This year started with global stock market and commodities problems over concerns about China’s economy and the overall global outlook. Investors are abandoning riskier stocks in favor of safer securities like gold and government bonds, while oil prices continue to fall. Some analysts believe the root of these problems is quantitative easing which has swamped the market with easy money. These analysts also believe that China’s government has made little progress in reorganizing their economies towards sources of jobs and growth. While everything around us is falling, some ask the question of whether or not this is a repeat of the 2008 financial crisis. Billionaire speculator George Soros said: “There is a financial crisis and a bear market … The source of the disequilibrium is different. In 2008 it was US sub-prime housing. Today it is China, where a hard landing is practically unavoidable.”
Worries about China’s economic strength are at the heart of these issues. In the past, China had extreme growth, during which it overtook Japan to become the world’s second largest economy. Currently, China is having a major slowdown. Last year China’s GDP expanded by 6.9%, which is the slowest pace it has had for 25 years. China’s problems are being felt in economies around the world because it is one of the biggest consumers of oil and other commodities. Because China is having such a slowdown, they are decreasing the amount of commodities they are using, which is weighing hard on oil prices. There have also been big swings on China’s stock market. The CSI300 index of the largest listed companies in Shanghai and Shenzhen is down 16% since the start of this year and 42% since a peak last June.
Another big issue is China’s currency. Last August, Beijing shocked the market by devaluing the Yuan. This is an issue because a weaker Yuan means cheaper Chinese exports shoring up its manufacturing sector. A cheaper Yuan also hurts imports because the imports will be more expensive compared to home goods. IMF chief Christine Lagarde has urged China to communicate better with financial markets.
Finally, there is little confidence in China’s policymaker’s ability to manage economic transitions. There have been six interest rate cuts since November 2014, which have all failed to halt the economic slowdown. This past month, Xiao Gang, chairman of the China Securities Regulatory Commission, introduced a mechanism to curb stock exchange volatility. This mechanism called the circuit breaker was taken away after 4 days because it furthered the trouble in the market. While China is definitely a big issue it cannot carry the blame alone. As of 2014, the US, the Eurozone and Japan together accounted for nearly half of the world economy. Despite rapid growth, China only makes up 13% of the world economy. Currently, the global economy is suffering from a number of different problems, of which China is a major, but not the only one.