It’s been but a fortnight since RBI Governor Raghuram Rajan, speaking at the London Business School, caused a flutter in the world economic circles with his warning that the global economy was slowly slipping into the Great Depression-like problems of the 1930s. Instead of paying heed to his observation that the central banks, pushed into competitive monetary policy easing, need to put their heads together and define new rules of the game, the IMF came out all guns blazing to counter the view. Rajan, formerly IMF’s chief economist, is among a handful to have correctly called the looming US subprime crisis of 2007. The Chinese stock market meltdown is unlikely to be the trigger for a 1930s-like depression as the tremors till now have been confined within the perimeter of the Great Wall.
Yet, a one-third market cap wipeout of about US $3 trillion in three weeks is a matter of great concern for the world. True, in the preceding 12 months, the Shanghai market had grown by a massive 140 per cent in what was a stark disconnect with a decelerating economy. Just as its economy is still growing at almost seven per cent, six million unsold apartments have forced the hand of China to drastically cut rates. With the government pushing stock market investments, several mainland companies with not-so-great fundamentals began showing astronomical Price/Earnings multiples. Result: the first half of 2015 yielded runaway returns to many first time dabblers in the market. It was but inevitable that the bubble would burst.
Sure, the Chinese meltdown has the potential to sting the global economy more than the Greek eurozone exit. Just as there is tremendous pressure on Greece to avert a financial meltdown, the Chinese government cannot be absolved of its sins of omission and commission, where topping the list would be competitive monetary policy easing by the People’s Bank of China. Measured market intervention should mean there is no disconnect between the economy and the market cap. China’s loss could well be India’s gain. Foreign institutional investors will tom-tom India as a stable investment destination in Asia. Because, our equity market may not fly into the orbit, but neither will it come crashing down like a misfiring Chinese rocket. And the next great depression will remain a conjecture.