China?s economy had seen incredible growth for a period of more than 30 years. Regardless of the measures used, it is one of, if not the single biggest economy in the world. China accounts for around 15% of global output, and investors had pushed the country?s shares to a 7 year peak in June this year. However, the wheels have seemingly fallen off in the past couple of months.
Slowing growth has not only impacted on the Chinese economy, but has had a knock-on effect in the foreign exchange market, the oil commodity price, and various stock markets around the globe. So what is the problem, and how can a single economy have such a huge impact on such geographically, politically, and economically diverse markets?
?Massive Economic Scale
In terms of how a single economy can have such a huge impact on the world, one only needs to look at the sheer scale of that economy. In 2014, the Chinese economy had an estimated value of nearly $18 trillion and was second only to the U.S. in terms of GDP. The country is also the largest consumer of energy and the largest net-importer of oil.
The country?s stock exchange had witnessed 150% rises in the 12 months to June, but there were obvious concerns that stocks had become greatly overvalued. The massive gains that had been experienced came to an alarming halt as prices hit a seven year peak. In just over two months, the market gave up all of those annual gains, and there are concerns that the slump will continue.
?Market Sentiment
Sentiment is a major driving factor in the stock market, and with investors already concerned over a slowing economy, the national bank?s decision to devalue the yuan further cemented the opinion that the economy was slowing. Sentiment followed sentiment, and the market saw continued decline as investors scrambled to cut losses and get out. Businesses, and individual consumers using trading platforms like ETX Capital sold shares sometimes at a significant loss in order to protect their capital.
?Oil Prices
It is no coincidence that, as the Chinese economy has suffered, the price of oil has dropped. China is the biggest buyer of oil in the world, and their steady acquisition of millions of barrels of oil had helped drive crude oil prices to a record $105 price. However, as growth has slowed, the country has invested less in its oil reserves, which means that demand has waned and prices have dropped. Crude prices now stand at less than $50 a barrel, representing a significant slump.
?Commodities
The size of the Chinese economy means that it is not just oil prices that are likely to suffer in this way. Commodities and materials like iron will be in less demand and this means that markets and buyers could see prices drop on a range of different materials and in a huge array of different markets.
China?s reliance on importing commodities and raw materials means that its performance directly affects the performance of many other countries, too. Australia, for example, has seen substantial economic growth on the back of increased sales of coal and iron ore to China. As this demand drops, then so too will the Australian economy. Stock in mining companies and processing companies will fall, unemployment is likely to rise, and wages will also plummet. Russia, Brazil, and Korea may also see similar downturn as a result.
?The Positives Of An Oil Price Slump
There is a positive side to the oil slump, of course. Drivers and individual consumers have seen petrol prices at the pump rise significantly over the past few years, and at least some of the considerable reduction in crude oil prices should be passed on to the individual petrol consumer, and also to energy buyers. Precisely how much of this price reduction will be passed on remains to be seen, but any reduction is a positive one for car owners. Businesses that rely on oil, for shipping or for manufacturing, should also benefit.
?Yuan Devaluation
The U.S. has long criticized China, with the view that they have kept their currency deliberately low when compared to the Dollar. The Chinese government was, at least according to Washington, attempting to ensure that Chinese exports remained highly competitively priced. Despite this criticism, economic data indicates that the currency actually appreciated by more than 30% against the Dollar, and so the International Monetary Fund welcomed the decision to devalue the currency.
?Global Effects
The devaluation of the Yuan will impact on economies around the world. Brazil, as China?s primary trading partner, would usually expect to see a significant downturn in their own economy as a result. However, while the devaluation is a concern for Brazil, it will not be felt as strongly as the end of the commodity boom that had seen Brazil?s own economy perform admirably in recent years.
Economies that compete with China for exporting goods will also suffer. Although China has tried to shed the image of a country that experts cheap goods to the world, it remains one of the largest and most prominent manufacturers of cheap clothing, electronic goods, and components. Countries like India, who already find it difficult to compete with China?s low prices, will have even more of a struggle on their hands as they have to try and reduce prices to make up for the Yuan devaluation.
There are some economists and analysts that point to the tumbling stock market, currency devaluation, and slowing growth as being a precursor to a major and global economic crisis. Parallels can certainly be drawn between now and the beginning of the global recession in 1998, and with China?s economy playing such a vital and intrinsic part in the global economy, it is understandable that many investors and experts are taking this view.
However, most agree that while there are turbulent times ahead for global economies, for stock markets, for the foreign exchange market, and specifically for China and its companies and investors, it is unlikely to have a huge or long-term effect on European, American, or global economies. Investment experts have said that medium- and long-term stock investments remain safe, while the turbulence in commodity and foreign exchange prices present opportunity for those with a clear investment strategy.
