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Does India have to worry about the Chinese Crash?


Posted on 09-Jul-2015 Comments  13

The crash in Chinese equities is one of the most violent corrections in recent times. Probably, the 22% correction in the Dow Jones Index in a single day during the 1987 crash was much greater in intensity. But what is happening in China is really hard to believe. Over the past 25 days since peaking on June 12th, the Chinese markets have lost close to 38%. In terms of wealth, roughly $3.4 trillion dollars has been wiped out in 25 days. To put things in perspective, this loss is greater than the annual GDP of Brazil and twice the market capitalization of India. There is the entire world which is worrying about the future of Greece and its impact. What is being forgotten is that the Chinese value destruction in 25 days is more than 10 times the annual GDP of Greece.

 

The Chinese correction has to be seen in the backdrop of the frenetic appreciation that Chinese markets saw. During the last year, China’s market was up close to 120%. This bull rally was largely driven by retail investors who almost had access to a limitless supply of funds and almost had a government guarantee that stock prices will not fall. Indian markets may be different for a variety of reasons. Firstly, the retail leverage in India is nowhere close to what is seen in China. Secondly, China boasts of 9 crore individual equity investors whereas in India retail investors are less than a sixth of this number. But India still has reasons to worry. Let us see why...


Demand for metals and other commodities:


Over the last 20 years, China has been the biggest driver of the global commodities super-cycle. With an insatiable appetite for agricultural commodities and mined products, there were scores of commodity-driven economies which entirely relied on Chinese demand. A slowdown in China is not great news for commodity producers and commodity companies. Indian companies with exposure to Africa, Australia, Canada, and Latin America could all get affected as they were predominant exporters to China.


Puts brakes on the consumer market:

 

As China has grown to become the second largest economy in the world, it has also evinced a huge appetite for consumer products like cars, perfumes, apparel, electronic goods, watches etc. China continues to be the largest market for Tata Motors’ marquee Jaguar and Land Rover brands. Many Indian companies that depend on Chinese markets to grow their products could be in for tough times.

 

Dumping products at cheaper rates:

 

Indian companies in the steel sector and capital goods sector have always found it tough to face Chinese competition. With its ability to manufacture products on a massive scale at lowest cost, China has out-priced most Indian companies. Indian steel and capital goods companies are already facing the pinch of Chinese competition and this slowdown and wealth destruction is only going to make it worse. A desperate China will look to boost its export basket by making goods available at extremely low cost.


Leverage could haunt India; the China way:

 

One of the reasons the Chinese markets corrected sharply was excess leverage, especially by retail investors. This is likely to create leverage aversion for investors across emerging markets. One can argue that India does not have leveraged retail investors funding their equity purchases through margin on this scale. But that is off the point! The leverage aversion is going to affect in a variety of ways. Companies with high debt will become a natural target for bears. Think of infrastructure, steel and real estate companies. Of course, companies with dollar debt could be worse hit. Secondly, promoters who have leveraged by pledging more than 80% of their shares may also come under attack. Watch out for leverage attacks in a variety of ways. Blame it on China!


Beware the risk-off trade:

 

The biggest risk that India needs to guard against is the risk-off trade. It refers to a situation when investors decide to play it safe by going short on emerging markets and long on developed markets. More so since Europe and Japan have been in the doldrums for a long time. The bubble in China may force many global investors to adopt a risk-off trade resulting in a large scale sell-off among emerging markets, including India. That could be the biggest risk for India!

 

China has resorted to a variety of knee jerk reactions to the crash. It has virtually banned the IPO market, encouraged unfettered leverage, forced brokers to provide a safety net and has forced over 25% of the companies to suspend trading. These kind of knee-jerk reactions send the wrong signals about emerging markets in general, accentuating the risk-off trade. This is something Indian markets really need to watch out for!

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Krishnamurthy

Posted on 7/9/2015 2:07:17 PM

Can you list down the name of the companies who is depending on China which is listed in Indian Market. Can you provide the update based on the china impact to these stocks.

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Tradeplus Admin

Posted on 7/9/2015 3:09:34 PM

Hi! Here is an indication list of companies and the reason they will be hit by a Chinese slowdown... 1. A decline in China's appetite for commodities will hit Indian metal products. Within the metals pack, JSW Steel may be relatively less impacted as they buy inputs from the open market and hence many not be affected. On the other hand, companies like Tata STeel and SAIL which have their own mines will be hardest hit. 2. Tyre makers like JK Tyre, Apollo and Ceat will be hit negatively by the Chinese slowdown. The demand for natural rubber from China has already fallen sharply by 30% and the price of rubber has fallen by 20%. This may be appear to be positive for tyre companies but in reality China will use lower rubber prices to flood the world market with cheaper tyres. Indian tyre companies are already feeling the pressure. 3. Automobile manufacturers like Tata Motors will have a tough time. Its JLR subsidiary gets 20% of its sales from China. With the sharp correction in Chinese markets, demand for luxury cars has gone for a toss. Bookings for luxury cars like Audi, JLR, BMW are being cancelled. No doubt, the stock of Tata Motors is falling sharply. 4. Manufacturers of apparel, toys and electronics will face pressure from China dumping cheaper products in other countries.

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jsk

Posted on 7/9/2015 2:31:40 PM

greek china episode has pulled down indian mkt... however, its perfect moment for accumulations,,, but in small.qty.

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Raji Thnagarasu

Posted on 7/9/2015 2:49:25 PM

I have account with many company's but no one send such type of articles. Trade plus team done great job. now I am very clear on the implications of Chinese crash.

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Sukanya

Posted on 7/9/2015 2:56:46 PM

A very well sliced message. Just to recall... in early June we saw messages of MSCI planning to add China A shares on emerging markets and our market reacted with fear of funds getting diverted from India to China. Now in early July we see a crash there. Could that mean there are possibilities of funds getting diverted from China to India ?

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Tradeplus Admin

Posted on 7/13/2015 11:21:07 AM

Hi Sukanya ! I am not sure this will result in flow of funds back from China to India because China is currently trading at 19 times P/E and India at 23.5 times P/E. Also the Chinese market cap is just 55% of GDP, whereas India's market cap is 92% of GDP. Foreign investors may wait out on China because they would like to see the retail leverage going out of the system. But that does not mean that money will flow into India. In fact, if the Q1 results happen to be weak (as it is expected to be) and the US hikes rates, then even India could see outflows.Cheers !

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sandi

Posted on 7/9/2015 9:43:09 PM

any sugest for tomarrow trade

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Jinachandran

Posted on 7/10/2015 8:49:56 AM

Good article.

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vinoth

Posted on 7/10/2015 10:50:42 AM

nice information but i dont think it will imapact much in our market , ecpect some sectors.

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Mary

Posted on 7/10/2015 3:34:02 PM

The article is worth to keep our investors aware of what are the stock’s that have been shaken by the fall of Chinese Market.

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amanganti surender r

Posted on 8/9/2015 5:54:27 PM

China July producer prices slump to near 6-year low,Greek govt says discussing draft of third bailout dealTata Steel spins out long products into standalone unit

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veena mamanganti

Posted on 8/9/2015 5:57:05 PM

The above article is very informatic, EU officials note progress in Greek bailout talks, deal possible next week

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veena mamanganti

Posted on 8/9/2015 5:57:49 PM

The above article is very informatic, EU officials note progress in Greek bailout talks, deal possible next week

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