Yesterday, we saw just how huge of an effect China has not only on the global economy, but on the forex market as well. If you’re at a loss as to what I’m talking about, take a look at your charts. You’d see that most of the major currencies, particularly the Aussie, took a massive hit and gave away triple-digit pips to the dollar and the yen in just a single day.
Apparently, the Conference Board’s leading indicator for China had a calculation error and had to be hugely revised down to 0.3% from the initial 1.7% figure. The previous strength of the leading index mostly came from the housing sector. Once the changes were accounted for, the index revealed that the foundation for further growth in China isn’t as rosy as we thought it was.
Needless to say, the drastic downward revision resulted in a massive flight to safety, with the S&P 500 tanking more than 3%. So, while Japan bid farewell to the World Cup, its currency, the yen, managed to lead the pack.
If there are signs that China’s housing market isn’t doing as well as initially thought, it may spark speculation that the economy isn’t so hot either. After all, its China’s housing industry that has been leading the pack and been showing signs of enormous potential. And you know what they say – once you chop off the head, everything comes to pieces!
Now, the reason why this spooked the markets is because, to many, China is considered as the world’s barometers for future economic activity. While all the other major players are plagued by negative growth and debt problems, China has been chugging along thanks to its savings. In other words, China has been on the forefront of economic recovery, absorbing all the excess supply when demand from the Western Nations fell during the financial crisis. If China were to reduce their spending, then who’s gonna buy all those exports from other countries? That’s right – nobody.
Still, I remain skeptical. China does play a huge role in the global economy, but don’t you think traders overreacted to the downward revision of the leading index? I mean, the leading index is just one of the many economic indicators out there and it’s pretty clear that China’s figures in the past have been no less than stellar. Besides, the leading index still hinted at future growth prospects, although much moderated than usual.
Compared to other economies, China has been very resilient, happily enjoying a more stable economic standing. In fact, Chinese policymakers even deemed it necessary to restrain growth in some areas of the economy. Too much ain’t too good, right? With a more flexible exchange rate scheme and tighter monetary policies, maybe China’s toned down leading index reflects how this super-economy is just its way of pulling back to give other economies a chance to keep up.