China is struggling to support growth without exacerbating a buildup of debt after a lending binge following the global financial crisis.
Advertisement
As Albert Edwards of Societe Generale wrote in a recent research note: “This move will transform perceptions about the resilience of the US economy…”
The crisis of the global financial markets that so many have been fearing looks as though it has arrived. That, coming on the heels of weaker-than-expected data in July, stoked fears of a slowdown in the world’s second-biggest economy.
China, which was posting double-digit growth in the mid-2000s, is trying to engineer a daunting transition – from overheated growth fueled by exports and often-wasteful investment to slower growth built on consumer spending.
“That’s a very powerful way to stimulate consumption”, he said.
China has so far weathered the potential crises by taking various policy steps, including a massive 4 trillion yuan stimulus in response to the global recession triggered by the 2008 collapse of Lehman Brothers.
Many countries are concerned that their exports will now be undercut by China, particularly in sectors that directly compete with it, for example high-tech exporters in South Korea and Taiwan.
Much analysis has happened around the fall and various reasons have been offered on why the stock market is on a free fall. And that is important to long-term investors who, when the moment comes, will try to allocate funds agin, after the current drops come to an end, which is of course not the situation yet, not by a long shot.
In an article in Chinese state media on Monday, Premier Li Keqiang exhorted senior party officials to do more to develop China’s 3D printing industry but said nothing about the turmoil in markets or a gathering slowdown in the wider economy.
After trading sideways to lower most of the session, December Comex Gold futures finally turned positive, but volatility has been relatively low compared to last week’s price action.
The first trigger for this “correction“, as it’s now widely being called, seems to have been the decision taken two weeks ago by China’s central bank to change the way in which it sets the daily trading range for China’s currency, the yuan.
The move came as Beijing appeared to be abandoning a strategy of having a state-owned company buy shares to stem the market slide. The result: an escalation of corporate debt that’s now feeding the problems.
Shares took a battering yesterday and the price of oil slumped amid investor concern over a slowing Chinese economy. Chinese stocks plunged the most since 2007.
But stocks rose to unsustainable levels and crashed.
Between 11 and 14 August 2015, the Chinese central bank devalued the value of the yuan against the dollar and pushed down its value to around 6.39 yuan to a dollar.
The worries have seen the FTSE 100 officially enter “correction” territory – more than 10% down from its all-time high of 7104 in April.
Experts have now predicted that the devaluation of the Chinese currency is likely to flood the market with cash.
Slowing industrial output and construction in China means less demand for Chilean copper, Australian coal and Brazilian iron ore.
At the same time, though, economists expect another a decline in orders for long-lasting or durable goods, reflecting weaker conditions in the large U.S. energy and manufacturing sectors.
“We maintain our full year GDP forecast at 7.1 percent“, said Qu. In the past decade, German makers of industrial machinery and autos have boosted profits thanks to China’s strong growth. BMW has been cautioning that China’s market is enduring a “normalization” and that lower growth is expected.
Still, China’s woes could shape the decision-making of other central banks by weakening the global economic outlook and transmitting another bout of deflationary pressures around the globe. “Overall, I think all the frenzy about China is exaggerated”, he says.
Advertisement
And central banks in all three remain on crisis footing, holding interest rates close to zero and, in Japan and Europe, still pumping liquidity into their economies to bolster growth. The political and social fallout could exert their own damage.
