.

GLOBAL markets are in meltdown with losses approaching those not seen since the global financial crisis. Should we be worried? Absolutely.

Australia bet big on never-ending Chinese growth and, increasingly, it looks like we could walk out of the casino empty-handed.

Global stock markets have been rocked over the past few weeks amid growing signs of a slowdown in China. It’s causing fears we could be seeing a re-run of the 1997-98 Asian financial crisis, and there are dire implications for the Australian economy.

The Australian market has closed down 4.09 per cent at 5001, with $60 billion stripped from the value of the nation’s companies.

It’s the biggest daily fall since September 2011, and is compounding an already dismal stretch which is on track to be the worst month since the GFC.

The benchmark S&P ASX 200 has fallen more than 16 per cent from its highs near the 6000 mark earlier this year. The local market looks to be heading for its first negative year since 2011.

From their highs earlier this year, US shares are now down 7.5 per cent, eurozone shares are down 14 per cent, Asian shares have fallen 20 per cent, Chinese shares are down 32 per cent and emerging market shares are down by 17 per cent.

Meanwhile, the Shanghai Composite has crashed 8.4 per cent this morning, putting even greater pressure on Australian stocks, particularly the big mining companies.

On top of everything else, there are fresh fears that Greece could exit the euro after Prime Minister Alexis Tsipras called for snap elections after growing division within his radical left-wing Syriza party over the stricken country’s bailout deal.

So should we be worried?

“The short answer is absolutely,” said ABC Bullion chief economist Jordan Eliseo.

“The volatility over the last week has simply revealed the fact that the primary cause of the GFC — excessive debt and capital misallocation — has not been solved.”

LF Economics’ Lindsay David said all the data and current trends pointed to “at the very least a financial crisis in Asia” in the not-too-distant future.

“Concerningly it could force many South East Asian nations alongside Australia to jack up interest rates to defend their currencies at the worst possible time,” he said.

“This is a scenario I don’t think mainstream economists — government and private — in Australia have taken into serious consideration as a possibility.”

Nicholas Teo, a strategist at CMC Markets in Singapore, told Bloomberg News the outlook for the world economy was clouding. “It seems like we’re seeing the makings of the 1997 Asian financial crisis all over, with emerging-market currencies plunging,” he said.

“China’s knock-on effect on the rest of the world is huge and China’s deepening economic slowdown will have an impact for the next couple of months or so.”

ABC Bullion’s Mr Eliseo argues the last few years of rallying equity markets were “nothing but a mirage caused by low interest rates and printed money”.

He said the market may well bounce out of the latest slump, but that didn’t change the fact that global debt levels were still “excessively high” and earnings weak.

While the growth of China was the main thing that kept Australia out of round one of the GFC, he argues slowing demand for iron ore and coal would wreak havoc on Australia’s national income in the short term.

“We will experience recession-like conditions for the foreseeable future, marked by low to negative real wage growth, rising under- or unemployment, weaker earnings and weaker capital investment by business,” Mr Eliseo said.

“There’s no question that, over the next few years, not only markets but the economy is going to get more difficult.”

LF Economics’s Mr David said “too much money was printed by too many central banks”, creating an artificial demand for stocks and inflating the value of global assets. “The hangover from this party will definitely require a lot more than a Panadol,” he said.

Mr David argues out of all countries, Australia was the nation that made the biggest bet on never-ending Chinese growth.

“Unfortunately, as every day passes, its looking like the Australian economy eventually will walk out of the casino empty-handed,” he said.

“Our mining industry has hit a brick wall. The negative market sentiment in Australia is slowly moving emphasis from the crumbling mining sector to our high-risk banking sector.

“Hence in the not to distant future we will start to become incredibly focused on the relationship between the banking sector, LMIs and the housing sector. If we get to that point, panic will truly set in.”

Mr David said the markets were seemingly headed “back to a place called reality”. “China’s economic wheel is clearly broken and on the back of this there is too much private sector debt,” he said.

“The Chinese private sector can’t borrow its way out of a debt problem. The domino effect of this is truly concerning, but predictable at the same time.”

However, AMP Capital chief economist Dr Shane Oliver is more optimistic, arguing despite the current turmoil, the share markets were more likely on a broad rising trend.

“Our market has already had a string of falls over the last few months,” he told the Herald Sun. “The weakness we are seeing in the emerging world has been factored into our market more than it has in the US.”

Dr Oliver played down renewed concerns about Greece, given enduring popular support of Mr Tsipras, and the fact that the main opposition party, New Democracy, is committed to the bailout anyway.

He said emerging markets were arguably much stronger than they were in 1997-98, with stronger current account balances, higher foreign exchange reserves and mostly floating as opposed to fixed exchange rates.

IG markets analyst Angus Nicholson told AAP there could be a midweek bounce. “I don’t think it will last through the week,” he said.

He based his optimism on further Chinese government intervention in the share market, and inflation data from the world’s third biggest economy, Japan.

CommSec chief economist Craig James also played down fears, saying despite the global uncertainty, the US and Australian economies remained in good shape.

He also believed worries about Greece and China were overrated. “At present, we would view the global sharemarket correction as a correction we had to have — a situation that will be beneficial in injecting more value into markets,” Mr James told AAP.

“There are clearly risks, but the data indicates that US and European economies continue to recover; lower oil prices will serve to boost consumer and business spending; and Chinese authorities are trying a range a measures to maintain momentum in their economy.”

It comes as China’s government gave the green light for the country’s massive state pension fund to invest in stocks in a bid to stem the sell-off.

The fund will be able to invest up to 30 per cent of its net assets in equities, AFP reported. The fund, to which workers must contribute, had 3.5 trillion yuan ($A746.63 billion) in net assets at the end of 2014.

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