Global financial markets have been plummeting as they are being driven lower, in large part, by the sudden bursting of China’s stock market bubble. It would be fun to discuss only that. It really would. However, I am going to focus on their slowing economy and what it means for you.
The world’s second largest economy has been slowing since 2011 and the People’s Bank of China (PBOC) has just started increasing efforts to stimulate the economy. Their gross domestic product (GDP) has been consistently growing at a slower pace, and their stock market (the Hang Seng Index) has been falling. This has forced Beijing to cut rates starting in late 2014. They have also lowered the reserve ratio requirement (RRR) for commercial banks to promote lending and liquidity. As of right now, the economic impact of this is still unclear. However, once they started doing this, the equity markets shot off like rockets rising more than fifty percent between January and June of 2015.
As the Chinese stock market rose, domestic interest also grew. According to a report in Zero Hedge News, by April 2015, Chinese investors had opened more than 4 million brokerage accounts. Out of this, came an interesting fact. According to the China Household Finance Survey, the average Chinese investor that was fueling this rally was a high school dropout.
These investors were betting on foreign investors flooding the markets after their country’s stock market was set to join the ranks of the Morgan Stanley Capital International (MSCI) emerging markets index. However, the MSCI decided this was not going to happen, and the bubble went poof!
Now let’s get back to what is more relevant. China’s immense economy is slowing down. This will have global implications as their credit fueled, investment driven economic growth engine is coming to an end. Their consumption engine, which Beijing wants to fuel economic growth, has yet to generate enough momentum. It will, but it is not enough yet.
First, China is the world’s biggest importer of metals. They import a large amount of iron ore, lead, zinc, copper, steel and other commodities to support their vast manufacturing base (see commodities examples from Triomarkets). A slowdown in demand for these economies, means prices will come down. This will induce a deflationary shock for not only these commodities but the other commodities China has been buying in large amounts to keep their industry going.
What does this mean? Global interest rates will remain low. Even if the US Federal Reserve (Fed) hikes rates by the end of this year, the increase will be only nominal and will not have much of an impact. Banks are, more than most likely, going to keep mortgage rates low so banks will get little return on their money. Or they could stop lending once again.
Secondly, a slowdown in China means lower prices, or lower competition in the markets. Chinese consumers are less likely to make big ticket purchases. The recent devaluation of the yuan also makes foreign goods more expensive on the mainland. In a recent New York Times article, it was highlighted that Chinese consumers account for 30 percent of the sales at Burberry, around 20 percent of the sales at Prada and this article does not even mention the number of Apple iPhones that China buys.
Thirdly, your own investment portfolio is not immune.
Today’s global interconnected economy effects everything. As China slows, so does the earnings at you’re your portfolio management team and mutual fund companies. These are the same companies that are managing your retirement funds. Your returns will be less. Many of America’s multinational corporations like Microsoft, General Electric, General Motors and Apple, to mention a few, a highly dependent on sales in China and Asia. As Asia slows down, thanks to China, their profits will be effected. This means portfolio managers will have to sell strong companies to keep their portfolios balanced.
To summarize and be clear, China’s slowdown will impact the world.
China will impact the stock markets, Forex markets, bond markets and commodity markets. China will impact your own personal investment portfolio.
The world’s second largest economy has been slowing since 2011 and the People’s Bank of China (PBOC) has just started increasing efforts to stimulate the economy. Their gross domestic product (GDP) has been consistently growing at a slower pace, and their stock market (the Hang Seng Index) has been falling. This has forced Beijing to cut rates starting in late 2014. They have also lowered the reserve ratio requirement (RRR) for commercial banks to promote lending and liquidity. As of right now, the economic impact of this is still unclear. However, once they started doing this, the equity markets shot off like rockets rising more than fifty percent between January and June of 2015.
As the Chinese stock market rose, domestic interest also grew. According to a report in Zero Hedge News, by April 2015, Chinese investors had opened more than 4 million brokerage accounts. Out of this, came an interesting fact. According to the China Household Finance Survey, the average Chinese investor that was fueling this rally was a high school dropout.
These investors were betting on foreign investors flooding the markets after their country’s stock market was set to join the ranks of the Morgan Stanley Capital International (MSCI) emerging markets index. However, the MSCI decided this was not going to happen, and the bubble went poof!
The People’s Bank of China Jumps into Action
After this happened, the PBOC started trying to support the markets. They put an end to loan ratio caps, to provide liquidity support and spur margin finance. They lowered the interest rate and then devalued the yuan. Even China’s Security Regulatory Commission (CSRC) and placed a ban on short selling. They added to a prior six month ban which forbids selling by major shareholders of Chinese companies. Beijing, even went so far as to ban their own state run press from reporting of major sell offs to the public. Thus adding more restrictions to the press.Now let’s get back to what is more relevant. China’s immense economy is slowing down. This will have global implications as their credit fueled, investment driven economic growth engine is coming to an end. Their consumption engine, which Beijing wants to fuel economic growth, has yet to generate enough momentum. It will, but it is not enough yet.
Three Major Implications Investors Should Worry About
There are many reasons why this economic slowdown in China is worrisome. However, I will concentrate on three key points in order to help explain the scope of what is happening and how it will impact not only the global economy but individual investors.First, China is the world’s biggest importer of metals. They import a large amount of iron ore, lead, zinc, copper, steel and other commodities to support their vast manufacturing base (see commodities examples from Triomarkets). A slowdown in demand for these economies, means prices will come down. This will induce a deflationary shock for not only these commodities but the other commodities China has been buying in large amounts to keep their industry going.
What does this mean? Global interest rates will remain low. Even if the US Federal Reserve (Fed) hikes rates by the end of this year, the increase will be only nominal and will not have much of an impact. Banks are, more than most likely, going to keep mortgage rates low so banks will get little return on their money. Or they could stop lending once again.
Secondly, a slowdown in China means lower prices, or lower competition in the markets. Chinese consumers are less likely to make big ticket purchases. The recent devaluation of the yuan also makes foreign goods more expensive on the mainland. In a recent New York Times article, it was highlighted that Chinese consumers account for 30 percent of the sales at Burberry, around 20 percent of the sales at Prada and this article does not even mention the number of Apple iPhones that China buys.
Thirdly, your own investment portfolio is not immune.
Today’s global interconnected economy effects everything. As China slows, so does the earnings at you’re your portfolio management team and mutual fund companies. These are the same companies that are managing your retirement funds. Your returns will be less. Many of America’s multinational corporations like Microsoft, General Electric, General Motors and Apple, to mention a few, a highly dependent on sales in China and Asia. As Asia slows down, thanks to China, their profits will be effected. This means portfolio managers will have to sell strong companies to keep their portfolios balanced.
To summarize and be clear, China’s slowdown will impact the world.
China will impact the stock markets, Forex markets, bond markets and commodity markets. China will impact your own personal investment portfolio.
Recommended Content
Editors’ Picks
EUR/USD holds below 1.0750 ahead of key US data
EUR/USD trades in a tight range below 1.0750 in the European session on Friday. The US Dollar struggles to gather strength ahead of key PCE Price Index data, the Fed's preferred gauge of inflation, and helps the pair hold its ground.
USD/JPY stays firm above 156.00 after BoJ Governor Ueda's comments
USD/JPY stays firm above 156.00 after surging above this level on the Bank of Japan's decision to leave the policy settings unchanged. BoJ Governor said weak Yen was not impacting prices but added that they will watch FX developments closely.
Gold price oscillates in a range as the focus remains glued to the US PCE Price Index
Gold price struggles to attract any meaningful buyers amid the emergence of fresh USD buying. Bets that the Fed will keep rates higher for longer amid sticky inflation help revive the USD demand.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
US core PCE inflation set to signal firm price pressures as markets delay Federal Reserve rate cut bets
The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in March, matching February’s increase.