Losing the Economy or Losing Face?

The Chinese stock market has been on a slump in recent times as tensions regarding growth keep investors away from betting on the economy. (Image:  
Robert Scoble via  flickr  CC BY 2.0 )
The Chinese stock market has been on a slump in recent times as tensions regarding growth keep investors away from betting on the economy. (Image: Robert Scoble via flickr CC BY 2.0 )

The Chinese stock market has been on a slump in recent times as tensions regarding growth keep investors away from betting on the economy. Experts predict that the situation could get worse if Beijing does not end the trade war with the U.S. and bring the economy back on track.

Stock markets in trouble

Hong Kong’s Hang Seng Index lost around 10.8 percent in October, the sixth consecutive month the index has been on a decline. The entire Asian region has also been affected by the uncertainty created by the U.S.-China trade war. The MSCI Asia Pacific index (The index measures the performance of stock markets in 15 Pacific region countries.) has declined by over 20 percent from its yearly high set on January 29, 2018, officially signaling a bear market.

Market volatility, as indicated by the Vix Index, has risen quite sharply, showing that investors are afraid and uncertain about the safety of their investments. “We haven’t thought that selling would be this steep. This sell-off makes us think the market may be set for capitulation,” Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center, said to The Guardian.

Meanwhile, Chinese officials recently told a group of U.S. investors that China is not afraid of the trade war. While this shows that Beijing is still looking at the situation as some kind of a prestige issue, the fact of the matter is that the U.S. only wants China to accept fair trading policies.  

Market volatility, as indicated by the Vix Index, has risen quite sharply, showing that investors are afraid and uncertain about the safety of their investments. (Image: pixabay / CC0 1.0)

“The goal of United States trade actions is not to harm China’s economy or start a trade war, but to get China to follow through on allowing fair competition and stop their unfair trade practices that have been hurting the American workers for years,” White House Deputy Press Secretary Lindsay Walters said to CNBC.

Declining manufacturing

China’s Purchasing Managers Index (PMI) for October was registered at just 50.2, down from 50.8 in the previous month. This is the lowest PMI level in more than two years. Considering that a figure below 50 indicates contraction, it is clear that the Chinese manufacturing sector is definitely facing some tough times.

“All the numbers from China’s PMI release today confirm a broad-based decline in economic activity… Besides an expected reserve requirement ratio (RRR) cut next January, we expect future supportive policy actions to be measured. The government’s priority is to avoid a financial blow-up,” said Raymond Yeung, chief economist for China at ANZ (The Economic Times)

Adding to the worries, China’s New Export Orders, which indicate future activity, have declined for the fifth consecutive month. This does not bode well for economic growth over the coming months. As per various reports, over 70 percent of U.S. businesses located in southern China are delaying their investments.

Adding to the worries, China’s New Export Orders, which indicates future activity, has declined for the fifth consecutive month. (Image: Frans Berkelaar via flickr CC BY 2.0 )

Adding to the worries, China’s New Export Orders, which indicate future activity, have declined for the fifth consecutive month. (Image: Frans Berkelaar via flickr CC BY 2.0 )

The longer the trade war continues, the more the Chinese exporters’ profits will be squeezed because of America’s import tariffs. This will only encourage them to move operations out from China. In fact, some manufacturers are reportedly shifting their production plants to countries like Vietnam, Indonesia, and Thailand so as to avoid paying the tariffs.

While the Chinese government has tried to stimulate the economy through investments in infrastructure projects and other measures, they have only had minimal success. This is because Beijing is not addressing the root issue of its declining economy — investors do not trust that the Chinese economy can grow given the U.S. sanctions. And the only way the Communist Party can resolve it is by playing fair.

Follow us on Twitter or subscribe to our weekly email

Xi Jinping Asks Chinese Military to Be War-Ready
China Trying to Influence the World Through Confucius Institutes
#article-ad-block-->