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The Chinese economy fell sharply this summer, beginning with an 8.5% fall in the stock market on July 27th and further falls particularly on August 24th and September 1st. Skepticism in the Chinese market had caused shareholders and brokers to sell throughout the summer, but stock prices fell without any buyers to create and sustain buying power. CSN members April Lo and Dan Adler spoke to Matthieu Ortiz, a sophomore studying International Studies and Economics, to gain insight on the crises and it’s true effects on the American economy (see sound bites below).
According to Ortiz, a large majority of the Chinese economy is state owned and run. Because of this system and the ruling Communist party, little is known about the true status of market imports and exports. This system is partly due to fears of the Chinese government that their economy would not be able to compete with external markets if they completely opened up to free trade.
Still, there had been a marked decrease in exports and weakening in the economy. In particular, Chinese manufacturing has been low. Due to cheap labor, manufacturing makes up about 40% of China’s GDP and largely consists of intermediary processing of raw materials from developing countries which are then exported for finishing and sales elsewhere. In response to the faltering market, the government devalued the Yuan to make exporting goods cheaper to increase export revenue, making them more competitive in the international export market.
While the devaluation of the Yuan is generally thought to be a smart and realistic move by the Chinese government, America worries about the effect on Chinese consumption of American products. Due to the lack of transparency, there is also concern about whether the Chinese market has been weaker than was previously believed. So on August 24th, the Dow Jones fell over 1000 points, but then closed at a 588 point drop. The SMP 500 also fell 3.9% on what is now named the Chinese Black Monday and was the worst day for stocks in four years.
According to the 2016 presidential candidates, the US is on the brink of disaster. Trump tweeted “Markets are crashing. This is because of poor planning and allowing China and Asia to dictate the agenda. This could be very messy. Vote Trump.” On the other side, Sanders blames Wall St and bankers rigging the rules for decades and the obsession with speculation.
But Matthieu believes that these statements are largely given for their shock value to draw listeners and voters.. Despite companies like Apple losing market power in China, America is not significantly affected in the short term. The US economy has 13% GDP in foreign exports and only 1-2% in exports to China. Therefore, effects of the weak Chinese economy is limited, especially compared to other countries such as Hong Kong, Japan, Taiwan, and South Korea.
Additionally, the majority of the Chinese population is not invested in the stock market and their economic and consumption power is not directly reflected in the market crash. All signs point to Chinese consumption holding relatively strong. The effects seen in this economic crash have been mostly limited to the Chinese stock market and Wall St. while investors are holding their breath for an announcement by the US federal reserve about a possible interest rate hike and to see if there will be ongoing currency devaluation signaling the Chinese market’s lack of confidence. It is likely, though, that the devaluation of the yuan might actually cause a delay in the Fed’s interest rate hike. The general public in both China and America need not worry excessively.
Of course, the economy is still in an imbalance and the long term effects of the Chinese market turmoil have yet to be seen. But unless all your savings are invested on Wall St, there is no cause for great concern.
[The podcast is edited for clarity and length.]
Matthieu Ortiz, Sophomore studying International Studies at Johns Hopkins University
Dan Adler, CSN Staff
April Lo, CSN Staff