China's 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 (Shidong, 2011). 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 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 (Banerjee, 2011). 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 (Czinkota, Ronkainen, & Moffett, 2011), any reductions in the amount 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 of 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.

As per the article, the value of the stock of major companies in China rose after the recent progress on the Greek debt problems. This is because the said progress increases investors’ confidence in taking more risks. A solution to the debt crisis will also stabilize the EU which is the biggest export market for China. This stability increases the confidence of investors considering that a stable EU will buy more from China and therefore increase the earnings of Chinese companies. It is this expected increase that drives up the prices of stock as investors expect improved dividend payments.

The stock increases were also supported by speculation that the Chinese authorities will undertake more measures to boost growth. For instance, the shares of China Petroleum and Chemical Corporation and of PetroChina Co. increased by at least 1.5% due to speculation that the government may give refiners the freedom of adjusting prices on their own (Shidong, 2011). The increase in the price of stock is also aided by the government’s announcement that it will step up measures to help small business to have easier access to bank loans.

The government is further expected to cut banks’ reserve requirements to boost manufacturing industry as reports of a slowdown in manufacturing emerge and inflation eases. The case highlights the challenges the Chinese face as they do business on the global scene. On one hand the Chinese economy is too dependent on exports. This means the economy is very much affected by what happens on the global sc