Article no.

1: 5 ways China market meltdown can

impact India
From smart cities to gold, the fallout of the Chinese meltdown will have far-reaching consequences

BS, Shishir Asthana

| Mumbai, July 8, 2015

An investor stands in front of an electronic board showing stock

information, filled with green figures indicating falling prices, at a brokerage house in Fuyang, Anhui province, China

The Chinese dragon seems to have run out of fire, with nearly 40% of its market wealth wiped out in less than a
month. But the bigger problem is its contagious effect on other global markets. The symptoms are already
visible, with global markets now responding to developments in China rather than in Greece.
China was one of the main engines driving global growth and now its sputtering is sending panic waves across
the globe. The initial reaction to the Chinese market meltdown was that it was only a market bubble and that
the Chinese economy would remain isolated. But Chinese stocks listed globally, be it in Hong Kong or the US
have also fallen, suggesting that the repercussions on the economy might be real.
The Chinese government was stepping on the brakes in an attempt to shift the economy from a manufacturing
base to a consumer-driven economy. Chinese officials attempted to inflate the real estate market but that did
not work. They then nurtured the equity markets which would act as an important source of secondary income
to its population to drive consumer demand. This worked for some time but then became unmanageable.
The markets had run far ahead of the economy. The first quarter of the current calendar year was the slowest
in the last six years, while the market touched a new high at bubble-like valuations of 46 times earnings.
The world has been insulated from the meltdown in Chinese market thanks to its low exposure in mainland
China of less than 1% of market capitalisation. But there will be no place to hide if Chinese consumption slows
down, impacting almost every country in the globe. Australia is already feeling the jitters. China is its largest
trading partner, consuming a majority of its mining output.
Here are five ways in which Indian economy may be impacted in case Chinese economy crash lands.
1. Good for smart cities: Hard commodities have been hit in expectation of a Chinese slowdown. Copper is
trading at a 6-year-low. China is the worlds top copper consumer, accounting for 40% of global consumption.
Similarly, aluminium is trading at new lows and is already trading at prices below cost of production of many
Chinese companies. For India as a consumer, this is good news as the cost of constructing new infrastructure,
especially smart cities, will come down. For producers of these metals, low prices are bad, especially so
because China has resorted to aggressive selling to clear its inventory and raise cash during adversity. Little
wonder metal stocks are bearing the brunt of the fall.

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2. Good for deficit and inflation management: Oil prices were already taking a beating, with global
slowdown and a possible US-Iran deal, China only nudged the prices lower. For India, low oil prices helps in
controlling its deficit and keeps inflation under check.
3. Bad for automobile producers: Automobile exporters and manufacturers, especially Tata Motors will feel
the pinch as China was its fastest growing market, especially for JLR, and the company was investing in the
market to drive future growth. But auto-ancillary suppliers will be hit as China consumption falls.
4. Gold might glitter: Chinese had overtaken India as the largest consumer of gold. Prices of gold have
slipped to a four month low in expectation that the present meltdown will spill over to the gold market. But the
fall in gold prices seems to be a temporary blip. China imported 36% more gold both on a year-on-year and
month-on-month basis, suggesting investors are parking their money in safe havens. Gold prices may move up
soon.
5. Mobiles can be cheaper: The real impact of the Chinese meltdown will be clear from the governments
action in the foreign exchange market. China has been pegging its currency against the dollar but the Yuan
which also trades on the New York currency exchange hit a three month low on fears that the market meltdown
will impact the economy. If the Chinese officials do devalue their currency to push growth, world markets will be
flooded with Chinese goods at low prices affecting exports of other countries including India.

Article no. 2: How Chinas slowdown affects the

rest of the world
Livemint, Tadit KunduRagini Bhuyan, Jan 07 2016.

A slowdown in China will undoubtedly have an impact on the rest of the world. That stems from not only the size of
the Chinese economy, but also its earlier rapid growth and the model it adopted.
Chinas investment spree in the noughties meant it gradually became the largest consumer of major commodities
(chart 1). By 2014, it accounted for almost half of the worlds consumption of copper, aluminium, nickel, zinc and
coal. Consequently, Chinese demand led to a sharp rise in global commodity prices in the 2000s, which has been
often dubbed as the commodity price super-cycle.

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However, given increasing signs of an entrenched slowdown, there is little chance that China will again embark on
such an investment spending spree. Data show that China actually trimmed its imports of major commodities in
2014 (chart 2). Consequently, the outlook on commodity prices has worsened (chart 3).

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This spells trouble for many commodity-exporting countries such as Australia, Brazil, and Indonesia, which are
being hurt by both lower export demand and falling commodity prices. Obviously, China is not the only factor
weighing on the fortunes of commodity exporterslower energy prices are already raising questions over the
economic health of a number of oil exporting nations.
Within commodity exporters, the countries which are likely to be disproportionately affected are those that have a
heavy reliance on Chinese exportsAustralia, for instance.
Chart 4 shows that Australia has reasons to worry over the slowdown in the Chinese economy, with about a third of
its exports headed for China. In a way, Australias growth was the mirror image of Chinas investment spending
spree in early 2000s.

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While China was busy building its infrastructure, Australia began to mine its resources for export to China. The
Australian dollar appreciated in real terms during this period as mining exports increased, but the strong currency
hurt manufacturing competitiveness and, increasingly, Australias export basket moved away from manufactured
items to mining products like iron ore and coal (chart 5).

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As long as commodity prices rose and Chinas growth story remained intact, Australia had little to worry about.
However, as the Chinese economy began to slow down over the last couple of years, Australia started witnessing a
fall in mining sector investment, raising questions over how long the mining-led economic growth will continue.
Apart from Australia, South-east Asian economies are likely to be the other losers. Many of them have linkages with
Chinese industries and countries like South Korea, the Philippines, Malaysia and Thailand are major exporters of
industrial supplies and capital goods to China (chart 4). Meanwhile, Indonesia is a major exporter of coal and an
exporter of industrial metals. Thus, the slowdown in Chinese manufacturing (as indicated by below-50 Purchasing
Managers Index readings), which itself is largely a result of weak demand from developed countries, is likely to
affect the economies of South-east Asia.
In the current environment of subdued growth in developed economies, South-east Asian countries will find it
difficult to replace the demand from China. In fact, there is already a steady decline in overall exports for most these
nations (chart 6). South Korea, whose biggest trade partner is China, saw exports fall 14.7% year on year in
Augustthe biggest monthly fall since August 2009.

In contrast, the possible effects of the Chinese slowdown on the Indian economy seem less alarming, mainly because
of Indias relatively lower export dependence on China.
On the other hand, Chinas slowdown has aided and partially driven the global fall in commodity prices since mid2014, which has helped India since it is a large commodity importer.

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In fact, Indias economic fundamentals as of now appear better poised for faster growth, when compared with
China. Unlike China, Indias working age population (as a ratio to total population) is slated to rise in coming years.
Moreover, India enjoys higher domestic consumption (as a share of gross national income) than China.
However, India is not completely immune from developments in China. Overcapacity in China has led to increased
exports of materials such as steel to India (chart 7). This has led to protests and complaints about dumping from
many Indian steel makers. Subsequently, the government recently imposed additional import duty on select steel
products.

Apart from the trade linkages outlined above, there remains the risk of a financial or credit market contagion. As
part III of this series highlighted, China is facing risks from increased shadow banking and high corporate debt.
In 2008, we saw the devastating effects of the mortgage market crisis in the largest economythe USon the rest
of the world. The question that remains is whether the slowdown in the second largest economy will be better
managed and less disruptive.
This is the last of a five-part explainer data series on China. Part I talked about why Chinese economic growth is
decelerating, part II about structural problems facing Chinas economy, part III about the risks and part IV about
balance of payments and markets.

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Article no. 3: Will Japan recession affect India?

Bank of Japan's decision to expand QE might ensure Indian stock markets remain buoyant
BS, Devangshu Datta November 23, 2014

Japan has slid into recession. Between April and September, the world's third-largest economy registered
successive quarters of shrinking gross domestic product (GDP). Even before the data was released, the Bank
of Japan (BoJ) announced it would increase the size of its quantitative expansion (QE) programme. The
announcement pushed the yen to a seven-year low against the dollar. Japan has seen low growth and deflation
for 24 years. It has tried multiple QEs. Also, there has been massive deficit financing of infrastructure capacity.
Government debt is a whopping 2.5 times the GDP. Shinzo Abe, prime minister, might have triggered the
recession when he raised taxes in April to reduce government debt.
It is believed at two per cent levels, inflation will stimulate consumption demand; the QE is designed to target
that two per cent. Economists say the recession will be short-lived and a recovery could start in the next quarter
(January-March).
How does this affect India and, in a broader sense, the world? India and Japan have a comprehensive
economic partnership agreement. In 2012-13, bilateral trade stood at $18-19 billion, falling to $16 billion in
2013-14, as both the rupee and the yen declined against the dollar. Since 2000, private foreign direct
investment (FDI) from Japan has been $15-16 billion.
Prime Minister Narendra Modi's visit to Japan in September led to FDI commitments amounting to about $35
billion through the next five years.
As Japanese exports (to India and the world) are likely to rise due to a weaker yen, Japan could get a larger
share of global trade. This might induce China, Korea, Thailand, etc, to weaken their respective currencies.
Japanese FDI flows into India could fall below the estimated $35 billion, as the yen has fallen substantially and
is expected to remain weak for an extended period. So long as QE continues, the yen will trend weaker.
Borrowing in yen and buying risky assets in any other currency will be attractive. The yen carry trade could
mean a lot of money flowing into Indian equities and other assets. There is a point at which the yen will snap
back or, more likely, see many recoveries between net losses. Being net-short on the yen against any other
currency might be profitable. In strictly local terms, Indian markets are valued somewhat higher than the
fundamentals seem to warrant. But the consensus about future performance is optimistic. For a foreign
institutional investor interested in yen carry trades, India is an obvious destination. The market is big enough to
absorb large investments and has relatively high growth rates compared to peers.
Also, India is out of step with many other large economies. It could be a haven in 2015, which promises to be a
year of low global GDP growth. Though the US is pulling out of recession, China, Europe and Japan remain
weak, while Russia is struggling. Among other emerging markets, Indonesia is weakening amid higher inflation,
while Brazil and South Africa are amid woes/sadness. India, on the other hand, has higher GDP growth and
lower inflation. Though the Indian economy has many problems, 2015 could be better than the past three
years. The BoJ's decision to expand QE might ensure Indian stock markets remain buoyant.
An interesting aspect is the asset allocation patterns in Japan. That country has seen zero or near-zero interest
rates for a long time. Under these circumstances, conventional wisdom indicates a rise in consumption and a
shift in asset allocation from debt to equity.
But Japan has an ageing workforce and a large retiree population. Household savings patterns remain debtoriented and consumption hasn't increased. Though a stock market recovery has been seen, it has not
translated into wealth effects and increased consumption. Few individuals hold substantial equity. For 20 years,

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the stock market headed nowhere, and this has created permanent aversion.
This has interesting implications. India has very different economic conditions, very different demographics and
a very different stock market performance. But Indian household savings and asset allocation patterns seem to
be as equity-averse as Japan. The underlying reasons for India being equity-averse might include lack of trust.
While the stock market has given stellar returns, it has also seen periodic scams and scandals. Many retail
investors lost money when they were caught in these, leading to their family/friends also turning equity-averse.
It will take time before this changes.

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