BANGALORE: Battered stock and currency markets are dragging the second largest economy of the world into deep pessimism. The slower growth in the country’s economy has led to the decelerating graph. The devaluation of the currency since last few months has witnessed disastrous days for the Chinese stocks.
Analysts are of the view that the bubble of Chinese economy is about to burst which was witnessed on January 7 where the stocks skidded so much that Shanghai exchange came to a halt. This instance made way for a volatile market in Asia. The skeptic government and looming economic challenges faced by the nation has pulled it to a dark phase.
The scenario is worsening as Beijing is working to undo some of the measures that were taken to boost the stocks after they had plunged in June last year.
However, there is more to it. Here is what China watchers say are the real reasons for the gloom in their economy, reports ET.
The Devaluation of Currency
The global economy was taken aback when the government of China pushed the Yuan by 2 pct. Probably, in the view to help their exporters, China pushed the value down for economic prospects. The government wanted to make Chinese products more affordable in markets abroad. This led to drop in the value of Yuan in comparison to the U.S. dollar. By October, the Chinese currency had dropped by 4 pct against dollar whereas on January 7, Yuan dropped to the lowest value since 2011. This fall in the currency is pressurizing the stocks further as the investor fear selling investments predicting yet another fall.
Tough Transition
China had received massive investment for the real-estate sector and factories which finally resulted wasteful and inefficient. A slower growth process is being introduced by the government to avoid overdependence and encourage service sectors. The transition from overdependence on manufacturing to trust on services industries is still not going well. Meanwhile, the Caixin China General Services also fell to its second lowest figure since 2005. In addition to this, slow hiring still couldn’t counterpart the factory layoffs.
Mismanagement in the Economy
The present actions in the economy of backsliding reforms and poor communication put this once-fast-growing economy in the bad light.
"The ongoing rout in China's stock and currency markets reflects a sharp erosion of confidence in the economic management skills of Chinese policymakers, coupled with rising concerns about the state of the economy," says Eswar Prasad, professor of trade policy at Cornell University.
The investors have been confused by the authorities in context to the policy toward the Yuan.
"You have to explain what you're doing…The Chinese economic managers are not good communicators." said Yukon Huang, senior associate at the Carnegie Asia Program.
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