China’s monetary policy essentially focuses on very high savings and very less spending. While this formula worked really well when China was experiencing high unemployment, this may not work as well for China now. China’s robust economic activity has seen their products being sold all over the world!
With less purchasing power, China is suffering under a lot of debt. The amount of debt is rapidly increasing especially because it is being financed by ‘shadow’ banks. There seems to be an eminent threat to the point of financial meltdown. This has affected the GDP rates as well. The GDP fell to 9.5% in 2011. Now it is now estimated to hover around 6.5%.
With the investment in oil falling globally, there has been a decrease in buying capital goods made in the U.S.
The ripples of the troubles in China are being felt by all other leading countries. The good news is that the Chinese share in the capital market is only about 5%, but this did not stop the global markets to take a dip. There was such a world impact, that the U.S. market was down by 450 pts and opened to only 256 pts on Monday. A similar issue took place last August.