Rewind. Global markets get Chinese chequered

The Chinese stock market was a bubble waiting to burst. The Chinese are inveterate gamblers — some four million trading accounts were opened in the last week of May.

Largely with the help of borrowed money, punters had pushed up the Shanghai Composite market cap from $3.3 trillion to $10.1 trillion in 12 months to June 2015. When the bubble burst on Monday, the Chinese market fell 9 per cent, dragging down global markets in its wake. The BSE Sensex tanked 1,600 points (5.8 per cent) in its largest fall.

What is interesting is that, on Monday, foreign institutional investors sold some ₹5,300 crore while domestic institutions bought ₹4,100 crore of equity.

The crash was therefore most likely not due to the net institutional sale of ₹1,200 but from retail investors unwinding trading positions after their brokers hiked margin requirements from a normal 20-30 per cent to 70-80 per cent.

The US Fed is expected to reverse the illness of monetary Alzheimer by hiking interest rates, long near zero. However, William Dudley, President of the NY Federal Reserve, says that the case to increase rates has weakened after the China collapse. In truth, central bankers, supported by large banks, have got addicted to the fix of easy money and are loath to raise rates. So one can expect the rate hike in September, if any, to be skimpy. For India, the China collapse presents an opportunity to attract funds. Bereft of China, India becomes the darling. Brazil and Russia are in poor shape.

The price of Brent crude has fallen below $45 a barrel, providing India, which imports 75 per cent of its crude, with substantial saving and, therefore, opportunity. The rupee has probably fallen and ought to strengthen. This means that if Indian leadership gets its act together and speeds up economic reform, foreign investors would pump in money, for they would then get a double benefit — an appreciation of portfolio and of currency.

Besides economic reforms, the government has to act firm to protect domestic investors. Remember, they are the ones to rely on, when foreign ones flee. In the NSEL case, the handful of companies that borrowed and have not repaid, are being permitted to get adjournments as often as they ask for. This is something the judiciary should stop. Surely the Supreme Court can order that no more than two adjournments per side will be permitted, irrespective of the reasons put forth.

The victims of chit fund schemes like Sarada are also suffering interminable judicial delays. It is not only beleaguered individual investors who suffer due to the delays, but also our banking system, which is under strain due to mounting bad loans.

Even as the US managed better-than-expected GDP growth in Q2, indicators of NY Fed such as new orders and shipments seem negative. A strong dollar has made US exports unviable too.

Though the Indian market may not remain immune to the global weakness, it should deliver healthy gains for investors in the long term.

The writer is India Head, Euromoney Conferences

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