China's Economic Woe

China has been the most preferred destination for Foreign Direct Investments (FDIs) from last few decades, has seen enormous amount of investment in Real Estate. Since late 90s China has built hundreds of cities out of nowhere.

“It is important to maintain a proper balance between savings and investments to beat the business cycle”.

China advanced a step further and made massive investments in infrastructure especially in housing and highways which leads to over infrastructure.

Series of major events which lead to Chinese economic woes:

• Huge Investment in Infrastructure (Highways and Housing) over the period of few decades.
• People deferred their investment decisions as Real Estate prices were on nosedive because of over supply (especially Housing) which had hurt the investment cycle.           
• People anticipated stock exchanges as alternative investment and their decision were backed by PBOC when it gave green signal to government agencies in direction to increase their exposure in Capital Market, particularly Secondary Market
• Even though, economy’s fundamentals were not good, stock market doubled in last one year till June because of lot of buying activity by retail investor most of who didn’t even had the knowledge of stock markets.
• During this period, millions of new Demat account were opened. It has been observed that in month of May 15 around 30 million new accounts became active.
• By the end of May, more than 80% trading activity was done through these accounts of retail investors. In US, 53% of trades execute using retail investor’s account and for India this number is only ~2%.
• Due to huge demand in stock market, indexes reached new high despite bad indicators and fundamentals. This made stocks overvalued.
• Crash begin from 12th June in Chinese market is mainly because of two reasons: First, PBOC put increase restriction in order to curb grey market. Second, already overvalued market started correcting to its market value.
• To boost investments PBOC artificially cut interest rate 5 times in last nine months, which continuously pressurizing Yuan even more of every cut(demand / Supply).
• To ease down the continuously growing pressure on Yuan along with the intention of boost exports, PBOC on 12th August devalued its currency by ~4%. And this move triggered the fear amongst investor community.

Open to discussion, Feel free to shoot queries :)

Source for Image: http://www.bloomberg.com/quote/SHCOMP:IND

Samuhik Nished (Collateral Damage)

In last few days you might have observe huge volatility not only in Indian Stock Exchanges but across the globe and agitation amongst investor community. Sensex crashed more than 1600 points in last week on 24th August, its biggest fall since 2008 crisis, not because of domestic factors but acknowledging the global rout triggered by Chinese policy maker’s effort of intentionally devaluing its currency by about 4 percent and worst Purchase Managerial Index (PMI) of around 47 since financial crisis of 2008. PMI is economic health indicator of manufacturing sector of any economy, if greater than 50 signify the expansionary phase in economy while less than 50 signify contractionary economy.    

Impact on Indian Economy:

1. Indian has trade deficit (imports are greater than exports) and policy makers are pushing hard to turn the table from a deficit to a surplus economy by providing various kind of incentives to exporters. China is export oriented country with a market share of around 14% in global export. As we know China is in trouble (For various reason which are out of the context of this blog) and in order to give boost to its derailed export oriented industry Chinese central bank devalued its currency, making its product/services even more competitive in global market, in turn raise trouble for Indian exporters.
2. On other hand, devaluation of Yuan make Chinese product more competitive in India as well. And if internal policy maker don’t intervene and save domestic manufacturers (electronics, machines, iron, steel etc.), may kill Indian domestic industry.
3. China is one of the biggest trading partner of India only second to UAE with total trade of ~ $80 billion at a deficit of ~63 billion dollars. Of the total export of India to china constitute ~ 53% of raw iron. And slowdown in China because of its falling internal demand will impact our iron industry and indirectly will have its repercussion on other industries as well.

Even though our fundamentals are strong, have enough reserves along with the impetus provided by “Make in India” campaign, we are in much better health than most of other emerging nations still feel the heat if dragon falls (China is second largest economy in world).