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China is the world’s second-largest economy in terms of gross domestic product (GDP), just next to the US. It has the highest population in the world and several manufacturing firms opt to set up shop there due to its cheap labor and supply materials. See more China used to enjoy double-digit growth over the past decades but last year, its growth slowed to 6.9% – the lowest in 25 years. Its stock market jumped by 150% in one year, but plummeted by 30% in just a few weeks and opened 2016 by falling another 7%. The International Monetary Fund projected that the economy’s decline will continue toward 2018, followed by a gradual recovery. I touched on this topic in my post in February: 2015-in-review-the-year-volatility-returned . And now, here are six ways the Asian giant’s slowdown can hurt investors. Beijing’s demand for oil will fall. China’s industrial production will fall as a result of declining factory activity. This will further add downward pressure to the price of oil, decimating profits and capital spending for oil firms listed on US exchanges. China’s demand for energy is one of the most important factors that drive the price of crude oil. In January, New York Stock Exchange-listed Exxon Mobil Corp. (NYSE: XOM ) slashed its forecast on China’s energy-demand growth toward 2025. Read more here Credit markets will be spooked . Chinese firms weighed by a ton of debt will default on their payments, spooking creditors, which will spike interest rates and ultimately drive the valuation of risk assets lower. China is the US’ largest creditor, accounting for around one-fifth of the total US treasury securities outstanding. Currencies will be in turmoil. Concerns over the health of China’s economy have already pushed capital away from its shores, pushing the yuan lower. This was only stopped by government intervention such as capital controls and a fixed exchange rate. Although the yuan is mainly traded on the mainland and is strictly supervised by the central bank, its offshore counterpart can be accessed by anyone. The onshore yuan is expected to continue its depreciation against the US dollar, hastening capital outflows and boosting demand for overseas assets. A weakening yuan amid a strengthening greenback could also increase political friction ahead of November 8 US Presidential elections. Currencies related to the Chinese economy will also experience the same fate. These include the Japanese Yen, the Korean Won and other emerging-market currencies. Investors may also opt to park their cash in safe government bonds or debts with low risk of default. Chinese imports of US goods will decline. An uncertain outlook on domestic demand will convince Chinese consumers to hold off on buying, especially US goods. China serves as the US’ biggest import partner, whose 2014 imports reached $466.75 billion or around 16.4% of the total import of the U.S. In comparison, the Asian country is also the US’ third largest export partner, just next to Canada and Mexico. Export goods and services amounted to $123.67 billion as of 2014, accounting for around 5.3% of total US exports. This means the trade balance of the U.S. vis-à-vis China is negative. A part of the deficit is funded by capital flow coming from China. A drop in Chinese consumer spending will hurt US exports, and if the US manufacturers failed to shift their product exports to other markets, this could result in a temporary decline in the US GDP. A two-percentage point decline in the growth of Chinese domestic demand growth translates into a 0.3-percantage point dip in the US GDP growth rate in 2015 and 2016, according to an estimate from the Organization for Economic Cooperation and Development (OECD). China may sell US Treasuries for stimulus. As a possible option in its stimulus program, the Chinese government may decide to sell US Treasuries that it has bought, driving treasury prices lower, yields and ultimately interest rates higher. Similar to Number 3, higher rates may result in a collapse in valuations of risk assets such as stocks. American unemployment rate may rise. US companies with significant exposure to the Chinese market will likely suffer from shrinking domestic demand in China. Shareholders and employees of American companies that derive majority of their revenues from China may also be affected. Some firms may consider cutting costs to lift profits, resulting in layoffs and higher unemployment rates. Despite these… The one reason to buy stocks despite the possibility of a hard landing in China is the Chinese government’s wherewithal. In a short span of time, it has blocked the exit of foreign capital, fixed exchange rates, and pacified financial markets, including stocks, currencies and properties. An added bonus is the fact that the US is the second biggest oil importer with around 7.2 million barrels daily as of April 2015. With oil prices falling due to a dim outlook on China’s GDP, trade balance deficit is affected in a positive way because of a decline in as the US’ cost to import oil. In summary: A slowdown in the world’s second biggest economy can hurt your investments because there will be lower demand for oil, creditors will be spooked, currencies will be in turmoil, there will be weaker demand for US goods, and interest rates and unemployment may go up. But on a positive note, the Chinese government has immediately taken measures to pacify financial markets, and the negative effects are offset by falling oil prices. Scalper1 News
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