China, one of the largest economic markets has been falling since the last 3 years. But why?
Once upon a time, China used to be one of the favorite Asian countries for Foreign Investors but now the tables have turned, and foreign investors are taking their investments out of China. China’s stock markets have delivered negative returns in the last 3 years. Investors are selling their investments because of the fear of China’s failing economy. Let us understand why the Chinese market is falling and its implications on the global market as well as India.
Table of Contents
Key Takeaways
- China’s GDP is not growing as much as expected.
- The Chinese local government’s debt is increasing.
- Taxes are being chased by local cities and government which are unpaid.
- China has been fighting trade war consistently with western countries.
- The GDP growth and high debts, trade war and uncertain future causing investors to stay away from Chinese market.
- The outgoing China economy slow down has made no impact because of other strong economical countries and the China’s self dependent financial system kept the slow down within borders.
- Foreign investors are likely to switch their investment from China to other emerging countries.
- India likely to gain investor’s attraction because it is one of the strongest emerging country.
- China’s economical slow down gives India an opportunity to attract foreign investment and export Made in India products globally.
Overview of China’s current economical situation
An amazing growth over the last few decades China’s economic growth has come to a halt. The growth has decelerated in recent times. Property Crisis, house prices are dropping, major real estate companies like Evergrande have gone bankrupt, High local government debts are putting China’s growing economy on pause.
Slow GDP Growth :
The world’s 2nd largest economy is slowing down and the country’s economic growth is not meeting the expectations. The country’s GDP is not growing as much as expected. In the latest Q2 quarter, the GDP growth stood at 4.7%, which is expected to be 5.1%. It was the weakest growth YoY growth since March 2023.
Industrial Production growth slowing down:
Weakened industrial production growth in July to 5.1%. The growth of industrial production was expected to be 5.2%. The July growth is lower than the June growth of 5.3%.
Real Estate Crisis:
The real estate sector is one of the important parts of GDP for every country but China’s Real estate is in crisis. The Major property developers like Evergrande have failed to pay their debts and going bankrupt is causing a loss of confidence in investors mind.
China which built big cities and houses is now facing challenges because property prices have been declining recently, hurting house owners and developers.
High Debt Challenges:
The debt has a high impact on any economy when it is high. China’s Local Government is facing a high debt challenge at present. The debts are significantly rising.
The country’s Debt to GDP ratio is on the rise and is expected to continue in coming times. The expected government-guided fund-to-GDP ratio for 2024 is at 124.0. The actual government-guided fund-to-GDP ratio for 2023 was at 116.9.
Desperate for Cash:
China’s current economic issues and running out of cash are challenging the country to maintain its economy. The Chinese cities trying to generate cash in every possible way. They are chasing unpaid taxes from companies. Several companies have received the tax notices. In one of the cases, the company received a tax notice which was unpaid back in 1990.
<European Union Hikes Tariffs on Chinese Electric Cars:
In July, The European Union hiked the tariffs on Chinese electric cars which could result in a hike in Chinese car prices in European countries. Which may impact China’s electric vehicles export business.
2. Why investors are consistently selling?
China’s SSE Composite index has given a -20% return till the date since January 2022, Isn’t that worrying? A negative return in the last 2 and a half years. But why do investors are selling? Let us understand why Investors are staying away from China and taking their money out of China.
GDP growth not as much as expected.
Investors are staying away from China’s markets because they are worried about China’s current economic slowdown. China’s GDP growth is not performing as much as expected.
China’s GDP growth has been dropping for the last few years which is making it less attractive for investors.
Real Estate Issues.
The current outgoing real estate issues like house prices dropping and major companies like Evergrande defaulting their debts have raised concern about investor’s confidence in China’s real estate sector.
The Trade Wars
China is consistently fighting trade wars with Western countries, especially the US. Trade disputes, technology restrictions, and tariff hikes have caused relations problems between the countries. This has made investors think that Chinese companies may face more restrictions and tariff hikes in the future.
Weakening Chinese currency (Yuan)
The Chinese currency has been depreciating over time may be because of the slower growth of the country. The weakening Yuan means a lower value of return on investment for foreign investors. This may be one of the reasons why foreign Investors are selling their investments.
Transparency of Data.
Foreign Investors often seek transparency, Corporate Governance, and Financial Reporting. Yesterday on the date of 19th August 2024, The Chinese stock exchanges stopped publishing public data as Investors are fleeing. This raises concern for foreign investors.
Other Emerging Markets.
As China’s Markets are not performing as much as expected from them, investors are switching to other emerging markets to invest. Some other countries may have been performing better than China’s Markets which may attract Investors.
In Summary, Investors may have lost faith in China’s markets due to economic slowdown, Trade wars, and Better investment options.
3. Why It Isn’t Significantly Affecting Other Countries Yet:
When other markets are reaching higher highs, the China market is making lower lows but why other country’s stock markets is not affecting China’s economic slowdown? let us find out!
Alternative Markets:
To take the place of China, there are a few other countries that are ready to take place. Emerging countries like India and other Southeast Asian countries have diversified their supply chain. This reduces the dependency of other countries on China.
Strong Global Economies:
China is the 2nd largest economy in the world but still, it is not affecting other global economies because of their strengths. The global domestic economies like the US and other Western countries have the strength to be independent. Their strong economies are not affected because of China’s economic slowdown.
China’s market is mostly about the country within itself, Their slowdown is not affecting a strong economy like the US. The US stock market is the strongest market in the world because of its strength. The global markets are mostly dependent on US markets and China’s lower economic growth is not affecting the US yet.
China’s self dependency:
China is mostly known for its self-dependency. China’s internal problems are mostly kept within themselves. China’s financial system is well insulated from other countries. The government’s control over the financial systems has kept their financial instability within the country itself. This has reduced the risk for other countries.
Is there a Chance of China’s slowdown affecting global markets in the future?
China is the world’s 2nd largest economy, their slowdown is not been affected so far because of other strong economies and their self-dependent financial systems but if the slowdown continues, it may affect globally because in the end, everyone is dependent on each other.
4. How is it beneficial for India?
Reducing dependency on China:
India is a country that is importing more than the exporting and most imports are coming from China. China’s economic challenges may help India to manufacture more products within India. India may likely reduce Chinese imports and focus on “Make In India” products.
Being the Alternative to China for Global Markets:
Investors always look for opportunities to gain handsome returns on their investments. They are always in search of better investing options. We have seen foreign investors leaving China and this leaves foreign investors to switch to other emerging economies like India and others
The Indian market can be one of the market options that can attract foreign investors who are looking to switch their investment from China markets. India is one of the best emerging markets in the world which has the potential to grow rapidly. India can be the best investment option for foreign investors.
More Export Opportunities for India:
China’s trade war with Western countries can benefit India in terms of exports. The trade war between China and westerns will be an opportunity for India to export products which are made in India. Exporting more products means good growth. If exports increase it will benefit India in many ways as well and the stock in India will be likely to rise when exports grow.
5. Conclusion:
China which is one of the strongest countries in the world, is fighting the battle within its borders while the world is watching how the Chinese government will tackle this period of uncertainty. For some, China’s crisis becomes a risk while for some it is a golden opportunity to grow.
We live in a world where everything is interconnected. Everyone is dependent on someone. As of now global markets are not affected by ongoing China concerns but China’s fortune is always linked globally. It will be interesting to see how China fights its battle and will be crucial in determining not just China’s economic trajectory, but also the broader balance of global economic power. The world needs to be prepared for the challenges and opportunities. We need to understand that every crisis teaches us valuable lessons and change accordingly.
6. Sources used in the article :
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