Words to define:
Production Managing Index (PMI) - Indicator of the health of the economy from the manufacturing sector and involves factors such as new orders and production.
China, the world's second largest economy has lately been through a lot of economic crises such as the devaluation of the yuan and its Production Managing Index and more. This reflecting the slowing economic growth of China along with a lot of crises affecting the world economy such as the Europe debt crisis and as the economy weakens, it is affecting a whole lot especially industries and commodities such as iron ore and gold. This shows how China's weakening economy is making a big impact on society is the China Stock Market crisis affecting millions of Chinese especially ordinary people who have been encouraged by the government to invest in stocks. In this case, we will be talking about how the stock market crisis in not just affecting stocks but other aspects important to economics specifically commodities. We will use the principles of the competitive market to explain this crisis in a new light and make it easier for those who don't understand it considering the audience in which this will cater to.
Before we even touch on this topic further, let us talk about demand, what is the main cause of why the stock market crisis is making a big impact on the world market especially commodities such as oil, iron ore, and more. The law of demand states that when price rises, quantity demanded falls and otherwise with the statement of ceteris paribus (all things equal) in hand, this could also be related to the Income Effect that as the price falls then the amount of goods that can be bought with the same income increases and otherwise. However, with law applied like these, it doesn't mean that there is a balance. Thus, the law of supply coming at hand that as price increases, quantity supplied increases and as price falls, the otherwise comes. These both combined make a market equilibrium, a point where the market clears as both demand and supply are equally balanced and if not achieved because of determinants both price and non-price, it may go to shortage or surplus of either demand or supply. However, the laws of demand and supply may also not be applied exactly to what it is defined because of the non-price determinants such as income, size of the market, resource costs and others. That actually shows what is happening in specific commodities as the stock market crashes.
One example that could be relatable to the crisis and the principles stated is the falling price of iron ore which is a primary source for the iron industry and thus important for industrial development thus playing an important role in developing countries especially those such as China. During the crisis with three trillion dollars wiped off in a matter of days with the need of the Chinese government to calm the situation through intervention, The price of iron ore fell by 25 percent during the height of the crisis to $44 per tonne with even the price dropping by more than 11 percent in a day overnight at that point analysts are saying of the price making it cheaper than a tonne of cabbages. According to David Bryant, head of investments for Australian Unity in an interview for ABC News in Australia, he said that if the Chinese government needs to use its resources to intervene, it will affects efforts in supporting employment and industries especially construction, as there is less building thus the decreasing price and demand for iron ore. This reflects different determinants of supply and demand in place because without these in place through the law of demand and supply, as prices go low for iron ore, there would be a surplus of demand for iron ore and shortage of supply for the same material but that's not happening though. In order to calm the stock market, the intervention of the Chinese government can be seen as subsidies such as enforcing rules allowing insurance companies to buy more stocks however with the government focused on the stock market, the number of buyers especially the government decreases along with falling income or money due to the lost money from stocks during the crisis will cause a low demand for iron ore thus the opposite happening with a surplus of iron ore in hand and shortage of demand. Thus companies like Atlas Iron have to cut down a lot of resources such as their staff from 330 to 95 according to their CEO David Flanagan because of that lack of demand due to the stock market crisis in a time where the price of iron ore could be an opportunity but seen in a wrong timing.
Therefore, the Chinese Stock Market Crisis is not just about money or stock but it affects every aspect not just economics but it also touches some parts of business and management at the same time. Stocks are like doctors which without them we cannot know the state of the economy such as what we saw with iron ore and the law of demands and supply and the determinants are a basis that economics are not just up and down or just number but it is also a way of life that involves the development of the country which can be able to go on it own two feet. The market can be unpredictable but if we know what is within the market, then we have to key to solve issues and contribute to boost the general people and foreign investor's confidence in their economy and help it thrive and grow further. The price fall of iron ore proves the importance of how this applies, through the falling demand of China that shows how much China is important to commodities like these and cause rise and fall of confidence to a commodity like iron ore. It should be said that even if there is hope or opportunity in the stock market for China, it should been seen with caution as if with caution, they could have prevented the disaster that the stock market left China in.
Sources:
Purchasing Managers Index (PMI) Definition | Investopedia. (2003, November 25). Retrieved August 25, 2015, from http://www.investopedia.com/terms/p/pmi.aspBRDRDFSDDZZXAZA SWWSSXZWSZSAS
Tomlinson, S. (2015, July 9). China's shareholder meltdown leaves markets in chaos, with a tonne of iron now cheaper than a tonne of CABBAGES as experts say 'desperate' Beijing officials 'have lost control' Retrieved August 25, 2015, from http://www.dailymail.co.uk/news/article-3154337/I-ve-never-seen-kind-slump-Analysts-fears-Chinese-markets-stocks-continue-fall-face-Beijing-s-attempts-stabilise-massive-loses.html
Wall Street falls, iron ore plunges on China market rout. (2015, July 8). Retrieved August 25, 2015, from http://www.abc.net.au/news/2015-07-09/wall-street-falls-iron-ore-plunges-on-china-market-rout/6605990
Chinese stock market in free fall threatens Australian economy. (n.d.). Retrieved August 25, 2015, from http://www.abc.net.au/7.30/content/2015/s4270869.htm
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