After the continued dismal economic data from China the government and central bank came under immense pressure to stimulate the economy. Exports unexpectedly fell sharply by 8.3% and the country’s imports have been continuously slowing since the start of the year. The recent China’s weak trade data along with fall in Producer price Index (PPI) to -5.4% prompted the government to take another step to stimulate the economy.
This was supported by the recent crash in Shanghai stock market last month. The world’s second largest export-driven economy is reeling under pressure of poor demand for commodities. Crude oil, copper, aluminium, gold has all seen negative return this year while the demand outlook continues to be bleak.
The devaluation of yuan would help exports to recover however, the growth is expected to be marginal. The imports would get costlier for Chinese manufacturers on back of stronger dollar. However, the demand – supply balance in commodity market is so fragile that if demand from rest part of the world does not improve how exports growth would help to strengthen Trade balance. Lower crude oil prices have already weakened the GDP growth in oil producer countries. Lower commodity prices have decelerated growth in Australia and South America.
Going forward the slump in commodity prices might just be the headache the manufacturing giant would like to face. The excess capacity would crumble and there might not be enough room for the central bank to manoeuvre.