Tuesday, 5 January 2016

Struggling China And The World

This year started with a 'Black Monday'. There was a huge dip in a stock exchange index(Sensex as well as NSE). This was accompanied with a depreciation of rupee by 0.47 (which is too much for a day). It is speculated that investors lost a huge sum of rupees 150 billion. In fact, throughout the last year, the world has witnessed multiple Black Mondays. These facts compelled us to discuss the antagonist of this tragedy: Economic Crisis in China.

From 1949 to 1978, China had Soviet-style centrally planned economy. China was experiencing an economic downturn, until the time its new president Deng Xiaoping began the economic reforms. China started economic liberalization in 1978 and moved towards market-oriented mixed economy under one-party rule. Its model was similar to that of Japan and South Korea. Like Japan and S. Korea, for nearly 30 years China has been growing at an average rate of 10%, thrusting its goods across the world. The growth of China was unprecedented in both duration and scale. It became the world's second largest economy by nominal GDP and largest economy by purchasing power parity(PPP) according to IMF. China accounts for 17% of global economic activity. As the second biggest economy in the world, its has the huge impact on global economy. This implies slowing down of China will slow down the world.

The growing streak of the Chinese economy was finally slowed down in 2015. The world was alarmed on 24th August when Shanghai main share index lost 8.49% of its value in a single day. Repercussions were seen in India's stock market as well as stock markets all over the world. As a result, billions of pounds were lost on international stock markets. Even media in China called it 'Black Monday'. It was followed by 'Black Tuesday', losing more than 7% again.

In the 1980s, China established 'special economic zones' to attract foreign investment. This allowed the influx of foreign investments into China helping its industrialization and reformed the export based economy. Growing economy and growing foreign investment kept increasing the stock exchange index. With government controlled media, China encouraged its people to invest in stock market. Many Chinese families borrowed their money to buy shares, hoping that share prices will eventually grow in value. As millions of investors started investing borrowed money into the stock market, share prices were pushed to inflated values. (This is similar to how subprime lending in the USA led to housing bubble in 2007-8)

Chinese government realized that allowing people to buy shares with borrowed money is a bad idea. They put the ban on purchasing shares with borrowed money. In the panic, investors sold off their stocks to pay back the money they had borrowed. Mass selling of shares plunged the share prices to even lower. The equivalent of $3 trillion was lost as a result of the drop in share prices.

As no external index for China's growth is available (figures published by Government is the only source), their stock market index signifies their economy. When stock index went down, even foreign investors pull out their money creating the situation even worse. The economy is also driven by psychology. When investors fear that market is going down, they pull out their investment and the market really goes down. When the economy of China slows down, investors fear of the global slow down and pull out investment from other countries also. So investors fear that Indian economy will also go down and start selling their shares in Indian stock market. This resulted in the dip in Indian stock exchange index on 'Black Monday and Tuesday'.

Only 1.5% Chinese shares belong to foreigners, but still their stock market crashes are affecting the financial markets in the UK, Europe, and the USA.

In 2015, the growth rate of China dropped down to 7.1% from 10% and was surpassed by India with a growth rate of 7.5%. These figures ratified the slowing down of China's economy. In July of 2015, China had imposed a restriction on selling the shares. These restrictions were until the end of 2015. As 2016 started, skeptical share-holders sold out their shares which decreased the stock market index by 7% withing two hours after which transaction was stopped. First Monday of 2016 became the 'Black Monday'. And this, of course, forced Indian stock market index to go down.

Today, economies of all nations are inter-dependent and when one economy starts sinking, it carries the entire world to the bottom.

No comments:

Post a Comment