What could investment restrictions in the Chinese economy lead to?
Today, China is the world's second-largest economy, with China's GDP estimated at over US$18 trillion in 2022.
The country managed to achieve this figure, not least thanks to foreign direct investment.
Every year, foreign investors invest approximately 200 billion dollars in the development of the Chinese economy, and this figure grows by an average of 20% every year.
Recently, the US administration announced that it is preparing a package of sanctions against China, which will 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 move would prohibit American companies and individuals from investing in North Korea. This would mean not only being prohibited from buying shares in Chinese companies, but also from building branches of American factories.
It's no secret that virtually all major American companies have already moved their production to China or are planning to do so in the near future.
Such a move would be a major blow to the Chinese economy and would force new investors to abandon their plans and old ones to withdraw their capital from the country.
Following the introduction of sanctions, the following market reaction should be expected:
A decline in demand and an increase in supply of Chinese securities will inevitably lead to a collapse in the prices of Chinese company shares.
A fall in stock indices – a decrease in the price of securities – will immediately be reflected in the value of indices such as the SSE Composite and SZSE Component.
Rising unemployment – if sanctions lead to the closure of American factories in China, this could lead to a reduction in workers and, as a result, an increase in the unemployment rate.
The decline of the yuan exchange rate – the Chinese national currency is unlikely to remain unaffected by events on 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 to pass if the imposed sanctions are truly harsh.
This is unlikely to happen, as a number of US officials are already stating the close connection between the two economies and the need to be more careful in adopting restrictive measures so that they do not have an adverse impact on the US economy.
In any case, the news of new sanctions will trigger 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 sell stop orders near support levels for Chinese stock indices. These orders will be triggered if the price breaks through the support levels and declines after the sanctions are imposed.
Those who like to make money on purchases should pay attention to the Indian stock market, as many companies are already planning to move their businesses from China to India.
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