A one-two blow from Greece and China

As Greece's political turbulence rolls on and markets grapple with the idea of a eurozone exit, Chinese economic data is showing the effects of Europe's turmoil and fanning fears of a hard landing.

Are global markets robust enough to cope with the double whammy of a sharp slowdown in Chinese growth coming at a time when Greece looks increasingly likely to quit the eurozone?

That’s the dilemma that dismayed investors will ponder this week as they watch frantic efforts being made in Athens to end the political crisis that has gripped the country in the wake of last Sunday’s election, while China tries to rekindle economic growth by making it easier for its banks to lend.

Overnight, Greek president Karolos Papoulias summoned the leaders of the country’s three main political parties – the conservative New Democracy, Socialist Pasok and radical-left Syriza parties – in an attempt to cobble together a coalition government capable of negotiating with the country’s creditors. Without a credible government, Athens risks seeing its aid payments being cut off, which would force the country to default on its debts.

But the acrimonious talks broke off after 90 minutes, with the radical left Syriza party refusing to participate in a coalition government, even if there was an undertaking that it would seek to renegotiate the harsh terms imposed on the country in exchange for its latest €130 billion ($US167.5 billion) bailout.

"They're asking for accomplices to austerity. We can't take part in this crime," Syriza leader Alexis Tsipras declared.

Papoulias then met with leaders of four other smaller Greek political parties, starting with the right-wing nationalist group Independent Greeks (which picked up 10.6 per cent in the recent elections), then the Communists (which 9.5 per cent of the vote), the neo-nazi Golden Dawn party (up close to 7 per cent of the vote), and the left-wing Democratic Left (6.1 per cent).

A solution must be reached before Thursday, when the new parliament is expected to sit for the first time. If not, fresh elections will be held, although few believe that this will mean an end to the country’s political turbulence. According to opinion polls published in the Greek weekly To Vima on the weekend, 72 per cent of Greeks believe that the political parties should cooperate, and 78 per cent say that they are in favour of Greece remaining in the eurozone.

But the same opinion polls also show that if new elections were held, Syriza would emerge as the victor, picking up 20.5 per cent of the vote, compared with 18.1 per cent for New Democracy and only 12.2 per cent for the Pasok socialists.

Meanwhile, European leaders have issued increasingly strident warnings to Greece that its aid money will be cut off unless it implements the budget cuts and economic reforms it promised in exchange for its latest rescue package. In an interview published in the German media on the weekend, the head of Germany’s powerful Bundesbank, Jens Weidmann, said that "if Athens doesn't stick to its word, that's a democratic decision." But, he added, "the result is there's no more basis for financial support."

Meanwhile, the front cover of the respected German publication Der Spiegel is proclaiming "Acropolis, Adieu! Why Greece must leave the euro". According to Der Spiegel, "the Greeks were never ready for monetary union, and are still not today. Efforts to support the country through reforms have failed.”

European leaders are keen to reassure investors that a Greek exit from the eurozone will not roil financial markets. After all, investors have had plenty of time to find ways to protect themselves from the consequences of a Greek exit. And after the recent Greek debt restructuring, private sector lenders – mostly European banks and pension funds –only hold €70 billion in Greek bonds.

But investors are deeply worried that the Greek crisis is erupting at a time when the Chinese economy is slowing sharply. Recent figures show that Chinese industrial production fell to 9.3 per cent in April from 11.9 per cent in March, which was the lowest rate of increase since May 2009.

Even more alarming is the sharp contraction in lending. Chinese banks only made new loans of 681 billion yuan ($US108 billion) in April, down from 1,010 billion yuan in March and their lowest level so far this year.

Investors are worried that the Chinese economy is being buffeted by the deepening European recession, with exports to the region slumping 2.4 per cent in the year to April. As a result, total Chinese exports only increased by a feeble 4.9 per cent in the year to April, compared with the 8.9 per cent growth recorded in the year to March.

The slide in exports comes at a time when the Chinese government’s efforts to deflate the country’s real estate bubble are beginning to bite, and the Chinese property sector is slowing. Housing sales in the first four months of the year dropped 14.9 per cent compared to a year earlier.

On Saturday, China’s central bank responded to signs that the Chinese economy is weakening by cutting the level of reserves that banks are forced to hold by 0.5 percentage points, which will free up around 400 billion yuan for lending.

But some investors are worried that this move will do little to spur activity. Chinese firms, they argue, are now under intense pressure. Foreign sales are drying up as Europe plunges deeper into recession, while the United States slows. Meanwhile, rising labour costs and a stronger yuan mean that they are facing stronger competition from lower-cost countries such as Vietnam and Cambodia. As a result, they have little interest in borrowing money to expand their productive capacity.

China, they fear, could be facing a hard landing at exactly the same time that the markets are grappling with the consequences of a Greek exit from the eurozone.