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Simple Explanation to ‘Why are the Global Markets shaken up, due to China?’

The recent stock market volatility has literally shaken up the Globe and is a warning sign that the wounds from the 2008 financial crisis still haven’t been healed yet on a structural, or a practical level for the Global economy.

Simply put, the economies of different countries are so highly inter-linked that the ‘action’ in one, quickly translates into an ‘impact’ of another. This is the spill over effect of one large Global economy.  

Therefore, there was a sharp downwards reaction in the Global financial markets to a decline in the World’s second-largest economy i.e China.

Why is China so volatile?

  • China’s surprise currency devaluation two weeks ago, provided a signal of downturn
  • Data showed that production in Chinese factories shrank in August (2015) at its fastest rate in more than six years
    • Primarily because of falling domestic and export demand
Chinese Yuan
Chinese Yuan

As a result, its benchmark stock index plunged more than 8 percent this week. 

Phil Davis, founder of PSW Investments, says, “Everyone acted like the financial crisis in 2008 happened overnight, but it didn’t. It comes from ignoring all the warning signs, and China’s a big one.” – That means history might repeat itself! 

What is the impact on other Emerging economies?

  • With China’s demand for basic materials (reqd for production) going down, the global commodity prices shrank
    • Nearly everything from crude oil to cotton has been getting cheaper
    • And the lower prices have big consequences for small countries, who are majorly dependent on its exports to China
  • As a result of fall in commodity prices, the emerging market currencies have also become weaker and right now into big losses

What is the Impact on U.S and EU?

  • U.S. and EU multinationals that have direct exposure to emerging markets to fuel product growth and thus will be majorly affected due to slowing consumer demand

“It’s not just the Apple, but it’s also the consumer staples companies, such as Colgate, Proctor & Gamble and Johnson & Johnson that have significant revenue growth through the emerging space. All of it is going to be negatively impacted.” says Tony Roth, chief investment officer at Wilmington Trust.

What to expect next?

  • Commercial activity may dry up as consumers and businesses put off purchases with the expectation that prices will fall even more. It can create less demand for big-ticket items from cars to washing machines
  • As China faces a slowdown, it could have spillover effects that could lead to deflation throughout the global economy – hence there is a warning signal, to keep a check on International trade.

Source: IBT Times, Times of India