A red flag

The collapse of China’s stock markets came as a shock globally, wiping out over $3.5 trillion, twice the size of the Bombay Stock Exchange’s market cap. Though the Chinese markets had lost over 30 per cent in the last six weeks, the general perception was that the Chinese government was in control and would not allow it to get out of hand. That it failed is scary and a matter of serious concern.

The chaos in the Chinese markets is of the government’s own making as it acted to boost consumer demand. Cheap margins and easy money to attract ordinary Chinese to invest even though they knew nothing about the markets created a bubble that was not related to fundamentals. Beijing is lucky that neither the ordinary Chinese nor the media have taken the government to task, as it happens in India. However, in India, too, it’s an outcry in vain as investors have not got a single paisa in compensation after the several multi-crore stock market scams.

If the devastating effect of the market collapse infects the Chinese economy, it will have huge global ramifications as China was the global growth engine since the 2008 financial crisis crippled the European and US economies, which are just recovering.

Indian markets are not expected to benefit automatically from China’s woes as it is said that the Chinese blue-chip stocks that were battered are very attractive and investors have started mopping them up. Indian stocks, on the other hand, are overvalued. So it is unlikely that foreign institutional investors will rush to Indian markets.