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China is the worlds second-largest economy behind the United States. Its gross
domestic product (GDP) has seen double-digit growth over the last three and a
half decades (although it has begun to slow down). Chinas economy has a
profound impact on the global economy and markets. Understanding and
keeping tabs on its economy is not as straightforward as it is with other
economic heavyweights.

Some Background
Since the late 1970s China has transitioned from Communism to a centrally
controlled capitalist market. Its economic transformation began in 1978 when
capitalist market reforms were introduced. In the decades that have followed
China has transitioned from a rural agricultural economy to a manufacturing or
industrial and consumer or service-oriented economy. It's the largest agricultural
and manufacturing economy in the world.

China continues to rebalance its economy. The focus now is more on domestic
consumption versus industry and exports.
As the worlds most populous country, with 1.4 billion people, its consumer
purchasing power is widely watched. The initial public offering earlier this year of
Hangzhou-based e-commerce company Alibaba Group (BABA) the largest in
history. It raised $25 billion on the New York Stock Exchange. Alibabas version of
Cyber Monday or Black Friday, called Singles Day, resulted in $9 billion in sales
in November 2014.

China tightly controls the value of its currency by setting a daily rate
for the yuan versus the dollar. In Chinas domestic market, traders are
allowed to push the yuan 2% stronger or weaker for the day. But the
Peoples Bank of China often ignores those market signals when it sets

the next days rate, sometimes setting the yuan stronger versus the
dollar when the market is signaling it sees the yuan as weaker. The
central bank said it will now take the previous days trading into
account and it attributes that move to Tuesdays sharp drop.
Why?

China tightly controls the value of its currency by setting a daily rate
for the yuan versus the dollar. In Chinas domestic market, traders are
allowed to push the yuan 2% stronger or weaker for the day. But the
Peoples Bank of China often ignores those market signals when it sets
the next days rate, sometimes setting the yuan stronger versus the
dollar when the market is signaling it sees the yuan as weaker. The
central bank said it will now take the previous days trading into
account and it attributes that move to Tuesdays sharp drop.
In its statement, the PBOC said it wants to bring the yuan more in line
with the market. But the move also comes as Chinas important export
sector has weakened and overall economic growth looks sluggish.
Over the weekend, Chinese customs officials said July exports fell
8.3% compared with a year ago. A weaker currency helps Chinas
exporters sell their goods abroad.
The most immediate effect is that it signals to the world that Beijing
thinks the Chinese economy is sputtering. The move suggests China is
looking for ways to get it going again. But it also has major
implications for the U.S. and other countries that trade with China
because it puts their companies at a disadvantage. In the U.S., it will
likely reignite criticism that Beijing keeps the currency artificially low
to help its own manufacturers a charge that could get added impetus
during the presidential election campaign.
Global Impact

Despite being an emerging market, China is the worlds second largest economy and
has tremendous influence on the global economy and financial markets. In the last
decade it has contributed more than 30% to global economic growth, according to
reports.

After experiencing double-digit growth for decades Chinas economy is beginning to

slow. Its GDP grew 7.3% in the third quarter of this year, the slowest since the global
financial crisis. The Conference Board estimates that after 2020 economic growth will
slow to 4% annually. The slowdown is seen as a maturing of Chinas economy.
Chinas emerging middle class, urbanization and a real estate boom, which is now
waning, has fueled its economic growth. A slowdown affects different parts of the world
in different ways. The economies of countries that export commodities to China are
feeling the impact. Australias economy for example, relies heavily on exports to China.
Emerging markets that also export commodities to China include Brazil, Chile and
Indonesia. The economies of emerging markets countries that benefited from Chinas
economic growth have also seen the value of their currencies take a hit in relation to the
dollar.