If the free fall in the Chinese share markets in the three weeks since June 12 is anything to go by, the dragon is no longer the invincible giant that many took it to be. Even taking into account that the two principal markets soared in the preceding 12 months—Shanghai by 150 per cent and Shenzhen by 125 per cent—the recent seemingly-catastrophic fall is very significant.
By this spring, the stock markets in Shanghai, with 831 listed companies, and Shenzhen, with 1,700, boasted a combined market capitalisation of $9.5 trillion that made them, along with the much older Hong Kong exchange, the second largest financial market in the world. In the tailspin that followed, a little over one-third of it has got eroded.
Evidently, the cushion that the Chinese stock markets had built up before the downturn came in handy when the crash occurred.
Incorrigible optimists were predicting that the boom would continue, but for the realists the bubble was waiting to burst as the fundamentals looked none too rosy. Mercifully, India has suffered from the Chinese bust only marginally. After the initial shock when the Bombay Stock Exchange index lost 481 points on a single day, Indian markets have been virtually unaffected.
China’s has been an isolated stock market. It had little impact on world markets, when its stock indices doubled and tripled in a very short span. That explains why India is so little affected by the crash. Within China, however, a huge number of youngsters who dabbled in stocks seeing the impressive results of the one year of absolute boom have had the shock of their lives.
Though share prices have ruled firm, the impact on commodities in India has been considerable. Vedanta, which produces copper and aluminium, closed over 8 per cent lower, aluminium maker Hindalco ended 5 per cent down and the state-run NMDC, the country’s biggest iron ore producer, declined 2.55 per cent in the immediate aftermath of the Chinese crash. Tata Steel lost 5 per cent. These may not reflect a steep fall, but they were indicative of a downward trend.
With copper and aluminium trading at an all-time low as China was the world’s largest consumer, what it translates into for us is that the cost of infrastructure projects like smart cities could come down significantly.
The recent rally in the US dollar also depressed commodity prices. Gold fell to a near four-month low, as prices slipped below Rs 26,000 in India. Silver sank nearly 7 per cent. Platinum dropped to a 2009 low. Crude oil prices also trended lower after the Chinese bubble burst.
Tata Motors shares declined 6.2 per cent amid concerns that the meltdown in Chinese markets will impact consumer demand in the largest auto market. China is the biggest market for Tata Motors’ luxury brand Jaguar Land Rover.
It must be said that the Chinese government has responded to the challenge manfully. A couple of weeks ago, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with positive talk. But how far all this will go only time will tell.
k.kamlendra@gmail.com
Kanwar is a former journalist