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CHINA CONCERN RESURFACES

Event: Latest Chinese manufacturing & services report that came at the end of the year 2015
resurfaced the China slowdown fear.
The Caixin General China Manufacturing PMI (Purchasing Managers Index), an indicator of
manufacturing activity, edged down to 48.2 in Dec from 48.6 in November. The reading is lowest
since Sept, acc to survey conducted by financial information service provider Markit & sponsored
by Caixin Media Co Ltd. Operating condition faced by Chinese goods producers continued to
deteriorate in December. Production declined for seventh time in past eight months, driven in
part by further fall in total new work, the survey showed. Data suggested that client demand was
weak both at home & abroad, with new export business falling for the first time in December.
Also the Caixin-Markit services PMI gauge fell to 50.2 from 51.2 in November, the lowest level
seen since July 2014. (About the reading: A reading above 50 indicates expansion while below 50
represents contraction.)
Why does world stock market & media seem to react to every new data point about Chinas
economy?? Why is China Important For Global Economy??
China has quickly become the second-largest economy in the world. It accounts for 10%
of the worlds imports. Demand for imports comes from China, and if the Chinese
economy is slowing down, then it means big trouble for countries that are exporting
heavily to China.s
China contributes almost half of the global growth in 2013, i.e it is 50% of worlds GDP.
This is much more than the United States which is 29% of worlds GDP. So, a slowdown in
China will negatively impact economies to China.
Resource-hungry China has an outsized influence on most commodities markets. China
affects the commodities markets, including crude oil and gold. China comes among the
top 5 oil consuming economies in the world. China consumes 10.3 million barrels of crude
oil per day. The US consumes 18.5 million barrels a day. Though the US still consumes
almost twice as much crude oil as China but Chinese demand for oil is pivotal. As the

number of vehicles has skyrocketed in China, so has the demand for oil in the country.
Thus China slowdown has impacted the crude oil prices adversely which is currently at 11
year low. The collapse in the commodity prices which has sent a chill down the spine of
commodity investors a huge drop of up to 40% in a year. That drop has come about
because of China slowing down. For example, China was responsible for half of the
demand for metal.
China is the largest foreign holder of US Treasuries. Chinas central bank is a major
purchaser of US Treasuries, mainly because of its exchange-rate policy. The Chinese
renminbi (currency of Chian) was pegged to the US dollar to protect the currency from
appreciation, which would make Chinese exports unattractive. And china is primarily an
export driven economy Concept: Pegging: A method of stabilizing a country's currency by
fixing its exchange rate to that of another country.
Now, since the US runs a budget deficit, it needs a way to finance it. It does this by issuing
lots of Treasury bonds.
Concept: Treasury bonds are interest bearing bonds issued by US Treasury.
All else being equal, buying US Treasuries increases the demand for them, which reduces
their yields (return). This results in a general decrease in interest rates in the US. So if
China were to stop buying, or start selling these bonds, it would result in higher Treasury
yields. For example, if China decided to inject a monetary stimulus to its slowing economy,
it could sell some of the US Treasuries it holds to finance the stimulus.If China decides to
sell the Treasuries all at once, Treasury yields could spike due to sudden, excessive
supply. The increase to interest rates in the US could cause volatility all over the world
China Is The Largest Market For Many Goods In The World: China is now the largest
market in the world for cars, computers, mobile phones and countless other products.
Wine sales in China, for instance, have more than tripled in just five years. China is also
the largest Car market in the world. It produces nearly 14.5 million cars. So approx one
out of every four cars made comes from China. Major car producing firms such as Toyota
have set up many plants in China. To some extent, these companies are dependent on
the well-being of China. And, China isnt just a major car market. Its also a leader in
computers and mobile phones, as well as other electronics. Tech companies in the US rely
on steady growth in China. Apple for eg, sells many of its iPhones in China. Many
other multinational companies from different parts of the world are partly dependent on
stable growth in China.

So the impact of slowdown in China will be felt across all major economies in the world as all
are highly interdependent.

Impact on India: The China slowdown has not had a major negative effect on India as Indias
export to China is small i.e ~4%. But still China slowdown is a mixed bag for India and not entirely
positive. Because if the global economy slows down further as the results of Chinese economic
restructuring, it would be difficult to see why a sluggish world economy would help the Indian
economy
Good for India as
a consumer of
commodites

Good for Indias

deficit and
inflation
management
Bad for
automobile
manufacturer

Hard commodities like aluminum, zinc and other metals have been hit in
expectation of a Chinese slowdown. For India as a consumer, this is good news
as the cost of constructing new infrastructure, will come down. For producers of
these metals, low prices are bad, especially so because China has resorted to
aggressive selling to clear its inventory and raise cash during adversity.
Oil prices were already taking a beating, with global slowdown and a possible
US-Iran deal, China only nudged the prices lower. For India, low oil prices helps
in controlling its deficit and keeps inflation under check.
Automobile exporters and manufacturers, especially Tata Motors will feel the
pinch as China was its fastest growing market, especially for JLR, and the
company was investing in the market to drive future growth. But auto-ancillary
suppliers will be hit as China consumption falls

Now with China devaluing its currency to push growth, world markets will be flooded with
Chinese goods at low prices affecting exports of other countries including India.