What could restrictions on investment in the Chinese economy lead to?
Today China is the world's second largest economy; in 2022, China's GDP amounted to more than 18 trillion US dollars.
The country managed to achieve this figure, not least thanks to foreign direct investment.
Every year, foreign investors invest about $200 billion in the development of the Chinese economy, and every year this figure grows by an average of 20%.
The other day, the American administration announced that it was preparing a package of sanctions against China, and they would also affect investments in the Chinese economy.
How will the introduction of sanctions affect the Chinese economy and what should investors be prepared for?
In practice, such a step would mean a ban on American companies and individuals investing in North Korea. That is, it will not only be impossible to buy shares of Chinese companies, but also to build branches of American factories.
But it’s no secret that almost all large American companies have already moved the production of their products to China or are planning to do so in the near future.
Such a step would hurt the Chinese economy and force new investors to abandon their plans and old ones to withdraw capital from the country.
After the introduction of sanctions, you should expect the following market reaction:
A decrease in demand and an increase in supply of Chinese securities - which will definitely lead to a collapse in prices for shares of companies from China.
A fall in stock indices - a decrease in the price of securities will immediately be reflected in the value of such indices as the SSE Composite and SZSE Component.
Increased unemployment - if sanctions lead to the closure of American factories in China, this could cause a layoff of workers and, as a result, an increase in the unemployment rate.
Depreciation of the yuan - the Chinese national currency is unlikely to remain aloof from events in the stock market, and the yuan will begin to fall against major world currencies.
It is clear that this is the most pessimistic scenario that will come true if the sanctions imposed are really tough.
Which is unlikely to happen, since a number of US officials have already stated that the two economies are closely connected and that one needs to be more careful with the adoption of restrictive measures so that they do not have an adverse impact on the US economy.
In any case, the news about the introduction of new sanctions will cause a downward trend in the Chinese stock market, so you should be prepared for its release and not miss the chance to make good money.
One solution could be to place pending sell stop orders in the area of support levels for Chinese stock indices. Orders will work if, after the introduction of sanctions, the price breaks through support levels and rushes down.
For those who like to make money on purchases, you should pay attention to the Indian stock market, as many of the companies are already planning to transfer business from China to India.
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