China stock market loss means systemic weakening and is a warning for India

The continuing scoop in China’s stock market is not good news for EMEs including India. Portfolio investors are sniffing for systemic fault lines in other EMEs as the Chinese government’s invisible effort to tame the market goes futile.

Already, the Chinese equities are down by nearly 10% in the last two trading days. Drying liquidity amidst weakening economy is the root cause of the burst in the Chinese market. Overvaluation and bubble in the last one year is also a contributor.

So far, the market observers are interpreting it as the inability of the communist part to rein in the market. Here, the conclusion is that the problem is China specific.

But a caution is right there in the Chinese development as the steep fall may develop risk aversion among institutional investors. Hence, there is strong logic that any factor that affects China may also produce repercussions in India.

On Monday, India’s stocks have also fallen by nearly 5%. The trend is continuing though in a mild way, on Tuesday.

The triggering factor that tempted the market to fall in India was the negative observations made by the MB Shah Committee on Participatory Notes. If some follow up actions are taken by SEBI on foreign inflows, it may produce a bigger response in the market in future.

Steep decline in share prices will discourage an upturn in India’s investment cycle. Flight of foreign investors and the low stock prices may adversely affect growth prospects. Hence, the new downward trend in China should not be brought to India through negative shocks from the official level. 

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