Sunday, 30 August 2015

Major Economic Challenges | Chinese slowdown, Sensex fall, Pressure on Rupee


There are three major crisis faced by the Indian financial markets since the opening up of the Indian Economy in 1992:

Crisis
Reason
India’s response
South-East Asian currency crisis in 1997
EMEs were over-heated with the foreign funds entering their real estate and stock markets.
India’s premature stage of openness (of economy) helped the country from a wild attack of withdrawal of foreign funds as witnessed in other countries
Global financial crisis in 2007
Sub-prime loan crisis à Fall of investment bank, Lehman Brothers
Country’s economy was well protected by the RBI

The proactive regulatory regime perceived by higher capital as well as higher risk weightage for real estate loans, the central bank was able to kept the asset bubbles at bay.
Slump in the Chinese economy witnessed in August 2015
Devaluation of Yuan by People’s Bank of China (PBoC) in August 2015 led to major volatility in global markets and competitive devaluation in currencies by a few emerging markets

Trade data released earlier this month showed China’s exports fell 8.3 per cent in July. China has been the world’s manufacturer for years now, and its growth has been dependent upon exports. A decline in exports suggests a global softening in demand and fall in consumption.
There is also concern that a shrinkage of China’s manufacturing will impact other countries that are part of the value chain of Chinese manufacturing. A dip in China’s growth and global demand has led to the softening of commodity prices, and that, in turn, has impacted other commodity exporting nations such as Russia and Brazil.

Currencies across the world have been under stress over the last couple of weeks after China decided to devalue the yuan. The rupee has depreciated around 2.8 per cent over the last 10 days.

We were able to protect our markets because of our strong macro economic fundamentals

There is also a view that a fall in the rupee has been more than covered by the fall in crude oil and other commodity prices — since India is a big commodity importer.

For Indian markets, as inflation has been climbing down, monsoon near normal and currency being one of the better currencies compared to Malaysian Ringgit, Indonesian Rupiah and South African Rand, the economy could withstand any financial onslaught.
The Sensex fall
Related to the China’s slowdown (the point above) - While China announced a depreciation of its currency, the yuan, twice last week in order to prop up exports and keep its factories going, the move rang alarm bells across the world, leading to a slide in many global currencies, and a fall in their stock markets.

Renewed concerns over Greece where, not too long after a debt default and signing of a new deal to stay in the  Eurozone

Then there are apprehensions of an expected rate hike by the US Federal Reserve in September, which may lead to greater funds outflows from emerging economies

Experts say that since several commodity driven emerging economies including China are under extreme pressure, FIIs are finding it tough to liquidate their money there — and are, therefore, looking to sell in the Indian markets in order to meet their obligations abroad. “You will sell what you can sell,”

A sharp fall in the markets also pushed short-sellers to take fresh positions, pushing the market further into the red à  most of the money is headed into US treasury bills
The Shanghai Composite in China and Hang Seng in Hong Kong have fallen 19 per cent and 11.4 per cent since August 14. The Dow Jones Industrial in the US fell 3.1 per cent on Monday, taking its loss to 8.4 per cent. All the major European indices in the UK, Germany and France have fallen more than 10 per cent since August 14.
In comparison, Indian markets lost only 2.5 per cent last week, and were holding on even as markets worldwide crashed. On Monday, however, the Indian markets too gave in to pressures of the global sell-off, tanking as a sharp outflow of foreign institutional money took place.















































































































The China factor:
  • Even though on REER (Real Effective Exchange Rates) basis, Yuan doesn’t seem to be undervalued but the timing of devaluation (slowing growth in China and plunging stock market) exacerbated the market reaction as market participants took this as a signal that Chinese authority are going to use currency devaluation as a tool to spur growth
  • For long China has been the powerhouse of global growth. So, naturally any slowdown in Chinese economy has much wider ramifications. 
    • On the one hand, it adversely impacts commodities producing nations like Australia, Africa, Russia etc. directly as the biggest consumer of commodities like iron ore and copper, slows down. 
    • On the other hand, it impacts most of the nations, including the U.S. and Eurozone, exporting to China.  
  • The sharpest fall in China’s stocks since 2007 came despite Beijing’s latest attempt to support the equity market
    • In the background of the current turmoil lies the unusual rise in Chinese markets for about a year until June, as investors — most of them ordinary Chinese — poured large sums of money into stocks, even though both growth and corporate profits were weak. The detachment from the reality of China’s slowing economy led to overvaluation of the market, and the creation of a classic bubble, which finally burst on June 12. Small retail investors have been the worst hit by the crash. Many had borrowed to invest in the market, and some were reported to have even sold homes to join what they believed was a party that would quickly make them rich

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