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Chinese slowdown: what does it mean and why is it happening?
I wish I could tell you that I knew this was coming. In honesty, I didn’t. It is always at the back of the mind, “what happens if the Chinese economy and manufacturing slows? We’re all done for!” along with “when will the US raise interest rates?” and “Is the Greek saga finally over?”, but I never thought China would be the one answered first.
So what does the Chinese slowdown mean and why has it happened? Here are the top reasons explained:
The Chinese economy Stats grew at a respectable 7%; in the UK I think we’d be ecstatic (also slightly alarmed) to achieve a massive 7% growth in the economy. But looking at it from Chinese perspective, 7% growth is poor. The forecast by many commentators including the IMF, had originally been for a minimum of 8% growth, which is down from the 10% average growth China normally achieves. Following the publishing of this information, the Chinese equities market has fallen dramatically.
China’s Black Monday
On Monday, Chinese equities incurred its biggest one day fall since 2007, which resulted in being one of the main contributing factors for the largest equities sell off at the start of the 2008 recession. The Chinese stock market woes have continued from Monday into Tuesday with the Chinese stock index falling 7.6%, with the Shanghai Composite Index falling over 20%.
From Monday 10th August the Shanghai Exchange stood at 3928.415 and it currently sits at 3071.061 – that is a whopping 21.8% drop. In the last couple of weeks massive companies such as PetroChina, China’s largest company by market flotation, have fallen by the maximum 10% in a day. PetroChina are not by any means alone, with many other leading companies falling the 10% limit in a day.
What does the Chinese slowdown mean?
In the mean time, it likely means that rates rises for the US and UK will be set back. For the US the likelihood of a rates rise this year now looks increasingly unlikely and it would hardly be surprising if the rates rise was now at some point in the middle of 2016. For the UK, in truth its trade with China is not massive. Comparatively, the UK does more trade with Ireland than it does with China, but it isn’t just the UK that has to be considered. The European Union with particular focus on Germany, are one of China’s biggest traders and another of the UK’s biggest partners is the US, China’s largest sole trader. Both of these markets are the UK’s biggest traders.
In the long term, a Chinese slowdown will mean the markets in the EU and US will likely suffer and this inevitably will put pressure on the UK economy. Although it may mean a strengthening of sterling which means an increase in purchasing power parity, it isn’t likely to give any great benefits in the long term for trade, as our trading partners are going to be less active. It will be quite the job for our monetary committee to keep sterling at an even level to maintain trade.
In the short term, currencies will strengthen hugely against the Yuan which will make purchasing of Chinese goods cheaper. This will help to prop the Chinese economy up and hope to encourage a stimulus in growth. The reality of course is they aren’t expanding or producing as much as before and most importantly they are using less resources and commodities.
So why is the slowdown happening?
It is due to a couple of things:
Firstly, the growth we saw back in the mid 2000’s peaked at 14.2% in 2007 when the Chinese economy was worth $3,524.72Bn. The Chinese economy in 2014 is now worth $10,361.12Bn with a growth of 7.4%% – the lowest it has been since 1999. In reality though, China has expanded rapidly in the last 10 years and so the modest 7% growth rate now is actually far more valuable than the growth of 14% in 2007. It is hardly surprising that we aren’t seeing the 10% and 12% increases we were seeing before. It is far harder to sustain that when your economy has almost tripled in less than 10 years.
Within China itself, the people are far more technologically advanced and exposed to education than they have been before. In China there is a massive evolving middle class, who have smart phones, who don’t work the factory floors and have had full time education. This class is only going to expand in the coming years. China therefore aren’t going to be buying raw materials as they once did. Arise the emerging markets of India or Brazil to begin to pick up the production reins.
Verdict:- What does the Chinese slowdown mean? In the short term, a strengthening of currencies and a pushing back of interest rates rises. In the long term, it raises questions over production and whether China’s grip over the world’s production will start to shift to other emerging markets as it has done with Taiwan and Korea. Cue our hero Brazil – Fique tranquilo!
Article by Michael Cooper