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The Chinese economy and its impact on world markets

Jones Sheridan clients may have seen the reports of a ‘Black Monday’ in world markets towards the end of August, as the Chinese market dipped sharply and several world markets followed suit. How and why did this happen and how does the Chinese market hold so much influence over the rest of the world?

The first answer has a lot to do with both the size and make-up of China’s economy. China is the world’s second largest economy, behind only the United States and historically, its economic power has been built on exports. World businesses go to China for their production needs, which can typically be fulfilled for a good price, relative to other locations worldwide.

If this situation were to ever change then world businesses would be likely to encounter at least temporary supply chain problems, which could in turn lead to increased costs. This is obviously just one fairly simple example of how businesses can be ‘exposed’ to the movements of the Chinese market, with plenty of further reasons why a fall could be seen to affect world businesses and therefore world markets.

How though did the Chinese markets ‘get spooked’ in the first place? ‘Black Monday’, which took place on 24th August, saw an 8.5% fall in one of China’s main markets and the following day saw another 7.6% wiped from the value of the market.

As with all sudden and significant market movements, the reasons for China’s fall are varied, but most relate to government policy. The Chinese government is trying to alter the country’s economic policy but also to keep up with ambitious targets of 7% GDP growth per year. Whilst official figures show that the economy is keeping pace with that target, some independent observers think that the actual growth might be more like 3%.

Coupled with these questions around growth numbers are questions around China’s policy-makers’ ability to influence the economy at all. Interest rates have been cut repeatedly (and were cut again just recently) along with a host of other measures, including allowing the main state pension fund to invest in the market for the first time. But, despite these fairly major policies, the markets have continued to slide.

The latest example of this was ‘Black Monday’ and its knock-on effects, as the world once again looked to China to gauge its own performance and the impact a Chinese slowdown could have on the rest of us.