How China is Impacting the Global Economy

How China's Economy Impacts International Investors

Getty Images / Shenji Li.

China's economy the largest exporter of goods and the second largest importer of services in the world. Until 2015, it was also the fastest growing major economy in the world, growing at about 10% per year. International investors simply can’t ignore the country given its growing share of global market capitalization, especially since its economy has such a profound impact on seemingly unrelated asset classes, including global debt and equity markets.

In this article, we’ll take a look at some ways that China is impacting global markets and some important considerations for international investors.

Economic Uncertainty

China’s economy touches nearly every part of the world in some way. In many emerging markets, China’s status as the world’s largest commodity buyer makes it extremely important for their export-driven industries. In developed countries, China’s status as a major importer of goods and services could mean reduced earnings growth for corporations. The slowdown in emerging markets could also impact global demand for goods and services produced in developed countries.

In addition to the direct economic impact, China’s economy has a tremendous impact on global capital flows. International investors or debt holders that lose money in Chinese markets may be forced to liquidate holdings in other regions around the world. Similarly, a slowdown in emerging markets and commodities - due to a lack of Chinese demand - could spur investors to move into cash.

Less liquidity in the global financial system can in turn make dramatic moves more commonplace.

Europe’s sovereign debt crisis caused some of these scenarios to play out throughout 2015 and 2016. After these end markets dried up, China’s economy began to dramatically slow down. The slowdown in its economy led to falling commodity prices, which hurt emerging market economies.

And in 2016, these trends have started to take a toll on the resilient U.S. economy until Europe began showing signs of recovery and commodities began to reverse direction.

Foreign Direct Investment

China’s economic uncertainty may dominate the headlines during bear markets, but its growing propensity for acquisitions marks the other side of the story. In 2015, the country’s international investments reached $6.4 trillion. Some economists believe that these figures could grow to reach nearly $20 trillion by 2020, helped by preferential tax rates, financing, and government services to encourage companies to invest abroad as a way to increase growth rates.

Over the past couple of years alone, China National Chemical Corp. bid $43 billion for Switzerland’s Syngenta AG, Qingdao Haier Co. acquired General Electric Co.’s appliance division for $5.4 billion, and Dalian Wanda Group Co. bought Legendary Entertainment for $3.5 billion. Many experts believe this may be the tip of the iceberg given the trillions of dollars accumulated by Chinese companies eager to pursue growth outside of their domestic economy.

These trends are likely to persist despite the country’s economic downturn. By focusing on making acquisition abroad, Chinese companies may further embed themselves into the portfolios of international investors.

These purchases could also help boost valuations at a time when many developed countries are struggling economically. However, there’s also the risk that these moves could destabilize the markets by mixing state and private enterprise.

Important Risk Factors

International investors should keep in mind that China's economy has a higher level of political risk than other developed countries like the U.S., Canada, or many countries in Europe. For example, the country's strict control over currency valuations and strategic industries means that there may be a gap between the current value and the fair value that could change at any time. Chinese equities also tend to be much more volatile than developed equity markets due to the greater number of speculators.

Key Takeaway Points

  • China has one of the world’s largest economies, which means that almost no portfolio is immune from its effects, even if they don’t hold Chinese stocks.
  • China’s economic uncertainty can have a profound impact on markets around the world, including both emerging and developed markets.
  • China is rapidly becoming a global acquirer thanks to government incentives designed to encourage domestic companies to invest abroad.