A quick recap. There were two major announcements that led to this. One was the China's surprise devaluation of the yuan twice in one week. Next was the release of bearish manufacturing data that showed that its economy is indeed slowing down at a higher than anticipated rate.
Both had their impact globally. As China is the biggest consumer of commodities, this depressed the global commodity prices further. Also the global export competitiveness was affected, as a weaker yuan made Chinese imports relatively cheaper. The manufacturing data compounded the declines on a range of asset classes. Emerging market stocks headed for their worst week in three years. All in all, China has been losing its long held magnetism, and fast.
An article in Economist states how the Chinese economy itself is facing significant headwinds. Exports are stumbling. Bad loans are rising. The industrial sector is at its weakest since the depths of global financial crisis. Further, more stress is emanating from its market situation. Capital outflows from the nation have shot up as investors are giving up their hopes on the economy. A desperate move to stabilize this situation was carried out by the government. The government infused 1 trillion yuan towards buying stocks. This led to no respite however. In fact, such artificial buying rattled markets even more.
Further, debt has reached more than 250% of the GDP. The working-age population in China is shrinking. Goods moved by rail have declined and producer prices are caught up in a deflationary spiral. In fact, reports indicate skepticism that add up all of these factors and the annual growth for nation may be just 2-3%!
All in all, China stands out as a troubled economy. Alarm bells are ringing all around as it could drag other economies down with it. A fundamental reassessment coupled with a range of reforms that take it from an export oriented economy to a consumer driven one seem like the only thing that can open new doors for growth.
While the prospects of this shift happening in a hurry look remote, macro economic developments often have a way of upturning expectations. Only time will tell how China's story, which looks awfully grim right now, will pan out in the years to come.