An analysis of China’s economic slowdown and currency devaluation

1. PARAM PAREKH (L020)
MEET SHAH (L023)
RUSHABH SHAH (L024)

2. GDP GREW 6.9% IN 2015 VS 14% FROM 2001-2007, SLOWEST
EXPANSION SINCE TWO DECADES

5. •GLOBAL MANUFACTURING SLOWDOWN
•REAL ESTATE BUBBLE
•FALL IN STEEL DEMAND
•STOCK MARKET
•HUGE DEBTS

6. MANUFACTURING SLOWDOWN
•MANUFACTURING CONSTITUTES 59% OF GDP
•REDUCED DEMAND FROM EU, JAPAN, SOUTH KOREA

7. REAL ESTATE BUBBLE
•ACCOUNTS FOR 25% TO 30% OF CHINA’S GDP
•EXTREMELY LOW LOAN RATE
•LUCRATIVE DOMESTIC INVESTMENT DESTINATION FOR CHINESE
•LARGE NUMBER OF VACANT AND UNDERPERFORMING
COMMERCIAL PROPERTIES
•DEFAULTS BY OVERLEVERAGED REAL ESTATE DEVELOPERS

8. FALL IN STEEL DEMAND
•LARGEST PRODUCER OF STEEL IN THE WORLD
•DECLINE IN AUTOMOBILE AND CONSTRUCTION SECTOR

10. STOCK MARKET
•FALLS OF UP TO 8% A DAY AND LOST TRILLIONS OF POUNDS WORTH OF
VALUE.
•VARIOUS BANS ON SHARE SALES WERE PUT IN PLACE
•THE PEOPLE'S BANK OF CHINA CUT BOTH RESERVE REQUIREMENTS AND
INTEREST RATES, AND PUMPED EXTRA CASH INTO THE MARKETS AND THAT
OVERINFLATED BUBBLE BUSTED AGAIN.

12. HUGE DEBTS
•TOTAL DEBT ABOUT 250 % OF GDP
•REPAYMENT BURDEN AFTER INITIAL PHASES
•CHINA’S INVENTORY OF UNSOLD HOMES AT RECORD HIGH
•PROPERTY RATES FELL

14. DOMESTIC IMPACT
• CHINA IS NOW SUCH A BIG FORCE IN THE GLOBAL ECONOMY THAT IT WOULD INEVITABLY AFFECT THE
REST OF THE WORLD. IT IS THE SECOND LARGEST ECONOMY AND THE SECOND LARGEST IMPORTER OF
BOTH GOODS AND COMMERCIAL SERVICES.
• INCREASE IN RISKS TO OVERALL GLOBAL GROWTH:
• CHINA WOULD NOT CONFRONT ITS SLOWDOWN WITH GROWTH-SUPPORTING POLICIES;
• COMMODITY PRICES WOULD SLIDE FURTHER;
• THE US DOLLAR WOULD CONTINUE TO RISE;
• COMPANIES WOULD SUFFER FROM HIGHER DEBTS.
Commodity prices

15. •WAYS IN WHICH A CHINA SLOWDOWN WILL SUBSTANTIALLY IMPACT REGIONAL
ECONOMIC GROWTH:
•A PULLBACK IN FOREIGN DIRECT INVESTMENT
•A FADING EXPORT MARKET
•A TRIGGER OF FINANCIAL-MARKET INSTABILITY
SHIPPING COMPANIES
GLOBAL TECHNOLOGY
HEAVY MANUFACTURING
AUTOMOTIVE SECTORS
•SLOWDOWN ONE OF THE BIG DRIVERS OF MASSIVE FALL IN OIL PRICES

16. • ON COMMODITIES : FURTHER DOWNSIDE RISK ON CRUDE OIL AND COPPER PRICES.
• ON GLOBAL GROWTH: A 5% DECLINE IN CHINA’S REAL FIXED ASSET INVESTMENT GROWTH COULD LEAD TO
0.3-0.5% FALL IN WORLD OUTPUT
• ON ASEAN ECONOMIES: SUSTAINED SLOWDOWN IN CHINA WILL FEED THOUGH HIGH LEVEL OF SUPPLY
CHAIN INTEGRATION WITH ASEAN ECONOMIES. COMMODITY SUPPLIERS INDONESIA, CAMBODIA WILL
SUFFER A DOUBLE BLOW.
THE BIGGEST CONCERNS ARE FOR ASIAN ECONOMIES, AS WELL AS AUSTRALIA, BRAZIL, CANADA, CHILE AND
PERU WHICH DEPEND ON DEMAND FROM CHINA FOR VITAL COMMODITIES FOR INDUSTRY.
IN MANUFACTURING, HONG KONG, KOREA, MALAYSIA, SINGAPORE AND TAIWAN ARE AMONG THOSE MOST
EXPOSED.

18. IMPACT ON USA
•ECONOMIC SLOWDOWN IN CHINA WAS FELT BY THE AMERICAN
COMPANIES WHERE 17% OF FIRMS IN THEIR CHINA OPERATIONS THIS YEAR
BELIEVE FALLING REVENUE WAS DISCOVERED IN THE NEW SURVEY FROM
THE US-CHINA BUSINESS COUNCIL.
•ONE FIFTH OF THEM PLAN TO CUT OFF STAFFING RESOURCES

20. IMPACT ON UAE
•CHINA’S ECONOMIC SLOWDOWN WON’T HAVE ANY NEGATIVE EFFECT ON
UAE IN THEIR JOINT VENTURES IN INDUSTRIAL AND ENERGY SECTORS.
•CHINA- MIDDLE EAST TRADE INCREASED MAJORLY DUE TO DEMAND OF OIL
FROM UAE.
•NO NEGATIVE EFFECT ON UAE AS SUCH ARE FOR LONG TERMS

21. IMPACT ON AFRICA
•IN THE FIRST HALF OF THE YEAR, CHINESE INVESTMENT IN AFRICA SINKED 84 %.
• AFRICA WILL FACE LOT OF PROBLEMS IN DEVELOPING AS CHINA IS ITS SINGLE LARGEST
TRADING PARTNER AND ALSO INVESTS A LOT IN IT.
• AFRICA IS CHINA’S SOURCE FOR FUEL.
• AFRICA’S SHORT- AND LONG-TERM OUTLOOKS ARE NOT STABLE AND ARE LIKELY TO
COLLAPSE DUE TO CHINA’S SLOWDOWN.
•CHINA NOW WON’T REQUIRE NEARLY MORE FUEL, OIL, GAS, COPPER, IRON ORE AND
OTHER RESOURCES THAT THAN BEFORE DUE TO ITS LESS GROWTH.

22. IMPACT ON INDIA
POSITIVE EFFECTS :-
•CHEAPER COMMODITY PRICES
•CHEAP COMMODITY PRICES LEADING TO CHEAPER IMPORTS
•LOWER INPUT COSTS & HIGHER PROFIT MARGINS
•AN ATTRACTIVE ALTERNATIVE TO CHINA
•CHINESE INVESTMENT IN INFRASTRUCTURE IN INDIA($60 BN)

23. NEGATIVE EFFECTS :-
•CHINESE DEMAND HAS DECREASED
•INDIA’S EXPORT TO CHINA HAS DECREASED (14.8 TO 11.9)
•CHEAP CHINESE PRODUCTS COMPETING WITH THE DOMESTIC
INDUSTRIES OF INDIA

25. •CENTRAL BANK REIGNITED FEAR OF A CURRENCY WAR IN JANUARY BY
CUTTING THE YUAN’S REFERENCE RATE FOR EIGHT DAYS IN A ROW
•IN 1994 EXCHANGE RATE REGIME WAS FIXED ( PEGGED) AND
DEVALUATION WAS DONE BY 2%
•IN 2005 END OF FIXED EXCHANGE RATE ( PEGGED) AND INTRODUCE
FLOATING EXCHANGE RATE ( MANAGED EXCHANGE RATE).
•AND CURRENTLY DEVALUATION IS DONE BY 1.9% ( 11TH AUG 2015).

26. WHY DID CHINA DO IT?
•IN ITS STATEMENT, THE PBOC SAID IT WANTS TO BRING THE YUAN
MORE IN
•LINE WITH THE MARKET. BUT THE MOVE ALSO COMES AS CHINA’S
•IMPORTANT EXPORT SECTOR HAS WEAKENED. A WEAKER
CURRENCY HELPS
•CHINA’S EXPORTERS SELL THEIR GOODS ABROAD.

27. WHAT DOES THIS MEAN
FOR THE REST OF THE WORLD?
•THE MOST IMMEDIATE EFFECT IS THAT IT SIGNALS TO THE WORLD
THAT BEIJING THINKS THE CHINESE ECONOMY IS SPUTTERING.
•IN THE U.S., IT WILL LIKELY REIGNITE CRITICISM THAT BEIJING
KEEPS THE CURRENCY ARTIFICIALLY LOW TO HELP ITS OWN
MANUFACTURERS.

28. WHAT DOES THIS
MEAN FOR MARKETS?
•THE MOVE PUTS PRESSURE ON OTHER CENTRAL BANKS AROUND
THE WORLD TO PUSH DOWN THEIR OWN CURRENCIES TO HELP
THEIR OWN EXPORTERS AND TO PREVENT DESTABILIZING
CAPITAL FLOWS.

29. •CHINA SUFFERED ALMOST $700 BILLION WORTH OF CAPITAL
FLIGHT IN 2015
•IN JULY, FOREIGN RESERVES FELL TO $3.20 TRILLION, OFF A PEAK
OF $3.99 TRILLION IN JUNE 2014
•VOLATILITY HAS ALSO EBBED SOMEWHAT

31. •SINCE THEN, THE WEAKER YUAN HASN'T STOKED INFLATION AND ANY
GAINS IN EXPORT COMPETITIVENESS WERE SMALL COMPARED WITH
OTHER EMERGING MARKET CURRENCIES
•Q2 2016 GDP GROWTH AT 6.7%
•STILL, MARKET INTERVENTION AND PERSISTENT WEAKNESS IN THE YUAN
HAVE UNDERMINED THE GOVERNMENT’S EFFORTS TO EXPAND ITS GLOBAL
USE. THE CHINESE CURRENCY ACCOUNTED FOR 1.72 PERCENT OF
TRANSACTIONS IN JUNE, THE SMALLEST PORTION SINCE OCTOBER 2014