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Lok Sabha TV Insights – Chinese Meltdown

Lok Sabha TV Insights – Chinese Meltdown

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13/07/2015

At time when when nervousness over Greece crisis was at its zenith, world got another jolt in face of Chinese stock market meltdown. Chinese stock markets were bullish from 2010 when Government gradually started to allow people to invest with borrowed money or margin money. Consequently, Retail investment in markets went up astronomically. People also identified some loopholes in law and exploited them in various ways. Few weeks back when administration tried to plug these loopholes, there was a massive selloff in markets. Shanghai Composite Index which only few weeks back was up 150% from 2010 level fell meanwhile by 30%. Opinion remains divided between whether this fall was a mere market correction of overvalued stock or it is indicator of a deeper rot in Chinese economy.

Chinese economy has been growing over and above 8% for last 2 decades, which economists say is unsustainable. This growth, moreover, was based on export demand rather than domestic consumption. So when global markets are saturated with Chinese products or there is 2008 type slowdown, Chinese capacities will be left surplus, hence bringing down its growth.

After 2008 global crisis, China has been trying to shift towards consumption oriented economy. But so far there is limited success. China is providing cheap credit to its public so that consumption is revived but most of this money moved to financial assets (shares etc.), leading in stock market bubble. As savings got blocked in overpriced financial assets, china had to finance its growth by borrowing debt.

As a result, China’s debt to GDP ratio stands at whopping 280% of its GDP. In absolute terms its debt is around $ 30 Trillion, when its annual GDP is just over $ 10 Trillion. But fortunately, unlike Greece almost all the Chinese debt is domestic and foreign debt is just $ 1 trillion for which it has $ 3.8 trillion FOREX kitty.

Domestic debt is not as bad as foreign debt, but still it has capacity to instigate domestic instability. It is well accepted that Chinese growth will slow down in coming time. If this growth rate goes beneath the interest costs on its debt, which is very likely, then it will caught into vicious debt trap. However, problem being domestic can be dealt undoubtedly by authoritarian regime in China. It might be possible that to absorb losses by recent crash, China starts selling its FOREX reserves, which will most likely result in fall in value of dollar and hence massive instability.

Today, world economy overwhelmingly depends upon China. Recently an IMF report pointed that global growth this year will be much slower. Some time back RBI governor even said that there are signs of depression like situation coming. With all this only India and South East Asia are bright spots on world map. Chinese slowdown is poised to induce further decline in commodity prices and this will be a boon to India. India is having an unprecedented opportunity to leapfrog to a highly competitive and progressive economy.

Further, China has been formidable competitor of India when it comes to foreign investments. With India offering better returns, it will emerge as preferred destination. So it was no surprise that World Bank’s ‘Baseline Profitability Index’ put India at no. 1 for investment, while China was at 65. But, for this to take place, India will have to reposition itself in every aspect. Currently, business in India has no advantage other than being ‘low cost’ and access to huge domestic market. Even low cost advantage is taken away by poor infrastructure and red tape. While even China is itself eager to make in India, India must not let this opportunity go.