The Impact of China
Written by: Ryan Bouchey
The two leading sources of the markets bad fortunes of late are the Federal Reserve and China. We’ve discussed in great detail our perspective regarding the Fed – essentially that uncertainty is rattling the markets and when the Fed does decide to raise rates it should help the stock market. We haven’t spent as much time discussing China, but let’s quickly touch upon some reasons why the fear of a Chinese meltdown is a little overblown and shouldn’t affect the U.S. stock market to the extent that it has.
The slowdown in China should certainly raise concerns, but not to the extent of causing a correction in our own markets. When you think back to China devaluing their currency, yes it was a sign that their economy wasn’t growing as they had hoped and the government was looking for a way to boost output, but it must also be discussed that this isn’t a death sentence to U.S. manufacturing and output. The Chinese Yuan started off devalued by only a few percentage points and it caused massive losses to the U.S. stock market. Over that same time frame, the Japanese yen was down over 17% and the Euro was down over 16% – two countries/regions that are larger trading partners. At the end of the day the devaluation of the Chinese yuan shouldn’t be of major concern.
It’s not a great thing to see the slowdown in the Chinese economy, however their slow economy is still growing at a rate of 4-6% per year, well above our average of 2% since the great recession. A couple of things to keep in mind regarding China’s GDP. For one, exports of U.S. goods to China represent 0.7% of our GDP. A slowdown in China will do very little to affect the U.S. economy. Secondly, the slowdown in China can partially be attributed to a maturing consumer-driven economy, which long-term may strengthen their overall economy. In the past, their growth was attributed to industrial output and an economy driven by exports. Now it’s relying more on consumption-led growth which is a good thing and indicates a more developed economy. This type of economic growth will never be able to maintain the double digit growth we were used to seeing in China and that’s okay.
As stated above, there is certainly reason for concern with the recent news from China. But there is a big difference between being concerned and overreacting and thus far the markets seem to be overreacting. We live in an ever shrinking world due to advances in technology, but keep in mind when you hear any further negative news out of China just what it really means to U.S. companies and their stock value. More times than not, it shouldn’t be a huge concern.