How Will a Falling Chinese Stock Market Affect World Currencies?

The Chinese stock market went up 150% in a year despite a slowing Chinese economy. Since a month ago stocks in China have fallen 30% and there is no end in sight. The Chinese government is trying to support the market but trying to convince investors to stay with a falling market is a lost cause. The Chinese stock market is half way back to where it started last year and could well fall farther. How will a falling Chinese stock market affect world currencies?

The Falling Chinese Stock Market

The Guardian reports that China stocks tumble again as the premier ignores the issue in a speech.

The biggest markets fall more than 3% after investors were unnerved by leader’s failure to address the plunge in a statement on the economy. The sell-off on Chinese stocks continued on Tuesday despite government efforts to bolster the markets amid investor unease that premier Li Keqiang failed to mention the deepening crisis in a statement on the economy.

Before the market opened, Li said in comments on a government website that China had the confidence and ability to deal with challenges faced by its economy, but had nothing to say on the three-week plunge that has knocked around 30% off Chinese shares since mid-June.

There are three underlying issues here. One is that the Chinese stock market went up because investors fled from a deflating real estate market. The Chinese economy is cooling off and company values did not support the rapid rise in stock prices. And there is a risk of social upheaval if the government seems to mismanage the previously unstoppable economy.

Who Makes Money Selling to China?

Brazil was on track to be the South American super power on par with the USA. Then China reduced its demand for raw materials. The Brazil real is falling as Brazil’s economy suffers according to Bloomberg Business.

Brazil’s real declined for a second straight day as Finance Minister Joaquim Levy said a stalled economy is reducing tax revenue, adding to concern that the administration is struggling to pare deficits.

Fiscal changes need to be carried out quickly, and measures to simplify taxes will soon be submitted to Congress, Levy told Valor Economico newspaper in a story published Monday in Sao Paulo. He has cautioned that failure to adopt belt-tightening measures may result in a lower credit rating.

The bottom line here is that a falling Chinese stock market takes equity out of the Chinese economy at a time when it is already slowing down. The more China slows down the fewer raw materials it needs and that hurts countries like Brazil and the real.

Who Sells to China

European companies and especially the Germans sell high tech manufacturing equipment as well as luxury cars to China. As China’s economy slows so do order for German technology. The Euro is already affected by the threat of a renewed recession and the Greek debt crisis. Forbes writes about how German car makers are concerned about the Chinese market, economy and purchases of their products.

German premium car makers BMW, Mercedes and Volkswagen’s share prices have been on the slide since doubts began to mount over the future of the lucrative Chinese market, but a couple of recent reports show these worries are probably overdone and medium term prospects are still strong.

China’s days as a virtual license for the German premium manufacturers to print money do seem to have gone.

The falling Chinese stock market hurts all of the mom and pop investors who own 80% of stocks. These folks are likely to put off buying a BMW or Mercedes. And therefore the Euro may take a hit as well.