One of the most common questions among investors who are engrossed in the news often wonder is just why is China so essential to the health of the global economy? Just like the U.S. any rocky health with major global economies can shake any and all stock markets - changes in the tide will rise or lower all boats.
The deal with China lately, is actually worrisome since the reason for their economic decline mirrors a lot of what happened with the U.S. in 2008. China's economy is reaching a leveling-off after achieving double-digit GDP growth for over two consecutive decades. This is what happens when an economy goes from developing to becoming a developed economy (like the U.S.) which in not necessarily a bad thing, but China's obsession with growth and overconfidence in growth is what is disturbing. It essentially sets the bar far too high and when they don't achieve their goal, panic ensues and confidence is lost.
China is worried about its loss in economic growth levels. As a way to entice growth, the government recently printed more money and injected 130 billion yuan (or $19.95 billion) into the broader economy - which is the largest monetary injection since September 2015 and this had ultimately led to market weakness as well. By printing more money, this weakens the value of the yuan.
Why would a country want its currency to be weak?
Well, a weaker currency means that its goods and services become cheaper to other economies. This ultimately means that in theory, China's exports will grow because relative to other global currencies, their products are really cheap.
If it's that easy, why don't more economies do this?
It's not a healthy move to make. Devaluation of a country's currency is seen as a last-ditch effort on the part of the government to entice an increase in exports. The fear is that no matter what, China still will not be able to keep achieving its long-term growth targets and will no longer be a source of "cheap goods" in the world.
Whether it was intentional or not, all global economies depend on one another for strength. When one domino tumbles, so will the rest. This is inevitable, but it is important to keep in mind for the future - no matter which country you currently inhabit.
Greetings, GradMoney Readers!
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