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.
