The Affect of China’s Stock Market on the U.S
Over the last decade, the world saw the link between the US and Chinese stock market that has been in a sync with the S&P 500. Nonetheless, the Chinese stock market has always been controlled by its own government, quite unlike the U.S market. This is because a majority of the investors in the Chinese stock trade look toward the government to control and maintain stability in the market. Moreover, most of the Chinese investments are controlled so that they get traded on a margin using loans to invest.
The relationship between the U.S and Chinese stock market is such that if the Chinese market sees a decline, it will directly affect the growth of the U.S market, resulting in countrywide inflation.
When this happens and the market crashes, those making investments also seek to become stable by buying more treasury bills, notes, and bonds and ultimately making the US Dollar to rise.
The dollar grew by 3% in 2015 against other currencies. This caused the export prices of services and good to surge too. What’s more, the Chinese stock market mainly relies on its economy, particularly the investors. As a result, the employment rates also declines which ultimately causes the country to incur less international imports. Because of the effectual increase in process of goods and services that are exported and a reduced Chinese demand for imported goods and services, the revenues that the United State gets from export trade go down as well.
Amongst the largest risks that the U.S is exposed to is failing to regulate its interest rate by losing control. In view of the fact that China possesses most of the U.S. Treasury bills, bonds, and notes, a Chinese stock market crash can cause the Chinese government to sell off these securities to lessen its own liabilities.
In turn, this would put strains on the U.S dollar causing it to lose its value instantly and therefore push the Federal Reserve to increase the interest rate as a measure to minimize the spiraling down effect on their currency. This increase in the interest rate triggers inflation.
While the risk is undeniable, it is improbable for China to capitalize on the back of U.S. securities as a drop in the value of the dollar will result in an increase in the Yuan’s value. This is the technical side of the picture that ultimately restricts competition between the two countries.
Primary Keyword: Stock Market
Secondary Keyword: China
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