Why Investors are Concerned About Slowdown in Chinese Economy – Introduction
China is the second largest economy in the world with a GDP of more than $12 trillion and a population of more than 1.32 billion people. In the past 20 years, the country’s GDP has grown from less than a trillion dollars. The country’s growth can be attributed to a number of factors.
First, the country became a member of World Trade Organization (WTO) during the Bill Clinton’s presidency. The goal for Clinton was to bring China to order by allowing it to operate based on the rules set by the WTO. It was also his intention to let American companies be able to compete in the Chinese market.
Second, the entry to the WTO made it possible for global companies to establish plants in the country. Since the country had a huge population of young and well-educated people, the country was able to attract more companies. For example, an American clothing company like Nike was able to outsource its labor to China, where wages were low. The migration of American companies to China led to a massive growth in the Chinese economy.
Third, to boost the country’s economic growth, the leaders started investing in large infrastructural projects. The country built hundreds of new cities, thousands of kilometers of new roads, and new rail projects. As this happened, it created large demand for the country’s goods and services, which helped to increase the economic growth.
Fourth, the country started using unconventional methods to grow it local businesses. For example, for global companies to do business in China, they needed to set up joint ventures with their Chinese counterparts. This was a dangerous thing because the Chinese companies stole their business ideas and their intellectual property. A good example of this is when Google went to China. Their local joint venture counterparts, Baidu stole their technology and created the largest social media companies in the country. Another unconventional way China has done that is by having large tariffs on imported goods. These tariffs help the country to develop its industries.
In the past few years, the country’s economy has seen significant growth. This growth has made it become a key consumer and a key supplier of products. As a result, investors use the country as a barometer for global growth. As such, when its economy slows, they believe that the global economy is slowing as well.
This year, numbers from the country show that the economy is softening. Last week, the country’s PMI numbers showed weakness in the manufacturing sector and IMF has already lowered its guidance for the year. Today, the numbers from the country showed that its exports had slowed the most in more than two years. Exports declined by 4.4% in December while imports reduced by 7.6%. At the same time, its annual trade surplus with the US increased to more than $323 billion, which was the highest level since 2006. The reason for the latter is that the country slashed its US imports of key agricultural products while US imports from China continued to rise.
As a trader, it is very important that you take time to study data from China. This data will help you know where and how to invest. For example, a falling growth tends to lead to lower oil and agricultural commodity prices.