The Dow Jones index plunged to its worst four-day percentage loss to start a year on record, the Sensex on Friday was still struggling to recover from the massive 555-point hit it took the previous day, and analysts were taking about a repeat of the economic crisis of 2008.
What were the factors which triggered the global freakout. How will this affect other countries, especially emerging economies like India. Here is a quick explainer.
Fear of another 2008: Billionaire financier George Soros put in so many words what many others already feared. That the world risks a repeat of the economic crisis of 2008. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008,” Soros said at an economic forum in Sri Lanka
China may export more, import less: The devaluation of yuan makes Chinese exports cheaper and imports dearer. This would mean Chinese goods flooding other markets including India, which will hit the sale of domestically produced goods. Since commodities are valued in US dollars, the devaluation makes commodities dearer for Chinese buyers. This would bring about a decline in Chinese imports.
Currency wars: Competitive devaluation , or beggar-thy-neighbour policy as RBI governor Raghuram Rajan calls it, may trigger a currency war. This is because other economies will be forced to devalue their own currencies . Many analysts believe the yuan will keep depreciating this year despite Beijing's tight grip on currency flows. As Mexico's finance minister Luis Videgaray put it, " if all countries end up devaluating, nobody will make itself more competitive."
Oil prices: Apart from the crisis in the Middle East and problems with over supply, the dramatic fall on China's stock markets also factored in bringing crude oil prices to a record low. That is because it stoked fears of a stall in global demand. However there is a brighter side in Indiam which is one of the largest importers of crude. The country will save billions of dollars by a fall in diesel and petrol prices, lower tyre prices and lower paint prices.
Will hit corporates: The slide in the yuan could be the signal that the Chinese economy is in crisis. China is the world's second biggest economy and this means that the crisis will hit the earnings of global corporates.
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