On January 21 2019, China announced that its economy in 2018 grew at the slowest rate in 28 years. This news is concerning, but understandable. The US Stock Market turned negative over the concern of China’s slowing economic growth. In this blog post, I will talk about what is going on with China, and how this could affect your investing strategy?
China is the world’s biggest manufacturer and exporter. So, if China’s economy is slowing down, what does that mean? Does it mean that demand for goods across the world is slowing down? Maybe. According to China Labour Bulletin, over the past decade, the minimum wage has risen steadily, and the cost of living is constantly increasing. Due to this, the cost of producing goods has gone up. In other words, China has essentially lost its “competitive advantage” to produce cheap products. Additionally, with the recent US trade war, companies are hesitant to have manufacturing in China. The manufacturing is slowly moving to Southeast Asia i.e. countries like Vietnam, Bangladesh, and the Philippines. So, if you are looking for places to invest your money, emerging countries in Southeast Asia have tremendous growth potential.
What does China’s slowdown mean for the US Economy? With the slowdown, people in China (1.38 billion) are less likely going to spend their money. The mentality during slowdowns is to save as much as you can, and spend as little as you can. So, if you own any US stocks that have international (China) exposure, then expect the earnings of those companies to decrease. Consistently decreasing earnings could potentially lead to layoffs in those US companies. As unemployments starts increasing in US, individuals start saving more and spending less. This leads to a slowdown in the US Economy, which could lead to a recession in the US.
You might be wondering, can’t China just devalue its currency again and make their products cheaper? Well, they could, but will it really help China? The more they devalue their currency, the pricier imports to China get. Let me illustrate what I said. Assume that 1 USD = 5 Chinese Yuan. When China imports a $500 Iphone at that rate, it will cost the end user 2500 Chinese Yuan. Now, China has decided to devalue its currency, which would make the new exchange rate 1 USD = 7 Chinese Yuan. That $500 Iphone is going to cost the end user 3500 Chinese Yuan. These increased prices would be seen on all the imports ranging from crude oil to integrated circuits. This increase in prices causes inflation, which leads to wage growth. With the increasing wage growth, labor costs go up, and Chinese exports would lose its competitive advantage. So, if China devalues its currency, it might be a temporary fix since inflation and wage growth would eventually catch back up.
Hope you learned a little and found this blog post helpful. We talked about China’s slowing growth and what this could mean for the United States. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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