Chinas Stocks Head for Weekly Gain on Policy Outlook, Europe - Article Example

According to the article, the stocks experience the biggest gain during the week in question influenced by signs that the Greek debt problem will be resolved and speculation and rumors about expected policy changes by the government. The European Union has been reeling under a string of debt crisis in several of its members the most notable being Greece, Portugal, Ireland and recently Italy. This crisis has had an effect on stocks across the globe. Although Europe’s problems may seem less of a concern to China, the truth is that what happens in Europe affects China in a big way.

This is because the EU is the largest export market for China’s goods. The EU accounts for 25% of China’s exports. In the first nine months of 2011, trade between China and Europe rose 21.8% year-on-year to stand at $372.12 billion according to statistics from Chinese authorities. The EU debt crisis has a direct bearing on China’s economy because a reduction in demand here means a reduction in China’s export. Since China’s economy is export-based, any reductions in the number of exports have the net effect of slowing down the country’s economic growth.

This is exactly what the crisis in Greece, Spain, Portugal and most recent Italy has done. This paper is going to evaluate the relationship between the EU debt crisis and the performance of China’s stock exchanges. The paper will find that when there is a crisis in Europe, the demand for China’s goods in these region goes down which affects the performance of the exporting companies leading to lower export earnings. The lower earnings drive the prices of the stocks involved down. On the contrary, positive indicators on the EU economic performance drive up the value of the stock in the market as people become more optimistic.