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How Chinese economy affects the US stock markets?

China is one of the largest economies in the world. It is currently second largest economy in the word just behind mighty United states of America.It is one of the fastest growing economies in the world. It is also included in the BRICS economic bloc.It is also the 2nd largest importer of the goods in the world.The fluctuations in the growth patterns and rates of Chinese economy affects the global stock markets and America is no different. Following are the reasons why fluctuations in the Chinese economy affects the American stock markets.

Devaluation of the Chinese Currency

Chinese Yuan is one of the strongest currencies in the world. Yuan is  included in the list of the international reserve along with Pound sterling,Swiss franc and German mark etc.It is expected that it will become third largest payment currency in 2018.More than 36 countries signed a currency swap agreements with China as of June 2016.This agreement will help countries to increase their currency trade  to  3.3 trillion yuan ($494.3 billion).Chinese yuan has been included in the IMF’s Special Drawing Rights (SDR) basket in December 2015 and this will really help Chinese currency to make a mark in the international arena.

The American stock market was badly hurt due to international status of the Yuan.China devalued yuan last year and it badly affected American stock market .China devalued its currency in the month of August last year.This move caused panic in the minds of international investors and economists. American stock market crashed after the devaluation of the Chinese currency.The currency devaluation was a tricky move as it made Chinese exports cheaper for the importer countries.It also raised fears in the mind of the Chinese consumers as imported goods became expensive for them in the Chinese market.This unstable situation pushed Chinese yuan down versus other major currencies of the world such as euro and dollar. Yaun fell 2.2% against euro and 1.8 % against dollar.

Slowdown of the Chinese economy

Fast growing Chinese economy has  a huge demand for the raw material goods such as oil and precious metals.It provides an avenue of growth to emerging and advanced countries. India exports more than 4 % goods to China.Brazil is another emerging economy and  more than 18 % of its exports are to China.

United States of America is probably most important trading partner of China,as more than 7.7 % of its exports are to China.This was the reason why Dow Jones lost  1000 points after the news of Chinese economic slowdown. It was 25 august 2016,when Dow Jones lost 1000 points on a single day.This news also pushed S & P 500 index to its lowest level in last 2 and half years.It happened because investors started selling their Chinese based company shares after this news.

Stock prices of very popular and strong  american companies  also decreased after that news .These companies include Pepsi (PEP) and General Electric (GE) .The share prices of these companies crashed more than 20% at one instant.The share prices of  wholesale companies like Costco (COST) decrease by 16%.The weakening of the Chinese economy affected the US stock market as investors go to safe haven investments in time of economic slowdown.After Chinese slowdown investors were more interested inputting their money in safe investment avenues such as bonds,gold and debts.So we saw a considerable increase in the gold prices in USA after Chinese and American stock markets crash.

 

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About Emaad Qureshi