Opinion China syndrome

The blowout in China following the turmoil in Greece will dampen spirits and further cloud the outlook on global growth.

The ripple effect of China’s stockmarket meltdown was felt across the world on Wednesday. Indian markets fell 2 per cent or over 450 points on the BSE Index, the steepest in a month. Trading has been halted on almost 1,300 Chinese firms listed on the Shanghai and Shenzhen exchanges. This was after the Shanghai Composite Index dropped 5.9 per cent in a three-week-long sell off that erased over $3.2 trillion in value, despite policymakers and state regulators throwing everything and the kitchen sink at it to stem the slide. There had been enough warnings of a Chinese stockmarket bubble, or irrational exuberance, by global equity strategists uncomfortable with stratospheric valuations and soaring stock prices despite concerns about slowing growth in the world’s second largest economy. It was also fuelled by easy money and the securities regulator talking up the markets, which includes a growing number of new retail investors, including students. The Chinese stockmarket has a low institutional base and foreign participation is limited to below 2 per cent of equity, so retail investors have been mainly hurt by the volatility. The central bank, the securities regulator and the government have intervened by instituting monetary easing, halting initial public offerings and nudging state-owned firms to offer funding support and buy stock.

But, as we have seen in the past, when such bubbles are pricked, measures to stabilise the market often don’t work in the near term, especially if there is a crisis of confidence and a disconnect between economic fundamentals and the state of the real economy. The impact has also depressed commodities markets, especially metals, fuelling worries of a broader impact on the Chinese economy, which has been an engine of global growth.

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The blowout in China following the turmoil in Greece will dampen spirits and further cloud the outlook on global growth. From India’s perspective, these events may not cause immediate worry, but should serve as a lesson to policymakers. Unlike China, India’s infrastructure needs fixing and there is plenty of potential, as RBI Governor Raghuram Rajan has pointed out, for Indian firms to make in India for Indian consumers. Indeed, on paper, India appears to be a safe haven compared to other volatile economies. But disappointingly, over the last few months, the government has failed to grasp such opportunities, having wasted its political capital on battles that could have been fought later, like land legislation. The crises unfolding elsewhere offer another window of opportunity for the Narendra Modi government to step up the pace of execution of shovel-ready projects in infrastructure, and move on executive decisions to repair stretched bank balance sheets.