It would be foolhardy to think that the Chinese have received a huge jolt with the 30-40 per cent crash in their stock index in the four weeks since the markets hit the peak on June 12. There are two indices in China—the Shanghai index which is down 32 per cent and the Shenzhen index which has plunged 40 per cent from its mid-June high.This may appear very steep but it would be naïve to ignore the fact that the Shanghai index had soared 150 per cent over the 12 months before the downturn. Likewise, the Shenzen index too was ruling at a peak when the fall came.
There is no denying, however, that smaller investors are likely to lose the most because they jumped into the market near the top. The cushion that the Chinese stock markets had built up before the downturn came in handy when the crash came. Yet, it must be conceded that the June-July mayhem was the biggest rout in this volatile market since 1992, and it prompted the Chinese government to take strong measures.
A couple of weeks ago, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with happy talk.
With the Chinese market being the second largest in the world, it is undeniable that the continued sell-off in Chinese markets cast its shadow over other countries, including India. But the fallout of the bursting of the Chinese bubble was very limited. The commodities market was, however, hit.
In the Indian markets, Vedanta, which produces copper and aluminium, closed over 8 per cent lower, Aluminium maker Hindalco ended 5 per cent down and State-run NMDC, India’s biggest iron ore producer, declined 2.55 per cent. Tata Steel lost 5 per cent. These may not reflect a steep fall but they were indicative of a downward trend in the immediate aftermath of the Chinese slump.
With copper and aluminium, trading is at an all time low as China was the world’s largest consumer. What it translates for us is that the cost of infrastructure projects like smart cities could come down significantly.
The recent rally in the US dollar also depressed commodity prices. Gold fell to a near four-month low. In India, gold prices slipped below Rs 26,000 after falling Rs 51 in futures trade. Silver sank
nearly 7 per cent and platinum dropped to a 2009 low. Crude oil prices also trended lower after the Chinese bubble burst, hitting upstream companies like Cairn India and state-run ONGC. Cairn India shares closed 6.5 per cent lower. Tata Motors’ shares declined 6.2 per cent amid concerns that the meltdown in Chinese markets will impact consumer demand in the world’s largest auto market. China is the biggest market for Tata Motors’ luxury brand Jaguar Land Rover (JLR).
Leading authorities on financial markets say that while there has been a knee jerk reaction to the crash in all Asian markets, India may not suffer in the long run. China’s was an isolated stock market. It had no impact on world markets when China’s stock indices doubled and tripled in a very short span of time. So a crash in China’s markets too should show no major impact on other emerging markets.
According to analysts, some sectors like the automobile industry are likely to suffer since China was one of the fastest growing markets for the industry. However, there may well be good news for India in other areas.
If China decides to devalue the Yuan to push growth, the world market, including India, could be flooded with cheap Chinese goods. While this is good for consumers, it could affect manufacturing and exports negatively. It would inevitably affect the financial viability of Indian competitors.
Oil prices were already low because of a global slowdown and the possible Iran-US nuclear deal. The China Effect may help them sink even further. Low oil prices can help the Indian government control its deficit and check inflation. Automobile exporters and manufacturers, especially Tata Motors, will feel the pinch as China was its fastest growing market, especially for JLR, and the company was investing in the market to drive future growth. But auto-ancillary suppliers will be hit as China’s consumption falls.
Chinese had overtaken India as the largest consumer of gold. Prices of gold have slipped to a four month low in expectation that the present meltdown will spill over to the gold market. But the fall in gold prices seems to be a temporary blip. China imported 36% more gold both on a year-on-year and month-on-month basis, suggesting investors are parking their money in safe havens. Gold prices may move up soon.
The real impact of the Chinese meltdown will be clear from the government’s action in the foreign exchange market. China has been pegging its currency against the dollar but the Yuan, which also trades on the New York currency exchange, hit a three month low on fears that the market meltdown will impact the economy. If the Chinese officials do devalue their currency to push growth, world markets will be flooded with Chinese goods at low prices affecting exports of other countries including India.
The downward spiral in Chinese stocks has, for now, been halted but with so many artificial props in play, there is no knowing how heavy would be the residual impact after the props are removed. There is intense speculation on whether the worst is over or is yet to come. The market would unravel itself in the next few weeks.
Kamlendra Kanwar
