This year has been tough on the Chinese market due to more reasons than one. And the impact of the fall of Chinese market has been felt all across the world. When an elephant falls, it shakes the whole earth around it. Being the second biggest economy of the world, there are a huge number stakeholders in the running of the businesses in this country. The 2016 Chinese market fall has not been as large as the 2009 American crash but this is noticeably impacting all countries and is comparable due to the longevity of its effects.
Some of the possible triggers:
1. Circuit Breakers
Image Source: xinfinance.com
What do you do if you need to hold the river to your city? You build a dam. But does it work in heavy rainfalls? No. You end up being flooded. Circuit Breakers that are introduced by the Chinese Government are supposed to close trading beyond a certain specific point in market fall. But can they do what they promise to do when it comes to a waterfall slump in the market. Once people start selling heavily and encounter a circuit breaker, there is an enhanced sense of panic and they continue to sell further as soon as the market opens again. In parallel, it triggers foreign investors of the market to lose trust and withdraw more money from this market in turn weakening it further. Not only weakening the stock market index but also other economic indices including exports.
1. US Fed Tapering
To some extent the US and Europe market falls in the recent past have juggernaut-ed into a fall of the biggest Asian economy. The announcement by US Federal Reserve to taper the introduction of money into financial system made the world market go crazy. Though it triggered many countries into injecting huge money in Asian growing markets, it couldn’t sustain. One, the US markets corrected itself with the help of fall of dollar price and the heavy regulations in Asian markets towards foreign investment didn’t help either. In fact, the movement of investments back to the West, meant a fall for the Asian market sooner or later.
3. Chinese Yuan devaluation
There was a 0.5 percent devaluation of Yuan just before the Black Friday. Some part of Chinese market fall has to be attributed to this event trigger. A currency devaluation in China results in a devaluation in India as well as a devaluation in many other neighboring Asian countries as the highly linked in terms of exports and in terms of trade exchanges. If there are two immediate indicators of a country’s growth they are the GDP and the currency strength. When GDP indicates the internal strength of a country, the country currency shows its power in relation to other countries and the benchmark of Dollar. Though China has been leading in its pace of growth indicated by its GDP, the same has come down drastically in late few years. And the slump in GDP reflects in Yuan devaluation leading to loss of trust of its own investors.
4. Supply shocks in Oil
Image Source: Washingtonpost.com
China is the fourth largest supplier of Crude oil in the world. And any fall in the prices of Crude oil results in the fall of Chinese market. This is why we state it as one of the biggest trigger for Black Friday after the Circuit breaking. Some may say that Circuit breaking is an after-effect but having introduced such a policy in the first place is a negative move. When it comes to crude oil prices though, there has to be no doubt or question into its impacts. Canada can be taken as a big example. Its economy and its stock markets are heavily dependent on its crude oil exports and is in turmoil every time there is a heavy fall in crude oil prices.
China Market Fall Causes
Now the next question is, Does Black Friday represent a downfall of Chinese financial market and its economy in long term? Call us an optimist but No. At best, this is a correction. A big, big correction we agree but it does not dictate Chinese economical power in long term. Looking at the triggers given in the figure above closely it is evident that the situation can come back to normal once the regulations in China are corrected and the Middle-East pacifies to bring the oil prices down. By regulatory improvements what we mean is that it needs to stay away from the artificial boundaries that it has introduced to prevent market falls.
Some might say that the slump in China’s GDP and the market slowdown is due to its move from being Manufacturing oriented to Service oriented. Being in production business is not as sustainable and so the shift to Service is inevitable. It is in fact the most natural path to move on to for China. China has been the second largest economy for so long for some good reason. It is therefore no doubt capable of lifting itself back up and rising to success in coming years.
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