In 2009, China overtook Japan as the world’s second largest economy. The massive growth in China was spurred by agricultural and industrial industries, which account for 60% of the country’s gross domestic product (GDP). As of 2012, the GDP of China was in excess of $7 trillion. The economic standing of China means that developments in the Chinese economy are sure to have an impact on the global financial markets. Let us explore this in more detail.
Monetary and Fiscal Policy in China
Monetary and fiscal policy in China is the mandate of the People’s Bank of China (PBOC). Like other Central Banks, PBOC hikes or cuts interest rates so as to control economic activity in the China. In addition to controlling interest rates, PBOC also periodically adjusts the reserve ratio requirements of banks in the country. The reserve ratio requirement is the amount of cash banks in China are required to hold in their vaults. By adjusting this amount, PBOC is able to control the money in circulation in China as well as keep inflation within its targets.
The Impact of Chinese Economy in Trading
China is a trading partner of major world economies and developments in China will have ripple effects in the global financial market.
China and the US Dollar
China is a major trading partner of the United States of America; 7.8% of China’s imports are from the US while 16.7% of China’s exports are to the US. The trade balance of these countries usually fluctuates and this impacts on the value of the US dollar (USD). If the trade balance is in favour of the US, the value of the dollar will rise and vice versa.
The US dollar is also considered an alternative safe haven to the Chinese Yuan (CNY). This means that in times of economic turmoil, especially in China, most investors usually shift their Yuan-denominated assets to US denomination. This would result in the increased value of the US dollar.
In most cases, the value of the US dollar will have a negative correlation with the economic situation in China. Binary options traders, for instance, can place Put orders on the US dollar index if there is positive economic data from China.
China and the Japanese Yen
China receives 8.3% of its imports from Japan and exports 6.8% of its products to its Asian counterpart. The Japanese yen (JPY) usually has a positive correlation with the US dollar and in most cases; developments in China will impact both the US dollar and yen in the same manner. The Japanese yen also shares the safe haven status like the US dollar.
For instance, if economic data from China is below expectations, the value of the Japanese yen would be expected to rise while that of the Chinese Yuan would be expected to fall. A binary options trader can then seek opportunities to place Call orders on the Yen or Japanese stocks and indices.
China and the Australian Dollar
China is the major trading partner of Australia. It imports a significant portion of the country’s mining and agricultural products. In fact, the growth of the Australian economy can largely be attributed to China’s growth over the years. For this reason, the health of the Australian dollar is usually much dependent on the economic situation in China. If China is doing well, so will the Australian dollar strengthen.
Positive economic data from China will impact the value of the Australian dollar positively. For instance, if the GDP data from China is above expectation, binary options traders can seek opportunities to place Call orders on the AUDUSD. This can be executed with ease on the Option.FM trading platform.
China’s Effect on Canadian Dollar and New Zealand Dollar
Chinese data usually impacts the value of the Canadian and New Zealand dollars, yet the two nations are not its major trading partners. The reason for this is that like the Australian dollar, the Canadian and New Zealand dollars are commodity currencies. The economies of their respective countries are usually dependent on natural resources such as Oil and Gold. For this reason, these three commodity currencies usually share a positive correlation. The impact the Chinese economy will have on the Australian dollar will be replicated in the other two commodity currencies.
For instance, positive Chinese economic data will have binary options traders seeking to place Put orders on the USDCAD and Call orders on the NZDUSD currency pair.
The Major Indicators of the Chinese Economy
Gross Domestic Product (GDP)
GDP is usually the most influential economic indicator. It represents the market value of all goods and services produced by the Chinese economy. The GDP report will give traders an easy way to determine whether the Chinese economy contracted or expanded within a particular time.
Trade Balance Report
The Chinese trade balance report is considered one of the leading growth indicators because a huge part of Chinese economy is dependent on international trade. Traders also look out for this report because it can help them understand the relative strength of Chinese economy compared to other major world economies.
PBOC Interest Rate Decision
The PBOC usually takes an active role in enforcing monetary policy changes to control economic activity in China. Traders should watch out for interest rate changes by the PBOC because they usually spur much volatility in the markets.
China is a major influencer of the global financial markets. Traders should track developments in the Chinese economy so as to effectively exploit trading opportunities that may arise.