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  • Rahul Jacob - Deputy Editor, Business Standard

    Rahul Jacob

    Deputy Editor, Business Standard

    DATE: August 03, 2015, 02:00 PM

    SUBJECT: Will China's stock market drop slow global growth?




    Good Afternoon and a warm welcome to the webchat with Rahul Jacob, Managing Editor, Business Standard. The subject for the day is "Will China's stock market drop slow global growth?"



  • A


    Good Afternoon Sir. China seems to be gradually losing out as a global manufacturing hub as wages have been steadily rising while the continued economic slowdown is also acting as a dampener. With the Make-in-India campaign picking up pace could the relocation of manufacturing activities from China could boost India's GDP in the forthcoming years?


    I wish the answer was yes. the truth is that China's global share of exports even in labour intensive sectors of manufacturing such as garments is still rising marginally. Wages in factories have been rising by double digits in China since 2010 annually, partly as a result of Beijing's desire that workers become a larger part of the consumption story and partly because the cohorts of new workers is becoming smaller as the effects of the one child policy kick in. But China remains hugely competitive as an exporter because Chinese companies have invested in automation, workers are better educated. Wages are only a small part of the decision to manufacture in a place anyway. In a world of just in time inventories, infrastructure matters as much; its infrastructure --ports six lane highways and the like -- are First Wolrd, rather than fifth rate as in India. Thus far Bangladesh and Vietnam are doing a better job getting a share of labour intensive exports moving from China in part because of looser labour regulations than in India.

  • A


    The Shanghai index has plunged by more than 30% since mid-June despite moves by the Chinese authorities to freeze trading in some stocks. Does this suggest that the bubble in the Chinese stock markets and economy in general is beginnning to burst and China is no longer a driver of global growth? In such a scenario, what would be the implications for the global economy?


    The 10 per cent drop last week and the overall drop of 30 per cent since mid June certainly confirm that the bizarre and heavy-handed government interventions -- a ban on new IPOs, commitments by the Chinese sovereign wealth fund to buy $500 billion in equities,visits by police to brokerage houses to discourage them from writing negative research on the market -- are not working. This is a seminal moment for China in terms of how future investors in the stock markets -- both domestic and foreign -- will view the government's credibility. The world and China is finally waking up to how much of a liability an authoritarian, Communist government can be when it comes to making the right policy interventions when the stock market is rising and then plunging. Is it a turning point for the Chinese economy, however? I would argue thus far not necessarily. The commodity markets were already signalling a huge decline in Chinese demand for iron ore, coal and more even as the market was up almost 150 per cent till June. The economy was indeed decelerating even before the market gyrations of the past few weeks. Shares are less widely owned than they are in a developed economy and account for 7 per cent of total household wealth so many analysts believe the negative wealth effect will be limited. That said, many retail investors piled in at the height of the market. China can be an emotional place in its response to the losses of money that some small investors are bound to have lost in the past few weeks. The government's fear of these losses undermining social stability is driving its confused response to the drop in stock prices. Having cheerfully encouraged retail investors to invest in shares through editorials in state-owned media, the Communist government looks reckless and incompetent as the indices fall.

  • R


    A slowdown in Chinese economy has led to a decline in its foreign trade after exports dropped sharply. Do you feel the weak China growth is an opportunity for the Indian firms to boost their export market share?


    Slower global growth is having a dampening on exporters everywhere, but China's share is in fact still growing on that front -- outbound shipments rose 2 per cent or so in June. Contrast that with the drop in India's exports by 16 per cent in June and 20 per cent the month before and you will see that we have an uphill battle on our hands. I would argue that as domestic demand slows in China, its exporters will drop prices and indeed even dump goods on global markets, making their export numbers look better relative to everyone else's. Indian firms are likely to lose market share if that prediction is right.

  • S


    China's manufacturing sector narrowly avoided a contraction in July, in a clear sign the industry is slowing down. To what extent will this stymie the Chinese govt's intiatitives in maintaining buoyancy in the stock markets?


    There is a very debatable relationship between economic realities and the fortunes of stock markets the world over. In the case of China, this disconnect is especially pronounced; it is better to understand its domestic market as more akin to a casino rather than a stock market. Please remember that the stock market rose 150 per cent in the 12 months to June 2015 even as the housing market was in doldrums and investment activity was slowing. For that reason, the reading of Caixin/Markit’s purchasing managers’ index (PMI) that showed China’s manufacturing sector contracted in July by more than previously thought, to 47.8, is yet another bad sign for the economy but stock market investors are likely to be more swayed by government actions to prop up the economy and indeed the stock market. The recent stock market gyrations are a a vicious circle; not only have they hurt the Chinese government's credibility but in a bid to boost its economy and bolster its credibility at home and abroad, the Chinese govt is embarking on just the sort of wasteful infrastructure spending that economists have long suggested the govt must stop to rebalance the economy towards more consumption led growth. Over the weekend, Beijing announced that it would be undertaing the building of more airportsin the sparsely populated western regions. Expediting the building of "a modern underground pipe system" as Bloomberg reports is harder to quibble with but the government is clearly confused again about how to react to the economy's slowdown and is going with its predictable instincts to dig ditches, build airports rather than push the financial reforms the country needs -- in particular to move lending away from favouring SOEs so that it can benefit dynamic private entrepreneurs instead. These reforms are going to be hobbled by government nervousness in the wake of the drop in the stock market last week by 10 per cent and by 30 per cent in June. That is a tragedy for China.

  • M


    Will China's vision of setting up a European Union-like consortium of trading nations along the proposed new Silk road help revive its economy? To what extent will it help boost the economy of the entire region?


    This is an excellent question but hard to answer at this point. One point to make right off is that the vision Xi Jinping in pushing the Silk Road initiative is not a European Union style consortium of equal trading, visa privileges. The Silk Road initiative in its political sense is essentially to establish China as a regional overlord. This is how imperial China related to its neighbours; hundreds of years later, it remains the prism through which Communist China cajoles and when need be bullies its neighbours. The Silk Road is a charm offensive -- in which both meanings will eventually apply. In its economic sense, with China announcing infrastructure projects with Central Asian countries and railway lines and highways through Pakistan and Afghanistan, this seems hard to argue with as an engine of growth for the region. I have often wished our leaders would be more energetic in seeking Chinese assistance to build roads and ports in India. China would in theory benefit in all these arrangements as the leading infrastructure companies for projects in developing markets are in many cases Chinese. Our neighbour Sri Lanka has already benefitted from both highways that boost tourism and been hurt by an airport project and a port project in Hambantota built by China -- in the case of Hambantota allegedly because it is the family constutuency of the former president Mahinda Rajapaksa. The lack of transparency in some of these deals will be an ongoing concern as will China's ability to execute them in unstable parts of Pakistan and Afghanistan for instance. It is one thing to announce you will invest $48 billion in Pakistan as China did recently. Good luck trying to put that sort of money to work in an area as contentious as building infrastructure.

  • T


    Many of China's internet products, such as wechat, baidu and weibo are giving their global counterparts, such as google, twitter and whatsApp a run for their money. Do you foresee a situation in which the Chinese Internet boom overtakes America and overhauls the rules in the online space?


    Wechat, Baidu and weibo are very important influences in China generally in terms of creating a more open society with in limits. They exist however in a vacuum as neither Google nor Twitter can actually compete against them in China in the way that they operate in India for instance. The only way to answer that question is to ask you whether you are on Baidu or Weibo? I would guess not.

  • R


    With stocks and property out of picture, where will the Chinese with extra disposable income invest next?


    Answering that question is very hard. If you add also that the casinos in Macau, the southern Chinese special territory where gambling is allowed are down by 20 to 40 per cent month on month in casino receipts, it is hard to see where wealthy Chinese will take their propensity to gamble next now that the other legal casino, the Shanghai stock market, is down on its luck. Reports from real estate brokers in London, New York and San Francisco -- many of whom have hired Mandarin speakers -- suggests that real estate overseas has been a major beneficiary in the past two years and may see even more money flooding in which should worry local governments.

  • R


    In recent months we have seen fall in global commodities on the back of weakness in global demand. Is the crisis in Greece and weakness in China stocks are first signs that could weaken global stocks?


    In fact, the drop in steel and copper prices to ten year lows and the drop in coal prices by about a third this year long predates the Greek (melo)drama and the 30 per cent drop in Chinese stock markets since June. The drops in commodity prices is a direct consequence of the slowdown in investment in China -- construction and real estate amounts for a huge chunk of investment in China and global commodity markets have already been in doldrums because of that. Global markets after the occasional sputter on days when Shanghai was down by 8 per cent seem to be taking the gyrations on the Chinese markets in their stride. The fact remains that interest rates the world over are still very low and there are a finite number of places other than stocks where investors can put their money. For now, they are keeping faith. Whether they are right to do so, given the many clouds looming over China, the world's second largest economy, and Europe, is another question altogether.

  • S


    Will China's pain be India's gain?


    In economic terms, China's pain is already India's pain as well; our commodity producers are hurting as the price of coal and iron ore tumble as demand from China collapses. The other aspect that I mentioned earlier is that margins for our exporters (and indeed domestic producers exposed to Chinese imports) is already being hit because when Chinese manufacturers get desperate, they will push even more production on global markets. In stock market terms, the Indian market looks predictable and sensibly administered by comparison to Shanghai. The Morgan Stanley decision i early June to defer China's inclusion in the MSCI index recently is likely to hold for a long time as it predated the inspired lunacy of Chinese authorities in trying to prevent the market from falling further. Those commentators who predicted that the Chinese renminbi would be a global reserve currency in a matter of years displacing the US dollar must be chastened today. The US dollar is the clear winner as is the case for democracy and libertarian economics more generally.

  • M


    Is the stock market fall in China a precursor to a hard landing? And will it impact the world in a similar fashion as the Lehman crisis did?


    I have heard people predicting a crash in the Chinese economy for at least two decades now. The truth is that an economy that has grown to be a $10 trillion economy in such a short time and boasts foreign reserves of $ 3 trillion can cover up a multitude of sins of omission and commission. The truth is the Chinese government has more money to recapitalise its large banks than than the Indian government does with PSUs here. That said, the sheer stupidity of the manner in which the Chinese government has acted as a cheerleader and instigator as markets were cresting ever more absurd highs till June and now has responded in a draconian way -- telling newspapers they must submit stock market reports to a censor, having police visit brokerages to intimidate analysts and instructing the Chinese regulator to in effect buys billions in shares -- make the risk of triggering a stock market panic ever higher. Its hard to see something in the order of the Lehman crisis thus far because China's stock markets are not that integrated into the world stock trading fraternity to the same degree that the New York stock exchange was and is. Holdings of foreign institutional investors, for instance, account for just 2 per cent of total market capitalisation.


    Thank you, Mr Jacob, for answering our readers' questions today. We also thank our readers for sending their queries. We regret that all the questions could not be accommodated in this chat due to time constraints. Hope to see you soon

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