A near 9% crash of Shanghai Composite Index triggered a worldwide collapse of Capital markets that saw Sensex plummeting by about 1600 points yesterday and Rupee down by 82 paise to a new low below 66. The shockwaves are far-reaching as Dow slid by about 800 points and Crude prices were close to a six year low of 40 USD/bbl. The experts are predicting more volatility, as seven years after the global financial crisis of September 2008, the world economies are still struggling to grow well, and the emerging economies are continuing to get hammered.
The epicentre of the new tremors is in China this time, as the Chinese share markets are going through a corrective phase after a rapid growth in 2014 driven by middle income level people investing in share markets. Despite a fall of more than 30% since this June, the Shanghai index is still higher than what it was a year ago. The real concern though is not the capital markets there, as much as the overall growth of Chinese economy. The Chinese establishment has not been able to spur and sustain growth despite several measures including the recent depreciation of yuan, that India has now surpassed China in growth rate after several years. And we all know when Chinese say their economy is slowing, it is lot worse than what they are saying.
The Chinese growth concerns is not the only issue that has triggered this collapse. Most of the major economies are still struggling. We recently saw how EU had to pull a last minute deal for Greece and things are not fine there yet. Before that the Swiss delinked their currency peg with Euro that led to a minor currency crisis in the region. From Mexico to Malaysia, most of the emerging economies that are oil export driven are getting hammered, and Brazil’s woes had begun atleast a year and a half back. The Oil price crash from the end of last year seems to be more long lasting this time, as the Supplies have not come down as expected, specially the US tight oil, despite the prices being less than half of last year. The Iran nuclear deal in July has only increased the concerns of even more supplies coming in 2016, whereas the demand is not increasing, but only going down with China slowing down.
This is compounded by the tapering of Quantitative Easing by Fed and an expectation of interest rate hikes in this year, that saw most of the funds pulling out from various asset and commodity class across the world and rushing to the safe havens – US treasury bonds. Amidst the chaos, the only bright spot continues to be India as it promises to shine through with better growth rates and even poised to touch a double digit growth rate. However, the gap between expectations and realisation is widening, with more and more hurdles being faced in implementing key reforms like Land bill, GST bill and such and the recent Parliament logjam has aggravated the investor concerns. Modi government needs to do a lot of catching up before the funds flow start to dry up, and very soon!
Though we can proudly say we have overcome China in terms of growth rates, we need to introspect a lot more, as we are now competing with a weaker China or China under transition, where the investment and export driven growth model it pursued for so long is now plateauing and a new captive domestic demand model is taking shape. Hence it is more due to Chinese slowing down and falling behind than we speeding up that has made us the number one growing economy. If we need to sustain this growth and in fact even double the GDP in the next four to five years (which is not impossible), a lot more purposeful groundwork is required in reform process than mere sloganeering and campaigns. Thankfully, our own model is largely in-house demand driven and there is more scope for growth in investments, specially in infrastructure and exports. Therefore, as Raghuram Rajan said, the fundamentals are still strongly in favour of India despite the mayhem around the world.
But for the time being, Karma seems to be catching up with the proverbial bull in a China shop, as it is China’s turn to cause some damage to the bull!
Image courtesy : Artist Keshav