How China’s slowdown affects the global economy

  • China is slowing down (GDP growth down to 7% in Q2 2015)
    • Weak demand for goods and commodities
  • Weak demand hurts China’s suppliers: Brazil, etc.
    • Commodity prices fall: iron, steel, etc.
  • …and that hurts their currencies
    • if demand for Brazilian iron ore—or other commodities—falls, so should demand for the real
    • worrisome for investors who havelent a ton of hard currency—US dollars—to companies and governments in those countries by buying dollar-denominated bonds from them
    • As the currencies of these countries get weaker, it takes more and more reals—or ringgit or pesos or rands—to acquire the dollars needed to repay those bonds
    • Worried that they won’t get paid back, people who hold those bonds have been selling them
    • That pushes up bond yields (credit spread), which are the borrowing costs
  • China will be less of an aggressive buyer of US government securities

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s