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...

  • When working with a financial planner, my expectation is to work with someone who is responsive to changes and who can devise a path forward as we age for the benefit of ourselves and our children. I valued the depth of detail and explanation along with the disclosure of all the variables at play. I would certainly recommend Anthony to my family and friends!

  • I was looking for a financial planner who could provide clarity and show me the best possible way to structure and plan for my retirement. Anthony’s expertise was clearly evident. He is professional, punctual, and answered all my questions and concerns. I would definitely recommend Anthony to my family and friends.

  • We expect a Financial planner to be thorough, detailed and have a strong understanding of their clients' needs. It was a pleasure working with Anthony and his team. He delivered a tremendous package and reviewed his findings in great detail. Anthony's attention to detail, solutions, recommendations and in-depth reports provides a great deal of confidence in his recommendations. We would absolutely refer our family, friends and associates to Anthony.

  • I expect my financial planner to review and discuss my financial goals along with how my goals can be achieved. I valued Anthony reviewing my investments and the projections of what they will equate to when I reach my eventual retirement. Anthony has certainly met my expectations and I would be happy to refer my family and friends.

  • My expectation was to be provided with the best possible advice specific to my situation (as it evolves) and to be provided with objective, evidence-based solutions which will provide me with the maximum financial benefit (and peace of mind). I valued the very thorough process of gathering all pertinent information regarding my estate, pension, income and expenses in order to produce a very detailed and fulsome projection of my current and future financial situation. I really appreciate the time Anthony has taken to answer all of my questions and provide sound advice based on my goals and concerns. I am really looking forward to continuing my investment and financial planning journey with Anthony. I would certainly recommend Anthony to my family and friends!

  • 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.