It has been quite the year for China, the world’s second largest economy. Growing concerns have increased over the country’s economic and political signals in fear of being the source of the next global downturn.
Bells rang across world markets back in August as Chinese shares dropped nine percent, alarming investors.
“Markets are panicking. Things are starting to look like the Asian financial crisis back in the late 1990s. Speculators are selling assets that seem the most vulnerable,” stated Takako Masai, head of research at Shinsei Bank.
Chris Flowers, who has invested in banks in a number of international markets, said it was impossible to turn banking into a risk-free utility. “All the stuff that has happened and all the rules we’ve introduced have depressed profitability and that is a real vulnerability,” Flowers said.
“The problem is that the Chinese economy is now rapidly cooling. This in turn means they no longer need all of those commodities, and the prices have fallen sharply–this leaves a huge loss of wealth for the emerging markets,” explains John Ficenec, editor of the Questor column at Telegraph Media Group.
China’s recent stock meltdown has expectedly attracted global attention, as it is one of the world’s largest economies. Any turmoil in its economy will certainly affect the global economy, as we live in an interconnected world.
Although most of the global attention is focused on predictions for China’s economy (which is very important), these “dangers” are not as serious as many people think and don’t necessarily spell disaster for the U.S. Stocks in the U.S. almost always bounce back. Over larger time spans, when stocks are expensive, they tend to post returns that are lower than historical averages. When stocks are cheap, they tend to return more.
China’s industrialization generated huge export booms by increasing the prices of their products. Lower prices on resources are actually a benefit to resource importers like the U.S., Europe, and Japan. This moderates some of the impact of the Chinese slowdown.
The U.S. also has an enormous bilateral trade deficit with China. Just as the debate over free trade deals was the topic of discussion in Washington, free trade advocates were hit with the unfortunate news that the trade deficit surged to $51.4 billion last March (from $35 billion in February), according to Fortune. The U.S. imports three times as much from China as it exports to China—what this means is that a Chinese economic transition will do little harm to businesses in the U.S. since so few of them are dependent on selling oversees to China.