Chinese share prices continue to be volatile after seeing a 16% fall in a week

The Chinese Central Bank cut its lending rate by 0.25% yesterday to try and calm stock markets, but this further cut has caused stock value drops in other parts of Asia and overall investor confidence to fall.

In an attempt to help the Chinese economy in the long-term, the People’s Bank of China has made it cheaper for banks to borrow, which will enable business and private people to borrow more easily. These actions are focused on growing the economy as a whole rather than improving the day-to-day stock market; the hope being that this will stabilise the economy.

Due to the size and dominance of the Chinese economy, the consequences of it slowing down would be felt across the world.

The instability of share-prices despite the easing from the central bank suggests that there is a lot of mistrust regarding the state of the Chinese economy. The fact that such a drop in share prices has not prompted enough action to help stabilise stock values is concerning. Further cuts to interest rates will increase the withdrawal of capital from China which will only increase the pressure on their currency.

With Chinese exports becoming ever cheaper, the stress on competing economies is likely to grow. Neighbouring countries such as Malaysia, Thailand and Indonesia can expect a fall in their own currencies, if China continues to reduce its export prices.

The competitive devaluation could see emerging economies undermining each other and this would, without doubt, have a detrimental impact on growth both locally and globally.

Meanwhile, the devaluation will, in the short term, mean that the West enjoys lower petrol and food prices; however, in the long term, this could spell unbalanced growth and this could push us to spend beyond our means. The lack of demand for exports will mean the UK is unable to sell enough abroad to match our spending. It was deficits like these that contributed to the crash in 2008.

It is now likely that central banks will be looked to for solutions to the economic problems. Yet a reliance on the banks to make what are political decisions could have negative consequences if the reforms are unpopular.

Whilst the consequences might not be immediate for the West, both the UK and America are looking to move out of their near-zero interest rates, but with a potential slowing of the global economy, this might need to be deferred for some time yet.