The downfall of the Chinese economy

The downfall of the Chinese economy

Tumbling stocks, plunging indices, rallying currencies and falling commodities...do you recognise this scenario, this looks much likely to what is happening on the global market right now, doesn't it?

Many of you out there might be losing their money right now and you might not be knowing the reason behind your failure. Binary Options is a field full of risks but is also very fruitful if one does understand the functioning of the market. The downfall of the Chinese economy has surprised many while it has also drawn attention to the global turmoil which has shaken most of the trading markets.

Almost all assets in Binary Options Trading has been affected in one way or the other. Chinese shares have fallen to such an extent that the Central Bank has to decided to intervene in order to bring China back on track. So what has really caused this massive shake to the world's economy? Time to take a look at the facts.

 

The real picture

Earlier this month, reports for the manufacturing sector in China showed a sudden slowdown which made everyone wonder whether this slump would extend on a large scale. The demand for raw materials also dipped which was going to send even more dangerous signs on the global market. Analysts and investors are already talking about another global recession paving its way slowly, just like a slow poison. The reading for the manufacturing sector being below 50, suggest a contraction of the manufacturing sector in China. So along with a slowdown of the economy, a contraction is also being noted, almost a dangerous potion in the making.

A closer look inside the country might also reveal that, the infrastructure of the country rests on a pile of credit. Insiders say that most of the infrastructure tasks have been completed through a massive amount of credit. So have the Chinese been artificially showing that the economy has been expanding faster that it possibly could? Well, this is not a proven statement but could that hold any truth? Only time will reveal that. Moving on, about 50 percent of the China's GDP is inserted in the China's investment program, representing an excessive amount of investment.


When China's shares went down

The drop in the Chinese share market might have seemed to be an innocent little crash on the market. The plunge which started on the Asian market has had its nasty effects on the U.S. market last Friday. The fall has in fact gathered momentum, continuing to spread its effects which is now looking extremely worrying. Not later than Monday this week, when Shanghai markets closed, stocks were down by 8.5 percent with the Shanghai Composite having its worst trading day in eight years! The Black Monday effects reached the markets as named by the People's Daily, the communist party's and the outcomes of the tumbling Chinese economy were said to be much bigger than we think.

The surprise devaluation of the Yuan began on August 11th, which generated a chain of events on the market. From that day, around $5 trillion has been wiped off on global stock prices and looking at the meltdown of the economy, it looks like that the sharp slowdown in China's industrial activity has disappointed the whole market. The Chinese government has been reluctant in inserting new bold measures in the economy so as to prop up equity prices which has in turn dragged the economy to the lows.

The sense of panic does not seem to end here as new orders, exports and production are all down for the month of August. The heart of the economy of China is its property market. Since the beginning of this year, the property market seems to have stabilized across the country and figures were good in major cities. But unfortunately with time, construction seems to have stalled and severe repercussions were seen due to uncompleted housing resulting into unsold homes. New housing data started to fall and eventually a change in construction seems impossible to achieve. This on the other hand, has triggered much havoc, since exporters did not have enough to cheer about commodities.

The Deadly explosion in Tianji

We are definitely in the world of binary options trading, but we cannot ignore the fact that little fundamental changes might deeply affect the way the market functions. One of the factors that added to the woes of China was the explosion in Tianji wreaking havoc at one of the world's busiest port. In the same area, thousands of factories operate and following the explosion they have been ordered to close down for a while so as to make way for a military parade. The malaise does not end here, a lot of private companies in China are running into deeper debt.

Changing Structure of the economy

China has been a pillar of the global economy since decades now since it is the biggest crude importer in the world and the slowdown of the economy has definitely affected the supply of crude oil in Asia. Despite efforts to reanimate the economy, many measures have failed and now the Bank of China is stepping in to bring the changes required. The Central Bank has decided to bring in cuts in the interest rates so as to ease the economy for the moment. Some months back, stimulus packages were being injected in the veins of the economy, so as to boost manufacturing and production.

The weak demand for crude is somewhere also linked with what is happening in China. China is thirsty for oil and despite that, it cannot help to lift crude oil prices. This has further weakened exports of OPEC and might send further worries on the market. Oil prices haven't stayed immune ever since China's economy went completely down. Now China wants oil more than it wants other energy sources.

While growth is slowing down, the structure of the economy is also changing. The services sector for example, tried to replace the manufacturing sector a couple of years ago, but it will take time before it becomes the next big thing in China. That trend has taken place only a few years back and the outcomes are still being monitored.

Where does China's credibility stands

China's government believed that it could engineer a transition from a strong double-digit economic growth which would be pumped by exports and investments but this took time. The idea behind this was to balance growth and give rise to domestic consumption, which would undoubtedly be supported by sensible policies and reforms. But China's economy inspired a lot of uncertainty which has taken down the share market and the devaluation of the Yuan has contributed to it.

The credibility of China was slightly damaged when the Chinese government introduced its latest move of prohibiting short-selling and sales by major shareholders in the stock market. Now all eyes are on the policymakers who might bring in new policies to revive the economy. But even the policymakers could go wrong, as since some decades now some policymakers have been wrong in managing financial markets and have dragged down several economies. Thus, everything remains uncertain.

Conclusion

The share market has gone down and the slow economy will certainly result in social and political instability. Definitely no one wishes for it, but with the world's second largest economy plunging down, these things can be expected. Also, this will impede on job creation which is already a matter of concern in the country. The Communist party, on the other hand will struggle to maintain legitimacy of its political monopoly. However, China is a big economy and within years has paved its way into being one of the key economies with a strong manpower. Though it looks unlikely on such a short notice, but China will use the best measures possible to bounce back in the global picture, or maybe the global recession is back...!

 
Warren Tancredi By: Warren Tancredi
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