Collapse on the Chinese exchange

18 January 2016

Collapse on the Chinese exchangeDear clients,

In July 2015 there was a drop in prices of securities on the Chinese exchange. It was caused by unsustainable character of China's economic growth - the so-called "overheating of the economy". Since November 2014 to June 2015 stocks index on the Chinese exchange grew more than twice: the Shanghai Composite Index of Shanghai Stock Exchange rose from 2506.86 to 5045.69.

What are the consequences for the Chinese economy, as well as for the world economy?

Economic instability in China will have a negative impact on the global economy in general. In terms of nominal GDP, China is ranked the second economy in the world and it is one of the main trading partners of the G-20 countries. China is the world's second largest importer of the "black gold", and reduction of manufacturing activity will force companies to reduce the amount of imported oil.

Will it lead to weakening of the Yuan?

In our opinion, the People's Bank of China (the PBC) has no other choice but to undertake a smooth devaluation of the national currency. Since this measure will enhance competitiveness of its products abroad, and finally cause a strong growth of exports, which will have a positive impact on economic growth.

How long can the new regime for currency exchange last?

Now it is quite difficult to answer this question, as the Chinese financial authorities are not fully ready for the current financial turmoil. In the first week of January, we saw that PBC lowered the official exchange rate of the yuan twice, and then only once raised the rate. These actions indicate a lack of competent management plan for the financial system.

Good luck in trading!
FreshForex - fresh view on money

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