The dramatic collapse of the equity markets in China—the Shanghai Composite Index collapsed 30% in a month...
The dramatic collapse of the equity markets in China—the Shanghai Composite Index collapsed 30% in a month—would suggest that the bubble created by the five-fold increase in margin debt in the last one year, the amount investors borrowed to buy stocks, has finally popped.
Unlike India, the bulk of trading in China is done by retail investors and the fall in stock prices could erode consumer confidence and further weigh on China’s economy, which grew at its slowest pace in six years at the start of 2015. The slowdown in key industrial sectors has intensified leading to a huge pile-up of bad loans. The rapid development of China’s shadow banking since 2010 has also compounded the problem. To support the property sector and stock markets, the central bank had cut its benchmark lending rate to a record low of 4.85% on June 27, the fourth reduction since November last year. So, the rout may not just be about the markets, but possibly involve China’s overall economy.
The hard landing of the Chinese economy has pulled down demand for commodities such as crude oil and copper with global prices trending down. Though it will work to India’s advantage as it is one of the chief importers of these commodities, our exports to China have slipped to $11.95 billion in FY15 from $18.12 billion in FY12. The impact of the Chinese markets is affecting Indian markets as the bigger problem is its contagion effect on other global markets.
The symptoms are visible, with global markets now responding to developments in China rather than Greece.