For over a year and simultaneously with the dramatic drop in oil prices, signals indicating a slowdown in China’s economic growth have increased. Many analysts estimated the fragility could be just temporary. However, by thoroughly analyzing the reasons for this, one could see that it is not only China’s financial markets which are in trouble but structural parts of the Chinese economy, particularly in the fields of real estate and shadow banking that makes very difficult the actual evaluation of Chinese debt and its quality.
Therefore, now that the Chinese State is one of the largest shareholders of companies listed on China’s financial markets, it has also engaged itself like never before in a currency war which started – what a coincidence – roughly one year ago. The devaluation of the Yuan means two things.
First, if it is time to stimulate the economy that means China’s economy is not currently in good shape. Second, this devaluation reshuffles the cards for neighboring economies, including that of Japan, and this could affect regional geopolitics. The whole crisis could culminate with the expected rate hike by the Fed, indefinitely delaying, according to the worst case scenario, Beijing’s project for an “Asian Century.”