Financial trouble has been brewing in China for several months now, and traditional stock markets remain very shaky ground for the time being. Keeping in mind how the Chinese economy will affect nearly every other country in the world, things are not looking overly positive right now. By the looks of things, global lenders are not that confident in the Chinese economy anymore, which could lead to further turmoil down the line.
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China’s Financial Peril is Far From Over
Even though the People’s Bank of China has taken several measures to fight further downfall of the stock market, their efforts seem to be in vain for the most part. On top of that, global lenders are losing confidence in the country’s plan for recovery, as there has still not been any form of proposal from government officials.
Needless to say, this growing uncertainty could easily lead to further devaluation of the yuan. When a country’s financial situation is on the brink of collapsing, it is the sole responsibility of the central bank and government officials to devise a strategy. So far, that has not happened, and it is making investors and other financial players very nervous.
The Chinese yuan has been losing a fair share of its value for several months now,and it still remains unclear as to whether or not this downward trend will continue over the weeks to come. Some financial experts see the delay in coming up with a solution as a covert plan to further weaken the yuan in favor of their new trade-weighted basket of currencies.
In December of 2015, the People’s Bank of China made several financial interventions to stop capital outflow. Even though the official number of money spent by the bank remains unknown to this very day, some experts estimate it at US$140 billion. It goes without saying that PBOC has been sacrificing a large portion of its foreign exchange reserves, to little avail.
It remains impossible to predict what would happen if the Chinese yuan would be faced with another devaluation in the near future. One thing’s for sure though: the financial shockwave will be felt by all countries around the world. Zones such as Japan and Europe are already weakening their currencies, and another major hit could send both economies in a death spiral from which they will not recover any time soon.
Chinese government officials will have to come up with a plan to reform their financial structure and create a more transparent ecosystem. Right now, China’s financial system is obscured from the rest of the world, as information is very difficult to come by. Furthermore, the country’s excess industrial capacity will need to be addressed as well.
Funds Dry Up Due To Failed Diversification
Based on several statements published in a recent Telegraph UK article, it looks like China is running out of funds rather quickly. With an estimated US$600 billion left in reserves that can be spent whenever needed, there is very little headroom for another disaster. If this funds were to dry up completely, things could get very uncomfortable for China.
If the government and central bank had properly diversified their portfolio, a part of this crisis could have been averted. Rather than relying on traditional financial instruments, diversification with Bitcoin is an interesting alternative. In fact, the central bank of Barbados might be eyeing bitcoin as a way to diversify their asset portfolio at some point in the future.
What are your thoughts on the ongoing debacle in China? What will the result be? Let us know in the comments below!
Source: Telegraph UK
Images courtesy of Shutterstock, PBOC
