Minsky Moment: Is brewing trouble in China a boon or a bane for India?

China may witness a ‘Minsky Moment’ soon — a sudden collapse of asset values, central bank governor Zhou Xiaochuan has warned. A trouble brewing in China due to “excessive optimism”, would also mean a trouble brewing for rest the world and India as well.

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, November 9, 2016. REUTERS/Danish Siddiqui/Files

China may witness a ‘Minsky Moment’ soon — a sudden collapse of asset values, central bank governor Zhou Xiaochuan has warned. World’s second largest economy, China, contributes nearly 25%-35% to the global growth. A trouble brewing in China due to “excessive optimism”, would also mean a trouble brewing for rest the world and India as well.

“If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment,” Zhou Xiaochuan said on the sidelines of China’s 19th Communist Party Congress to Reuters last week. China will control risks from sudden adjustments to asset bubbles and will seriously deal with disguised debt of local government financing vehicles, Zhou added.

Another Black Monday?

In 2015, when concerns over the Chinese economic slowdown led to panic-selling, it led to a record intra-day drop in Dow and Sensex. India reportedly lost wealth worth Rs 7 lakh crore. A drop in the value of assets in China would not only impact India on the stock market but in many other ways.

Wider trade imbalance?

First, China is India’s biggest importer. According to 2015-2016 data, India imported $61.71 billion worth goods from China and exported merely $9.01 billion worth goods. If Chinese goods get cheaper, it would only mean more trouble for India’s domestic industries, which are already facing stiff competition from these goods. It would also lead to wider trade imbalance between the two countries, which according to 2015-16 data stood at $50.70 billion.

Devaluation of Rupee?

Moreover, in the international market cheaper Yuan may also hurt India’s chances in competing products. India and China compete in almost all major segments — steel, gems, apparels, jewellery and organic chemicals. A weaker Yuan against Dollar would also put pressure on India to either depreciate the value of Rupee or face market losses.

But it is not all bad!

However, India is flush with foreign exchange reserves which will cushion India against external vulnerabilities. “The current stock is sufficient to cushion India against unexpected global risks,” DBS said in a note. India’s total foreign reserves touched a record high of $402.5 billion in September. India’s pitch in the world market as a destination for investment with ease of doing business would also be beneficial if China’s economy heads for a market correction, economists suggest.

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