The news echoed with the shocking headlines: The Dow was down a thousand points at the opening bell on Monday, August 24, oil was trading under $40 a barrel, and China, the supposedly invincible economic powerhouse, was experiencing a sharp economic slowdown.

The attention towards China’s weakening economy began with the Chinese government’s devaluation of its currency, the renminbi, in early August. From August 11 to 12, the People’s Bank of China shocked the markets by implementing a 3.5% devaluation of the renminbi against the dollar, making it the largest two-day decline of the renminbi in twenty years. The currency’s losses mounted the next day.

“The Chinese economy has gotten progressively worse,” Catherine Wang ‘19 bluntly states. “I mean, they devalued their currency by 2%.”

At the time, many speculators, including presidential candidate Donald Trump, were saying that the Communist Party’s move was another attempt to try to lower the cost of sending exports and help China’s already robust manufacturing industry. The People’s Bank of China has responded to those claims by explaining that the policy change was made in response to troubling market performance.

As it turns out, the People’s Bank of China may be telling the truth. China’s stock indexes have fallen even more than the American ones: The SSE composite index fell by nearly 25% since China devalued its currency just weeks ago and has fallen almost 40% since June 8,  making the current situation the worst stock market drop China has experienced since 2008.

What could be driving this collapse, other than the currency devaluation? One reason may be the changing demographics of China. While China industrializes, its population ages and becomes less productive. In fact, China’s working age population peaked in 2012. Moreover, China’s technological superiority over more developed countries is smaller than before, which means its productivity growth will become lower as well.

Furthermore, while the American real estate sector is blossoming, China’s inventory of unsold homes sits at a record high. China’s real estate sector, which accounted for 15% of economic growth in 2013, faces dire straits. New property starting prices fell by 20% in the first two months of 2015 when compared to prices in the first two months of 2014.

The impacts of China’s economic woes have translated into many problems for the rest of the world. China, having overtaken the United States as the world’s largest oil consumer, is now partly responsible for the decline in oil prices. A sluggish Chinese economy means less demand for crude oil, which is hurting oil exporters, oil companies, and major worldwide stock markets. The Dow Jones Industrial Average, for example, has decreased by 11% in the latter half of August.

Julien Wadwa ’18 expresses the grim nature of the current United States economy as he states, “Due to the recent developments in China, the impact is felt on the U.S. stock market, which is doing increasingly worst ever since the turmoil in China started.” Chinese imports have fallen as a result of a slower, less intense economy. The Guardian reported that Chinese imports have also fallen 14.6% over 2015, which has hurt many countries exporting goods to China. Already, this reduction in imports has cost Australia 1.7% of its GDP (25 billion dollars), Korea 1% of its GDP, and New Zealand 1.9% of its GDP.

Some economists see this slowdown as a ‘correction’ due to China’s overly-intense growth rates before. While the threats to China’s economy are taking their toll, it is far from a meltdown, as China’s projected growth rate is still 7% for this year. But perhaps this slowdown indicates that China’s best days are indeed behind her.

References

http://www.theguardian.com/world/ng-interactive/2015/aug/26/china-economic-slowdown-world-imports

http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-8]

http://www.essaysabout.com

http://www.cnn.com/2015/08/12/china/china-currency-explainer/

http://money.cnn.com/data/markets/dow/

http://money.cnn.com/2014/07/14/news/economy/china-property-risk/

http://finance.yahoo.com/q?s=000001.SS