As we all know (or at least the ones of us who get time to read a newspaper or see the news once a while), China is currently going through an economic crisis. In the last three days, the country’s stock market has crashed and they have lost three trillion yuan.
Now the stock market crash makes no sense to those who aren’t in the business world, so there is a simple way of explaining it-
The amount which your company is worth in the market- whoosh. free fall. kaboom.
Now why this happens is still a mystery to majority of investors, but let’s get back to China.
You may have read- China has devalued it’s currency.
So what does that mean?
Well if you get into technicalities, China’s Yuan against the US Dollar is weaker. Therefore, the exchange value is lower. Why on earth would you do that when you have an economic crisis and you want more money?
In simple words, China’s products will now be for lower prices around the globe, because their currency has become cheaper. Therefore, since we all love good stuff at cheap prices, we will buy more of them. Therefore, their economy gets a small boost. People will invest in domestic stocks, and more pressure will be given on exports.
Unfortunately, this still means that in the long term, China will take a longer time to recover their earlier exchange rate before the crash.
Now what else has China done to combat this particular crisis?
A. There were restrictions on how much investors could borrow to invest in stocks, but those numbers have now been relaxed, to encourage people to invest in the existing companies.
B. New companies cannot give out shares– they want the public to rather invest in existing companies rather than take a chance on new infant companies.
C. Trading has been suspended for thousands of struggling firms around the country.
China’s growth was much more than predicted, but will it fall on the same scale?
But on the brighter side, only 15% of the country’s household assets are invested in stocks. Meaning, only 15% of their population has invested in the stock market. They still have a high national savings percentage, and by offering attractive interest rates they can keep their economy secure.
So what it essentially has affected, is China’s economic growth. It is still the second largest growing economy, but the country’s next steps will show if they can still maintain the position.