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  • MODERATOR:

    Hello. Welcome to a webchat with Rahul Jacob, Business Standard, on "Chinese markets in a free fall, can the rapid decline also impact its economy?"


    RAHUL JACOB:

    Hello


  • I

    ITIKA

    Will China's huge exposure to exports bail out the country amid its ongoing crisis in much the same way that India braved the 2008 crisis due to its domestic consumption story?

    RAHUL JACOB

    The problem for exporters everywhere, including ours, is that demand worldwide is very soft. We may be running out of enough middle class people around the world who need new t-shirts and handbags every month or so. China's exporters are among the most efficient in the world but they cannot buck this trend. China's exports in July were down by 8.3 per cent. Nevertheless there has been an enormous domestic consumption growth story in tier 3 and tier 4 towns in China over the past several years that we tend to overlook. China, in fact, is not quite as dependent on exports as a straight exports as a percentage of GDP calculation would suggest. Many of its exports -- say of Apple's iPhones -- are filled with components from Taiwan and Korea. That tends to be overlooked by many commentators who look at the admittedly huge export sector in China. The larger problem for China is that GDP growth has likely dropped to about 4-5 per cent and investment as a percentage of GDP last year was 44 per cent. As the FT's Martin Wolf points out in a brilliant column today, investment ratios that high when growth is slowing to such an extent dont make sense.


  • B

    BARUN NAG

    What will be the consequence of a collapse in the Chinese markets? Will India face a problem? If yes, why?

    RAHUL JACOB

    Chinese markets are marginally up at lunch time today after severe volatility this morning. Monday and Tuesday saw losses of 16 per cent in total which is certainly the harbinger of a collapse. Predicting where markets will go from here is difficult to do because we are in potentially uncharted territory where China's financial markets are concerned. First, the Chinese retail investor has taken a beating in the past couple of weeks after being assured by persistent editorials in state media since last summer that investing in the stock market was a smart thing to do. Because the Chinese Communist leadership had planted its flag so closely to this particularly volatile and profoundly capitalistic asset class, Beijing then felt it necessary intervene massively to keep equities up, which is almost always a losing battle when governments try and take on sellers in a downward spiralling market. The upshot was that foreign investors, many of whom have for years held Beijing's economic leadership in high regard, are now panicking because their response to a mere downturn in a wildly overpriced market has been so clumsy. All that said, even a collapse in Chinese markets need not slow China that much more than the economy was already slowing before the August 11 devaluation. Household spending is not tied to the fortunes of the stock market as it would be in countries like the US and UK where stock ownership is much more widespread among the general population. Less than 10 per cent of Chinese have money in the stock market. For that reason, India would only face a problem as it did last week and on Monday if there was a massive contagion effect that brought the Sensex to its knees. With markets stabilising in Europe and the US and Asia, I think that while the markets will not recover anytime soon the gyrations that we saw Monday are likely behind us with any luck. More erratic behaviour on the past of Beijing however and that sanguine assessment would be proved wrong I imagine.


  • S

    SUJEETH

    If China devaluates its currency further, how will the move impact the global markets, especially India?

    RAHUL JACOB

    The Chinese central bank have in fact spent the past few days and several billion dollars intervening to prop up the renminbi. It is very unlikely they will devalue further. What they were attempting to do, albeit clumsily, was allow market forces to influence the currency rather than pegging it rigidly to the US dollar. The problems was this experiment occurred at a time when the world's confusion about Chinese policy prompted traders to believe that the initial 1.9 per cent devaluation was a sign of much more to come. The fact is that China has not sought to begin a currency war, notwithstanding many headlines to the contrary.


  • M

    MAHESH

    Why have the measures adopted by the Chinese authorities proved futile and what more can be expected over the next few months? Will the fall in Chinese economy benefit India?

    RAHUL JACOB

    Government intervention on the scale of China's -- the govt spent $ 200 bn trying to prop up the market through last Friday -- is rightly seen as panic. The lack of communication by the central bank as well as the Chinese authorities made matters much worse than they should have been. Premier Li Keqiang's only comment on Monday was not on the stock market at all but on growth prospects for the 3D printing industry in China which I am guessing was because he was at a trade event of some kind. This inability to address issues head on -- whether it is an industrial disaster of the sort we saw a couple of weeks ago in Tianjin or a stock market bubble bursting -- is a crucial weakness China's leadership suffers from. It has been true for decades but the stock market crisis brought it on to our front pages. The decision to let the market find its true levels in the past couple of days and the cuts in interest rates and reserve ratios announcedlate on Tuesday suggest that Beijing is hoping a stimulus will turn things around. In the short-term, it seems much more sensible than spending billions to prop up the market. In the long-term, China has some hard decisions to make to curtail investment, not stimulate it.


  • T

    TARUN BHATIA

    What is the main problem with China and why is it creating so much panic across the world? Can you tell me what is this Chinese contagion?

    RAHUL JACOB

    China's main longterm problem is that it is caught in a transition to a more market led economy and is led by a Communist leadership not always certain of what its main priorities are. President Xi Jinping has made all the right noises about reforming the economy but his main thrust has been on increasing China's stature in the region and around the world. The move to devalue the currency on August 11 and allow it to trade in a wider band appears to have been an attempt to strengthen China's case for the renminbi to be included in a basket of currencies determined by the IMF and a major step to it being viewed as a global reserve currency like the dollar and the euro. The trouble is this bit of self-aggrandisement was poorly timed and hopelessly executed because the Chinese leadership is so unused to speaking openly about its objectives. The world interpreted it as the beginning of a currency war and markets took fright. That said when China devalues most of Asia usually does get hurt but lets keep this in perspective -- it is thus far a devaluation of less than 3 per cent. Labour is a relatively small input in the price of manufactured goods anyway and China's labour costs have been going up by double digits annually over the past five years.


  • S

    SUNIL

    The Chinese markets have declined about 15% since the beginning of August, evoking fears of a global slowdown. Are the fears justified and what would be the impact on currencies and commodities worldwide?

    RAHUL JACOB

    The reaction to the decline in Chinese markets by global markets last week and on Monday has been exaggerated. Anyone tracking declining commodity imports by China and economic indicators like freight and electricity in China has known that the Chinese economy is not growing at anything close to the official figures of 7 per cent. The plunge in stock markets has merely made this front page news for people who werent paying adequate attention to the ongoing slowdown in the world's second largest economy. It turns out some of these people are fund managers as well!


  • U

    UDAY

    How are we placed vis-a-vis China in the emerging economies pack? Do the troubles in China open a window of opportunity for India and how should we respond as an economy to capitalise on the situation?

    RAHUL JACOB

    We seem to shape up quite well against other emerging economies because we are not a commodity exporter like Indonesia, Brazil and Russia. I think international investors are cognizant of this but when there is market turmoil involving a supertanker like China, the waters get choppy for everyone. I've broadly answered the second question earlier in the chat so please refer to my earlier answers.


  • N

    NIMESH

    Can we say conclusively that the Chinese stock market collapse indicates that the Dragon is going to lose its International market leadership sooner than later?

    RAHUL JACOB

    What the inept handling of the bubble bursting has conclusively proved is that commentators who thought the renminbi was going to be the world's reserve currency by 2018, 2020 or whatever have been proved wildly off the mark. Beijing has looked even more chaotic in its responses than our government did in its comments on MAT earlier this summer. We should rejoice. One thing democracies do better than dictatorships apparently is ride out stock market declines. Such gloating aside, the bursting of a stock market bubble in China is not going to wipe out a $10 trillion economy overnight.


  • R

    RAMA

    Does it look like India will surge ahead ahead of China in the short term and the Chinese stock market collapse just gave us a glimpse of the future?

    RAHUL JACOB

    India is incapable of surging ahead of China for another 50 years unless China is hit by a revolution and a nuclear holocaust and probably not even then. India is a country that has been reforming fitfully since 1991. The labour reforms being undertaken by state governments like Rajasthan and MP in 2015 were mooted back then. The power sector has the same problems of excessive subsidies that it had back then. The banking sector is saddled with bad loans. In the past few days, LIC had to step into buy the divestment of Indian Oil, which should have been done months earlier when the markets were soaring. China's divestment programme of the past decade and a half by contrast was brilliantly timed and well executed.


  • S

    SUNIL ARORA

    Given that China is sitting on huge capacities and its own consumption is slowing, is there a real danger of chinese materials flooding Indian markets? If so, what can Indian government do to protect its own economy?

    RAHUL JACOB

    I think that is a huge danger and given that India's consumer goods companies are themselves sitting on overcapacity, the two combined are a huge risk for the Indian economy. I am not certain what India can do to protect itself except to be alert to clear cases of dumping while not being forced into needless anti-dumping actions and export subsidies by indiscriminately heeding the alarm calls of Indian industry who as I say have problems of their own making.


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