China Crisis Explained in Lay-mans terms.

China Crisis Explained in Lay-mans terms. 

China is a workshop. It buys raw material (oil, rubber, minerals, etc.) from other countries, works with it in its little workshop, makes some plates and toothbrushes, and sells them to the developed countries like EU and the US. It buys materials for $5, sells the final product for $7, and earns $2, which it uses to pay its workers and the machinery.

In order for China to make her buck, she needs people to keeping buying plates and toothbrushes, and that means a growing middle class worldwide. Well, that has not happened since 2008. The wealthy countries are stagnant, and the developing countries have polarized wealth distribution. Say, you have 10 middle-class people, each of them spends $7 on toothbrushes every year, then China makes $20 a year. But if you have 1 person who's super rich, and 9 people who are poor, then only 1 person will buy the toothbrushes, and the other 9 won't. So China can only make $2 a year.

Eurozone, the #1 trading partner of China, as a whole has not yet recovered from 2008

China has been fighting this trend for a long time. It has been investing in Asia, Africa, and Latin America, hoping to see the middle class start growing there. It's also been investing in technology so that it can make things that the rich guys will like, such as iPhone. But the problem comes to a head when it has not yet ramp up the capacity to make high-end stuff, and its customer market for plates and toothbrushes is decidedly shrinking. Its big trading partners such as EU and Japan have been devaluing their currencies like no tomorrow. Euro vs. CNY has dropped by 18% and Yen vs. CNY has dropped by 35% in the last year. So China's export has dropped by 10% in response, since now China's products are more expensive than before in those countries.

What's going to happen is that China is going to buy less stuff from developed countries, and there will be fewer Chinese tourists out and about. And as China's labor market gets cheaper, it'll take some business away from other developing nations. Remember China is a "middle player" - when it slows down, it'll take both the high and the low with it. That's why the world market is reacting this way.

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