What is China's end-game with its new economic regulations?
For the last six-month, China has been implementing new regulations which affected the large corporations' business model. Consequently, Hang Seng Index fell 10.47% compared to the Nasdaq Index which is up 12.30%. Despite these events, China is still the largest exporter in the world with $2.16 Trillion. While, investors are losing money in Chinese stocks such as BABA, HK, or DIDI. One must wonder about what Chinese new economic regulations mean for U.S investors.
China is too big to fail, but what about their companies in the U.S stock market. Ali Baba's stock price is currently trading at $160.15 (42.38%) which is 52 weeks low. Investors are closely monitoring Chinese regulations and their impact on companies’ earnings. Long-term and short-term investors should consider political risk while investing in foreign companies.
The global market presently relies on the U.S currency, and China imports to maintain a smooth trade exchange among countries. Regardless of the impact of China regulations on tech companies, one can consider the downtrend of the stocks price to be temporary.
The more important matter is the valuation of the Yuan compared to the U.S Dollar. China trade agreement and importation have reached more than 100 countries. Countries have been very dependent on Chinese importation. Consequently, China can afford to apply sanctions on certain countries regardless of the United Nations trade agreement. For instance, in July of 2021, China hit several Australian industries with economic sanctions.
In the next 15 years, it will be up to China to reinforce the use of the Yuan in the trade agreement. As a result of this action, U.S Dollar and Federal Reserve may lose influence over international monetary policies and trade.
In addition, for the last two years, one can also notice the appreciation of the Chinese Yuan against the U.S Dollar. As of September 14, 2021, The Yuan went from 7.07 to 6.44 Yuan against 1 U.S Dollar.
To boost its fiscal spending and keep liquidity in the economy, China maintained its first year's prime loan at 3.85% for the last 14 months. And it has also increased its loans in developing countries, especially Africa. China is carefully balancing between its quantitative ease, the risk of a high inflation rate, and appreciation of its currency.
China regulations are certes affecting many U.S companies. Nonetheless, it is the path for the country to maintain its global economic dominance.
In contrast to China, U.S regulations empower large corporations to drive the best economic result.
Until Chinese companies find the best business model to improve their earnings, international investors will have to adjust their portfolios to their reduce risk.