The market selloff that occurred in late September 2021 was triggered by an impending default of a Chinese real estate giant. How is it that an event in one country was able to trigger such a massive collapse in global stock markets and other risk-associated assets? This article examines China’s impact on the financial markets and why traders need to pay close attention to this nation as they conduct their trades.
China has built itself into a global political, economic and military powerhouse in the space of 40 years. When Mao Tse-Tung died in 1976, China was one of the poorest countries in the world. Deng Xiaoping took over and pushed the "to get rich is glorious" slogan into the national psyche. Xiaoping has been dead for two decades now, but the transformation he started put China on the path to becoming the following:
China's massive industrial base has not only made it the biggest destination market for commodities in the world, but it has also driven some of the largest real estate developments in the world. Indeed, real estate developments make up 30% of China's GDP contribution.
China is also a significant player in the supply chain of the pharmaceutical industry. China's population of 1.5 billion people also constitutes the world's single greatest market contained in a geographical border. China is the number 1 creditor to the United States, as it holds $1.3trillion worth of US Treasury bills. China also owns hundreds of thousands of acres of arable farmland in the US. It is impossible to ignore China's economic imprint in Africa and Latin America.
The country's engineering companies and development banks are bringing the capital and expertise to reconstruct the crumbling infrastructure and new projects in these 3rd world nations.
These factors have made China the epicentre of the global economy, and this is why anytime China sneezes, the whole world catches a cold. Here are instances where the global financial markets have felt the pinch anytime there are economic and political actions out of China.
Here are some instances of where events in China played a role in the downturn of global financial markets.
In 2015, the Chinese stock exchange entered a steep correction after a two-year bullish run. On a particular August morning in that year, the Shanghai stock exchange lost a tenth of its value in one trading session. This move sent jitters around the world’s financial markets and caused a monumental collapse in global stock markets around the world. Commodities associated with risk-on sentiment such as crude oil and copper also took a massive hit.
In the same month, manufacturing PMI data out of China dropped steeply, putting the country in danger of missing its GDP target of 7%. The contraction of manufacturing activity in China is bad for industrial commodities such as copper. Chile, Peru, Australia, and Zambia depend a lot on copper for their foreign exchange revenue. The Australian Dollar took a hit from the news, as did copper prices.
Between August 11 and August 13, 2015, the Peoples Bank of China decided to respond to the situation by weakening the Chinese Yuan to make Chinese exports attractive. Global stock markets plunged further as a result.
How did these events of August 2015 affect the financial markets?
The Dow Jones had its worst-performing day in 2015, falling nearly 600 points. The Indian bourse experienced its worst fall in seven years to that point, and stock markets in Europe fell nearly 5%.
Emerging market economies that are heavily dependent on Chinese patronage of their commodities saw various hits to their currencies. Currencies such as the South African Rand, Turkish Lira, Kazakh Tenge, Malaysian Ringgit, Brazilian Real and Nigerian Naira fell steeply as commodity prices fell.
Crude oil and copper prices fell steeply as Chinese patronage fell in 2015.
COVID-19's first cases came out of China, forcing the country to adopt some of the most draconian restrictions on movement and gatherings. Factories and transportation hubs were closed, and economic activity in many provinces was shut down. These restrictions triggered possibly the most significant upheaval in the financial markets ever known to man. Crude oil and copper prices collapsed, and gold shot to all-time highs. Entire stock markets fell in proportions that exceeded the 2008 global financial crisis or the 1929 market crash.
Recovery in copper prices and crude oil in 2021 are almost directly due to the recovery of Chinese demand as the country gets a hold of its local pandemic situation. This situation is still evolving as COVID-19 gets entrenched in the human population.
The Evergrande Group is China's second-largest property development firm, with extensive housing development projects all over China. The company also has interests in several other areas such as healthcare, tourism, sports and entertainment.
The company took on a lot of debt, including corporate bonds, to finance these developments. However, the company is now riddled with lots of debt; about $300 billion. As of the end of September, it was no longer able to meet its debt obligations. Fears of a systemic collapse if the company were to fail, seized the financial markets, leading to massive selloffs in global markets. The Nasdaq 100 index and S&P 500 index are home to several Chinese and foreign firms with significant operations in China. Evergrande’s debt crisis triggered a massive selloff on these exchanges for three days straight. As of writing this piece, the debt crisis continues to hang over the markets like a dark cloud.
The discussion cannot be complete without mentioning the impact that China has had on the cryptocurrency market. Most of the world's crypto mining rigs and the biggest mining farms are in China. There was a significant trading population in China, until 2017 when the government decided to reign in crypto trading.
In September 2017, China implemented its first crackdowns on the cryptocurrency market, prohibiting the trading of Bitcoin in its territory. Bitcoin lost half of its value at the time, falling from just above $7000 to about $4000 in two days.
Fast forward to May 2021. The cryptocurrency market was in full bloom as investment money poured into it from other markets that the COVID-19 fallout had dampened. Bitcoin saw a huge jump to test all-time highs above $62,000. Then came extensive crackdowns from China on cryptocurrencies, banning crypto transactions, Bitcoin mining and almost everything that had to do with the entire crypto value chain. These actions triggered a massive slump in cryptos, causing Bitcoin to crash to $29,000, half of its May 2021 value.
China remains an important determinant of crypto prices via their actions in limiting cryptocurrency trading, mining and transactions. There is evidence to show that several other countries are copying the Chinese model.
China's position as the epicentre of the global economy in a globalized world has made it a central focus for a fundamental impact on the financial markets. The influence of China on the world's financial markets will only continue to expand in the coming years. This is why all traders in the financial markets must observe events out of China to successfully trade its financial market footprint.