Chinese Domino Effect


Source: Public Domain

China, the “world’s factory” has stumbled. The Chinese stock market recently dropped a significant 17.37% and has authorities, economists and investors very worried. The world’s second largest economy has shown clear signs of deceleration in the last five years, but nobody predicted such severe damage in the stock market.

According to economic analyst Paula Barra, to understand the downfall of the stock market, first, one has to understand China’s economic growth in the last decade. China is a titan, and a country with one of the largest labour workforces, yet its growth is slowly decreasing. Economists fear that finally the “commodity bubble” will have to burst, causing a chain of events similar to the recession that took place in the United States in 2008. In fact, China’s deceleration already seems to have caused international reactions within the stock market. Tokyo, Athens, Paris, Madrid, Milan, London and São Paulo all closed their markets with significant losses as a result.

Now, China only exports uncertainties.

— Henrique Souza

Keith Bradsher, a writer for The New York Times, summarized the events adeptly: “Now, China only exports uncertainties.”

What happened to China’s stock market? According to Duncan Weldon, BBC’s economic analyst, “The catalyzer of this Chinese crash seems to be both the absence of a response from the government last week and also the large amount of loaned money used in investments.” Both national and international investors believed that the government would implement measures to stimulate the market, such as introducing low interest rates to motivate firms to take out loans. However, investors now claim that the government’s negative response means that they no longer have the tools to help entrepreneurs and investors grow.

Is the Chinese economy compromised?

Duncan Weldon believes that this crisis will make Chinese politicians change their views on controlling the economy, and he strongly believes that in some years China will regain an average growth rate. He explained that the people who think that China will return to its 10%-11% growth are wrong. According to Weldon, China “has reached its maximum point of growth, and most probably will have to balance into a 4-7% growth.”

One of the important questions is: what is the effect of China’s on the global economies, like Brazil or the United States?

Initially, the global economy, including the U.S, reacted negatively towards China’s crisis. Yet the low performance of the emerging economies (BRICS) and the low price of commodities pushed the dollar to appreciate to its highest value in almost a decade. Also, as only 2% of the Chinese stock market is made from foreign investment, the true stock aspect won’t be compromised, according to BBC analysts. Even though China is Brazil’s biggest economic partner, BBC’s specialist André Perfeito believes that the Brazilian economy will not be affected. He believes that it is already in its own deep deceleration process. André finished by saying: “The only negative aspect might be the increase of the dollar against the real which might increase interest rates, plunging the domestic economy.”

In the midst of chaotic feelings, from both the market and the politicians, there is one that stands out: China needs to regain its investors’ trust. As the United States produces its best economical results in a decade, they are having a good laugh at their biggest competitor. The world will be watching, and China must act fast. What will politicians do? How will the population be impacted? These are all questions that only time can answer.


Sources: BBC, Globo