China’s Recent Struggles and Proposed Strategies Moving Forward

Written by Bradley Adams, GEI Associate

On January 7th China’s renminbi devalued 0.5% to 6.5646 per dollar, the lowest it’s been valued against the US currency since March 2011. Following this news, the Shanghai Composite dropped 7% in a matter of 30 minutes before officials shut down the market prematurely. Paired with the recent announcement of China’s 6.9% GDP growth, their slowest in 25 years, questions have been raised over the country’s stability and potential moving forward.

Worries over China’s growing debt, changing demographic structure, and weakening ability to effectively use government policies have pushed many economists and Chinese officials to project tougher years ahead. Furthermore, the total capital outflows for the year 2015 have been estimated at as much as $1 trillion, according to Bloomberg, which is only hurting investor confidence more. Many are still skeptical of the reliability of China’s growth figures and these findings have only strengthened worries. Dropping oil prices and shaky commodity markets have contributed to a plunging Shanghai Composite, which YTD has erased all gains and ended lower by 444.667 points.

Chinese officials hope to ease credit to consumers moving forward and propel this sector of the economy, though they face a balancing act of not putting too much downward pressure on the yuan. Much of the worry rests on the amount of money leaving the country in search of safer investments, though Chinese officials are considering lowering the reserve requirement ratio to encourage more lending at home, namely through a higher level of consumption by consumers. Exporters have also began holding their earnings in USD, as opposed to converting them into yuan, which has fed into the fear held about the country’s future potential. The biggest concern of investors has been the lack of communication of the People’s Bank policies, as well as confidence in their ability to uphold the currency.