CHINA’S ECONOMIC SLOWDOWN

& CURRENCY

DEVALUATION

PARAM PAREKH (L020)MEET SHAH (L023)RUSHABH SHAH (L024)

THE SLOWDOWN

GDP GREW 6.9% IN 2015 VS 14% FROM 2001-2007, SLOWEST EXPANSION SINCE TWO DECADES

•GLOBAL MANUFACTURING SLOWDOWN•REAL ESTATE BUBBLE•FALL IN STEEL DEMAND•STOCK MARKET•HUGE DEBTS

CAUSES

MANUFACTURING SLOWDOWN•MANUFACTURING CONSTITUTES 59% OF GDP

•REDUCED DEMAND FROM EU, JAPAN, SOUTH KOREA

REAL ESTATE BUBBLE•ACCOUNTS FOR 25% TO 30% OF CHINA’S GDP•EXTREMELY LOW LOAN RATE •LUCRATIVE DOMESTIC INVESTMENT DESTINATION FOR CHINESE•LARGE NUMBER OF VACANT AND UNDERPERFORMING COMMERCIAL PROPERTIES•DEFAULTS BY OVERLEVERAGED REAL ESTATE DEVELOPERS

FALL IN STEEL DEMAND

•LARGEST PRODUCER OF STEEL IN THE WORLD

•DECLINE IN AUTOMOBILE AND CONSTRUCTION SECTOR

STOCK MARKET•FALLS OF UP TO 8% A DAY AND LOST TRILLIONS OF

POUNDS WORTH OF VALUE.•VARIOUS BANS ON SHARE SALES WERE PUT IN PLACE•THE PEOPLE'S BANK OF CHINA CUT BOTH RESERVE

REQUIREMENTS AND INTEREST RATES, AND PUMPED EXTRA CASH INTO THE MARKETS AND THAT OVERINFLATED BUBBLE BUSTED AGAIN.

HUGE DEBTS•TOTAL DEBT ABOUT 250 % OF GDP•REPAYMENT BURDEN AFTER INITIAL PHASES•CHINA’S INVENTORY OF UNSOLD HOMES AT RECORD HIGH•PROPERTY RATES FELL

DOMESTIC IMPACT• CHINA IS NOW SUCH A BIG FORCE IN THE GLOBAL ECONOMY THAT IT WOULD

INEVITABLY AFFECT THE REST OF THE WORLD. IT IS THE SECOND LARGEST ECONOMY AND THE SECOND LARGEST IMPORTER OF BOTH GOODS AND COMMERCIAL SERVICES.

• INCREASE IN RISKS TO OVERALL GLOBAL GROWTH: • CHINA WOULD NOT CONFRONT ITS SLOWDOWN WITH GROWTH-

SUPPORTING POLICIES;• COMMODITY PRICES WOULD SLIDE FURTHER;• THE US DOLLAR WOULD CONTINUE TO RISE;• COMPANIES WOULD SUFFER FROM HIGHER DEBTS. Commodity

prices

•WAYS IN WHICH A CHINA SLOWDOWN WILL SUBSTANTIALLY IMPACT REGIONAL ECONOMIC GROWTH:•A PULLBACK IN FOREIGN DIRECT INVESTMENT•A FADING EXPORT MARKET•A TRIGGER OF FINANCIAL-MARKET INSTABILITYSHIPPING COMPANIESGLOBAL TECHNOLOGYHEAVY MANUFACTURINGAUTOMOTIVE SECTORS•SLOWDOWN ONE OF THE BIG DRIVERS OF MASSIVE FALL IN OIL

PRICES

• ON COMMODITIES : FURTHER DOWNSIDE RISK ON CRUDE OIL AND COPPER PRICES.• ON GLOBAL GROWTH: A 5% DECLINE IN CHINA’S REAL FIXED ASSET

INVESTMENT GROWTH COULD LEAD TO 0.3-0.5% FALL IN WORLD OUTPUT• ON ASEAN ECONOMIES: SUSTAINED SLOWDOWN IN CHINA WILL FEED

THOUGH HIGH LEVEL OF SUPPLY CHAIN INTEGRATION WITH ASEAN ECONOMIES. COMMODITY SUPPLIERS INDONESIA, CAMBODIA WILL SUFFER A DOUBLE BLOW.

THE BIGGEST CONCERNS ARE FOR ASIAN ECONOMIES, AS WELL AS AUSTRALIA, BRAZIL, CANADA, CHILE AND PERU WHICH DEPEND ON DEMAND FROM CHINA FOR VITAL COMMODITIES FOR INDUSTRY. 

IN MANUFACTURING, HONG KONG, KOREA, MALAYSIA, SINGAPORE AND TAIWAN ARE AMONG THOSE MOST EXPOSED.

IMPACT ON WORLD MARKET

IMPACT ON USA

•ECONOMIC SLOWDOWN IN CHINA WAS FELT BY THE AMERICAN COMPANIES WHERE 17% OF FIRMS IN THEIR CHINA OPERATIONS THIS YEAR BELIEVE FALLING REVENUE WAS DISCOVERED IN THE NEW SURVEY FROM THE US-CHINA BUSINESS COUNCIL.•ONE FIFTH OF THEM PLAN TO CUT OFF STAFFING RESOURCES

IMPACT ON UAE

•CHINA’S ECONOMIC SLOWDOWN WON’T HAVE ANY NEGATIVE EFFECT ON UAE IN THEIR JOINT VENTURES IN INDUSTRIAL AND ENERGY SECTORS.•CHINA- MIDDLE EAST TRADE INCREASED MAJORLY DUE TO

DEMAND OF OIL FROM UAE.•NO NEGATIVE EFFECT ON UAE AS SUCH ARE FOR LONG TERMS

IMPACT ON AFRICA• IN THE FIRST HALF OF THE YEAR, CHINESE INVESTMENT IN

AFRICA SINKED 84 %.• AFRICA WILL FACE LOT OF PROBLEMS IN DEVELOPING AS CHINA

IS ITS SINGLE LARGEST TRADING PARTNER AND ALSO INVESTS A LOT IN IT.• AFRICA IS CHINA’S SOURCE FOR FUEL.• AFRICA’S SHORT- AND LONG-TERM OUTLOOKS ARE NOT STABLE

AND ARE LIKELY TO COLLAPSE DUE TO CHINA’S SLOWDOWN. •CHINA NOW WON’T REQUIRE NEARLY MORE FUEL, OIL, GAS,

COPPER, IRON ORE AND OTHER RESOURCES THAT THAN BEFORE DUE TO ITS LESS GROWTH.

IMPACT ON INDIAPOSITIVE EFFECTS :- •CHEAPER COMMODITY PRICES•CHEAP COMMODITY PRICES LEADING TO CHEAPER

IMPORTS•LOWER INPUT COSTS & HIGHER PROFIT MARGINS•AN ATTRACTIVE ALTERNATIVE TO CHINA•CHINESE INVESTMENT IN INFRASTRUCTURE IN

INDIA($60 BN)

NEGATIVE EFFECTS :-•CHINESE DEMAND HAS DECREASED•INDIA’S EXPORT TO CHINA HAS DECREASED (14.8 TO 11.9)•CHEAP CHINESE PRODUCTS COMPETING WITH THE DOMESTIC INDUSTRIES OF INDIA

GOVERNMENT MEASURES

•CENTRAL BANK REIGNITED FEAR OF A CURRENCY WAR IN JANUARY BY CUTTING THE YUAN’S REFERENCE RATE FOR EIGHT DAYS IN A ROW•IN 1994 EXCHANGE RATE REGIME WAS FIXED ( PEGGED) AND DEVALUATION WAS DONE BY 2%•IN 2005 END OF FIXED EXCHANGE RATE ( PEGGED) AND INTRODUCE FLOATING EXCHANGE RATE ( MANAGED EXCHANGE RATE).• AND CURRENTLY DEVALUATION IS DONE BY 1.9% ( 11TH AUG 2015).

CURRENCY DEVALUATION

WHY DID CHINA DO IT?•IN ITS STATEMENT, THE PBOC SAID IT WANTS TO BRING THE YUAN MORE IN•LINE WITH THE MARKET. BUT THE MOVE ALSO COMES AS CHINA’S•IMPORTANT EXPORT SECTOR HAS WEAKENED. A WEAKER CURRENCY HELPS•CHINA’S EXPORTERS SELL THEIR GOODS ABROAD.

WHAT DOES THIS MEANFOR THE REST OF THE WORLD?

•THE MOST IMMEDIATE EFFECT IS THAT IT SIGNALS TO THE WORLD THAT BEIJING THINKS THE CHINESE ECONOMY IS SPUTTERING.•IN THE U.S., IT WILL LIKELY REIGNITE CRITICISM THAT BEIJING KEEPS THE CURRENCY ARTIFICIALLY LOW TO HELP ITS OWN MANUFACTURERS.

WHAT DOES THISMEAN FOR MARKETS?

•THE MOVE PUTS PRESSURE ON OTHER CENTRAL BANKS AROUND THE WORLD TO PUSH DOWN THEIR OWN CURRENCIES TO HELP THEIR OWN EXPORTERS AND TO PREVENT DESTABILIZING CAPITAL FLOWS.

•CHINA SUFFERED ALMOST $700 BILLION WORTH OF CAPITAL FLIGHT IN 2015•IN JULY, FOREIGN RESERVES FELL TO $3.20 TRILLION, OFF A PEAK OF $3.99 TRILLION IN JUNE 2014•VOLATILITY HAS ALSO EBBED SOMEWHAT

TODAY

•SINCE THEN, THE WEAKER YUAN HASN'T STOKED INFLATION AND ANY GAINS IN EXPORT COMPETITIVENESS WERE SMALL COMPARED WITH OTHER EMERGING MARKET CURRENCIES•Q2 2016 GDP GROWTH AT 6.7%•STILL, MARKET INTERVENTION AND PERSISTENT

WEAKNESS IN THE YUAN HAVE UNDERMINED THE GOVERNMENT’S EFFORTS TO EXPAND ITS GLOBAL USE. THE CHINESE CURRENCY ACCOUNTED FOR 1.72 PERCENT OF TRANSACTIONS IN JUNE, THE SMALLEST PORTION SINCE OCTOBER 2014

THANK YOU