Monday, 13 July 2015

Chinese Economic Debacle and Benefits to India

What happened?
  • What goes up fast comes down faster. China grew very fast and came down very fast. 
  • Apart from FII inflows and a cut in interest rates, the rally was driven by liquidity from retail investors. And there was a sense that the government’s policies were helping the markets.
  • But while there was panic among investors, for perspective, it must be remembered that the market is still trading at a 70 per cent premium on its value of June 2014.

What led to the fall?
  • Greek crisis + growth concerns in China and world
  • Became pronounced in China because valuations were overstretched, and had entered a bubble zone. 
    • By mid-June, the price-to-earning (PE) ratio of Shanghai-listed companies averaged 32 — and excluding banks, stood at 57 in other words there were huge profits happening. At such high valuations, a number of investors were already looking to book profits — and a fall in markets in June just triggered that.
    • Measures like stepping up supervision of over-the-counter margin financing, are also believed to have played a role in weakening Chinese equity markets.
    • Concern among investors on the liquidity front — which led to a further decline in the markets.

Will the Chinese economy be impacted?
  • Impact of the stock market turmoil on domestic financing will not be significant, as equity has played a relatively small role in the financing of the real economy. 
  • However, shrinkage in equity financing will redirect funding needs to bank loans and bonds, and can marginally push up credit demand and financing costs. 
What is the outlook for India? 
  • China's debacle can be India's oracle.
  • There may be a contagion effect in terms of some money going out of emerging markets, but the gains are likely to be greater. 
  • From a fundamental perspective, a slowdown in the Chinese economy and a resultant decline in commodity prices can only be good news for India, which is a net commodity importer. 
  • Portfolio re-management and thus shift money from china to emerging markets including India.
    • India is more stable  on account of increased domestic institutional participation. 
  • To SUM UP - Market observers say that domestic investment is emerging as a counterbalancing force to FIIs — providing stability to Indian markets against volatility. A weak Chinese equity market, and stable Indian markets will see higher inflows into Indian markets.
References: [Times Group, Indian Express, Hindustan Times]

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