The global financial markets are in quandary and China is at the centre of it all. Like the epicentre of a massive earthquake the shocks are being felt far and wide, and like the eye of a storm, it is gathering momentum by the day.
This article looks at how the slowdown in the Chinese economy is affecting the global economies and financial markets with particular interest on how the traders in the various Dukascopy contests can trade the events. The Chinese economy grew an annual 6.9% in the third quarter of 2015 the weakest since first quarter of 2009.
China is the world’s most populous country, and is fast becoming a global economic powerhouse with an estimated GDP of USD 10.3 trillion in 2015. China's economy is now the world's second largest economy by nominal GDP and the world's largest economy by purchasing power parity according to the IMF. Until 2015 China was the world's fastest-growing major economy, with growth rates averaging 10% over 30 years. However the Chinese economy has been slowing down in 2015. At this juncture we should not that the Chinese economy is not in recession but the rate of economic growth has reduced.
Recent third quarter data has confirmed the slowdown with a growth rate of 6.9%. Fig 1 below shows the annualised quarterly growth rates from China since 2013.
Fig 1: China GDP Annual Growth rate
According to the latest GDP report the strength in services and consumption offset weaker manufacturing and exports. Services sector growth quickened to 8.4% in the three quarters of 2015, while the secondary industry, which includes manufacturing, weakened to a 6% expansion and fixed-asset investment expansion slowed to 10.3% the weakest growth since 2000. Consumption accounted for 58.4% of China's GDP in the period and capital formation for 43.4% while net exports trimmed 1.8% from the GDP.
Fig 2: China inflation rate
Fig 2 shows the monthly annual inflation rates from China over the past year. China's annual inflation rate was recorded at 1.6% in September of 2015, down from 2.0 percent in the previous month. Food prices increased by 2.7% and the non-food category, cost rose by 1% while transport and communication declined by 2.1%. The low oil prices have been a big contributing factor in the decline in inflation across the globe and it’s not a surprise to see the decline in transport. However the slowing economic activity has not resulted in in a direct decline in consumer demand in the economy.
Over the years China has played a central role in world trade and a slowdown in the Chinese economy is likely to reverberate around the globe. China is a global hub for manufacturing, and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world. China is also the world's fastest growing consumer market and second largest importer of goods in the world according to statistics for IMF.
Fig 3: China’s trading partner
According to the details in Fig 3, China imports 57.7% of the global trade in iron ore and soya beans with Australia and Brazil being the major exporters of iron ore and The USA and Brazil being the major trading partners in Soya beans. China is also a major importer of Oil, copper, cars and integrated circuits.
Ever since the indications of the slowdown emerged The People's Bank of China has been introducing measures to ease monetary policy and stimulate demand and aid the slowing economy.
- Interest rates
The People's Bank of China cut its benchmark one-year lending rate by 25bps to 4.6 percent on August 25th, 2015 for the fifth time since November 2014 as highlighted in Fig 4 above. The benchmark rate is now down by 140 bps since then and has established a fresh record low.
- Exchange rate regime
As part of the raft of measures to ease monetary policy the Chinese central bank changed the way it calculated the currency's daily midpoint against the USD. The method now involves taking the midpoint from market-makers quotes and the previous day's closing price. Following the announcement the yuan depreciated almost 2% against the USD to levels last seen almost three years ago. The USDCNY traded at 6.36 on Thursday 22 October 2015
- Cash reserve Ratio
In a bid to inject more capital in the system the central bank has been cutting the cash reserve ratio as shown in Fig 5. Cash Reserve Ratio in China has been dropped by 50bps with effect from September 6th 2015 as the central banks move for more accommodative monetary policy.
Impact on Chinese Equity markets
The woes in the Chinese economy has been further compounded by the crash in the stock market due to the slowdown in the economy and stock market bubble caused by leveraged investments. By 8–9 July 2015, the Shanghai stock market had fallen 30% and over a period of three weeks as 1,400 companies filed for a trading halt in an attempt to prevent further losses. On 24 August, Shanghai main share index lost 8.49% of its value and it became known as the day Black Monday.There were similar losses of over 7% on 25 August causing some commentators to call it Black Tuesday.
In response to this The Chinese government enacted many measures to stem the tide of the crash which included
- Limited short selling under threat of arrest.
- Large mutual funds and pension funds pledged to buy more stocks.
- The government stopped initial public offerings.
- The government also provided cash to brokers to buy shares, backed by central-bank cash.
- China Securities Regulatory Commission (CSRC) imposed a six-month ban on stockholders owning more than 5 percent of a company's stock from selling those stocks.
- Further, around 1,300 total firms, representing 45 percent of the stock market, suspended the trading of stocks starting on 8 July 2015.
Dow Jones Industrial Average – On Black Monday, the Dow dropped 1000 points at opening, the largest drop ever. In the week prior to the day, the index had fallen over concerns about the yuan, low gas prices, and uncertainty over the U.S. Federal Reserve's moves to raise interest rates.
The Sentex - In India, the Sensex recorded its biggest single-day fall of 1,624.51 points on August 24, ending the day -5.94%.
FTSE - The FTSE lost -4.4% (£78bn) but upon opening on 25 August 2015.
Impact on the Commodity Markets
Concerns about the Chinese slowdown have been dragging the commodity prices lower. As shown in Fig 3 China is big commodity consumer. Most of the commodity prices have been on the decline as the slowdown in the Chinese economy takes its toll. Copper and iron ore are some of the countries being affected by the slowdown.
Impact on the Forex Market
The impact of the slowdown in China on the forex market cannot be understated. There has been massive devaluation of the Yuan in the year. The AUD and NZD have also been losing ground as trade with China slows and commodity prices tumble. Close to home the Zambian Kwacha has been falling due to the falling copper prices and this is a story for another day.