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Will the U.S. and China Go Head to Head?

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Will the U.S. and China Go Head to Head?

Will the U.S. and China Go Head to Head?

Aug 28 2015, 09.14am GMT

STOCK.com

One of the questions facing officialdom and investors alike is the motivation behind the recent devaluation of the Chinese yuan in a move which unleashed unprecedented turmoil on markets in China before spreading to global markets.

Stock markets in China have dropped sharply over the last few weeks, despite measures by the central bank and other government agencies to calm investors and retain global confidence in the country’s perceptibly slowing economy.

Chinese stocks surged by 150% over the twelve month period to mid-June, fuelled by investors climbing into a rising market, using borrowed money to do so. Repeated warnings that the shares were overvalued in the face of a slowing economy were ignored and something had to break and shares started dropping.

The shock move by China to devalue its currency earlier this month, with the intended effect of stabilizing the markets, backfired and culminated in what has become known as “Black Monday” as markets in China crashed and have since given up all their gains for the year.

Additional measures taken subsequently to ease the lending restrictions on Chinese banks and pumping 140 billion yuan into the financial system seem to be having little effect on the markets in China. The Shanghai Composite Index lost 8.5% on Black Monday, its biggest one day loss since February 2007.

The other major global economy is that of the United States where economists and officialdom are watching developments in China with a wary and skeptic eye. The impact of Chinese attempts to influence and possibly even manipulate the markets is seen by many as a direct assault on the U.S. where the import of Chinese goods exceeds that of any other source. Imports from China for 2014 totaled $466,754 million, almost 20% of the total of all U.S imports, while exports to China account accounted for only 7.6% of U.S. exports.

This is where the multiple, even though it might be unintended, threat lies from the yuan devaluation. The U.S. fears an increase in imports from China as the goods become cheaper while at the same time lowering inflation, which the Federal Reserve wants to see at around the 2% level before hiking interest rates.

The United States and the International Monetary Fund have repeatedly said the yuan is undervalued, and this was before the recent devaluation which makes the situation even worse.

Central banker Zhang Xiaohui said that the “temporary loosening of liquidity” had put pressure on the currency but that “there's no foundation for the yuan’s devaluation to last.”

The comment was made that while Beijing struggles to sort out its problem, the U.S. government must be on guard so that the Chinese influenza doesn’t turn into an American pneumonia.

The other concern facing business in the United States is that government subsidies have repeatedly made it possible for Chinese manufacturers to undercut the local opposition, costing jobs in the U.S., with the tire industry in particular making accusations against China in this regard.

The difference between the Chinese government approach, which is one of government intervention at all levels of economic activity which has been ineffective, and the proven U.S. approach, which allows market forces to run their own course without interference, can be the deciding factor in the long run.

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