The Chinese equities bubble has popped, and it's taking the DOW with it.

The world's fascination with and need for technology has been keeping Chinese manufacturing in the best economic position it's ever known. It is the world's largest producer of manufactured goods and the main supplier of everything from smartphones to computers: in fact, there's a good chance the majority of the products sitting on your desk right now were produced in one of its high-production, low-wage factories. For years, manufacturers like Apple have relied on Chinese production to keep up with demand while maintaining an impressive profit margin.

But the kind of growth China has been experiencing for the past decade simply isn't sustainable in an unstable economy: in June, as a result of investors pouring money into an economy with lackluster growth and slim company profits, the bubble popped. The Shanghai index lost about a third of its value and the Shenzhen Composite showed dramatic losses. Whatever moves the government made to alleviate the damage failed, and the Shanghai Composite wiped away any gains made in 2015.

With American and Chinese economies so tightly interconnected, a fluctuation in one ultimately affects the other: the DOW has fallen by more than 1,000 in a five-day trading period. Confident investors grown complacent by steadily increasing stocks over the last six years have begun to face the ramifications of what has been foreshadowed for years: it's impossible to produce massive amounts of electronics, pay a subsistence salary to workers, increase demand, and then not expect something to give. Tech companies have been slammed especially hard.

A peek inside a Chinese assembly plant.

And what if recovery is not soon in coming? What if China's already volatile economy simply is unable to weather an economic assault of this magnitude?

For tech companies, it may mean a complete logistical overhaul. Many companies were already looking at other third-world companies for cheaper production, but that would mean essentially relocating and duplicating the same issues. Designers that relied on Chinese manufacturing for things like PCBs and components may find their sources sluggish and unreliable. 

Ultimately, the crash may either be an initial hint at further calamities or a warning of how to proceed from here on out: paying more for manufacturing, ensuring fair treatment of workers, and stabilizing production is the only way to have meaningful growth. It may mean that profit margins are cut, but ultimately will keep the tech industry from collapsing. 

 

Comments

1 Comment


  • Papabravo 2015-08-25

    The article is wrong on the facts and reaches dubious conclusions.  The stock market and the real economy are not as tightly coupled as many people think, and the reliability of information or lack therof may be more important than the economic well being and living standards of the workers.  Savy investors make money regardless of which way the market goes and sheep will always get slaughtered.