China’s slowing economy and how it affects you

When the second largest economy in the world, China’s, takes a hit, so does the stock market. And the country is facing even more problems with ongoing trade war with the U.S. China’s economy faltered last month among industry and consumers, according to the Wall Street Journal. The double-headed whammy saw the slowest industry production since 2016 and retail sales growth hitting a 15-year low.

China’s economic growth was the world’s economic success story – until Black Monday, July 16, 2018 when its markets crashed. Today, China’s economic growth is half what it was in the starting of the year 2018.

Reasons for slowing economy of China

The fact is, China’s slowdown was inevitable – for some reasons

  1. First, China’s economy has long been built on its manufacturing sector. Being the factory of the world is easy when you have a huge and growing population – harder when your one-child policy slows growth, ages your population, and creates a generation unwilling to accept the low-paid jobs of their ancestors.China’s government is trying to move from a manufacturing and export-driven economy to a service and domestically-driven one. So exports are declining after decades of 20 percent annual growth – a huge part of China’s latest slump.
  2. Second is China’s response to the 2008 financial crisis. The government spent $586bn to stimulate the economy. This worked in the short-term: bolstering industry and commerce. But it left a legacy of debt and dozens of ghost cities – bad assets doing nothing to sustain that first burst of growth.In 2014 China aggressively cut the cost of borrowing. Again, this stimulated the economy briefly – especially at a local level. But householders are now servicing unsustainable debt instead of spending in the real economy.
  3. The third reason is that – simply enough – China is transitioning from a developing to a developed economy. Growth rates of 10 percent a year just don’t happen in developed economies.2016 does promise weaker Chinese growth. But the country’s economy is still growing at 4.3 percent. Most of the developed world would give anything for that growth rate.Services are on the rise. Rail, technology, alterative energy, education, media and entertainment are leading the way.

Some more reasons of China’s slow economy

  1. Accelerating Credit Growth
  2. Overvalued Currency
  3. Frothy Real Estate Market
  4. Overheated Property market
  5. Chinese exports are tumbling
  6. A transition to consumption-based economy, and a rise in household debt

Effects of China’s slow economy

  1. China’s economic slowdown would impact different regions of the world in different ways depending on their exposure. In countries dependent on commodity exports, like Australia, Brazil, Canada, and Indonesia, the slowdown could have a negative impact on their GDP growth as demand slows. The inevitable fall in commodity prices could be beneficial, however, for other countries that consume the commodities, such as the United States and countries across Europe.
  2. The country has been the single largest contributor to global economic growth over the past several years, according to the IMF, contributing 31 percent on average between 2010 and 2013. These figures are significantly higher than its eight percent contribution in the 1980s, but some economists argue that the U.S. and Europe could pick up much of the slack as the global economy rebounds from the 2008 financial crisis.
  3. The United States buys about 20 per cent of China’s exports. Sellers of low-margin goods such as surgical gloves and handbags say American customers are canceling orders. But producers of higher-technology goods such as factory machinery and medical equipment report little impact.

Bottom Line

China’s economic situation is difficult to assess. While China has made steps toward a more transparent financial sector, there is still a tradition of cooking the books. Chinese stocks typically sell at discounts of at least 10 to 20% of their American counterparts, and this implies that China’s economy is under performing compared to government reports. Analysts question to what extent the data are being manipulated.

Important trends that investors should keep a close eye on over time:

  1. Reduce Commodity Exposure
  2. Increase Diversification
  3. Hedge with Puts on Chinese ETFs

Well, China is still the world’s second largest economy. Anything China does causes huge economic waves. 

But as China shifts from an export-led economy to one more domestically driven, its impact on other countries should drop. China’s role as the vacuum of the world’s commodities will continue to recede. And as domestic consumption increases, China’s massive population will become an even more lucrative marketplace for sales and services. 

China may no longer dazzle the world with its burgeoning economy, but slower, domestic-led growth will be a lot more sustainable.

 

References:

http://fortune.com/

https://www.nytimes.com

https://www.worldfinance.com

https://www.thebalance.com

https://www.investopedia.com/