Regions

Yes, What happens in China matters in your retirement plans

August 26
8:36 PM 2015

One can cite several reasons for the ongoing crash of equity values across the global markets. The major reason that no one can afford to avoid is Chinese factor. The slowdown in the world's second-largest economy, China's latest devaluation of its currency Yuan, drop in manufacturing output, mining companies reporting worst performance, etc, all these developments are impacting the global markets in fact all the countries including developed and emerging economies as well.

The Chinese impact not only confined to global markets but also one's retirement plans as well. Yes, China does matter in your retirement plans.  

It's true that what happens to China will also happen to the rest of the world and more particularly yourretirement plans. How the slowdown in the world's second-largest economy growth impacts other nations. One might think that Chinese market conditions have little role to play in the US and the European Union (EU) markets.

Gone were the days of what happens in China would confine to Asia only, observe some market analysts. So far, many trade pundits assume that China's impact on the global markets and mutual funds is limited. 

Jay Bryson at Wells Fargo said: "The direct economic and financial exposure of the US to China is limited. China accounts for seven percent of the US exports and this is less than one percent of American GDP. US multinational companies get two percent of their income from China. Less than one percent of American banking system is exposed to China."

Contrary to all these notions, the world's second largest economy does cast its shadow on European and North American markets. How? Let's take a look.

The Chinese currency devaluation will have an impact in the global market. The overhyped real estate, credit and stock markets in China are poised to burst anytime, as market analysts alert, and when it happens, the dragon country can't achieve a growth rate of 7-8% annually. This will force China to depend more on exports.

Subsequently, this will lead to further devaluation of Yuan to make exports more attractive. As a result, exports from the US, Canada and European countries will turn out to be more expensive in the global markets when compared to China exports in the foreign trade. 

This will make the ailing economies in the Europe further worse. For instance, olive exports from Greek will become costlier in the international foreign trade. This will further hurt the revenues of Greece government, which is reeling under severe economic crisis pressure.

Not only this, there will be another major development following the Chinese currency devaluation. Other emerging economies are also forced to devalue their currencies falling in tandem with China. What happens there after nobody knows. 

This will erode the profitability of many mutual funds, pension funds, treasuries, etc. Many investors and employees have invested in global mutual funds. If not directly, China will impact performance of your retirement plan in an indirect way and more effectively. Adding to this, many emerging economies have greater exposure to Chinese market. So, whatever happens in China will have implications on other emerging economies thus affecting the entire global market. 

According to data from S&P Capital IQ, Vanguard FTSE EM has 28 percent exposure in Chinese stocks, iShares MSCI EM has 24 percent, Fidelity EM has 16 percent exposure. 

This shows how global funds have significant proportion of their holdings in China and one can't rule out the dragon country has little role to play in the global markets more particularly the western world.

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