Downturn in Chinese Economy Rattles Global Markets
August 26, 2015
A downturn in China’s economic outlook has caused sell-offs of stocks globally this week. The government of China often intervenes in the nation’s economy, currency, and stock exchange, about which Western governments often complain. However, the China’s reluctance to do so in the last few weeks has led to worldwide concern.
China’s economy has been slowing down. Much of its economy is fueled by manufacturing items that are sold for export. But wages in China are not as low as they once were. Other nations are now able to sell goods more cheaply than China. Further, China’s currency, the yuan, fell in value in early August. It was the largest drop in value for the currency in two decades. Ordinarily, the Chinese government artificially sets the value of the yuan, as opposed to allowing it to fluctuate based on trading in the currency markets. The Peoples’ Bank of China, the nation’s central bank, sets a value for the yuan against the United States dollar. In theory, when the yuan is traded in markets, it is allowed to move 2% above or below that value. Often, however, the government refuses to allow the yuan to devalue when the U.S. dollar loses value. Recently, however, the government of China stopped propping the currency up. The yuan lost four percent of its value against the U.S. dollar over the month of August.
China’s stock market, the Shanghai Composite, has been falling in value over the summer. In early July, the government halted the sale of new stocks on the market, hoping to stem the downward slide in the stock market. By August, however, weakness in China’s economy and the currency devaluation led to a huge drop in the value of China’s stock market. The Shanghai market lost nearly 10 percent in one day; since mid-June, it has lost 30 percent of its value.
The U.S. economy is not heavily dependent on the Chinese economy, fewer than two percent of U.S. goods sold for export go to China. Nevertheless, the crash in China sent global markets, including markets in the United States, sharply down. In the United States, the world’s largest economy, investors became nervous about what the news in China, the world’s second largest economy, meant for the global outlook. The U.S markets have lost 11 percent of their value in the last week. Some experts view these changes as a natural correction of the stock market, but others fear it signals the early stages of a recession. In markets around the world, stocks and bonds have dropped $3.2 trillion in this downturn.