China's Global Impact

The August correction in the Chinese stock market led to a lot of "how terrible" news coverage and speculation as to whether or not this signaled the end of the China growth story and how it would impact the US and global economies.

Calmer voices were more resolute in the midst of the chaos, proclaiming that the Chinese stock market correction was a local event and would not contaminate the rest of the global economy. Case in point, trade from the US to China only accounts for about 15% of US GDP1 and a slowdown in this trade would hardly be felt within the rest of the U.S. economy.

So what impact does a slowing Chinese economy have for investors and how will this be reflected in client portfolios? The impact for clients will vary for each individual.

Consider the following. Recent events most likely mean the end of China’s economic model of export-led and investment driven growth. As economist Richard Duncan notes, there is no one left to export more to every year and China finds itself with extraordinary excess capacity across every industry. Product prices are falling, companies are unprofitable and bank loans in China are going bad; moreover, China is also buying much less raw materials from the rest of the world. As a result, commodity prices have collapsed. In October, China’s imports fell 20%2 from same month in the previous year. Thus, China is no longer a driver of global growth as it was coming out of the Great Recession of 2008-09.

Secondly, China would like to devalue their currency, the yuan, against the US Dollar in an effort to boost China’s exports and economic growth. However, China already has a trade surplus with the U.S. last year of $340 billion3, which means that further exports to the U.S. would see the Yuan appreciate against the Dollar, hurt future Chinese exports and lead to further economic slowdown.

The U.S. worries that further Yuan weakness will hinder the competitiveness of U.S. exporters relative to Chinese exporters. In addition, since the U.S. buys approximately $500 billion worth of goods4 from China yearly, the declining Yuan would influence export deflation, thereby defeating the U.S. government’s efforts to create inflation of 2% or more per annum5 as a way to stimulate and grow the U.S. economy and reduce the outstanding U.S. government debt. The above scenario would also include the debt issued as part of the Quantitative Easing, following the 2008 crisis program, to prevent a U.S. collapse into another 1930’s style Depression.

Finally, China does not want the Dollar to strengthen any further relative to the Euro and the Yen. According to Duncan’s notes, the Yuan is tied closed to the US Dollar, so when the USD strengthens against the Euro and the Yen so does the Chinese Yuan. A stronger Yuan hurts exports to Europe and Japan; therefore, China does not want the Federal Reserve to increase interest rates because higher U.S. interest rates would cause the USD and the Yuan to appreciate together and further hurt Chinese economic growth.

The coming months will determine if the Chinese move to further devalue the Yuan and possibly trigger a currency war, of which the impact will be felt globally on all asset classes.

Call us today for a review of your investment strategy in light of these recent developments.

1 US Census Statistics, 2,3,4 Richard Duncan, 5 US Federal Reserve

Do you have questions about your
financial strategies?

Contact our office today !

Copyright © 2015 AdvisorNet Communications Inc., under license from W.F.I. All rights reserved. This article is provided for informational purposes only and is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.

What our clients are saying...

  • We valued receiving a detailed report and explanation of our finances. When working with a financial planner, we expect to have our questions answered with adequate detail and to have a plan developed to help grow our money. Our expectations were clearly met and we would be happy to recommend Anthony to anyone looking for a Financial Plan.

  • We valued the fact that you sat down with us, heard what we wanted to say, asked for clarification and offered suggestions, and then came up with a detailed and well-reasoned plan in a short period of time and communicated that back to us so that we knew what we needed to do moving forward. Thanks!

    Our expectations for a financial planner are several fold: (1) Does the planner communicate well, in that they both listen but also offer suggestions and ideas in a clear easy-to-understand way, (2) Are they able to meet their client at the same energy/level and meet their specific needs? In our case we needed a tax minimization strategy within a short turn around time. (3) Did the planner actually do their job, in that were they able to provide ideas and suggestions that helped address the client's asks?

    We came to see you because we realised that we hadn't looked at how to minimize the taxes related to my Father’s estate planning and my mother’s future financial planning, and you were able to tell us things that we didn't know about, and offered us solutions that helped us with our future financial planning.

    You definitely met our expectations! In some ways, you actually exceeded our expectations. We were hoping that you could respond quickly, and you came up with a detailed and well-reasoned plan faster than we expected!

    Our only area of improvement we could think of was, given that the plan was very detailed, if we had an explicitly spelled out action plan with a timeline for completion.

    We are very happy and would definitely recommend you to our family and friends and in fact have already done so!

  • Anthony made the process very clear and explained each step along the way. He was very honest and straight forward. My expectation from a financial planner is that they are honest and transparent. Anthony definitely met my expectations and I would be happy to recommend him to my family and friends.

  • When working with a financial planner our expectations are to maximize our investments and have a solid plan for retirement. We now have a greater awareness of our current portfolio and options to best protect our estate. We were provided with good information to use in order to make better investment and estate planning decisions. We would gladly recommend Anthony to our family and friends.

  • We value the personal service and detailed explanations we receive from Anthony on an ongoing basis. We feel comfortable recommending Anthony to our family and friends as he is someone who we can trust and has our best interests in mind. He has been great at helping us work towards a comfortable and manageable retirement.

  • The financial planning process we went through was clearly outlined and explained to me. I wanted to have a better understanding of my financial position and to know whether I could retire early or not.

    I am happy to recommend Anthony to my family and friends.