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Think the Chinese stock market crash has no effect on you? Think again...
Even when working within an international business model, it's easy to feel detached from social and financial issues occurring overseas. Despite the physical distance, however, major economic events can spur butterfly effects that ripple throughout the entire world. So if you're examining the Chinese stock market crash from what you believe is a safe distance, you may want to reexamine your position. Its effects are likely hitting close to home in a number of ways.
Roots of financial turmoil
Before you can assess how the Chinese stock market crash will impact you directly, it's important to know the key factors behind the economic slump. According to CNN, China began its path to the crash at the start of 2015, when large numbers of ordinary citizens started profiting from the stock market through trading. As this practice continued, however, the country's economy was slowing significantly, causing a severe financial imbalance.
Patrick Chovanec, managing director at Silvercrest Asset Management, told CNN that China's stock market and economy essentially started operating as completely disconnected entities. Because this isn't a sustainable fiscal model, the stock market crashed.
How it will affect you
Of course, the most significant effects of the crash have already been felt by the Chinese people. Many took advantage of the trading frenzy and invested their savings in the market, only to lose all their finances when it collapsed. Still, the crash's consequences have extended internationally.
According to market research conducted by ProOpinion, about 42 percent of professionals believe the crash's greatest impact will be that U.S. stocks will plummet due to the fact that major corporations generate high sales in China. This is a valid concern, as the U.S. stock market - in addition to markets in Europe and Asia - fell Sept. 14. The Wall Street Journal explained that China's economic crisis played a major role in this drop, as did the Federal Reserve meeting scheduled for Sept. 17, during which the agency is expected to raise interest rates.
The source reported that China's economic situation will continue to influence the U.S. stock market, as it's the world's second-largest economy and a major trading partner.
"China will remain a major source of volatility. Today's sharp fall in the Shanghai Composite Index was a reminder that Chinese stocks are not out of the woods just yet," Rabobank analyst Piotr Matys told the Wall Street Journal.
About 27 percent of ProOpinion respondents said they think China's crash will help the U.S. dollar gain value against global currencies. According to the International Business Times, the Chinese yuan has already dropped by 2.6 percent against the dollar since the start of 2015, and this trend is expected to continue for the rest of the year. While some economists conservatively estimate the yuan will have fallen by 2.8 percent against the dollar by January, others predict a comparative decline of up to 17.8 percent, reported the source.
The dollar isn't just performing well against China, however. It's currently growing at its strongest rate since 1984, explained Bloomberg. However, while China's financial slump certainly helped boost the U.S. dollar on an international scale, it wasn't the sole factor. The source explained that American currency has been gaining traction since the end of 2013.
"China intentionally devalued its currency."
Roughly 20 percent of professionals told ProOpinion they believe the largest impact will come in the form of rising prices on goods that U.S. exporters sell abroad. The San Diego Union-Tribune spoke to Marney Cox from the San Diego Association of Governments who explained why might be the case. According to Cox, China intentionally devalued its currency in order to make exported products cheaper. Ideally for China, this will cause them to receive fewer exports from the U.S., which will in turn open the trade gap even further. The exports China does receive from the U.S. would be expensive, as the dollar has the advantage over the yen. The Chinese government hopes this will prompt more internal spending to stimulate the currently sluggish economy.
Still, about 11 percent of ProOpinion respondents believe China's stock market crash will impact the U.S. more significantly in other ways. Because of the size and importance of China's economy, there are realistically countless ways in which you could feel the spillover of its financial crisis. According to PBS, China has long been the world's largest consumer of iron ore, lead, steel, zinc and copper. With China purchasing fewer of these commodities externally, people working in these industries will likely see prices waver until the country can regain enough stability to import on a large scale again. The source noted that China is also a major importer of luxury fashion goods, so prices in this area will likely fall as well.
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