On August 24, the Shanghai Composite Index sharply fell by about 8.5% causing aftershocks in markets across the world and triggering fears of another global meltdown.
The reason for this is that for the past two decades, China has been contributing heavily to the global economy, and a slowdown in China would put the brakes on the world’s pace.While India is relatively less affected, the devaluation of the yuan by about 1.9% on August 11 made Indian exports more expensive compared to China. This put pressure on our rupee, which was further affected by the tremors felt by other Asian currencies.
The trade deficit with China – we import close to $60 billion and export only $12 billion – will deepen with a depreciated yuan.
The Chinese impact continued into the current week and the pushback of the US Fed’s rate hike reinforced fears that the condition of the world economy is not rosy. That nervousness is being seen in the frequent fall in markets and the rise in volatility.
The International Monetary Fund (IMF) on Wednesday reported that China's slowdown, volatile financial markets and tumbling raw-materials prices have increased risks to economic growth around the world.
China's slowing economy and worries about global growth prompted investors to reduce bets on the yen and the euro, both of which have been popular for funding trades involving the sale of low-yielding currencies to buy higher-yielding, but riskier, assets.