How will China’s stock plunge affect the global economy?

China’s much-publicised stock plunge, which can largely be attributed to a struggling commodities market, has had serious implications for the world economy. So what exactly is going on, and are things likely to get better for investors in 2016?

What’s happening to China’s stock market?

The growth of the world’s second-largest economy has slowed down in recent months – China’s ‘real’ year-on-year economic growth may be as low as 3%, rather than the official figure of 7%. As a result, investors are looking for more security and many are turning to gold as a “safe-haven” investment – prices of gold have now exceeded $1,100 an ounce.

Slower growth rates and the continued depreciation of the renminbi has, inevitably, rocked Chinese stock markets. Recently, the Chinese government was forced to act by buying shares itself, and by introducing a ‘circuit-breaking’ trading halt, which went some way towards preventing panic share selling.

What are the global implications?

Unsurprisingly, sell-offs in China have sparked concern on the international markets. The Dow Jones, for example, has suffered its worst new-year period for eight years, while Germany’s DAX Index fell by 4.3%. The Topix index in Japan, meanwhile, experienced a 2.4% slump, while New Zealand’s S&P/NZX 50 Index declined by 1.4%.

When markets fluctuate like this, currency values, and, indeed, international money transfers, are impacted. In particular, Australia and New Zealand’s respective dollars have been particularly affected, primarily because of their close ties with Chinese trade. The Japanese yen and US dollar, by contrast, have made considerable gains as investors seek a refuge investment option.

What’s likely to happen next?

Fortunately, economic stimulation initiatives in China seem to be having the desired effect. Local governments are investing more, particularly in infrastructure, due to an ease in financial constraints. Considering the extent to which the health of China’s economy affects global markets – and, in turn, currency values – this is potentially good news.

If you’re worried about future exchange rate fluctuations, The Money Cloud’s trusted group of brokers can use tools such as forward contracts, to provide stability and the best rates for your international money transfers.

Keep up to date with the latest market insights on The Money Cloud.

 

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Martin Ham

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