What happened in China?
China is one of the biggest economies which faced one of the worst stock market crashes and that led to the change in the value of US Dollars and also currency crisis within the country. The inadequacy of margin calls for the borrowed money was a major reason behind the economic crisis. This led to the Chinese companies getting to a highly inflated level and highly competitive banks and fund managers promised high unrealistic profits in order to attract more investors. These affected almost all economies of the world.
The solutions to stop the dynamo effect on other countries of this crisis is:
- Devaluation of Yuan: With the rise in the value of US Dollars, the value of Renminbi (Yuan) also rose. Due to this, the value of all the Chinese products also increased and it became costlier. The increase in Renminbi led to fewer exports leading to fewer profits. Thus, Devaluation of Yuan is the biggest resort to easing the economic conditions of China. A realistic adjustment in the Renminbi’s value can result in increasing China’s exports which could lead to making the products again cheaper across the globe and attract FDIs.
- Government buying the stocks: The Chinese Securities Finance Corporation (CSF) had come with the solution of lending $42 billion to 21 brokerage companies so that they could purchase the ‘Blue Chip’ stocks. Before that, the brokerages had vowed to buy stocks worth $20 billion. This could increase the liquidity within the economy.
- The small and medium stocks: The CSF had also pledged to buy more of the small and medium stocks, even though no specific amount was mentioned. Just like the large stocks, this purchase would lead to more liquidity within the economy and lead to increase in purchasing power of the citizens.
- New stimulus: To increase the growth within the country, a new $40 billion plan was implemented. As the economy was facing a slowdown, this new stimulus could help in coping up.
- Increase in government spending: by speeding up the infrastructure government spending, will speed up the economic progress. By building the roads and the utilities the government will not only increase the growth in the economy as well as help the economic cycle.
- Hold on trading of stocks: Half of the companies on the stock exchange, if stop trading on the stock exchange, the crisis situation can be handled as stability can attain easily.
- No selling by big shareholders: For 6 months, the big shareholders and the board members couldn’t sell their holding. They were prohibited so that some stability could be created in the demand and supply within the markets.
- No IPOs:No stock could be listed on the market as that would create a huge supply of stocks when the demands are low. To avoid such imbalance, the government prohibited the listing of new stocks.
- Slashed rates: By cutting off the interest rates, the Chinese government can ease the economy and can put the effort of pumping in more money in the system.
- Flexibility on collateral: With flexible norms relating to collateral, the small investors would find it easy to take loans so that they could invest in the markets. This would lead to an increase in the demand for stocks, thus getting the economy back in business.